PAGENO="0001" REGULATORY REFORM HEARINGS BEFORE THE SUBCOMMITTEE ON MERCIIANT MARINE OF THE COMMITTEE ON MERCHANT MARINE AND FISHERIES HOUSE OF REPRESENTATIVES NINETY-SEVENTH CONGRESS FIRST AND SECOND SESSIONS ON H.R. .4374 A BILL TO IMPROVE THE INTERNATIONAL OCEAN COMMERCE TRANSPORTATION SYSTEM OF THE UNITED STATES OCTOBER 6, 7, NOVEMBER 5, 1981; MARCH 18, 1982 Serial No. 97-27 Printed for the use of the Committee on Merchant Marine and Fisheries U.S. GOVERNMENT PRINTING OFFICE 94-8860 WASHINGTON : 1982 PAGENO="0002" COMMITTEE ON MERCHANT MARINE AND FISHERIES MARIO BIAGGI, New York GLENN M. ANDERSON, California JOHN B. BREAUX, Louisiana GERRY E. STUDDS, Massachusetts DAVID R. BOWEN, Mississippi CARROLL HUBBARD, JR., Kentucky DON BONKER, Washington NORMAN E. D'AMOURS, New Hampshire JAMES L. OBERSTAR, Minnesota WILLIAM J. HUGHES, New Jersey BARBARA A. MIKULSKI, Maryland MIKE LOWRY, Washington 1 EARL HUTTO, Florida BRIAN J. DONNELLY, Massachusetts W. J. (BILLY) TAUZIN, Louisiana THOMAS M. FOGLIETTA, Pennsylvania WILLIAM N. PATMAN, Texas FOFO I. F. SUNIA, American Samoa DENNIS M. HERTEL, Michigan ROY DYSON, Maryland JOSEPH F. SMITH, Pennsylvania 2 GLENN M. ANDERSON, California BARBARA A. MIKULSKI, Maryland THOMAS M. FOGLIETTA, Pennsylvania DENNIS M. HERTEL, Michigan CARROLL HUBBARD, JR., Kentucky BRIAN J. DONNELLY, Massachusetts WILLIAM N. PATMAN, Texas FOFO I. F. SUNIA, American Samoa JOHN B. BREAUX, Louisiana WALTER B. JONES, North Carolina (Ex Officio) GENE SNYDER, Kentucky PAUL N. McCLOSKEY, JR., California EDWIN B. FORSYTHE, New Jersey JOEL PRITCHARD, Washington DON YOUNG, Alaska NORMAN F. LENT, New York DAVID F. EMERY, Maine THOMAS B. EVANS, JR., Delaware ROBERT W. DAVIS, Michigan WILLIAM CARNEY, New York CHARLES F. DOUGHERTY, Pennsylvania NORMAN D. SHUMWAY, California JACK FIELDS, Texas CLAUDINE SCHNEIDER, Rhode Island E. CLAY SHAW, JR., Florida PAUL N. McCLOSKEY, JR., California DON YOUNG, Alaska ROBERT W. DAVIS, Michigan CHARLES F. DOUGHERTY, Pennsylvania NORMAN D. SHUMWAY, California JACK FIELDS, Texas E. CLAY SHAW, JR., Florida GENE SNYDER, Kentucky (Ex Officio) 1Resigned from Committee October 23, 1981. 2Elected to Committee December 16, 1981. WALTER B. JONES, North Carolina, Chairman EDMUND B. WELCH, Chief Counsel MICHAEL J. TOOHEY, Minority Staff Director SUBCOMMITTEE ON MERCHANT MARINE MARIO BIAGGI, New York, Chairman RICARDO A. EArn, Chief Counsel RUDOLPH CA5sANI, Counsel LAWRENCE MALLON, Counsel BEVERLY ROWEN, Minority Counsel (II) PAGENO="0003" CONTENTS Hearings held: Page October 6, 1981 1 October 7, 1981~ 183 November 5, 1981 297 March 18, 1982 Text of H.R. 4374 4 Statement of: Abrams, Robert, New York State Attorney General 313 Arwood, John R., president, Trans-Freight Lines, Inc 184 Benner, C. Jonathan, general counsel, Federal Maritime Commission 35 Berman, Lawrence, vice president, Administration and Law, Transway International Corp., Washington, D.C 260 Prepared statement 263 Blocklin, Hans G., senior vice president, Lykes Bros. Steamship Co., Inc .... 358 Brady, John M., chairman, Traffic Board, North Atlantic Ports Associ- ation, Baltimore, Md 249 Prepared statement 253 Breed, Harlan P., vice president, Pricing-Pacific Sales, United States Lines, Inc 358 Charrier, J. William, Jr., director of government relations, Delta Steam- ship Lines, Inc 358 Chemical Manufacturers Association 348 Coffey, William J., senior counsel, Sea-Land Industries, Inc 147 Cooper, James K., managing director, Federal Maritime Commission 35 Council of European and Japanese National Shipowners' Associations 16 Day, Donovan D., Jr., chairman, Pacific Westbound Conference 423 Prepared statement 441 DeVierno, John; Billig, Sher & Jones, P.C., on behalf of 15 steamship conferences 423 Drozak, Frank, president, Seafarers International Union of North Amer- ica, AFL-CIO 308 E. I. duPont de Nemours and Co 539 Elbert, Edwin A., senior consultant, American Association of Exporters & Importers 232 Finnerty, Peter J., vice president, Public Affairs, Sea-Land Indus- tries, Inc 147 Flynn, Gerald J., chairman, Far East Conference 423 Prepared statement 441 Fowler, John M., General Counsel, Department of Transportation 506 French, Richard A., manager, Water and Air Transportation, Procter & Gamble Co., Washington, D.C 475 Frulla, Robert J., director, government affairs, Transway International Corp 260 Green, Alan, Jr., Chairman, Federal Maritime Commission 35 Kosut, Kenneth P., corporate counsel, Behring International, Houston, Tex 274 Prepared statement 280 Kurrus, Richard, counsel, Transway International Corp 260 Lewis, Drew, Secretary of Transportation 506 Licensed Independent Freight Forwarders in South Atlantic and Gulf Ports 324 Lidinsky, Richard A., Jr., special counsel, Traffic Board, and director, Tariffs and National Port Affairs, Maryland Port Authority 249 Luciano, Peter, executive director, Transportation Institute 14 (III) PAGENO="0004" IV Statement of-Continued Page Maskin, Alfred, executive director, American Maritime Association 317 May, Albert E., executive vice president, Council of American-Flag Ship Operators 358 North American Van Lines, Inc 355 O'Neill, Thomas E., general counsel, National Association of Beverage Importers, Washington, D.C 172 Prepared statement 173 Ortiz, Peter, chairman, Transportation Committee, American Association of Exporters & Importers 232 Prepared statement 234 Patti, C. James, vice president, Maritime Institute for Research and Industrial Development 136 Rosenbloom, Morris V., director, Washington Office, National Customs Brokers & Freight Forwarders Association of America 203 Rudman, Gloria Cataneo, director, Administration and Corporate Affairs, Joint Maritime Congress 136 Salvo, Enrico, president and general manager, Carmichael International Service 527 Schmeltzer, Edward; Schmeltzer, Aptaker & Sheppard, Washington, D.C., representing Behring International, Houston, Tex 274 Shear, Adm. Harold E., Administrator, Maritime Administration 506 Sher, Stanley 0.; Billig, Sher & Jones, P.C., on behalf of 15 steamship conferences 423 Prepared statement 424 Snyder, Hon. Gene, a Representative in Congress from the State of Ken- tucky 2 St. John, William, Jr., chairman, FMC/ICC Committee, and vice presi- dent, National Customs Brokers and Freight Forwarders Association of America 203 Prepared statement 204 Thayer, Ralph N., on behalf of the National Industrial Traffic League 342 Trans-Pacific Conferences (various) 550 U.S. West Coast Conferences (certain) 487 Ullman, Gerald H., general counsel, National Customs Brokers and Freight Forwarders Association of America 203 Wiesenmaier, Hubert, transportation consultant, American Association of Exporters and Importers 232 Williams, W. H., vice president, American President Lines, Inc 358 Additional material supplied: Day, Donovan D., Jr., and Gerald J. Flynn: Questions of Mr. Snyder and answers 471 Fairbanks, Richard: Aide Memoire from the Governments of Belgium, Denmark, Finland, France, the Federal Republic of Germany, Italy, Japan, the Neth- erlands, Norway, Portugal, Spain, Sweden, and the United King- dom 300 Embassy of Greece memorandum 304 Federal Maritime Commission: Questions of Mr. Snyder and answers 83 Questions submitted by Mr. Biaggi and answers 54 Tariff system study 98 Finnerty, Peter J.: Proposed amendments 154 French, Richard A.: Disposable paper diapers, U.S. Atlantic and Gulf to the Arab Gulf Kosut, Kenneth P.: Article: "Cargo Management/Making the difficult seem easy 289 Section 44(e) of the Shipping Act, 1916 279 May, Albert E.: Antitrust exemption 370 Questions of Mr. Snyder and answers 418 Review of several studies addressing the question of whether a "closed" conference system will result in higher prices than under an "open" or "competitive" conference system7 394 South American revenue pooling and equal access agreements 384 Tariff filing in the U.S. trades 375 Polking, Joseph C.: Misconception as to the nature of the ships' agency business, an agent's responsibilities, and remuneration 337 PAGENO="0005" V Additional material supplied-Continued Page Sher, Stanley 0.: Questions of Mr. Snyder and answers 470 St. John, William, Jr.: Article: "The Role of the International Freight Forwarder 218 Proposed revisions of ocean freight forwarder provisions of H.R. 4374. 216 Transportation Department: Tariff services 521 Ullman, Gerald H.: Questions of the committee and answers 226 Communications submitted: Abrams, Robert: Letter of October 20, 1981, to Hon. Mario Biaggi 312 Badour, Alan: Letter of December 9, 1981, to Hon. Mario Biaggi 547 Cavanaugh, J. Michael: Letter of November 10, 1981, to Hon. Walter B. Jones 486 Coats, Hon. Dan: Letter of October 27, 1981, to Hon. Mario Biaggi 354 Coday, William E.: Letter of September 21, 1981, to Hon. Mario Biaggi 352 deMember, Raymond P.: Letter of December 1, 1981, to Hon. Mario Biaggi 535 Del Mar, H. R.: Letter of March 1, 1982, to Hon. Mario Biaggi 504 Fairbanks, Richard: Letter of October 29, 1981, to Hon. Mario Biaggi 299 Finnerty, Peter J.: Letter of May 20, 1982, to Hon. Mario Biaggi with answers to ques- tions 159 Letter of June 10, 1982, to Hon. Gene Snyder with answers to ques- tions 169 Green, Alan, Jr.: Letter of October 5, 1981, to Hon. Mario Biaggi 36 Letter of October 22, 1981, to Hon. Mario Biaggi 305 Letter of February 12, 1982, to Hon. Slade Gorton 90 Jenkins, Paul: Letter of October 14, 1981, to Hon. Mario Biaggi 321 Lewis, Drew: Letter of February 5, 1982, to Hon. Mario Biaggi 499 May, Albert E.: Letter of December 7, 1981, to Hon. Mario Biaggi 369 Polking, Joseph C.: Letter of June 11, 1981, to J. Alton Boyer 336 Sher, Stanley 0.: Letter of December 18, 1981, to Hon. Gene Snyder 469 Stover, William M.: Letter of October 28, 1981, to Hon. Mario Biaggi 347 Ullman, Gerald H.: Letter of January 4, 1982, to Rudy Cassani with attachment 225 Warren, Charles F.: Letter of December 14, 1981, to Ms. Ann Miller 549 Wasacz, M. S.: Letter of September 16, 1981, to Hon. Mario Biaggi 350 PAGENO="0006" PAGENO="0007" REGULATORY REFORM TUESDAY, OCTOBER 6, 1981 HOUSE OF REPRESENTATIVES, SUBCOMMITTEE ON MERCHANT MARINE OF THE COMMITTEE ON MERCHANT MARINE AND FISHERIES, Washington, D.C. The subcommittee met, pursuant to notice, at 10:28 a.m., in room 1334, Longworth House Office Building, Hon. Mario Biaggi (chair- man of the subcommittee) presiding. Present: Representatives Biaggi, Sunia, Hertel, McCloskey, Shaw, and Snyder. Staff present: Ric Ratti, Rudy Cassani, Ed Welch, Gerry Seifert, Cyndy Wilkinson, John Long, Steve Little, Mike Toohey, Beverly Rowen, John Bruce, Dave Parker, Gwen Lockhart, and Ann Mueller. Mr. BIAGGI. The meeting is calledto order. Today the subcommittee is meeting for the first of three sessions to consider a bill to amend the regulatory aspects of our maritime laws. Rather than rewrite the existing laws, I have adopted the amendatory approach because experience tells me that clear-cut amendments are better understood and permit concentration on those issues that require revision and modernization. I do not be- lieve the lengthy, ill-fated omnibus approach of the prior Congress can do the job. This bill alone, of course, will not bolster nor revitalize the American merchant marine. It could, however, provide clear-cut rules and procedures that are applicable to both foreign and U. S.- flag operators so as to provide an equitable competitive floor. We cannot and will not foster a regulatory regime that will drive our vessels from the ocean carriage of goods in the international trade. The central theme that runs through our regulatory maritime policy is the inconsistency in enforcement. This has not only cre- ated discontent among our trading partners, but has also created an aura of unpredictability in the enforcement of antitrust laws. I need not belabor the well-known fact that our carriers are at a severe competitive disadvantage because the Federal Government participates in discriminatory enforcement against U.S. carriers while not able to take similar action against foreign-flag carriers. I do not need to remind anyone in this room that 10 U.S. flag companies have gone bankrupt in as many years-and that the re- maining fleet carries less than 5 percent of our Nation's total inter- national trade. Therefore, this committee would like to hear your views on antitrust immunity and whether or not H.R. 4374 goes too far or not far enough in dealing with that subject. (1) PAGENO="0008" 2 The other issue that has adversely affected our maritime indus- try is the divergency of views within the industry and within the various Government agencies that carry out our maritime policy. Some say that we do not have a maritime policy; I believe we do. However, it has been static, consisting of: construction and operat- ing differential subsidies, preference cargoes, sealift support through the military sealift command; and cabotage requirements. Our maritime policy has been fraught with conflict between the myriad segments of the industry: shippers-freight forwarders- port interests-terminal operators-nonVessel carriers-ocean car- riers_longshoremen_seamen-and shipbuilders, to name a few. Within the administration there has been a maritime policy-al- though, admittedly, it has also suffered a lack of coordination. The Defense Department desires an established and dependable U. S.-flag sealift capability; the Department of State is frequently preoccupied with the impact of maritime programs on foreign policy-to the detriment of domestic policy. The Special Trade Representative is required by law to reduce the impediments to exporting manufactured goods; Agriculture is preoccupied with reducing the cost of exporting farm commodities; Justice is overly concerned with the need to preserve a free and competitive market through its antitrust activities; and the Depart- ment of Transportation-via the Maritime Administration-seeks to provide protection and strengthening of the U.S.-flag merchant fleet. I intend to continue belaboring the issues of cooperation and co- hesiveness in an ongoing effort to highlight how absolutely essen- tial they are to the revitalization of our merchant marine-not only when considering regulatory reform but also when reviewing all other aspects of maritime trade. It is unfortunate today that we are not privileged to hear from the administration's spokesman on maritime policy. Maybe the Secretary of Transportation could have shed some light on these di- vergent views. In any event, I have confidence in the administra- tion's understanding of the problems and competing interests and that they will, in the near future, come forth with a program that will encourage a strong U.S. merchant marine. The subcommittee welcomes your suggestions and is looking for- ward to receiving constructive testimony so that we can have a re- liable intermodal transportation system that is responsive to the needs of our Nation's international trade, with fair and equal par- ticipation by U.S.-flag vessels. Mr. BIAGGI. I ask unanimous consent that a statement by Mr. Snyder appear in the record after my statement, along with a copy of the bill. Without objection, so ordered. [The following was received for the record:] STATEMENT BY HON. GENE SNYDER, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF KENTUCKY Thank you, Mr. Chairman. I want to congratulate you for taking the initiative of introducing legislation aimed at easing the regulatory burden that hampers the U.S. merchant marine. PAGENO="0009" 3 As you know, Mr. Chairman, one of the first things that should be done for the U.S. merchant marine industry is to lift whatever unnecessary or onerous regula- tions that prevent carriers from competing effectively in the marketplace. I am anxious to join you in that effort, Mr. Chairman, and I look forward to work- ing with you in determining how we can best improve the ocean commerce of this country. And, I look forward to listening to the maritime industry's suggestions and concerns regaring U.S. regulatory policy. Although there may be some differences of opinion, I believe that our goal is the same: To have a strong and competitive U.S. merchant marine, and to have a regulatory scheme that is fair and responsive to the needs of shippers. PAGENO="0010" 4 97TH CONGRESS 1ST SESSION To improve the international ocean commerce transportation system of the United States. IN THE HOUSE OF REPRESENTATIVES AUGUST 4, 1981 Mr. BIAGGI (for himself and Mr. JONES of North Carolina) introduced the following bill; which was referred to the Committee on Merchant Marine and Fisheries A BILL To improve the international ocean commerce transportation system of the United States. 1 Be it enacted by the Senate and House of Representa- 2 tives of the United States of America in Congress assembled, 3 That (a) section 1 of the Shipping Act, 1916 (39 Stat. 728), 4 as amended (46 U.S.C. 801 et seq.), is amended by adding at 5 the end of that section the following: 6 "The term `agreement' includes understandings and ar- 7 rangements, written or oral, and any amendment,. modifica- 8 tion, or cancellation thereof, but does not include maritime 9 labor agreements. PAGENO="0011" 5 2 1 "The term `shippers' council' means a broadly repre- 2 sentative association of shippers, other than nonvessel oper- 3 ating common carriers, that is formed for the purpose of en- 4 gaging within the United States in the broad range of shipper 5 interests authorized in subsection (a) of section 15a; except 6 that, for the purposes of this paragraph, no corporation, part- 7 nership, or other legal entity may be treated as a shipper 8 unless that entity has a proprietary interest in the merchan- 9 dise that such entity imports into, or exports from, the United 10 States. 11 "The term `antitrust laws' means the Act of July 2, 12 1890 (26 Stat. 209), as amended; the Act of October 15, 13 1914 (38 Stat. 730), as amended; the Federal Trade Com- 14 mission Act (38 Stat. 717), as amended; sections 73 and 74 15 of the Act of August 27, 1894 (28 Stat. 570), as amended; 16 the Act of June 19, 1936 (49 Stat. 1526), as amended; the 17 Antitrust Civil Process Act (76 Stat. 548), as amended; and 18 amendments and Acts supplementary thereto. 19 "The term `ocean freight forwarder' means a person in 20 the United States who for others- 21 "(a) dispatches shipments via ocean common car- 22 riers, and 23 "(b) processes the documentation or performs re- 24 lated activities incident to such shipments. PAGENO="0012" 6 3 1 "The term `nonvessel operating common carrier' means 2 a common carrier by water that does not operate the vessels 3 by which the ocean transportation service is provided. A 4 nonvessel operating common carrier is a shipper in his rela- 5 tionship with vessel operating ocean common carriers.". 6 (b) The ninth and tenth paragraphs of section 1 of the 7 Shipping Act, 1916 (39 Stat. 728), as amended (46 U.S.C. 8 801 et seq.), which define the terms "carrying on the busi- 9 ness of forwarding" and "independent ocean freight for- 10 warder", respectively, are repealed. 11 S~o. 2. Section 15 of the Shipping Act, 1916 (39 Stat. 12 733), as amended (46 U.S.C. 814), is amended as follows: 13 (1) The first sentence of the first paragraph is 14 amended by adding after the phrase "freight or passen- 15 ger traffic to be carried;" the words "limiting or regu- 16 lating the membership of conferences;". 17 (2) Strike the last sentence of the first paragraph 18 defining the term "agreement". 19 (3) The first sentence of the second paragraph is 20 amended by striking "or to be contrary to the public 21 interest,". 22 (4) The second sentence of the second paragraph 23 is amended by adding after the phrase "other qualified 24 carriers in the trade," the words "or admits to mem- 25 bership at least one carrier operating United States- PAGENO="0013" 7 4 1 flag vessels willing to serve the particular trade or 2 route involved,", and by adding "(3)" before "fails to 3 provide that any". 4 (5) At the end of the second paragraph, which 5 ends with the words "penalty for such withdrawal.", 6 add the following: "Any proceeding to disapprove, 7 cancel, or modify any agreement shall be commenced 8 no later than thirty days after the filing of the agree- 9 ment; and a final order of disapproval, cancellation, or 10 modification by the Commission shall be issued no later 11 than one hundred and eighty days thereafter. The 12 burden to show that the agreement should be disap- 13 proved, canceled, or modified shall be borne by the 14 Commission or by such other department or agency of 15 the United States that may oppose the agreement.". 16 (6) The following new paragraph is added after 17 the third paragraph: 18 "The Commission shall-upon written complaint of any 19 common carrier by water, shipper, port, or other person sub- 20 ject to this Act that is filed no later than twenty calendar 21 days after an agreement is filed with the Commission-hold 22 an informal preliminary hearing within thirty days of the 23 written complaint to ascertain the reasonable probability that 24 the agreement is in violation of this Act. In this proceeding PAGENO="0014" 8 5 1 before the Commission, the complainant shall bear the 2 burden of proving his allegations.". 3 (7) Strike the seventh paragraph, commencing 4 with the words "Whoever violates any provision of this 5 section" and ending with "in accordance with the pro- 6 visions of this section.". 7 Si~c. 3. The Shipping Act, 1916 (39 Stat. 728), as 8 amended (46 U.S.C. 801 et seq.), is amended by adding a 9 new section 15a after section 15 to read as follows: 10 "SEc. iSa. (a) A shippers' council organized or existing 11 under the laws of the United States may, only pursuant to an 12 agreement approved by the Federal Commission, 13 meet, confer, and- 14 "(1) consult and agree with any ocean common 15 carrier or conference regarding general rate levels, 16 practices, and terms and conditions of service affecting 17 ocean transportation; 18 "(2) exchange information with ocean common 19 carriers or conferences concerning traffic and transpor- 20 tation data; and 21 "(3) provide for the analysis and distribution of 22 the information referred to in paragraph (2). 23 Nothing in this section shall restrict the powers of an associ- 24 ation organized under the Act of April 18, 1918 (15 U.S.C. 25 61 et. seq.), commonly referred to as the Export Trade Act. PAGENO="0015" 9 6 1 "(b) Each shippers' council shall file immediately with 2 the Commission a true copy or, if oral, a true and complete 3 memorandum of every agreement entered into with respect 4 to any activity referred to in this section. The antitrust laws 5 of the United States shall not apply to any such activity. 6 "(c) The Commission shall not approve any agreement 7 entered into by shippers concerning the establishment or op- 8 eration of a shippers' council unless the agreement- 9 "(1) provides a consultation process for the regu- 10 lar and orderly communication and exchange of infor- 11 mation with conferences, for the resolution of disputes, 12 and for cooj?eration in curbing maipractices; 13 "(2) provides reasonable and equal terms and con- 14 ditions for admission and readmission to council mem- 15 bership for all shippers that ship in any trade covered 16 by the agreement; 17 "(3) provides that shippers may resign and rejoin 18 the council without restriction or penalty; 19 "(4) provides for independent consultation and 20 agreement with any ocean common carrier or confer- 21 ence; 22 "(5) prohibits a council from operating in any 23 trade which has no conference or other association of 24 ocean common carriers; PAGENO="0016" 10 7 1 "(6) prohibits members of a council from engaging 2 in any collective refusal to deal with any person; 3 "(7) prohibits discussion, agreement, or concerted 4 action by members of a council with regard to their 5 specific commodity rates, output, or marketing; and 6 "(8) prohibits a council from routing or arranging 7 for the transportation of traffic on behalf of its mem- 8 bers or from entering into any exclusive loyalty con- 9 tract or dual rate contract.". 10 SEc. 4. (a) Section 13 of the Shipping Act, 1916 (36 11 Stat. 117), is repealed. 12 (b) Section 14 of the Shipping Act, 1916 (39 Stat. 733), 13 as amended (46 U.S.C. 812), is amended by striking "Any 14 carrier who violates any provision of this section shall be 15 guilty of a misdemeanor punishable by a fine of not more 16 than $25,000 for each offense: Provided, That nothing" and 17 inserting in lieu thereof "Any carrier who violates any provi- 18 sion of this section shall be subject to a civil penalty. Noth- 19 ing". 20 (c) The penalty provisions of section 21 of the Shipping 21 Act, 1916 (39 Stat. 736), as amended (46 U.S.C. 820), are 22 amended (1) by striking the words "forfeit to the United 23 States the sum of $100 for each day of such default." and 24 inserting in lieu thereof "be subject to a civil penalty."; (2) 25 by striking "guilty of a misdemeanor, and subject upon con- PAGENO="0017" 11 8 1 viction to a fine of not more than $1,000, or imprisonment 2 for not more than one year, or to both such fine and impris- 3 onment." and inserting in lieu thereof "subject to a civil pen- 4 alty."; and (3) by striking "Failure to file any such certifica- 5 tion shall result in a civil penalty of not more than $5,000 for 6 each day such violation continues." and inserting in lieu 7 thereof "Whoever fails to file anyyequired certification shall 8 be subject to a civil penalty.". 9 (d) Subsections 32 (a), (b), and (c) of the Shipping Act, 10 1917 (39 Stat. 738), as amended (46 U.S.C. 831), are 11 amended to read as follows: 12 "SEc. 32. (a) Any shipper, shippers' council, ocean 13 common carrier, conference, ocean freight forwarder, or 14 other person subject to the Act, who is found by the Federal 15 Maritime Commission, after notice and opportunity for a 16 hearing, to have violated any provision of this Act or a regu- 17 lation issued thereunder, unless otherwise specifically pro- 18 vided for, shall be liable to the United States for a civil penal- 19 ty of not less than $5,000 nor more than $25,000 for each 20 violation. Each day of a continuing violation shall constitute 21 a separate violation. The amount of each civil penalty shall 22 be assessed by the Commission, by written notice. 23 "(b) In determining the amount of each penalty, the 24 Commission shall take into account the nature, circum- 25 stances, extent, ~nd gravity of the violation committed and 9~4-856 0 - 82 - 2 PAGENO="0018" 12 9 1 the degree of culpability, any history of prior offenses, ability 2 to pay, and such other matters as justice may require. The 3 Commission may compromise, modify, or remit, with or with- 4 out conditions, any civil penalty that is subject to imposition 5 or that has been imposed under this section. 6 "(c) If any person fails to pay a civil penalty after it has 7 become final, the Commission may refer the matter to the 8 Attorney General of the United States for collection in any 9 appropriate district court of the United States. The Secretary 10 of the Treasury shall withhold or revoke, at the request of 11 the Commission, the clearance required by section 4197 of 12 the Revised Statutes of the United States (46 U.S.C. 91) of 13 any vessel, the owner or operator of which is subject to any 14 of the penalties in this section. Clearance may be granted in 15 these cases upon the filing of a bond or other surety satisfac- 16 tory to the Commission.". 17 SEc. 5. Section 44 of the Shipping Act, 1916 (75 Stat. 18 522), as amended (46 U.S.C. 841b.), is amended to read as 19 follows: 20 "SEc. 44. (a) No person may be engaged as an ocean 21 freight forwarder or issue a bill of lading as a nonvessel oper- 22 ating common carrier unless he has furnished a bond ap- 23 proved by the Federal Maritime Commission of no less than 24 $50,000 or no greater than $100,000. PAGENO="0019" 13 10 1 "(b) No compensation shall be paid for ocean freight for- 2 warding services, nor shall any person issue a bill of lading as 3 a nonvessel operating common carrier, until the person pro- 4 viding the service has certified in writing to the person for 5 whom the services are provided that the bond required under 6 subsection (a) has been provided, and that he has no benefi- 7 cial interest in the shipment.". PAGENO="0020" 14 At this point I would like to introduce into the record a state- ment by Peter Luciano, the executive director of the Transporta- tion Institute. Without objection, so ordered. [The following was received for the record:] PREPARED STATEMENT OF PETER LucIAN0, EXECUTIVE DIRECTOR, TRANSPORTATION INSTITUTE Mr. Chairman and members of the subcommittee, my name is Peter Luciano. I am Executive Director of the Transportation Institute, a nonprofit research and educational organization, founded in 1968. Our 174 member companies operate in the Nation's foreign and domestic shipping trades. The Institute commends the Sub- committee for its efforts to revitalize the U.S-flag maritime industry, and we thank you for the opportunity to express our views on H.R. 4374. The Transportation Institute endorses the basic policy objectives set forth in the proposed legislation. Since the Subcommittee will be hearing from a number of com- panies directly affected by this proposed legislation, we will limit the scope of our comments to an attempt at an overview. It is our opinion that if enacted, legislation of this nature would promote an effi- cient, effective and expeditious regulatory environment. Many of the inequities pres- ently existing in the regulation of ocean transportation would be eliminated. A reg- ulatory climate would be created in which U.S-flag carriers can achieve equal rights and equal strength with foreign-flag competitors. The U.S. merchant marine competes in a world market which is greatly different from almost every other commodity or service market in existence today. Its com- petitors range from government-owned fleets to multinational cartels. The United States government, however, treats the U.S-flag operator as though he were com- peting in a "free" market and restricts him with domestic statutes which have no relevance to international ocean shipping. It is common practice in international ocean shipping for operators to set rates, restrict membership in conferences, pool earnings, and formulate agreements to increase their operating efficiency. However, U.S-flag operators are restricted from such actions because of U.S. antitrust laws which limit their ability to compete in the world market. It is therefore necessary to recognize the fact that, when dealing with international shipping matters, the text- book example of a free market does not exist and therefore should have little bear- ing on our government's decisions in matters concerning the U.S. merchant marine. At present, the U.S-flag international ocean shipping industry is restricted by provisions in the 1916 Shipping Act which severely curtail an operator's ability to compete in the world market as it actually exists. U.S. operators are severely disad- vantaged under the present open conference system. U.S. operators simply cannot compete with the much stronger conferences that operate in foreign trades where the right exists to limit membership and to take strong action against shippers who do not exclusively patronize conference vessels. Specifically, U.S. vessel operators are limited in the extent to which they can enter into agreements which affect con- ference, pooling and other activities which are common in the conduct of interna- tional ocean shipping. Entry into and operation under such agreements are ham- pered by application of the U.S. antitrust laws to these activities. This is imprudent, we believe, because it forces the U.S-flag carrier to operate under restrictions which do not apply to his competitors. The U.S-flag merchant marine has been seriously damaged by the extraterritor- ial application of domestic antitrust laws to international shipping. We feel that the measures contained within H.R. 4374, will help U.S-flag operators to compete with foreign operators and renew an American presence on the high seas. The exemption of certain agreements from antitrust laws is essential if U.S-flag carriers are to sur- vive in today's competitive ocean shipping market. The Congress recognized this fact when in 1962 the Subcommittee on Monopolies and Commercial Law of the House Committee on Judiciary issued House Report No. 1419, 87th Congress, Second Session which stated "The Antitrust Subcommittee recognizes the unique character of the ocean shipping industry with respect to the application of the antitrust laws. No other governments inhibit their carriers by antitrust laws, and American ocean carriers must compete, not within the framework of our domestic antitrust laws, but in the jungle world of ocean shipping cartels." The U.S-flag liner industry has experienced a decline of more than 50 percent since that Committee Report was released. Of the nineteen U.S. liner carriers oper- ating in 1970, only nine remain. If prompt action is not forthcoming, more compa- PAGENO="0021" 15 nies will likely disappear. Antitrust immunity is a necessary component in the in- dustry's revitalization as it will allow our operators to compete on a more even level with their foreign counterparts. The bill before you today is an important step toward the revitalization of the U.S. merchant fleet. In line with President Reagan's objectives, H.R. 4374 eases the regulatory burden which presently encumbers U.S.-flag operators. Any effort to renew the American merchant fleet's presence on the high seas must include re- moval of the regulatory impediments which now exist. The Transportation Institute therefore supports the intent of this legislation, and we appreciate the opportunity to work with this Subcommittee and its staff, both on this piece of legislation and other efforts to restore the U.S. fleet to the status re- quired by the national interest. Thank you. Mr. BIAGGI. A statement by the Council of European and Japa- nese National Shipowners' Associations (CENSA). Without objection, so ordered. [The following was received for the record.] PAGENO="0022" 16 PREPARED STATEMENT OF THE COUNCIL OF EUROPEAN AND JAPANESE NATIONAL SHIPOWNERS' ASSOCIATIONS It is a pleasure to have this oppoi~tunity to present views concerning H.R. 4347, a bill "To improve the international ocean commerce transpqrtation system of the United States", on behalf of the Council of European and Japanese National Shipowners' Associations ("CENSA"). The subject-matter of this bill is of considerable interest to CENSA, which comprises the national shipowners' associations of the free world's major maritime nations other than the United States (Belgium, Denmark, Finland, France, the Federal Republic of *1 Germany, Greece,- Italy, Japan, the Netherlands, Norway, Portugal, Sweden and the United Kingdom) and individual liner operators/container consortia of these countries. CENSA carriers own and operate vessels accounting for 44.5% of the world's gross registered tonnage. They serve shippers and consignees in the foreign trade of most countries of the world, including substantial participation in the U.S. ocean commerce. *1 . - The Union of Greek Shipowners reserves its position as regards closed conferences. PAGENO="0023" 17 In particular, CENSA is pleased to note (subject to certain reservations hereinafter set forth) that H.R. 4374 contains provisions that seek to update, restore and codify the following principles: o That healthy, effective conferences are essential in the U.S. ocean trades and, in particular, that limited-membership or closed conferences are a sound commercial mechanism for achieving optimum rationalization of services (Section 2(1)); o That the antitrust-laden `public interest" test should not be applied to agreements for concerted action under the Shipping Act and that such agreements should be approved, unless shown to be unjustly discriminatory or unfair, detrimental to commerce or in violation of the Act, with the burden of proof regarding any such consequences to be borne by the party alleging them (Section 2(3), (5) and (6)); o That there should be prompt administrative action on proposals by conferences and carriers to implement commercially-agreed arrangements to rationalize tonnage, services and sailings through cooperative-action agreements (Section 2(5) and (6)); and o That shippers' councils have a legitimate role in consultative discussions with conferences on general rate levels, practices and terms and conditions of service affecting ocean transportation (Section 3). The foregoing principles should be helpful in reducing the problems of U.S. regulation and delays attendant thereto that have beset conferences, carriers and shippers alike in the U.S. ocean trades over the past two decades, as well as the increasing frequency and intensity of international confrontations that have been precipitated during that period as a result. In this latter connection, a degree of' comfort is provided by PAGENO="0024" 18 Chairman Biaggi's stated objective, in remarks accompanying introduction of H.R. 4374, that -- The modifications this bill proposes will provide for greater regulatory flexibility so as to make our laws and procedures consistent with those that have been generally accepted in international trade. This is mandatory if we are to effectively compete within the international maritime marketplace . ~ Rec., Aug. 4, 1981, p. E3908.) In this context, CENSA was particularly encouraged by S. 1593, introduced August 3, 1981 in the Senate, which bill emphasises commercial means to obtain a competitive and efficient ocean transportation system, including the option of open or closed-type conferences without mandatory provisions and the absence in the objectives and provisions of S. 1593 of any form of preferential treatment. In regard to preferential treatment for U.S.-flag carriers proposed in Section 2(1) of H.R. 4374, CENSA would like to record its serious reservations, which are fully explained later in this submission under the subheading Miscellaneous Provisions. CENSA offers the following specific comments and suggestions. Antitrust Exemption. -- CENSA wishes to observe that in what is perhaps the most critical single issue in this respect, disapplication of the U.S. antitrust laws and principles to international liner shipping, the bill falls short of what is desperately needed by U.S.-flag and foreign-flag operators alike-- i.e., assurance that violations of the Shipping Act will be dealt with under that Act alone, without the risk of collateral criminal PAGENO="0025" 19 prosecution or exposure to civil treble-damage actions under the antitrust laws as well. Until 1966, it was generally accepted that in enacting the Shipping Act, Congress intended to immunize liner shipping from the impact of the antitrust laws. In 1966, the Supreme Court abruptly departed from this concept in carnation Company v. Pacific Westbound,Conference, 383 U.S. 213 (1966), holding that there had been no Congressional intent to grant the shipping industry complete antitrust immunity and that implementation of ratemaking agreements not approved by the Federal Maritime Commission was subject to antitrust laws. To be sure, H.R. 4374 would eliminate the antitrust-laden "public interest~ test from Section 15 of the Shipping Act, and the related antitrust concepts read into it pursuant to the Svenska case, for approvability of concerted-action agreements. Thus, approval of such agreements would be facilitated under the bill. (Section 2(3).) But that alone is insuffibient; it begs the question whether even FMC approval will confer antitrust immunity for action pursuant to the agreement. A prime example of this dilemma was presented in Sabre Shipping Corporation_v. American President Lines, Ltd., 285 F. Supp. 949 (S.D.N.Y. 1968), cert. den. 395 U.S. 922, where the plaintiff alleged in a treble-damage antitrust complaint that even though rate-fixing was clearly within the scope of a conference's approved Section 15 agreement, the rates fixed were so low that they were detrimental to U.S. commerce and therefore in violation of Section 18(b)(5) of PAGENO="0026" 20 the Shipping Act. The court concurred, holding that the rates violated Section 18(b)(5) and were, therefore, beyond the scope of the approved conference agreement, hence the concerted action in fixing such rates was retroactively devoid of antitrust immunity. The same dilemma is also involved in current litigation over conference intermodal authority in United States v. FMC (D.C. Cir., No. 79-1299; pending rehear4ng en bane). There, the Department of Justice is arguing that under Section 15 of the Shipping Act, conference activity can extend only to port-to-port movements and, therefore, the FMC has no jurisdiction to approve (hence, to confer antitrust immunity to) conference agreements that regulate the intermodal services of their members. With respect to the foregoing observations, it should be emphasized that commercially-based ocean conferences and carriers necessarily serve trades of direct interest to at least two, and often more, countries. They operate in and, to survive, must bridge environments that are politically, economically, legally, and socially multinational and complex. They function in environments, as do shippers and consignees, where unilateral regulation and extraterritorial application of U.S. antitrust laws create economic and jurisdictional problems, not solutions, stifling instead of stimulating better liner conference services. This conclusion is not new. flther governments have studied liner conferences for almost 100 years. None subjects them to antitrust philosophy or PAGENO="0027" 21 regulatory statutes, concluding that maximum self-regulation by the commercial interests best serves the intercourse of nations. Your Congress also determined in 1916, after years of careful study, that the antitrust laws should not apply to international liner shipping. The most serious problems flowing from applying antitrust concepts and laws was also recognized by the House Merchant Marine & Fisheries Committee in 1961 when H.R. 6775 was under consideration; similarly last year by the Senate Committee on Commerce, Science and Transportation after several years of careful study of the problem in connection with S. 2585, and by the Senate itself when it passed that bill. Accordingly, CENSA strongly urges the Subcommittee to add language to H.R. 4374 that would expressly exempt any conduct or activity that is covered by the Shipping Act from sanctions under the antitrust laws, and subject such conduct or activity exclusively to the Shipping Act itself. This could be accomplished by inserting the following new text following Subsection 2(6) of the bill and renumbering present *1 Subsection 2(7) as "(8)":- "(7) Strike the sixth paragraph commencing with the words "Every agreement, modification, or cancellation lawful under this section, or permitted under section 14b" and ending "and amendments and Acts supplementary thereto.", and insert the following new paragraph in lieu thereof: *1 1 - See also recommendation at page 9, infra, which, if accepted, would likewise require numbering this proposed new "Subsection as (7)" and present Subsection 2(7) as "(8)". PAGENO="0028" 22 "The requirement, standards, penalties and civil liabilities provided in this Act shall, as to the activities regulated herein of all common carriers by water, conferences, shippers' councils and other persons subject to this Act, be exclusive of all other laws, including specifically the antitrust laws; neither shall the antitrust laws apply (i) to any agreement that concerns or involves intermodal transportation, or other transportation and related services between or within any foreign country or place, or (ii) to consultations with or activities of shippers' councils situated outside the United States." (If this recommended amendment is adopted, the last sentence of proposed new Section lSa(b), at page 6, lines 4 and 5 of the bill, should be stricken as redundant.) Turning to other features of the bill that warrant comment, CENSA offers the following additional observations and suggestions. Expedited Administrative Procedures. -- The provisions of H.R. 4374 that would impose mandatory commencement and final action dates on FMC processing of Section 15 agreements are very welcome, as is the requirement that opponents of any agreement (including the FMC and any other department or agency of the United States) must bear the burden of proof that the Section 15 standards of approvability are not satisfied. (Section 2(5) and (6),) However, despite the requirement that a final order must be issued by the FMC no later than 180 days after an agreement has been filed, (Section 2(5)), the bill is silent on the consequences of the FMC's failure to do so. At the very least, the bill PAGENO="0029" 23 should provide that in these circumstances the agreement shall take effect as filed. By the same token, it is unclear what purpose is intended by the requirement, upon complaint, for an "informal preliminary hearing . . . to ascertain the reasonable probability" that the agreement is in violation of the Shipping Act (Section 2(6)). First of all, since that question is at the very heart of the FMC's inquiry in any event, one may question what purpose is to be served by an "informal preliminary hearing" that must be held not later than the 50th day of the 180-day period allowed the FMC for its review (assuming the jurisdictional 20-day filing requir~nent for a complaint has been met). The bill is silent on the effect, if any, of failure of that hearing to establish "reasonable probability" that the agreement is in violation of the Act. The logical corollary, of course, is that absent such a finding, implementation of the agreement should be permitted pending final action by the FMC. But the bill does not so provide and the informal hearing requirement is, therefore, no more than a burdensome distraction for all concerned. Tn this connection, CENSA would very much prefer to see an approach where implementation of Section 15 agreements would be permitted promptly after filing, absent complaint within a specified period of time following notice in the Federal Register and reasonable grounds to conclude that a complainant would suffer irreparable harm should the agreement be allowed to take effect pending final action by the FMC. This approach would be entirely PAGENO="0030" 24 consistent with *the bill's objective to simplify and expedite processing of Section 15 agreements and with removal of the amorphous and discretionary "public interest" test of approvability from the present statute. Specifically, CENSA recommends striking subsection 2(6) of the bill, substituting the new text, below, as subsection 2(3) and renumbering the subsequent subsections accordingly: "(3) The following new paragraph is added after the first paragraph: "The Commission shall, within five working days of receipt of any such agreement, transmit a notice of filing to the Federal Register for publication. Within 45 days after Federal Register notice of filing, the Commission shall grant temporary approval pending the Commission's final disposition of the agreement under this section unless, within such 45-day period, upon the verified complaint ofa carrier, shipper, port or other person served within 20 days of publication in the Federal Re~ister of notice of such filing, the Commfssion finds that: (i) the parties to the agreement would not be substan- tially harmed if the agreement were not immediately approved and implemented; and (ii) the complainant would be irreparably harmed if temporary approval were granted; and (iii) it appears from all the information available to the Commission that the agreement is likely to be found in violation of this Act." Shippers' Councils. -- In substance, CENSA has no objection to Section 3 of H.R. 4374 that would authorize formation of a shippers' council in the United States. Our membership have dealt with such organizations in their home countries, and CENSA has had a long and generally useful dialogue on a continuing basis for many years with its counterpart organization of the European PAGENO="0031" 25 National Shippers' Councils. However, we do have the following comments. Proposed new Section 15a(a)(1) would authorize a U.S. shippers' counsel to "consult and agree" with carriers and conferences concerning specified matters. (See p. 5, line 14 of the bill.) In our view, the consultative process can be a valuable forum for exchange and discussion of information and views concerning matters of mutual interest. However, inclusion of reference to agreement on such matters could be read as an implicit statutory mandate to reach agreement. This would, in our opinion, constitute an unwarranted intrusion into the complex array of business considerations bearing on commercial decisions by carriers and conferences with respect to general rate levels, practices and terms and conditions of service in ocean commerce. Carriers and conferences must be free to make their own final decisions on the appropriate forum, manner and extent of implementing action called for -- if any -- following consultations with shippers, lest legitimate commercial and financial considerations be relegated to a secondary role, contrary to accumulated experience and wisdom under the free-enterprise system. Thus, CENSA strongly urges deletion of the words "and agree" in proposed new Section 15a(a)(1) of the Shipping Act. Civil Penalty Provisions. -- CENSA is fully in accord with substituting civil penalties for the "misdemeanor" sanction now provided for certain violations of the Shipping Act, as proposed PAGENO="0032" 26 in the bill. (Section 4(b)-(d).) However, as previously noted in detail, CENSA believes most strongly that such penalties should be the exclusive remedy for such violations and that the bill should expressly so provide. Ocean Freight Forwarders. -- CENSA notes that the definition of "ocean freight forwarder" in the introductory section of the bill refers to a person who "dispatches shipments via ocean ccznrxn carriers" and "processes the documentation or performs related activities incident to such shipments." This language is bro~ enough to encompass services occasionally performed by general steamship agents and, therefore, it is conceivable that such agents, for which carriers have a legitimate commercial need could be subject to the bonding requirement set forth'in proposed new Section 44(a) of the Shipping Act as set forth in Section 5 of the bill. While CENSA has no objection to a bonding requirønent for ocean freight forwarders, the purpose to be served by a bond is inapplicable to the activities of a general steamship agency and exclusionary language should, therefore, be inserted in the definition; viz., "The term `ocean freight forwarder' means a person in the United States, other than a general steamship agent, who for others --". On an overriding note, however, it is recommended th~t the definitions in Section 1 of the Shipping Act and the other requirements and standards (except as to bonding) in Section 44 of the Shipping Act, 1916 that existed for 20 years, from 1961 until August of this year, should be adhered to and reinstated to the PAGENO="0033" 27 extent they were most recently and unexpectedly modified under Section 1608 of the Omnibus Budget Reconciliation Act of 1981 (H.R. 3982). In this regard, it will be recalled that the House Merchant Marine & Fisheries Committee and the Senate Commerce Committee held extensive hearings and carefully considered the ocean forwarding industry for several years prior to 1961, taking cognizance also of a preceding thorough investigation of the industry at the FMC. After most careful consideration, both Committees strongly recommended and in 1961 Congress adopted, the provisions in Sections 1 and 44, in order to foster a healthy competent forwarding industry and to eliminate then widespread malpractices, objectives that were and remain essential not only to that industry, but also the ocean carriers, shippers, and commerce. The necessary and carefully thought out ingredients to accomplish the objectives were, as the Shipping Act shows, that forwarders should be truly independent, having no beneficial interests in the shipments and no connections with shippers or consignees, that they should post bonds, that they could not operate without holding a Federal Maritime Commission license based upon a showing of fitness, willingness, and ability to perform forwarding services, and that they should be compensated only on the basis of certifying the prescribed services. Earlier this summer, Congress suddenly revised the Shipping Act requirements and standards when it passed the Omnibus Budget 94-856 0 - 82 - 3 PAGENO="0034" 28 Reconciliation Act. Under Section 1608 of that Act, the definition was revised so as to eliminate the requir~nent that forwarders be independent of shippers, consignees, sellers, or purchasers of shipments to foreign countries, and also reduced the prohibitions against compensation. H.R. 4374 goes further. Definitionally, it totally eliminates the "independent" status requirement; it revises Section 44 to eliminate entirely the licensing requirenent and fitness standard, limiting entry into the business solely to the posting of a bond of not less than $50,000 and no greater than $100,000; and it further eliminates all restrictions on compensating forwarders except for certifying that the forwarder has posted the required bond and that he has no beneficial interest in the shipment. CENSA submits that these drastic changes of the pre-Budget Act statutory requirements should not be adopted. Unless forwarders are required to be truly independent, and licensed on that basis, one can anticipate serious problems in policing the prohibition against compensation where the forwarder has a beneficial interest, and other activities which will again foster malpractices that flourished prior to 1961. Furthermore, without licensing, carriers will be confronted with any number of unknown forwarders as they daily process thousands of bills of lading before a shipment moves forward and they will have no reasonably realistic means for determining whether particular forwarders are fit, willing and able to perform the services needed by carriers PAGENO="0035" 29 and shippers. The most probable consequences would be a reversion to widening malpractices, and in the end harm to the forwarding industry, the ocean carriers, shippers, consignees and commerce generally. Miscellaneous Provisions. -- CENSA fully supports the proposal in Section 2(1) of the bill to amend Section 15 of the Shipping Act so as to authorize conferences to limit membership. The benefits resulting from authority of conferences to limit membership were conveyed to your Committee by CENSA and other knowledgeable witnesses last year. These were summarized at pages 29-30 of your Committee's Report 96-935, Part 1, dated May 9, 1980, accompanying H.R. 6899. However, Section 2(4) of the bill is at odds with the most desirable objectives contenplated by Section 2(1). Moreover, CENSA's experience, arid good sense, indicate there is no basis for anticipating that conferences would deny participation of the national flag of the United States or other countries served by the conferences. And, in any case, it would be most inappropriate and counterproductive for a country at one end of the conference trades to mandate by statute that its national-flag carriers must be admitted to conference membership considering, among other things, that conferences serve the tredes of countries, and frequently more than two countries, having equal interests in how the trade is served. It should be left to conferences themselves to decide their membership within a commercial system. This will allow for rationalisatjon of services, provided that the conference conditions for membership PAGENO="0036" 30 are not discriminatory and the trade remains open to non-conference lines operating on a commercial basis. Accordingly, CENSA recommends enactment of Section 2(1) of the bill and rewording of Section 2(4) to provide for elimination of the mandatory "open" conference requirement imposed by the language at the end of the second paragraph of existing Section 15 of the Shipping Act, 1916. CENSA would however recommend in this regard that your Subcommittee take the approach conteiiplated in Section 4(a) of S. 1593, which leaves it to the commercial sector itself in whatever is the most efficient and effective systen to serve the particular trade. This is wholly consistent with what we perceive as the intent of Congress to minimise the role of governmental interference and bureaucracy in purely commercial matters. Finally, Section 4(d) of the bill, in pertinent part, proposes to amend present Section 32(a) of the Shipping Act to make civil money penalties applicable for violation of "any provision of this Act." it is conceivable, if not probable, that this new expression of legislative intent could be read to apply to cases arising under Section 18(b)(5) of the Shipping Act; i.e., complaints that a carrier or conference rate or charge is "so unreasonably high or low as to be detrimental to the commerce of the Thited States." If that reading is strictly applied, it would constitute an expansion of carrier and conference exposure to retroactive reparation claims and penalties. Remedies under existing Section 18(b)(5) were for sound reasons intended to be, PAGENO="0037" 31 and have been, applied prospectively only. See in this regard the Commission's decision in Valley Evaporating Co. v. Grace Lin~~ Inc., 14 F.M.C. 16 (1970) quoting and applying the decision of the District Court in Federal Maritime Commission v. Carragher, 364 F.2d 709, 717 (2d Cir. 1966) that Section 18(b)(5): simply reflects Congress's awareness that whether a certain rate is `unreasonable' is often a close question and that consequently a regulated carrier should be liable for . . . penalties only if it continues to charge unreasonable ra~s after the Commission has determined they are unreasonable." (Underscoring supplfédThy the Commissior~[n its decision, with a footnote emphasizing that the Court holding "is fully supported by legislative history".) At the very least, the legislative history accompanying H.R. 4374 should reflect an explicit intention that this long-standing interpretation of Section 18(b)(5) should continue to be followed. Preferably, the section itself should be amended by adding the following new sentence at the end: "This remedy shall be exclusive unless the carrier or conference continues to impose the rate or charge that has been disapproved, in which case a civil penalty as provided in paragraph (6) of this subsection may be imposed." Having addressed the legislative proposals contained in H.R. 4374, CENSA would like to comment on an important matter that is not dealt with in the bill -- intermodal authority for conferences. PAGENO="0038" 32 Intermodal Movements. -- It is imperative that any legislation to update the 1916 Shipping Act contain express authority, coupled with antitrust immunity, for intermodal services by conference members. Since the advent of containerization, intermodal services have become intimately related to the activities and well-being of conferences. Indeed, facilitation of rapid and economical inland delivery of ocean cargo is perhaps the most dramatic commercial consequence of containerization. Increasingly since the late 1960s, conference carriers have invested billions of dollars in building container, Ro-Ro and LASH/Sea Bee vessels, and related intermodal equipment and systems. To realize the full potential of intermodalism, it is essential that conferences be able to offer uniform rates, terms and conditions for movement of ocean cargo; that is, providing shippers with access to transportation of their cargo from inland point of origin to inland point of destination via any member carrier at the sane rates and under the sane terms and conditions of carriage. Only in this way can the ultimate economies of scale and efficiencies of handling inherent in containerization of ocean freight be achieved by a conference; without intermodal authority, conferences would be precluded from offering shippers generally the best possible service on equal terms at the lowest practicable cost. Litigation presently pending before the United States Court of Appeals for the District of Columbia Circuit squarely presents the Department of Justice position that under the Shipping Act as PAGENO="0039" 33 now in force, conference activity can extend only to port-to-port movements and, therefore, the FMC has no authority to approve conference agreements to regulate the intermodal services of their *1 members.- Should this view prevail, unrectified by express legislative authority, the restriction would ultimately lead to the undermining of conference tariffs, rate-cutting, rate wars, and resulting carrier bankruptcies, monopolies, destruction of conferences, and other evils of predatory competition that your Congress and other governments have sought to avoid over the decades. Apart from these economic consequences, and bearing in mind that a particular service involves carriers of a number of countries which support conference intermoda]. service, the position taken by the Department of Justice can only needlessly cause significant international jurisdictional confrontations and problems. Thus, express legislative authority for interinodal service by ocean conferences is essential. This could be accomplished by adding the following new language to the first sentence of present Section 15 of the Shipping Act (text to be added is underlined): Every common carrier by water, or other person subject to this Act, shall file immediately with the Commission a true copy, or, if oral, a true and complete memorandum, of every agreement with another such carrier or other person subject to this Act, or with *1 - United States v. FMC, D.C. Cir., No. 79-1299; pending rehea~ing en banc. PAGENO="0040" 34 ~y~pr arty combination of air carriers, rail carriers or motor carriers regarding~intermod~~ ?àtés or service, or modification or ~áriàellation thereof, to which is may be a party or conform in whole or in part . A conforming amendment should also be made to present Section 18(b)(1) of the Shipping Act, as follows (text to be added is underlined): From and after ninety days following enactment thereof every common carrier by water in foreign commerce and any conference of such carriers shall file with the Commission and keep open to public inspection tariffs showing all the rates and charges of such carrier or conference of carriers for transportation to and from United States ports andpoints and foreign ports between all ports ~ñ~its own route and on any through route within the United States which has been established . . In conclusion, as Chairman Jones emphasized in his remarks accompanying introduction of H.R. 4374 on August 4, the bill is intended as a serious vehicle for discussion. In that vein, CENSA'S comments are intended to be constructive and supportive of the objectives the bill has set out to accomplish. We trust our views will be helpful in this connection and that the Subcommittee's mission will meet with the degree of success that this thoughtful beginning warrants. Dated: October 6, 1981 PAGENO="0041" 35 Mr. BIAGGI. Mr. McCloskey? Mr. MCCLOSKEY. I have no statement, Mr. Chairman. Mr. BIAGGI. Mr. Sunia? Mr. SUNIA. I have no statement. Mr. BIAGGI. Thank you. The first witness is the Honorable Alan Green, Jr., Chairman of the Federal Maritime Commission, accompanied by C. Jonathan Benner, General Counsel and James K. Cooper, Managing Director. Good morning, and welcome. STATEMENT OF HON. ALAN GREEN, JR., CHAIRMAN, FEDERAL MARITIME COMMISSION, ACCOMPANIED BY C. JONATHAN BENNER, GENERAL COUNSEL, AND JAMES K. COOPER, MANAG- ING DIRECTOR Mr. GREEN. Good morning. I am happy to appear before you this morning to present the views of the Federal Maritime Commission with respect to H.R. 4374, a bill that proposes several significant amendments to the Shipping Act of 1916. As you indicated, Mr. Chairman, I am accom- panied today by the Commission's Managing Director, James K. Cooper and our General Counsel, C. Jonathan Benner. I will confine my remarks today to a discussion of the major changes proposed by the bill, and reserve our more technical analy- sis of its provisions for our written comment in letter form. I ask, Mr. Chairman, that our letter dated October 5, 1981 be in- cluded in the record as an attachment to my remarks. Mr. BIAGGI. Without objection, so ordered. [The following was received for the record:] PAGENO="0042" 36 3JfL'~IL~rilt iIIZIiiIIIIIL' (! L11flhl1it~ t~itUl it1n~1uit~luit,D.Q. ;~L~5~:~ Q)tTir&~ n11I~~ UI~airn1nhl October 5, 1981 Honorable Mario Biaggi Chairman Subcommittee on Merchant Marine H2-531, House Annex #2 Washington, DC 20515 Dear Mr. Chairman: As a supplement to my prepared statement before your Subcommittee on H.R. 4374, a bill, "To improve the international ocean commerce transportation system of the United States," the Federal Maritime Commission would like to take this opportunity to submit a more detailed analysis of the provisions of the bill. While my statement does discuss the major issues involved with this legislation, we feel that our more technical comments would be an appropriate subject for a letter. Section 1 The bill's definition of "agreement" is derived from the definition of "agreement" that now appears in section 15 of the Shipping Act. However, the bill's definition does not include the phrase "unless such provisions provide for an assessment agreement described in the fifth paragraph of this section." This limiting language takes into account the Commission's jurisdiction over assessment agreements that remained unchanged by the provisions of the Maritime Labor Agreements Act, P.L. 96-325. This deletion could be corrected by including the phrase in the bill's definition of agreement. The definition of "shippers' council" includes the requirement that shippers have a proprietary interest in the merchandise. It is unclear whether this would exclude or include entities such as shippers cooperatives and export trading companies. The definition of ocean freight forwarder doe.s not define activities are necessary to "dispatch" a shipment. The PAGENO="0043" 37 definition would be less ambiguous if it clearly states activities that are contemplated. We suggest the following language: "Ocean freight forwarder". means a person in the United States who performs, or holds out to perform a service, or a combination of services for another, which facilitate the shipment of cargo via ocean common carrier. Services performed by ocean freight forwarders include, but are not limited to, the following: (1) ordering cargo to port; (2) preparing and/or processing export declarations; (3) booking, arranging for, or confirming cargo space; (4) preparing or processing delivery orders and dock rece ipts; (5) preparing and/or processing ocean bills of lading; (6) preparing or processing consular documents or arranging for their certification; (7) arranging for warehouse storage; (8) arranging for cargo insurance; (9) clearing shipments in accordance with United States Government Export regulations; (10) preparing and/or sending advance notifications of shipments and other documents to banks, shippers, or consignees, as required; (11) handling freight or other monies advanced by shippers, or remitting or advancing freight or other monies or credit in connection with the shipment of cargo; (12) coordinating the movement of shipment from origin * to vessel; and (13) giving expert advice to exporters concerning letters of credit, other documents, licenses, inspection, or on problems germane to the cargo's movement. PAGENO="0044" Q U Section 2 (1) The provision for closed conferences may conflict with those provisions of section 15 that require conference agreements to provide "reasonable and equal terms and conditions for admission and readmission to conference membership of other qualified carriers in the trade." Furthermore, the position taken by the Commission in United States V. Federal Maritime Commission No. 79-1299 (D.C. Cir.) is that agreements involving intermodal rates are covered by the curreni phrase in section 15 which includes agreements "fixing or regulating transportation rates or fares." We believe that the first sentence of the first paragraph of section 15 should be clarified by adding after the word "fares" the words "including intermodal rates." This would clarify the right of conferences to publish intermodal rates, but avoids the use of any language that could be implied to permit conferences to negotiate as a collective unit with inland carriers subject to the jurisdiction of the Interstate Commerce Commission. (2) No comment. (3) Although the term "public interest" is used, by many as a euphemism.for the policies of the antitrust laws, the "public interest" is a far broader term. As Justice Harlan pointed out in his concurring opinion in Federal_Maritime Commission v. Svenska Amerika Linien, 390 U.S. 238, 253: "It seems plain that the `contrary to the public interest' test was intended to comprehend factors unique to the shipping industry as well as those embodied in the antitrust laws." The elimination of the public interest standard may preclude examination of "factors unique to the shipping industry," a result which may not be intended. The inclusion of the public interest standard in section 15, did not, for the first time, inject consideration of competition into section 15 cases. The Commission often weighed the benefits of an agreement against the benefits of competition in numerous cases prior to 1961 when the public interest standard was added to the Shipping Act, 1916. See for example: Dollar-Matson Agreements, 1 USMC 750, 755 (1938); Pacific Coast-European Rates and Practices, 2 USMC 58, 61 (1939); Dollar-Matson Agreements, 2 USMC 387, 394 (1940); Isbrandtsen Co. Inc. v. United States, 211 F. 2d 51, 57 (D.C. PAGENO="0045" 39 Cir. 1954); Pacific Coast Eurqpean Conference - Payment of Brokerage, 5 FMB 225, 240 (1957); Swayne & Hoyt v. United States, 300 U.S. 297, 305, 306, (1937). Eliminating the public interest standard would do nothing to repudiate the cases cited above. We refer you to our comments in regard to burden of proof, infra. (4) By placing a "(3)" before the phrase "fails to provide that any member may. withdraw from membership upon reasonable notice without penalty for such withdrawl," the requirement will be extended to all agreements and not simply conference agreements as is presently the case. This appears to be unintentional. (5) We fully support time limits pertaining to the processing of section 15 agreements. However, the time limits in the bill are not realistic for several reasons. It takes approximately ten days for' notice of am agreement to be published in the Federal Resister. Protestants must be given a reasonable period after notice in the Federal Register to obtain the agreement, analyze it, and file comments. The Commission's staff must have some time to review thematerial and make a recommendation to the Commission. We prefer time limits which are similar to those contained in the two Senate bills (5. 1593, 5. 125). We note that because the time limits run from the filing of the agreement, they would apply only to the processing of initial agreements and not to investigations of previously approved agreements. In order to meet the deadlines imposed, it will be necessary for the proponents to submit concurrently with the agreement a statement explaining the background and objectives of the agreement. This requirement should be included in the bill. We suggest that the following language be added to the end of the second paragraph of section 15: "The time limits of this section shall only apply `to those agreements that are accompanied by a supporting statement setting forth 1) the economic and commercial reasons which caused the formulation of the agreement; 2) the results intended to flow from its implementation; and 3) how the `agreement complies with the requirements of paragraph (c) of this section. The statement shall be of su'ch composition, scope, and format' that it will serve as the proponents' direct case if the matter is set down for formal investigation and hearing." PAGENO="0046" 40 We suggest that the bill clarify that Congress. intends to legislatively overrule Svenska in regard to the shifting of the burden of proof, but does not intend to preclude the Commission from consideration of competition, apart from the antitrust laws, in considering agreements. The essence of this problem is that competition has come to be viewed as an end in itself and not as a means to achieve the real goal of efficiency. Because of that, the Svenska test creates a presumption in favor of competition. Since competition is not always the best means of achieving efficiency in ocean transportation and, in fact, is unworkable in many instancesbecause of government influences, that presumption is now in some quarters viewed as undesirable. However, in discarding this presumption, it would be foolish to refuse to consider competition at all in seeking to achieve a more efficient ocean transportation industry. We recommend that the following language be added to the section: `The burden of proof shall not be shifted to proponents of any agreement solely on the grounds that the agreement, absent appi~oval, would violate the antitrust laws." (6) We believe that the Commission must develop a modified procedure such as the one in use by the ICC in order to meet its deadlines (see 49 C.F.R. 1100.45). However, the provisions of the bill relating to informal hearings are more appropriately a subject for the Commission's Rules of Practice and Procedure. We suggest that the following language be substituted in the bill: ~Hearings. - Hearings pursuant to this section will be limited to the submission of affidavits of fact and memoranda. of law unless there is a genuine issue of fact that requires an oral evidentiary hearing. Oral argument may be ordered at the discretion of the Commission." This would express Congressional support for a modified procedure while giving the Commission flexibility to develop its own procedural rules. (7) No comment. Section 3 No comment. Section 4 No comment. SectionS See my statement, page 8. This completes our comments with respect to H.R. 4374. The Commission and its staff stand ready to assist the Committee in any way with respect to its consideration of this `important legislation. . * Sincerely, Alan Green, Jr. Chairman cc: Honorable Paul McCloskey PAGENO="0047" 41 Mr. GREEN. Thank you, sir. H.R. 4374 proposes amendments to sections 1, 14, 15, 21, 32, and 44 of the Shipping Act. In so doing, it represents a more modest approach to reform than that proposed during last Congress by the omnibus bill, which was intended to replace the Shipping Act in its entirety. As you know, a Shipping Act substitute (insofar as the foreign commerce is concerned) is also the approach taken by 5. 1593 and 5. 125, currently before your colleagues on the Senate Commerce Committee. The Commission offered its views with respect to those two measures during hearings late last month. While H.R. 4374 has a more limited scope than the Senate legis- lation, it does contain provisions which address certain areas of the Shipping Act that are sorely in need of clarification or change. Issues common to H.R. 4374 and the Senate bills are: The deletion of the public interest standard for approval of agreements; the au- thorization of shippers' councils; establishment of time limits on Commission action on agreements; and the elimination of the li- censing of freight forwarders. In my testimony today, I would like to briefly address each of these subjects and, in addition, mention one other topic-intermo- dal transportation. I or my associates then would be happy to answer any questions that committee members may have. The Commission strongly supports review of the shipping regula- tory statutes in order to clarify the antitrust immunity applicable to the activities of ocean common carriers and other persons sub- ject to the Shipping Act. If there is one issue which deserves legis- lative attention, it is this one. The scope and applicability of such immunity should be defined with certainty and precision. The con- fusion that now exists throughout the maritime industry because of the dual application of the antitrust laws and the Shipping Act has reached a point where steamship liner operators are at times beset by a commercial paralysis and cannot be expected to react quickly to changing trade conditions. H.R. 4374 would maintain the present system of providing a grant of immunity from the antitrust laws only upon action of the Commission approving a filed agreement. While the Commission has supported the so-called blanket immunity approach contained in the two Senate bills, we could also support a system which links the grant of immunity to Commission approval. This is the present system. However, if this approach is to be maintained, it will be neces- sary to establish clear guidelines as to the boundaries of the anti- trust immunity. Problems which currently exist are in large part based on gray areas in approved agreements. The grant of a blan- ket immunity has the advantage of resolving all ambiguities in favor of Shipping Act jurisdiction. For this reason, a statutory grant of antitrust immunity applicable to clearly defined types of activities may be the best solution to this conflict and confusion. However, should such an approach be adopted, it may remove the incentive to file an agreement with the Commission for approv- al. Thus, we believe that the bill should also provide stiff penalties for failure to file an agreement with the Commission. PAGENO="0048" 42 Providing clear and practical standards for the evaluation and approval of agreements is also essential for the fair and efficient processing of agreements. The Commission supports the inclusion of definite standards which commercial parties and the Commis- sion can apply in a sensible manner. To that end, H.R. 4374 pro- poses to delete the public interest standard for the approval of agreements. This deletion was presumably based upon a desire to terminate the so-called "Svenska" test which has been applied by the Commission since the mid-1960's. This test has become identi- fied with a requirement to perform a stringent antitrust analysis for certain agreements prior to Commission approval or disapprov- al. While some agreements have been disapproved on application of Svenska standards, the deletion of the public interest language of section 15 of the Shipping Act may not completely resolve the issues sought to be addressed. Under Commission case law prior to the public interest amendment of 1961, the effect of a proposed agreement on competition was considered under the unjust dis- crimination and detrimental to commerce standards. We suggest that the bill or the legislative history clarify that Congress intends to legislatively overrule Svenska, but does not intend to preclude the Commission from consideration of competition, apart from the antiturst laws in considering agreements. The essence of this problem is that competition has come to be viewed as an end in itself and not as a means to achieve the real goal of efficiency. Because of that, the Svenska test creates a pre- sumption in favor of competition. Since competition is not always the best means of achieving efficiency in ocean transportation and, in fact, is unworkable in many instances because of government in- fluences, that presumption is now generally viewed as undesirable. However, in discarding this presumption it would be foolish to refuse to consider competition at all in seeking to achieve a more efficient ocean transportation industry. An issue that is not addressed by the provisions of H.R. 4374 but which has recently been a source of considerable controversy, is the authority of the Commission to grant to conferences the section 15 approval necessary to set intermodal rates. The Commission's long-held view that section 15 has encom- passed this type of authority is now the subject of a court challenge in the U.S. Court of Appeals for the D.C. Circuit. In order to clearly restate the authority of conferences to offer intermodal service, we suggest that the first paragraph of section 15 be amended to pro- vide that carriers may agree on rates, including intermodal rates. Our amendment avoids the use of any language that could be im- plied to permit conference carriers to negotiate as a collective unit with inland carriers. In addition, it would be clear that the FMC would not have the authority to regulate the rates and services of air carriers or surface carriers subject to the jurisdiction of the ICC. Relative to the processing of agreements under section 15 of the Shipping Act, H.R. 4374 proposes time limits for Commission action with respect to agreements. The design of the time limits suggest a two-step hearing process-including a preliminary hearing on an agreement, to be held within 30 days of the filing of a complaint by PAGENO="0049" 43 a third party which in turn must be filed within 20 days of the agreement's filing. The Commission must commence a "proceeding to disapprove, modify or cancel" an agreement within 30 days after agreement is filed. Apparently the Commission could not initiate a preliminary hearing on its own motion. The complaint and hearing provisions also do not appear to apply to an already approved agreement. As a practical matter, these proposed time limits do not appear to be adequate. For example, it requires approximately 10 days for a notice of the filing of an agreement to appear in the Federal Reg- ister. Under the time limits of the bill, this would allow interested parties only a 10-day period in which to obtain the agreement, evaluate it, and file a complaint. Please do not misunderstand, the Commission believes that it should complete its action with respect to agreements as expedi- tiously as possible. We realize that the imposition of statutory time limits is the most effective way of ending delay. This raises the problem that not all agreements involve the same issues or require the same type of analysis. We therefore recommend that, if time limits are imposed on Commission action, parties to an agreement be required to file along with the text of the agreement a state- ment setting out significant background information with regard to the agreement's terms. Such an explanatory statement is impera- tive if the Commission is to provide a meaningful review of a pro- posed agreement within the statutory time limits contemplated. As to the specific time limits set by H.R. 4374, we believe that they are unnecessarily confusing, and should be clarified. H.R. 4374 authorizes the establishment of shippers' councils. The Commission believes that, if these councils are authorized and given antitrust immunity, the law should provide a flexible frame- work to allow the councils to form in ways which are responsive to the diverse needs of shippers. H.R. 4374 would provide such a framework. However, we note that the bill identifies the Federal Trade Commission as the responsible agency for the approval and supervision of these councils. We assume that this is an oversight. H.R. 4374 also proposes to eliminate the licensing of freight for- warders and set both a statutory minimum and maximum bond limit for both forwarders and NVO's. The Commission is unaware that the regulation of forwarders under section 44 of the Shipping Act imposes an unnecessary and unreasonable burden on the for- warding industry. The regulatory scheme which requires the licens- ing and bonding of forwarders was established in response to wide- spread abuses in the freight forwarder industry. That law has proven successful in curbing those abuses. It has been our understanding that this area of our regulatory responsibilities has been relatively noncontroversial. We therefore urge the committee not to change the law without a clear showing that the current scheme is not warranted or effective. We also recommend that the bill maintain the present system of permitting the Commission, by rule, to establish the amount of the bond, a method which allows for quicker response to inflationary changes in our economy. As a final point, I would like to note that H.R. 4374 contains an amendment to section 15 which would require conference agree- 9L~_856 0 - 82 - PAGENO="0050" 44 ments to provide an opportunity for membership of at least one U.S.-flag carrier. This provision apparently intends to prohibit the exclusion of U.S.-flag carriers from a conference in which such car- riers wish to participate. There are many agreements now on file with the Commission which do not have U.S.-flag members for a variety of reasons. As presently drafted, this provision would appear to establish a U.S.-flag quota which would be filled follow- ing the admission of the first willing U.S.-flag carrier. We assume that this was not the intent of the drafters. In conclusion, one additional thought, our comments today are based upon a level of funding which will enable the Commission to perform its current duties in a responsible and efficient manner. Accordingly, we may at some future time, because of budget re- strictions, wish to supplement our remarks concerning our ability to implement statutorily mandated programs. This concludes my prepared remarks. We will be happy to answer any questions which you may have. Thank you. Mr. BIAGGI. I do not want to disturb the rest of your day, the Federal Trade Commission is clerical error. Mr. GREEN. We are happy to hear that, sir. Mr. BIAGGI. I am sure. Thank you for your statement. I know you understand the objectives of the bill is to assist in revitalizing our merchant marine by removing some of the legal constraints that now put us at a competitive disadvantage. Do you still think the bill will accomplish that objective? Mr. GREEN. I think it is a step in the right direction, yes, sir. Mr. BIAGGI. You have made some recommendations. Are there any other changes that you recommend to help reach that stated purpose? Mr. GREEN. We have, in our separate comments, sir, we have some suggestions to clarify it, and also what is said here. We think it is a great step in the right direction. Mr. BIAGGI. What does the Senate bill have of any substance that we do not have in ours? Mr. GREEN. Of any substance? I would like to have Mr. Benner answer that question, if I may. Mr. BENNER. As you know, Mr. Chairman, the Senate bill starts from the ground up on rewriting the Shipping Act, and this partic- ular bill concentrates on making some much needed amendments to the existing act. There are some differences in approaches. I think our comments today are intended to indicate that we sup- port the objectives of both bills, we think that they are both con- structive approaches to the problems, and we will be satisfied that the legislative process will, if either bill goes forward, in current form, address many of the problems we now have. Mr. BIAGGI. I understand they have reference to intermodal transportation, and we do not have it in ours. Should we? Mr. BENNER. Well, our testimony in the Senate was, and here also, that we think this is a very pressing problem. At one time we would have thought that the intermodal authority in the statute now is quite clear. It just has not proven that way. PAGENO="0051" 45 We find ourselves in court on any number of intermodal agree- ment approvals, so we do recommend, most strongly, that your bill contain some restatement, or clarification of existing intermodal authority. Mr. BIAGGI. Previously the Department of Justice has consistent- ly opposed the granting of ocean liner conferences, and carriers of the authority to establish intermodal agreements. Do you have any suggestions as to how this agreement authority can be established so as to meet the complaints of Justice? Mr. GREEN. The Department of Justice, sir, is doing-they are doing their job as they see fit to do it. Mr. BIAGGI. I like the qualification, "as they see fit to do it." Mr. GREEN. Well, they are doing their job, and what we are trying to do is ours. Any clarification we can get would be very helpful, that is really what I look on, in the Senate bill, and also the House versions. I am very optimistic that the two are pretty close together, and I think that it can be perhaps successful, and if it is, you will bring some regulations that the maritime industry has needed for decades, apparently, and I think you will go down in history as a great man, sir. Mr. BIAGGI. I do not want to go down in history as anything. I would just like to try to get Justice off dead center, one way or an- other. Do you have any suggestions in how we can do it? Mr. GREEN. Just make the statute specific, sir, that is the way to do it. Make it plain and simple. Mr. BIAGGI. Would the inclusion of intermodal agreements within the jurisdiction of the Federal Maritime Commission run counter to the recent deregulatory effort of ICC? Mr. GREEN. No, sir. We have established with the ICC a close re- lationship, and our staffs are-have gotten to know each other, re- spect each other, and we are in the process of trying to work to- gether in a team play type of arrangement, sir. Mr. Benner would like to make a detail on that. Mr. BENNER. The issue that we are facing is one that we do not think should impinge on the ICC's role and we have had, as the chairman referenced, contacts with the ICC on this in preparation for testimony on this bill and the Senate bills. The authority that we are trying to clarify is the authority of a steamship conference to collectively set a through intermodal rate for the movement of cargo from an interior point to another interior point, or to a port. This really should have no effect, on the ICC's jurisdiction over the domestic surface carriers that they regulate and, for this reason, we feel that there can be no conflict. We do not speak for the ICC on this point, but we have been making every effort to make sure that they understand our point of view on this and that they understand that we are addressing the authority of ocean carriers to jointly set a through rate. We are not endeavoring to extend FMC jurisdiction to any part of an inland movement. Mr. BIAGGI. We did not pursue the so-called blanket approach be- cause we anticipated Justice's opposition. We tried to overcome that opposition, and that is why we took the approach that we did. PAGENO="0052" 46 You made some reference to the gray areas. Could you provide us with some suggestions as to how you deal with the gray areas? Mr. GREEN. I think the General Counsel ought to take that one, sir. Mr. BENNER. Well, our stated preference is for the so-called blan- ket immunity approach or the statutory of immunity. Even in a regime where you have an approved agreement, it is not always clear to the parties or to the Department of Justice what activity is included in that agreement. You can have disputes even when an agreement is in place as to whether the activities undertaken pür- suant to that agreement might be interstitial to the approval al- though perhaps not stated on the document. I think to some extent we ran into this problem in the North Atlantic trades. The blanket immunity approach just cuts through all that pretty thoroughly, and that is the attraction of giving a statutory grant of immunity. There cannot be that shadowy area where the Shipping Act immunity bumps against the antitrust laws. You should show with some precision where one stops and the other begins. Mr. BIAGGI. Blanket immunity might be the more desirable view. Do you expect that Justice would approve that? Mr. GREEN. We do not know. Mr. BIAGGI. Well, you spoke to the ICC. Let me suggest, if I may, that you speak to Justice. Mr. GREEN. Well, we have, sir. We do not think they would like it, sir; no. Mr. BIAGGI. Somehow I have a feeling there might be some movement this time within Justice. Apparently not in connection with blanket immunity but my own feeling is that something will happen in the area. I am hoping that it does. If we eliminate the public interest standard, would we not auto- matically return the law back to prior 1961, when unjust discrimi- nation and detrimental to commerce standards were used to consid- er competitive aspects of agreements? Mr. GREEN. Yes, we would, sir. Mr. BIAGGI. I am sure you are familiar with the proposal to elim- inate all tariff filings before FMC. This proposal is offered as an alternative to H.R. 3637 which this committee is now considering, the Canadian diversion bill. Could we have your views on that proposal? Mr. GREEN. You are talking about tariff, sir? Mr. BIAGGI. Yes, to eliminate all the tariff filings. Mr. GREEN. Well, in anticipation of the question similar to that, sir, we feel that the tariff system is the backbone of the common carrier system. It protects shippers against discrimination, it would provide price information necessary to insure competitive markets for ocean transportation services, that it enables export shippers to make sales with some assurance that the transportation costs will not fluctuate wildly for 30-day periods, that it provides the glue to hold the conference systems together, that it enables carriers to rely on relatively steady flow of revenues, that it promotes, and I think this is most important, that it promotes fair and open compe- tition among the carriers, and also that it provides the Federal Maritime Commission with means of enforcing the will of Con- PAGENO="0053" 47 gress, particularly with regard to antirebating provisions and the controlled carriers. Those are our main points, sir. Mr. BIAGGI. What would be the effect of eliminating the tariff filing before the Commission? Mr. GREEN. I thought my eight points would answer that some- what, sir. Mr. BIAGGI. But I would like it in more dramatic language. I know you are capable of that. Mr. GREEN. Well-- Mr. BIAGGI. Because, very frankly-- Mr. GREEN. Very frankly, I think the anticompetitive-I am sorry, Mr. Chairman. Mr. BIAGGI. Very frankly, we have some legislation under consid- eration. We have some mixed opinion in the committee. Mr. GREEN. I am sure you do. Mr. BIAGGI. It is very interesting that we have the automobile manufacturers in this country who are advocating buying Ameri- can cars. They say buy American and ship foreign. That is just about what they are doing in this intermodal operation with CAST and others coming onboard. I do not think-I simply do not think it is right. I think it is an inequitable situation. Our people are being compelled to live by rules, and the others are not. Mr. GREEN. I agree. Mr. BIAGGI. I listened to your eight points and they are very helpful in strengthening the committee's position when it deliber- ates further over that legislation, but I would like the negative side of it portrayed in very dramatic fashion. I know you are capable of it. If we do not have it-- Mr. GREEN. Well, I would like my two people here to reply but I do not want to disappoint you also in my colorful remarks. I do not think Americans ought to be penalized for being Americans, sir, and I have never felt that way. It really deals with the antitrust immunity as well as your tariff. The tariff is the glue of this thing. I am certainly not in any way, shape or form trying to promote myself, keep myself in a job or something like that. That has noth- ing to do with it. I simply think if you do not have tariffs-the tariff is like a Sear's catalog. You get to see what you are paying. I would like my cohorts to reply to this but I think it would be a very, very serious, serious thing to consider doing, not having open tariffs, sir. Mr. Benner and then Mr. Cooper might want to say something. Mr. BENNER. Well, when we speak of tariffs, we need to think why we have them. A tariff is a manifestation of the common carri- er obligations that Congress has determined should be presented to shippers. I think the tariff is the means by which shippers, large and small, can be sure that they are receiving equal treatment as they buy their transportation services in the foreign commerce of the United States. PAGENO="0054" 48 Mr. BIAGGI. Mr. Benner, excuse me for interrupting, but time is running out and we have to go vote. We will have a 10-minute recess. [Short recess.] Mr. BIAGGI. The meeting is called to order. Mr. McCloskey? Mr. MCCLOSKEY. Thank you, Mr. Chairman-- Mr. GREEN. Mr. Chairman, may we continue with that answer of Mr. Benner's? Mr. BIAGGI. Mr. Benner. Mr. BENNER. Well, excuse me, it may be that the point is made, but I think the other point in response to your question about tar- iffs is that the tariff system as it now stands is a fairly flexible pricing mechanism. It reflects prices. It does not influence the level of prices. So, in all this discussion of tariffs that has been going on in the past few weeks, the question we keep coming back to is what is the problem with the current system, and we have been hard pressed to find an answer to that general question. Mr. GREEN. Also my managing director, Mr. Cooper, has some very direct thoughts on this, sir. Mr. BIAGGI. Mr. Cooper. Mr. COOPER. Mr. Chairman, I believe that the tariffs which are filed with the Commission forms the basis for carriers being able to price their services as a marketing field. The American carriers depend very heavily upon this ability to meet competition from for- eign carriers and particularly from the State-controlled carriers that operate in our foreign commerce. From the view of the American carriers the filing of tariffs is particularly necessary, and I am sure that you will hear more about this from the carriers themselves when they testify. Mr. BIAGGI. Thank you. Mr. McCloskey? Mr. MCCLOSKEY. Mr. Green-- Mr. GREEN. Yes, Congressman. Mr. MCCLOSKEY. I have read your testimony with great care and I would like to set out, if I may, by way of introduction, the check- list of the problems which are referred to in your testimony. These are problems which cannot be resolved by this committee until we have the concurrence of the administration. I am speaking of the State Department, of the Department of Transportation, and par- ticularly the Attorney General. I would like to describe to you what happened 4 years ago when a new administration came to town under somewhat the same circumstances, with a President, Jimmy Carter, who had made certain commitments to the mari- time unions and certain commitments to the maritime industry. One was that his administration would resolve the interagency con- flicts which have plagued the determination of maritime policy since at least 1961 when this Commission was created. Now I know perfectly well that it is unfair to ask you for an ad- ministration position at this point, but by, say, next January, I hope it will not be unfair to ask for an administration position on all of these issues which are addressed in this bill, issues which are not resolved by your testimony. PAGENO="0055" 49 Let me go down with a checklist of what must be resolved: First, the question of closed conferences and whether or not there will be a right of independent action or a right to leave the conference and go to an independent situation, and if so, under what conditions. Next the question of whether the complaints of shippers will be entertained and fairly resolved by the Federal Maritime Commis- sion or by the Justice Department. In the past, the Justice Depart- ment has been intransigent about leaving this jurisdiction to the FMC has been because of Justice Department fears, real or not, but in some cases, borne out by events, that the FMC was not capable of determining for example, cases of illegal rebating or when con- ference agreements were violated. The complaint of shippers' ques- tion must be resolved and by whom? Another key problem that has existed over the last decade lies in the fact that every Chairman of the Federal Maritime Commission and every Chairman of the Interstate Commerce Commission has, within a few months of taking office, been imbued with the prima- cy of his Commission and its jurisdiction rather than the need for a national policy of cooperation between the two jurisdictions as to where the jurisdiction begins and ends. The spirit represented by the intermodal testimony in your statement will, I hope, be echoed by the Chairman of the ICC, but it is absolutely crucial that you and that Chairman be in agreement by, say, January if this bill is to reflect the position. The missing element in the past, and what plagued the Carter administration and made it impossible to pass the maritime omni- bus bill last year was that it will ultimately take a White House resolution of these disputes between State, Justice, the FMC, the Department of Transportation. Bill Baxter, now head of the Anti- trust Division, who comes from Stanford University, is a classmate of mine, you as Chairman of the FMC, Drew Lewis, of the Depart- ment of Transportation, who has given a new and vigorous leader- ship in this new whole field and, the new Administrator of the Maritime Administration, are as good people as we can possibly have in these jobs. But unless your heads are all knocked together by someone with the confidence of the White House so that you re- solve these issues, I am afraid that we will go through another 4 years of the kinds of frustration that practically drove us up the wall in the Carter administration. Because one of the commitments that Carter made that he never met was that he would have an advisor at the White House at the National Security Council level who would coordinate the understandable divergent priorities of each Cabinet Office. I hope, as a consequence of being at this hearing today, that you will insist that a White House coordinator, together with Mr. Lewis, Mr. Baxter, Administrator Shearer, yourself, some very high level person at the State Department, and finally Bill Brock, the Special Trade Representative, meet together to resolve these ques- tions. These are the six critical agencies; they should get together at the highest level. I think the seven of you ought to have lunch or dinner together once a week for the next 3 months and in Janu- ary come to us with a designated spokesman who can and will speak for the administration on all of these issues. And if you can do that by January and come to this committee with a resolution of PAGENO="0056" 50 these points, it seems to me we could easily have a bill out by June that would be a credit to the country. Now, in addition to the coordination of policy between these six Government agencies there is another basic controversy that has to be resolved. In my 14 years on this committee it has not been re- solved. It is the issue between organized labor and its work rules and featherbedding practices and our desire to have a strong mer- chant marine. If we are to create a merchant marine in which a large number of new American ships operating under American flag if we are going to generate a lot of new maritime jobs, it can only be done if we are assured that there is no such thing as a 50- mile rule which requires that containers loaded within 50-miles of the docks must be reloaded by dock workers; it can only be done if there is no featherbedding by the maritime unions, that they do not, for example impose a crew of 40 on a PFEL ship going out of San Francisco, that is operated with a crew of 32 out of New Or- leans. Labor and the Government must sit down and strike an agreement, a real compromise on how we get rid of these practices. Labor will have to make its services competitive in return for the Government investing the money and adapting the policies that will create the jobs for this industry. That is the other basic contro- versy that we have to address. I do not want to ask you many questions on the nature of your testimony because I think, in all fairness, you would concede that until the administration has resolved these questions of independ- ent action, resolved the historic conflict between the Justice De- partment, the FMC and the Maritime Administration, we really are talking up a blind alley. I think that perhaps in the next per- haps 120 days you have the greatest opportunity of as any Chair- man in the Federal Maritime Commission's history to resolve all of these problems you speak of. I know you personally and I know you can do it, but it has got to take the cooperation of six administrative agencies. I have never seen a better environment to accomplish this. We have a honest chairman of this subcommittee and this committee-you might have noted the history of this committee in the past. We have a Republican administration and a balance between the House and Senate. It should be possible to resolve these issues. We in Congress cannot do it unless, sitting in that position in your chair is some- body from the administration who speaks for all six agencies. Now, I make that statement in the hope that we can do in 120 days what the Carter administration said it would do but was unable to do in 4 years. It failed because of its inability to orches- trate meet at the highest level among those six administrative agencies. Furthermore, I think you will find Senator Gorton, Sena- tor Inouye, Congressman Biaggi and myself perfectly willing to accept any rational resolution of these differences. It is not which resolution that is important but that there be some resolution like the closed conference, like the shippers' conferences. I have read the testimony that follows you of one of the persons from the shippers council. There is the same division among ship- pers on each of these issues. Nevertheless, we can take a chance and experiment with a major new law if we can get consensus with the administration. It is not certain that all of our decisions will be PAGENO="0057" 51 correct, but we have to reach decisions and we cannot reach those decisions on an informed basis unless those six agencies on your side of the table can get together. Now, that, I have waited 14 years to give that speech to a person that I thought could do something about it. Mr. GREEN. Well, Congressman, you and I have known each other for 30 years. We even were roommates at Stanford together. I am going to shock you by telling you that I agree with a lot of what you said. Matter of fact, I agree an awful lot with what you said, Congress- man. I am anxiously awaiting the administration's position, too, sir. Mr. MCCLOSKEY. Now, when you speak in your last paragraph here of fiscal restraints-- Mr. GREEN. Yes. Mr. MCCLOSKEY. In the performance of your duties in a reason- able and efficient manner, what is the dollar volume that we are talking about? What could Mr. Biaggi and Senators Gorton and Inouye do to insure that at least you have the budget to accomplish this respon- sibility we wish to place on you? Mr. GREEN. Well, in the process of working it out, I would say that we are in the neighborhood of $1 million apart. Mr. MCCLOSKEY. Is that on an annual budget? Mr. GREEN. Yes, sir. I have been, you know, I have been on the job 3 months. What I have been doing is using every possible thing I could think of from my business background to bring this thing as closely in line as possible. We have knocked off completely all outside contracting, consulting. We have brought the furniture and equipment, you know, what is there is there, that is it. We have reduced the travel a great deal, we have to have some of it in there, but we have reduced a lot of it. And I personally am paying for some of my own travel. All outside training has been cut out. It is just-and we are just working on it all the time to try to bring it down because I am very sympathetic with the administration. I have worked 30 years in Oregon politics to have an administration such as this come to Washington, D. C., and I want to be a com- plete and utter team player, which led me-brings me a little bit to what I have to say on some of your remarks. I am optimistic. If you are a businessman, a self-starting businessman as I have been, you just are a natural optimist or you had better be that sort of thing. I personally have gone out with Mr. Benner on some cases, Mr. Cooper and sometimes together. I have visited with Mr. Baxter, I have visited with Mr. Hormatz at State, I have visited with Admiral Shear, I have visited with Drew Lewis, I have, of course, and one reason why-and I am sure that you would recog- nize this, why there is such a good relationship between the ICC and the FMC at the present time is because Reese Taylor, who is the Chairman of the ICC, is a mutual friend of yours and mine from Stanford, classmates together, so we have gotten together and we were even such good sports we took them on in a softball game and we lost 18 to 1, which I thought was pretty nice of us. Anyway, I am not going to tolerate turf fights. I am not after turf. I am after getting this thing done. I do not care about turf, PAGENO="0058" 52 Congressman McCloskey, and you know me well enough to know that I do not care about turfs. Mr. MCCLOSKEY. What is the date that we might look forward to, as a deadline when the administration might report back to us? These disagreements will not be easy to resolve. Let me just take two parts of your testimony as examples. With regard to the Shippers Council, last year Justice testified against Shippers Councils; you testified for it. Last year they testi- fied against closed conferences. The Commission testified in favor of the Svenska rule. It is important that those kinds of disputes would be resolved ideally by the administration within a time level. We had the omnibus bill that we threshed out for 4 years. We now have a more limited version, essentially title II of the omnibus bill, in the House and the Senate. These are vehicles really to give the administration a focal point, vehicles for on the kind of amend- ment that you have proposed today. But what would be a good deadline? What would be a reasonable time that we could ask the administration to come back with real specifics in which there would be testimony on the part of the administration rather than the individual six agencies? Mr. GREEN. I really-I am really not going to duck you on it but I do not think I am the one that can answer that. I think the administration has to answer that. Drew Lewis and I have become good friends. I admire that man a great deal. I am waiting anxiously to see what he has to say, and once the testimo- ny is out, I will meet at any time, anywhere, at any place, to start putting together whatever is needed as far as cooperation from the Federal Maritime Commission is concerned. And I get back to one other thing, sir, and I am sorry, it is my business background, but I cannot do it if I do not have survivable funds. And I am talking about less than a tail assembly of one F-14 to give me something halfway decent to at least get through the year to look at some- thing to see whether we really have not something going or not. Mr. MCCLOSKEY. Let me ask one final question based on your business background. We have been puzzled because the Shippers Councils elements of the bill would represent a new experiment in the United States. They have Shippers Councils in Europe and, in fact, that provision of the bill is modeled upon an experience which allows Shippers Councils to stand up to closed conferences with the Government stepping back into the role of an arbitrator between those competing economic powers. We have been wondering for sometime as to whether or not the Shippers Councils, an element in the bill which was supported by the last administration and by all but Justice Department apparently in the current administra- tion, wondering whether we should pass the Shippers Councils sec- tion perhaps a year before the rest of the bill became effective so that there could be a seasoning process for the businessmen unac- customed to this new antitrust immunity. This way they would have the opportunity to form the Shippers Councils prior to the en- actment of the rest of the deregulatory actions here. Do you think that that would be helpful if we passed out the Shippers Councils' portion early rather than making it part of an omnibus provision? PAGENO="0059" 53 Mr. GREEN. Well, that is a very interesting concept. We had not considered it before. Let me-anticipating some question on Shippers Councils, let me just give you one or two things apparently which has been said to us, and I think it has been said in testimony regarding opposition to Shippers Councils. I think some of the large shippers have opposed it, and small shippers apparently have feared that they would be dominated by large shippers. And also shippers of all sizes who fear dual regula- tion by the Federal Maritime Commission, and also shippers who just do not think the system will work because it is a brand new system. I think that what you say has got some merit. I would have to think about it, I would have to have the people who surround me, who I have a great deal of admiration and trust for, give me some input so that I could think that one out, Congressman. Mr. MCCLOSKEY. Thank you very much. As I say, I will not belabor it further. We will try to get you the million dollars. Mr. GREEN. We are working with 0MB, and they are good people and they have their job to do, and I know that. Mr. MCCLOSKEY. I have no further questions, Mr. Chairman. Mr. BIAGGI. Mr. Snyder? Mr. SNYDER. Mr. Chairman, I want to apologize for not being here during Chairman Green's testimony because of some other meetings. I really have not gone over his testimony that well. I am sure I will have some questions and, in that context, Mr. Chair- man, I would ask unanimous consent that I be permitted to submit some questions. Mr. BIAGGI. Without objection, so ordered. [The following was received for the record:] PAGENO="0060" 54 QUESTIONS SUBMITTED BY CHAIRMAN BIAGGI AND ANSWERED BY FEDERAL MARITIME COMMISSION Question 1 What is your opinion of an amendment to H.R, 4374 that states that when agreements are filed they must be considered presumptively in the public interest and consistent with the standards of the 1916 Shipping Act? Answer - The Commission has recently proposed an alternative method for the processing of agreements. It differs from the procedures and standards for agreements under section 15 and from those currently proposed in both shipping reform measures, H.R. 4374 and S. 1593. We described our proposal in a letter to Senator Gorton dated February 12, 1982. A copy of that letter is enclosed for your information. Briefly, we propose that the review of agreements by the Commission be limited to the post-implementation phases of the agreement's operation. Parties would be required to file their agreements with the Commission but the agreements would become effective within a short time after such filing, i.e. less than 60 days. The Commi~sion would have the authority, either on its own motion or upon complaint, to investigate an agreement for a violation of the Act. We also propose that the standards for approving agreements now contained in section 15 of the Shipping Act and repeated in large part in section 6 of S. 1593 be deleted and that an additional section be added to the Prohibited Acts title of S. 1593. The new section would relate to potential abuses of the authority to engage in concerted activities pursuant to effective agreements. We have suggested an amendment to sections 5, 6 and 12 of S. 1593 that would incorporate our proposal in the bill. If such a procedure for the processing of agreements is adopted, the Commission suggested that consideration be given to provic~ing some mechanism to protect carriers and shippers from the effects of a truly predatory agreement prior to its effective date. One alternative would be to provide the Commission with authority to request a U. S. District Court to enjoin the implementation of the agreement pending Commission investigation. We caution that this proposal cannot be equated with a provision for the presumptive approval of all agreements. Under the FMC proposal there would be no presumption that an agreement would not operate in violation of the Prohibited Acts section of the bill. The use of the term "presumptive approval" implies that all agreements would be "presumptively" PAGENO="0061" 55 in the public interest. ?~n important advantage of the Commission's proposal is that any proceeding to determine the lawfulness of an agreement will focus on evidence of the actual effects of the agreement during its time in operation. The purpose for an amendment authorizing the presumptive approval of agreements - to allow agreements to become effective as soon as possible - would also be accomplished by the procedures the Commission has proposed. Question 2 Would closed conferences and the right of independent action provide ~he stability and flexibility the shipping industry requires? What would the impact be on independent carriers? What impact would this have on rate structures? Answer -The question is a difficult one to answer because, first, we do not have any experience with a closed conference system and, second, there are so many market variables which affect the stability of the shipping industry that it is not possible to isolate one factor and determine its impact alone. Neither the Senate bills, S. 1593 and S. 125, nor H.R. 4374, provide for closed conferences as that term is commonly understood. The term `closed conference1 applies generally to ~ny. conference in which member lines may bar outsiders from membership. On the other end of the spectrum there are "open' conferences which must accept any and all carriers operating in the trade. Members are free to come and go at will. However, the degree of market power exercised by a conference depends not so much on whether the conference is open or closed, but rather on other factors by which the conference can control the cargo in a trade. For example, foreign carriers often have corporate ties to major shipping interests. Japan is a classic example of this with its trading companies, of which ocean carriers, are "family members." In addition, foreign-to-foreign conferences have been relatively uninhibited by antitrust laws in implementing strong tying devices, such as deferred rebate systems, and in "rationalizing" services to improve utilization of ships and equipment. Such rationalization generally includes coordinated sailing schedules, terminal sharing, space chartering and, in some instances, cargo and revenue pooling. Once conferences have achieved strength through such devices, the ability to limit membership then has some effect in combating over tonnaging, since independent carriers would find it difficult to compete with such a strong conference. PAGENO="0062" 56 There are presently no strong "trading companies" or parallel entities in the U.S. through which national-flag carriers can control large volumes of cargo and thus have a strong base from which to dominate a trade. Provisions in H.R. 4374 allowing conferences to limit their memberships alone would not, in our opinion, lead to the type of closed conference system that has traditionally existed in foreign-to-foreign trades. In fact, we doubt that conferences would opt to close their membership unless they had other devices available to them under which they couL3 largely control trade cargo in the first instance. In recent years, U.S. conferences have been trying hard to recruit new members, or in some cases, trying harder to retain old ones. The decision to limit the strength of conferences in the U.S. trades was based on our traditional distrust of cartels. According to conventional antitrust theory, the opportunity for increased competition which occurs under the U.S. conference system should result in ocean freight rates which are lower than those available under a strong conference system. Virtually all of our trading partners have opted for strong closed conference systems. They believe that fully rationalized service is more cost efficient because the carriers achieve a higher utilization than would otherwise be possible. This, it is said, results in better service at lower rates for the shipping public. It is extremely difficult, if not impossible, to compare the efficiencies of closed versus open conferences through an empirical study. The level of freight rates is influenced by a myriad of factors which vary from commodity to commodity and from trade to trade. The degree to which one factor affects the overall level of rates cannot be isolated with any degree Of accuracy. Thus, a comparison of the rates of a trade having a strong conference with the rates of a trade having a weak conference is of limited value. Not surprisingly, the results of studies which have been conducted to date vary with the trades being compared. In the absence of a definitive empirical study, it would appear that, ultimately, the decision to have open or closed conferences must turn on the strength of our philosophical convictions which take into account various foreign policy and trade. policy considerations. Under current law, the right of independent action is required for interconference agreements and agreements between conferences and individual carriers. The reason for this is the anticompetitive potential of an agreement with a conference PAGENO="0063" 57 or two conferences as party or parties. In addition, certain conference agreements have on their own included a right of independent action as a condition of the agreement. Among these, most notable is the conference agreement in the North Atlantic to Europe Trade. The Commission believes that the rationale underlying the current requirements are still valid but we do not favor a mandatory right of independent action for all conference agreements even if the conference may elect to Tri~it its membership. We believe that the decision to include a right of independent action should be made by the parties to the conference agreement. The inclusion of a right of independent action would of course be a factor in review and evaluation of a conference agreement under the standards of the Shipping Act. Question 3 It has been alleged that our open conference system results in higher freight rates to our shippers, thereby reducing their ability to compete in world markets. Do you have any hard data on the effect of closed conferences on shippers in those trades that are serviced by closed conferences. Answer - No. The Commission does not have any firsthand detailed information on the rate levels in trades where closed conferences operate. (See response to #2.) Perhaps the most restrictive conference structure with which we have experience operates in the U.S.-South American trades. Rate levels in those trades have been relatively stable over time, but this may not be attributable to the strong control of the conferences. As you know, the governments of those countries are activel~' involved in the operation of their national flag carriers in those trades. Question 4 Should this legislation provide that conference lines have the right to take independent action, and why? Answer - If the goal of this legislation is to strengthen the conference system in order to promote stability of rates and allow for better rationalization of services in the U.S. trades, then providing for a mandatory right of independent action may have the affect of weakening the conference system and be inconsistent with that goal. A better approach, in our opinion, would be to allow the commercial parties to an agreement to determine whether to limit conference membership PAGENO="0064" 58 and whether to permit for each member of the conference to have the right of independent action. In other words, the parties to a proposed agreement would choose, within the requirements! standards of the Shipping Act, how strong a conference structure they required for the conditions in a particular trade. While a closed conference with no right of independent action may be appropriate for one trade, in another trade, the conference may wish to recruit members by providing open membership and a right of independent action. The Commission prefers such a flexible approach. Question 5 What are the advantages and disadvantages of closed conferences? Answer - See our response to question #2. Question 6 Are you in favor of the proposed amendment to section 15 that would require conference agreements to provide an opportunity for membership of at least one U.S. flag carrier? Answer - The Commission does not favor this section 15 amendment which can be interpreted to establish a U.S. flag "quota" which would be filled following the admission of the first willing U.S. flag carrier. Under this amendment, it would be arguably lawful for a conference to exclude all but one U.S. flag carrier from its membership regardless of whether or not such exclusion was reasonable given the conditions in the trade. In addition, there are many agreements now on file with the Commission which do not have U.S. flag members, for a variety of reasons. The Commission thus recommends that this amendment to section 15 be deleted from H.R.~ 4374's provisions. Question 7 Could you provide us with data on the scope of involvement of independent carriers in the various trades, including those that service the U.S.? Answer - We have prepared several tables that demonstrate the scope of independent competition in the U.S. trades. To a large extent these tables are based on information contained in various "trade studies" prepared by the FMC staff in previous PAGENO="0065" 59 years. We have updated the list of operators in each trade but no attempt was made to update the sailing and capacity statistics since their preparation required many months of data collection. The staff believes, however, that the data are a reasonable representation of the current situation. It must be remembered that the term independent" can be misleading because it depends on the time and place. Many lines are independents in some trades -- or directions of trades -- and conference members in others. Hapag-Lloyd and Sea-Land are leading examples of this phenomenon. The staff selected major trade routes for examination to give a clear understanding of the level of independent competition -- which is most accurately shown in market share. A brief narrative of each table follows: U.S. Pacific Coast/East Asia Trade The 1980 import liner capacity in the U.S. Pacific Coast/East Asia trade is given in Table 1. The Far East trade has been one of the most rapidly growing U.S. trades. Two conference agreements covering this trade are: (1) the outbound Pacific Westbound Conference (PWC); and (2) the inbound Trans Pacific Freight Conference of Japan/Korea (TPFC-J/K). In 1980, PWC's share reached 80 percent. The conferenc&s share is a percentage of the total capacity excluding carriers no longer, in the trade and new .entrants. The conference share of TPFC-J/K was 55 percent. The difference between the outbound and inbound conference shares is primarily attributed to the fact that Sea-Land is not a conference carrier on the inbound leg of the trade. 9L~_856 0 82 - 5 PAGENO="0066" TABLE 1 New Entrants Since June 1980 China Ocean Shippong Co. (COSCO) Scindia °Not participating in the trade covered by the scope of the agreement. 1/BBS and EAC no longer huue a sailing arrangement. EAC recently acquired Knutsen. ~JKSC accounts for 27,612 TEBs. !!KSC is not a member of conference Agreement No. 57. KSC has indicated that it wall be leaving conference Agreement 110. 150. !!Tbn cnr'rrence snore in hosed on 980 TEA cacacity escluding the copacity of carrnern no lonoer on tne trade and new entrants. IMPORT LISER CAPACITY, JUNE 1980 . U.S. PACIFIC COAST/EAST ASIA ~ MEMBERSHIP/SOP DECEMBER 18,1901 Total Annual Container Container Areakbulk in 1~ W~ of Total Anvual Capacity in the Trade Provid.O!j5y...this Carrier TEAs Breakbulk Sail ings Per Year 157 36 46 116 24 36 40 36 224 24 12 42 APL BOS/EAC Evergreen FESCO Galleon Hanjin Yapag Lloyd Hong Kong Island Line Japanese Consortium Jinyang Knutsen KMTC N Lykes Maersk Maritime Co. of the Philippines SQL OOCL/KSC Phoeniv 63-LA Pact fic Line Sea-L and Seatrain Seaway Star Shipping iS. Lines Yangming TOTAL 46,332 11,388 3 34,053 . 2 65,152 - 4 - 13,584 - 1 - 41,400 - 3 - 39,707 - 3 - 18,008 . 1 - 244,019 - 17 . . 4,868 . 8 11,154 5,129 .8 12,408 16,268 - 18,799 1 .8 - 31 72,800 - 5 - 6,800 26 - 43 68,000 72 93,204~J 30 30,000 18 7,542 104 194,636 88 81,668 20 12,040 27 23,868 52 68,731 36 27,783 -~ ..~Z7 1,407 1,472,287 Conference Meonhersho~p ~ Aqomeotyyot No. 150 A 8 O 0 Nm Longer in Trade 0 0 lb Longer in Trade O 0 O B O 0 xl! 1/ No Longer in Trade 110 Longer in Trade No Longer in Trade No Longer in Trade O 0 Conference 80~ 55% Share Based on 1980 TEU Capacity!! 6 2 .5 13 .8 5 2 4 100.9 60,499 100 PAGENO="0067" 61 U.S. North and South Atlantic/Northern Europe Trade The two following tables cover the major U.S. outbound trade between the U.S. North and South Atlantic and Northern Europe. Table 2 shows 1978 export liner capacity in the North Atlantic/Europe trade. The outbound conferences considered are the North Atlantic/U.K. Freight Conference and the North Atlantic/Continental Freight Conference. Based on 1978 liner data, but excluding carriers no longer in the trade and recent additional carriers, the conference share reaches 83 percent. Table 3 shows export liner capacity in the South Atlantic/Europe trade. Under the trade covered by the South Atlantic-Northern Europe 48-Hour Rate Agreement, the conference share reaches 55 percent. The Conference shares for the North and South Atlantic/Northern European trade have changed since 1978 due to the growth of several carriers and new entrants into the trade. Trans Freight Lines (TFL), an independent carrier now serving both the North and South Atlantic, has increased its capacity. TFL currently claims about 12 to 15 percent of the market share. Polish Ocean Lines (POL) is another independent carrier which is presently quadruplin9 its capacity. Thith growth, along with new entrants, has increased the independents' capacity share in this trade. PAGENO="0068" TABLE 2 * EXPORT LINER CAPACITY - U.S. NORTH ATLANTIC/EUROPE TRADE, AS OF OCTOBER 1, 1978 CONFERENCE MEMBERSHIPAS OF DECEMBER 1981 Carrier Atlantic Container Line Atlantic Container Line - Sea-Land *AEL Farrell Lines Hapag-Lloyd U.S. Lines U.S. Lines Polish Ocean Lines *AElantic Biscay Container Line Trans Freight Lines * Dart Container Line *Evrobridge Lines *Spa,ish Lines * Norwegian America Line *.Seatraln Lines * Bait Atlantic Line 1 * Bait Atlantic Line - Contract Marine Carriers Scsi Lines Regent Line Waterman Line Annual Totals Sailings Per Year 94 47 52 48 52 48 48 48 26 52 52 26 24 24 48 60 15 48 12 12 11 836 Conference Share of 1978 Total Annual Capacity nyreemenL mo ~iq (North Atlantic/Continent) 3/ Only on inducement Total 2 0 of Total Annual Confere Annual Capacity-' Capacity in the Trade Agreement No. 7100 LOaD Cubic Feet) Provided by This Carrier (j~orth Atiantic]U.K.1 68,447 11.58 41,277 6.98 x 90,874 15.37 45,608 7.71 70,303 11.89 x 42,624 7.21 17,050 2.88 22,347 3.78 7,711 1.30 39,527 6.69 40,508 6.85 7,296 1.23 19,273 3.26 7,426 1.26 29,053 4.91 14,620 2.47 6,607 1.12 10,861 1.84 2,326 * .39 5,814 .98 100.00 83% 83% * Additional Carriers are Atlantic Cargo Services, Franco Espress Lines and !BC Containerline (independents). 1' Capacity is given for separate services. 2/ The cubic feet shows include container and breakbulk capacity. Container capacity represents approximately 93 percent of the total and breakbulk represents 7 percent. 3/ Because no information was available on this carrier, it is assumed to be no longer in the trade. 4/ The conference share is based on 1978 annual capacity excluding carriers no longer in the trade, carriers serving the trade only on inducement, and additional carriers. * No longer in the trade. PAGENO="0069" TABLE 3 EXPORT LINER CAPACITY - U.S. SOUTH ATLANTIC/EUROPE TRAOE ASPF OCTOBER 1, 1978-CONFERENCE MEMBERSHIP AS OF DECEMBER 1981 Carrier Sailings Per Year Total 2' Annual Capacity-- 1QCubic Fe~j % of Total Capacity. in the Provided by this Annual Trade Carrier Sea-Land U.S. Lines *Seatrajn *Balt Atlantic Line *Balt Atlantic Line Polish Ocean Line Polish Ocean Line Regent Lines Scol Lines *Combi Lines 1 Combi Lines - Sylvan Shipping Co. 1' - 1' - 52 48 48 60 15 10 48 12 12 20 26 26 9,198 25,574 59,443 3,655 1,652 460 1,662 5,814 581 8,296 970 26,233 6.41 17.82 41.41 2.54 1.15 .32 1.16 4.05 .40 5.78 .68 18.28 Annual Totals 377 143,538 100.00 Conference MembershiP3,, Agreement No. 9984 - x x 3/ Conference Share 55% of 1978 Total Annual Capacity- Contract Marine Carriers Hapag Lloyd I.N.L. Forest Lines Additional Carriers (NoncgfBc~J Trans Freight Lines Gulf Europe Express Dart Contajnerline 1' Capacity is given for separate services. 2/ The cubic feet shown include container and breakbulk capacity. Container capacity represents approximately 71 percent of the total and breakbulk accounts for 29 percent. 3/ Because no information was available on this carrier, it is assumed to be no longer in the trade. 4/ The conference share is based on 1978 annual capacity, excluding the capacity of carriers no longer in the trade and additional carriers. * No longer in the trade. Franco Express Lines Atlantic Cargo Services PAGENO="0070" 64 U.S. Atlantic/East Coast South America Trade The largest segment of our trade with SouthAmerica is the U.S. Atlantic/East Coast South America trade, which encompasses the three major South American nations of Venezuela, Brazil and Argentina (Table 4). The conference share varies by country but the dominant theme is that where there are bilateral agreements and pools -- Brazil and Argentina -- the conference share approaches 100 percent. In those trades where bilateral agreements and pools do not exist -- Venezuela and Colombia -- the conference share is much smaller -- between 70-90 percent. PAGENO="0071" 65 TABLE 4 EXPORT LINER CAPACITY U.S. ATLANTIC/EAST COAST SOUTH AMERICA TRADE AS 01 JULY 1, 1979 Annual Totals New Carriers Since Ju1y~j~7~ Samba Line Bottacchi (Conference) Delta (Conference) Flumar Paraguaya Use Navieras Central CCI * No longerserving the trade. Carrser Sallings Per Year Annual Cubic ~p~J 1~o~c~u~ement American Atlantic Line 78 4,354 Argentine Lines (ELMA) 48 18,594 108,849 tComerca Line (TMT) 52 8,312 464,827 Frota Amazonjca, S.A. 15 1,711 207,792 42,787 Grancolonbiana Holland Pan American Line 52 17 13,345 1,435 333,619 *Inparca Line 91 43,321 35,869 1,053,018 Ivaran Line 26 15,121 Linea Manaure, C.A. 67 15,422 378,018 Lloyd Brasileiro 48 26,586 385,544 *Marca Line 52 3,740 Moore McCormack Line 49 38,824 *Navieras Caprilles, C.A. 24 3,918 970,602 Netumar Line Nopal Caribe Lines *Rocargo, C.A. 36 46 66 27,241 10,743 5,626 97,939 681,015 268,576 Royal Netherlands Steamship Co. 26 3,558 140,659 88,953 *Seatrafn 26 5,957 *Tor Line 50 7,726 148,918 *Trans_Carjbbean Lines 26 2,155 Venezuelan Line (CAVN) 36 53,868 655,380 9~ ~4 Conference Agreement Member x S S x x S PAGENO="0072" 66 US. Atlantic and Pacific/Australian Trades Annual 1980 export liner capacity for the U.S. Pacific and Atlantic Coast/Australia trades is given in the following tables. In 1980 the conference share of the total annual capacity in the U.S. Pacific Coast/Australia trade was approximatelY 70.97 percent (Table 5). The two major independents in this trade are Karlander Kangaroo Lines with 24.08 percent and Seapac with 4.94 percent of the capacity. Farrel Lines, a conference operator, recently left the trade. In the Atlantic Coast/Australia trade, the liner carriers serving the trade are all conference members, giving the conference 100 percent of capacity offered (Table 6). PAGENO="0073" A1NJAL EXPORT LINER CAPACITY, 1980 - U.S. PACIFIC COAST/AUSTRALASIA TRADE ROUTE 27 Total Annual Capacity Serving Percentace of - the Pacific Coast ±1 Total Annual 1/ Cu. Ft.31 Measurement Capacity Serving PANCON Carrier - (000) - Tons ~ the Pacific Coast Member W Columbus 16,963 423,820 14.51 X Blue Star 7,608 190,190 6.51 X Pacific Australia Direct Line 58,352 1,458,806 49.95 X Seatrain/Seapac 5,777 144,431 4.94 Karlander Kangaroo Line 28,139 703,457 24.09 Farrell Lines 18,118 452,964 100.00 Conference 71 70.978 Share of TOTAL 134,947 3,373,668 Total Annual Capacity 1/ Carriers listed operate within the scope of Agreement No. 50. 2/ Capacity shown is exclusive of capacity used in non-Australian trade. 3/ Cubic feet and measurement tons shown include container and breakbulk capacity. Container capacity represents approximately 60 percent of the total, and breakhulk accounts for 40 percent. 4/ Forty measurement tons equal one cubic foot. 5/ Farrell Lines recently exited this trade. Therefore, Farrell's capacity has been omitted from the total capacity and the percentage of total annual capacity of each carrier is based on the, new total. 6/ PANCON is the U.S. Pacific/Australia - New Zealand Conference, Agreement No. 50. 7/ The conference share is based on total annual capacity excluding Farrel Lines' capacity. PAGENO="0074" 68 TABLE 6 ANNUAL EXPORT LINER CAPACITY, 1980, U.S. ATLANTIC COAST-AUSTRALIA _____TRADE P0 TE 16 ____ Percentage of Total Total Annual Atlantic & Annual TEU Capacity 1' Gulf Coast/Australia in this Trade Provided Conference ______ Container pa~ç~ TEUsJ.~L by is_c9rtj~r acific America Container Express (PACE) 32,444 26.38 tlanttrafik Express Service 13,140 10.68 X .olumhuu Lines 33,891 27.56 ank and Savill 9.157 7.45 arrell Lines 27.93 TOTAL 122,988 100.00 !`The carriers listed operate within the scope of Conference Agreement No. 6200. VTEU capacity only is considered here because hreakhulk capacity in this trade is egligible. ~/U.S. Atlantic & Gulf/Australia-New Zealand Conference Agreement No. 6200. PAGENO="0075" 69 As to data on non-U.S. trades, the Commission does not possess hard data on the extent of independent competition in foreign-to-foreign trades. According to the November 1981 issue of Llo~yd's Shipping Economist, however, the Far East Freight Conference (Europe to the Far East), which is probably the most important non-U.S. conference, is suffering from intense non-conference competition. This report indicates that the FEFC.accounts for approximately 68 percent of the capacity in the trade, down from 82 percent in 1975. The major independents competing with the FEFC are Evergreen and Yangming, Marine Transport Corp. (both Taiwanese), and Soviet/Cornecon carriers. It is estimated that by 1982 the two Taiwanese operators will control 59 percent of the non-conference slots and the Soviet/Comecon carriers will control another 33.8 percent of the slots. ~stion 8 Could you explain "contract coverage" as is being proposed by the larger shippers and any problems associated with the proposal? Answer - The Commission has not seen a specific written proposal regardin9 the authorization of `contract coverage" for ocean common carriers by water in the foreign commerce. We understand that it was suggested during the hearings on H.R, 4374 that a provision be adopted allowing ocean common carriers to enter into contracts with shippers either individually or collectively. That contract would govern the rates and services for specific transportation needs of the shipper(s). Under the proposal, the carriers would remain "common carriers" when providing transportation for non-contract shippers. The advocates of the proposal cite section 208 of the Staggers Rail Act of 1980, P.L. 96-448 (49 U.S.C. Sl07l3), which authorizes certain contracts for rail carriers, as a model for maritime carriers. Under section 208, rail contracts must be filed with the Interstate Commerce Commission which then may begin, within 30 days, either on complaint or on its own initiative, a proceeding to review the contract. The grounds for review of a contract are specified PAGENO="0076" 70 in the section.~J Any proceeding instituted by the ICC under section 208 must be completed within 30 days. The ICC is also directed to publish tariff rules for such contracts which will ensure that the "essential terms" of the contracts are available to the general public. Under section 208, any disputes arising between the parties of an approved and effective contract because of an alleged breach of the contract must be taken to an appropriate state or U.S. District Court, unless otherwise agreed by the parties. */ For contracts of non-agricultural commodities, a shipper may file a complaint only on the grounds "(i) That such shipper individually will be harmed because the proposed contract unduly impairs the ability of the contracting carrier or carriers to meet their common carrier obligations to the complainant under section 11101 of this title;" or A port may file a complaint: (ii) Only on the grounds that such port individually will be harmed because the proposed contract will result in unreasonable discrimination against such port." For contracts for the transportation of agricultural commodities (including forest products and paper), a shipper may file a complaint alleging that the shipper will be individually harmed because - "(i) the rail carrier has unreasonably discriminated by refusing to enter into a contract with such shipper for rates and services for the transportation of the same type of commodity under similar conditions to the contract at issue, and that shipper was ready, willing and able to enter into such a contract at a time essentially contemporaneous with the period during which the contract at issued was offered; or (ii) the proposed contract constitutes a destructive competitive practice under this subtitle." PAGENO="0077" 71 There have been tariffs filed with the FMC that reflect very detailed contract arrangements for specific transportation service requirements as well as. rates. These are not common in ocean tariffs but they are not unknown. See Matson Navigation Co.'s freight tariff No. 12-F (FMC- F No. 168) for raw sugar in bulk from Hawaii ports to Crockett, C.A; American Ex2~c~ Isbrandtsen Lines, Inc.~~ al.v. FMC&u.S.A., 380 F2d 609 (D.C. Cir. 1967), for discussion of lawful "requirements contracts" see Federal Maritime Board v. Isbraridtsen Co., 356 Contract arrangements between an ocean carrier and a particular shipper for types of service (vessel type and capacity, time of delivery, penalty for breach of these terms) as well as rates are lawful as long as these arrangements appear in the carrier's tariff and they meet the nondiscrimination provisions of the Shipping Act. PRRMSA - *~t~sonGovernm~ç~o, 18 S.R.R. 1265, 1269 (FMCTg78~T A common carrier under the Shipping Act does not stop being a common carrier by virtue of entering contract arrangements with a shipper for "special" carriage. Grace Line Inc.v. FMC, 280 F. 2d 790 (2d. Cir. 1960). Al1owin~ä~iiFjero actä~ommon carrier for some shippers and as a contract carrier for "favorite" shippers is inherently inconsistent with the carrier's common carrier obligations. If that is what is being proposed as "contract carriage,' the Commission would not support it. However, if the proposal is to specifically provide by statute that carriers may enter into nondiscriminatory contracts with shippers for service and rates which are published in a carrier's tariff - in effect ratifying what already occurs - \the Commission would have no objection. It is difficult to evaluate and comment on a proposal that has merely been broadly outlined and suggested in testimony. The Commission would be happy to comment further on the suggestion once more details of the proposal are known. PAGENO="0078" 72 Question 9 Are you aware of anyone who supports the removal of licensing requirements for freight forwarders, and why? Answer - The Commission is not aware of any representative of the ocean shipping industry a who recommends doing way with the license requirement for ocean freight forwarders under the Shipping Act, 1916. As you know, the Commission testified that the system of regulation of ocean freight forwarders, instituted in 1961, has proved effective in correcting abuses in the industry and beneficial in providing an initial review and evaluation of prospective freight forwarders. We recommend to the Committee that, absent a showing that the current regulatory scheme has been an unnecessary burden on the ocean freight forwarding industry, that the current regulatory provisions be maintained. Question 10 What is your response to the argument that the shipper connection prohibition has inhibited the development of a modern, efficient forwarding industry by limiting access to much needed sources of capital and management expertise? Answer - The Commission is not in the position to have information that would either support or contradict such an assertion. The freight forwarding industry been an industry characterized by relatively small operators, with some noteworthy exceptions. The reason for this structure is a matter of speculation. The rationale for the shipper connection prohibition in the law was to prevent the use of "dummy freight forwarders" as conduits for the payment of illegal rebates by carri~ers to shippers, a practice that was fairly widespread at the time section 44 was added to the Shipping Act. As noted above, the law has proved effective in correcting such abuses. Question 11 What is your response to the suggestion that the shipper connection prohibition is being opposed solely on the basis of the need to continue the government-protected competitive position of small forwarders? In other words, the reason for opposition has nothing to do with the dummy forwarder problem or illegal rebating. PAGENO="0079" 73 Answer -While the amendment to sections 1 and 44 of the Shipping Act altering the shipper connection prohibition may prove to be harmful to the competitive position of small forwarders, we do not believe that this reason is the sole or primary basis for opposition to the amendment. The "dummy forwarder" problem discussed above was a very real problem in the industry which in part prompted legislative action in 1961. There is no way of telling now whether such a problem may recur in the ocean forwarding industry. The Commission is charged by Congress to submit a report on the effect of the amendment prior to the law's sunset deadline (Dec. 31, 1983). We are not able to offer any meaningful analysis of the consequences of the change since the amendment has only been in effect for a short time. Q~stion 12 This bill prohibits the payment of compensation by a carrier to a forwarder unless the forwarder certifies that it has no beneficial interest in the shipment. Present law requires similar certification. Do you have any reason to believe the bill's certification will not work as well as existing certification requirements as an enforcement tool? Answer - Under current law, ocean freight forwarders are required to certify to a carrier that they have performed the requisite services as a condition for receipt of compensation for the carrier for such services. This was not changed by the August 1981 amendment. Pursuant to that amendment, there is now a prohibition against a forwarder's receiving compensation from a carr.ier on a shipment in which it has a beneficial interest. However, P.L. 97-35 did not contain a requirement that a forwarder certify to the carrier that it has no beneficial interest in the shipment for which compensation is sought. Therefore, it is not possible to compare the provision in H.R. 4374 requiring such a certification with present requirements since there currently is no such required certification: The Commission does not now know what effect such a requirement would have on the enforcement of the August amendment. We surmise, however, that such a certification would be very helpful to carriers because a carrier is not normally in a position to know the shipper affiliations of the forwarders which provide services to the carrier. it also would provide an incentive to freight forwarders to be particularly vigilant in overseeing the types of shipments on which they are entitled.to compensation and those on which they are not. PAGENO="0080" 74 Question 13 With respect to enforcement of the beneficial interest situation, would complete disclosure of shipper affiliations by ocean freight forwarders and general FEC enforcement powers be sufficient to prevent the practice of carriers passing rebates through a dummy forwarder? S Answer - Again, that is a difficult question to answer at this point because the change in the law has been in effect only since last August. The August amendment to the Shipping Act relaxing the shipper connection prohibition directed the FEC to study the effect of the amendment and, by June 1, 1983, "report to Congress evaluating the enforceability of this section and describing any reasons why this section should not be made * permanent law." The sunset deadline for the amendment is December 31, 1983 -- six months after the FEC report is due. The regulatory scheme which prohibited an ocean freight forwarder from having any connection with a shipper, or any interest in the cargo it handled, proved effective in correcting the `dummy forwarder" problem. Whether full disclosure of shipper affilations coupled with FEC vigilance will prevent the use of forwarders as a mechanism for illegal rebating remains to be seen. Given the restraints placed on Commission personnel and resources by current budget actions, we decline to make an optimistic prediction on this matter which may later prove false. The fact that the Congress imposed a sunset provision on the amendment indicates Congressional recognition of an element of uncertainty as to the effect of the amendment. Q~estion 14 SomeOne recommended that ocean freight forwarders be allowed to trade by forming export trading companies. The recommendation was made that either Sect.ion 5 of H.R. 4374 be adopted or that Section 1608 of the Omnibus Budget Reconciliation Act be made permanent. What is the Commission's view of these recommendations? Answer - Under section 1 of the Shipping Act, 1916, as amended by P.L. 97-35~ a licensed ocean freight forwarder may not be "a shipper, consignee, seller or purchaser of shipments to foreign countries". It is our understanding that an export trading company (ETC) would operate in many instances by taking title to the goods that it will process for export, that is, it will be a shipper. Asa shipper, an ETC may perform forwarding services for its own cargo without an FMC freight forwarder's PAGENO="0081" 75 license. but would not receive compensation from the carrier for such services. Such an export trading company could not perform forwarding services for cargo belonging to other shippers because its shipper status would render it ineligible for a freight forwarder's license. If an ETC is organized in such a way that it would not take title to the goods it exports, the company could perform forwarding services for shippers but would first be required to obtain an FMC forwarder's license. Thus, under section 1608 of the Omnibus Budget Reconciliation Act,. a licensed forwarder could act as an ETC only if it did not take title to the goods it promotes. The definition of "ocean freight forwarder" in section 1 of H.R. 4374 containS no prohibition against a shipper or consignee being a forwarder. It defines the term as a "person in the United States who for others (a) dispatches shipments via ocean common carriers, and (b) processes the documentation or performs related activities incident to such shipments." Thus, under H.R. 4374, as currently drafted, a person in the u.s., regardless of his shipper status, could perform forwarding services if. he obtains a bond and conforms with the requirements of section 5. The forwarder is not required to demonstrate that any forwarding services have been performed in order to receive compensation. The only requirement imposed is that the forwarder certify that he is bonded and that he has no beneficial interest in the cargo serviced for the carrier. Under this regulatory scheme, there would exist no obstacle against a forwarder operating as an export trading company. For that matter, there is not much of a "regulatory scheme." virtually anyone in the U.S. who is able to obtain a $100,000 bond may operate as a forwarder. Moreover, there is no affirmative requirement to perform certain forwarding services as a condition for receipt of compensation from a carrier. This leaves ample opportunity for the payment of illegal rebates to shippers who say they are bonded and are forwarding shipments belonging to others. a person whose primary business is the sale of merchandise may dispatch shipments of merchandise without a -license." 46 *U.S.C. §84lb. 914-856 0 - 82 - 6 - PAGENO="0082" 76 As the Commission stated before, we believe the current regulatory scheme under sections 1 and 44 of the Shipping Act, 1916 has proven effective in preventing malpractices and has not, as far as we are aware, been a harsh or unnecessary burden on the freight forwarding industry. Question 15 Could you provide us with a listing of the various persons and types of agreements you review that are the result of your jurisdiction over "other persons subject to this Act"? Answer - "Other persons" consist of two distinct types of individuals -r freight forwarders and marine terminal operators. Agreement filings involving freight forwarders generally number about five per year. This small number of filings is largely the result of the exemption from the filing and approval requirements of section 15 for nonexclusive cooperative working agreements between freight forwarders set forth in the Commission's General Order No. 4 at 46 C.F.R. 510.26. Under this exemption, freight forwarders may enter into nonexclusive arrangements to complete documentation and perform other freight forwarder functions on export shipments on behalf of each other without the necessity of filing or obtaining Commission approval. Freight forwarder agreements filed with the Commission generally involve exclusive cooperative working arrangements between forwarders which fall outside of the exemption. The Commission's terminal agreement guidelines at 46 C.F.R. 530.5 define an "other person" to be any person, firm, company, corporation, or government subdivision providing marine terminal services, or which owns or leases property used as a terminal, in connection with a common carrier by water subject to the Shipping Act, 1916. These entities include ocean common carriers, railroads, landlords, state port authorities, carloaders and unloaders, truck loaders and unloaders, grain elevator operators, bulk loaders, stevedores, off-dock freight station operations, etc. The diversity of agreements involving marine terminal operators reflects the widely-dispersed nature of this sector of the industry. These agreements can, however, be grouped into three broad categories: (1) marine terminal facility use agreements, which generally consist of leases, licenses, assignments and other agreements of a similar nature between persons subject to the Commission's jurisdiction; (2) marine PAGENO="0083" 77 terminal service agreements, which are generally between a terminal operator and a common carrier and provide for preferential berthing and the furnishing of terminal services on a basis deviating from the terminal operator's otherwise applicable terminal tariff charges; and (3) marine terminal operator conference agreements and disgussion agreements. Question 16 To assist the FMC in meeting their more important obligations, are there any activities that can realistically be dispensed with, and would this require legislative action? Answer - The Commission has found several areas where regulations can be eased, and has taken several actions to accomplish this. Section 35 of the Shipping Act authorizesthe Commission, under certain conditions, to exempt certain c1as~es of agreements and activities from statutory requirements. This authority has been used extensively. During the past year, the following exemptions have been issued or proposed, as indicated: - Exemption from the filing and approval requirements of section 15 of the Shipping Act, 1916, of non-exclusive equipment interchange agreements between common carriers by water. This exemption was issued on November 18, 1980. - Exemption of a~greements which provide for joint cargo inspection or self-policing services, or both, from the filing and approval requirements of section 15 of the Shipping Act, 1916. This exemption should encourage the use of cargo inspection services which complement self-poLicing and also strengthen compliance with the provisions of carrier tariffs. This exemption was issued August 6, 1981. - Exemption of agreements which relate to routine administrative or housekeeping matters from the filing and approval requirements of section 15 of the Shipping Act, 1916. This exemption should lessen the regulatory burden on ocean carriers and promote efficiencies and economies in operation for such carriers. This exemption was issued September 23, 1981. - Exemption of agency agreements which provide for an a9ent's solicitation and booking of cargoes, and signing contracts of affreightment and bills of PAGENO="0084" 78 lading, on behalf of a common carrier by water from the filing and approval requirements of section 15 of the Shipping Act, 1916. This exemption was issued October 9, 1981. - Exemption of agreements covering the collection, compilation, and exchange of credit information from the filing and approval requirements of section 15 of the Shipping Act, 1916. This exemption was proposed on February 20, 1981, and is currently pending issuance of the final rule. - Exemption of both nonexclusive and exclusive equipment interchange agreements covering empty containers, chassis, LASH/SEABEE barges and related equipment between two or more persons subject to the Shipping Act, 1916, from the filing and approval requirements of section 15 of the Act. The proposed exemption should afford the participants greater flexibility to meet and respond in a timely fashion to problems of equipment imbalance. Participants should also be able to make more effective use of expensive equipment with concomitant benefits to shippers and consignees. This exemption was proposed on June 23, 1981. Other changes to ease regulatory burden have also been made. The following rule changes have been made within the past year, or have been proposed, as indicated: - Tariff material covering the through movement of cargo between foreign countries transshipped at a U.S. port has been eliminated from the requirements of Part 536 of the Commission's Rules. This action was taken in response to requests for clarification of Part 536's scope and is intended to lessen the regulatory burden on ocean carriers. - This amendment was issued February 12, 1981. - An amendment to General Order 18 excluded from the Commission's reporting requirements discussions and decisions dealing with certain routine rate actions. This amendment was issued September 11, 1981. - The Commission issued a rule temporarily suspending regulations governing rates quoted for the transportation of U.S. Department of Defense cargoes pursuant to Military Sealift Command requests for proposals RFP-1600, Second Cycle commencing on October 1, 1981, and RFP-1600, Second Cycle commencing on April 1, 1982. This rule was issued on March 31, 1981 to lessen the regulatory burden on U.S. flag operators. PAGENO="0085" 79 - The Commission amended its rules governing the financial reporting requirements imposed on common carriers by water serving the domestic offshore trades off the United States. Part 511 of Title 46 C.F.R. and its reporting requirements were eliminated and Part 512 of Title 46 C.F.R. has been amended to reduce the frequency and complexity of reporting requirements. The amendment was issued October 22, 1981, and should significantly reduce the financial reporting burden of domestic offshore common carriers. * - The Commission has proposed.to amend its tariff filing requirements to prohibit carriers from barring shippers' filing of overcharge claims less than two years after date of shipment. The intended effect of the amendment is to prevent unnecessary administrative proceedings where there is no dispute among the parties, and to ensure that violations of section 18(b)(3) of the Shipping Act, 1916 do not go unredressed because of unreasonable limitations in carriers' tariffs. The proposal was made on August 28, 1981. - A proposal would prescribe uniform rules and regulations 9overnirt9 the filing of time/volume rates. It will eliminate the present confusion and imprecision surrounding existing time/volume rates and their related tariff provisions. The proposal was issued October 8, 1981. The Commission has also approved an order extending indefinitely an exemption from the provisions of the Shipping Act, 1916, and the IntercOastal Shipping Act, 1933, for carriage of general cargo between ports in the contiguous continental United States and Prudhoe Bay, Alaska. Future plans were identified in the Commission's Regulatory Flexibility Agenda published in the Federal Register on November 20, 1981. They include plans to: - Exempt vessel charter arrangements between competitors which are entered into for a short term or for a small portion of the fleets of two or more parties, and vessel charter arrangements between non-competitors for use in non-competitive trades, from the filing and approval requirements of section 15 of Shipping Act, 1916. PAGENO="0086" 80 - Exempt from the filing and approval requirements of section 15 of Shipping Act, 1916, (a) certain agreements relating to the lease, license, assignment or other similar use of marine terminal real property; (b) agreements relating solely to the performance of traditional stevedoring services; (c) certain marine terminal agreements relating to the use of dock, berth, apron, or pier space; (d) other terminal facilities at other than tariff rates; and (e) marine terminal services at other than tariff rates. - Clarify the present exemption of transshipment agreements under 46 C.F.R. 524. Given the mission and size of the FMC, it would in our opinion, be helpful and appropriate to exempt the FMC from the requirements of the National Environmental Policy Act (42 U.S.C. §4332 (2)(C), (D) & (E)), and the Energy Policy and Conservation Act (42 U.S.C. §6362(h)). The decisions of the Commission are not of the type and effect at which the policies of those acts were targeted. Those statutes were enacted for specific policy reasons and in consequence of certain Federal actions, but were made applicable to all federal agencies without regard to agency size or function. We submit that the benefits, if any, of the cost of the Commission's compliance with these statutes are not outweighed by such compliance. Given the current fiscal restraints, the Commission believes that an exemption from these statutes is warranted and will not have adverse consequences for the industry we regulate or for the environment. Question 17 Would you favor amending the law to remove the requirement that agreements involving terminals be approved by the FMC, and why? Answer - To the extent antitrust immunity is extended to terminal agreements, we feel they should be subject to the same filing requirements and standards as are applicable to agreements among carriers. At the outset, it should be noted that the overwhelming majority of industry transactions for the useof marine terminal facilities and services do not, in fact, require Commission approval. The Commission's guidelines on section 15 applicability in this area are set forth at 46 C.F.R. 530.5; in short, most of these arrangements are not required to be filed for Commission approval since they are either in accordance with specific marine terminal tariff provisions (see 46 C.F.R. 533) or are under agreements which, PAGENO="0087" 81 while perhaps between persons subject to the Commission's jurisdiction, do not provide for any activity requiring section 15 approval. The latter category includes straight landlord-tenant leases, where the landlord acts merely in the capacity of a lessor of realty and neither maintains any control over the lessee's rates or competitive practices nor grants the lessee any preferential tariff treatment as compared to other users of the landlord's facilities or services. As noted aboved, the Commission has, pursuant to section 35 of the Shipping Act, 1916, authority to exempt from the requirements of the Act any class of agreements upon a finding after notice and hearing that effective regulation will not be impaired. The Commission has already exempted certain types of terminal agreements from its approval requirements and will in the near future give consideration to embarking upon a proceeding to exempt other classes of terminal agreements. However, to legislatively remove this category of agreements from the Commission's section 15 approval authority altogether could result in the Commission being unable to effectively.fulfill its responsibilities as the arbiter of competition in the shipping industry. In view of the foregoing, the exemption approach would appear to be far preferable as a matter of sound public policy over the long run, particularly since it is a process which, under the safeguards of the Administrative Procedures Act, can be carefully tailored on an ongoing basis according to changing industry conditions. Question 18 Does the FMC consider the proposed penalties in H.R. 4374 to be adequate to deter prohibited practices? Answer - Yes. Question 19 Do you foresee any problems in placing non-vessel operating common carriers under a bonding requirement, and do you believe this to be necessary? Answer - The Commission supports the proposal to bond nonvèssel-operating common carriers (NVOCC's). These persons assume the same liability for loss or damage or breach of contract vis-a-vis their customers as do the vessel operators, PAGENO="0088" 82 yet while the vessel operators have substantial commercial operations including large captial assets, the NVOCC's very often do not. In other words, the NVOCC's may not have the same financial `stake' in their businesses as do the vessel operators. As a result, shippers have little recourse against an unscrupulous NVOCC in the event of a breach of the transportation contract by the NVOCC. For this reason, the requirement that an NVOCC obtain a bond is reasonable and appropriate, in our opinion, and should afford shippers more protection while not hampering commercially sound operators. PAGENO="0089" 83 QuESTIoNs SUBMIrFED BY REPRESENTATIVE SNYDER AND ANSWERED BY FEDERAL MAR!- - TIME COMMISSION Question 1 What type of agreements would you consider to be likely candidates for the automatic approval or "blanket immunity" which you mention on page 3 of your statment? Answer - On page 3 of Chairman Green's prepared statement, reference was made to the Commission's support of the so-called "blanket immunity" approach contained in S. 1593 and S. 125. That approach cannot be equated with a procedure for "automatic approval" of agreements now subject to section 15 of the ShippingAct; 1916. The two Senate bills clearly define the types of concerted activities which would be authorized under the new bills (subject to procedural requirements including Commission review and action). These activities of common carriers and shippers' councils would be immunized from the antitrust laws by specific provision in the two bills (section 8 in S. 1593 and section 316 in S. 125). This approach differs from current law because, under section 15 of the Shipping Act, 1916, antitrust immunity attaches to activity within the scope of an agreement only after the agreement receives the approval of the FMC. Under the Senate bills, activities described by the bill would be immunized ~ statute, hence the characterization that it is a "~Ta~i1~E immunity." As the Commission noted in its statement, the advantage to this approach is that it resolves conflict and confusion regarding the scope of antitrust immunity in favor of Shipping Act jurisdiction. ~~stion 2 Under a closed conference system which would provide operators with greater control over rate-fixing, would you anticipate that conference rates would fall? Wouldn't service levels fall? Answer - Service levels might fall if a trade is overtonnaged and the closed conference provides a means of rationalizing capacity levels and sailing schedules. This assumes, of course, that there is excess capacity in a trade at the time th~ closed conference system comes into effect. Whether such a system would necessarily result in higher rates cannot be determined as a general matter. Also, please see our discussion of closed conferences under Question #2 posed by Chairman Biaggi. PAGENO="0090" 84 Question 3 What effect do you think a closed conference system in the U.S. foreign commerce will have on independent operators? Answer - Again, please see the discussion under Question 1+2 from Chairman Biaggi. Question 4 There has been much discussion in recent weeks concerning the possibility of eliminating the tariff-filing requirement. Given this country's move toward deregulation, why should we require the publishing of tariffs at all? Answer - The, system of centralized filing of tariffs that are open to public inspection affords both shippers and carriers access to the rates and schedules of~ ocean going common carriers. The availability of this price information is a central component of a competitive ocean transportation system. Unlike tariffs in a domestic surface modes and other utilities, tariffs in the foreign ocean trades are not part of a regulatory scheme which controls the levels of rates or requires approval of rate levels by a regulatory body. Increases can be implemented only on 30-day notice. This requirement protects American importers and exporters from sudden rate fluctuations which can hamper their ability to compete effectively in international markets. Rates can he lowered on immediate notice, Concern that tariffs impede price flexibility is quickly allayed by examining the history of rate levels in major U.S. liner trades over the past decade. The Commission's Office of Regulatory Policy and Planning is currently conducting a study of the tariff system. The major objective of the study is to qualitatively measure the costs and benefits of current Commission tariff filing and enforcement requirements to determine whether changes in the system should be recommended, While this study is not yet completed, results of the first two phases have been published and are enclosed for your information. Question ~aL Were the problems which you forsee as a result of the elimination of the tar iff~-filing requirement prevalent and unmanageable prior to 1961 (the year in which the requirement to file tariffs with the FMC became law)? If not, why not? Answer - The filing of tariffs by carriers in the foreign commerce with the FMC had been required by rule since 1935. Tariffs showing a schedule of the rates applicable on all PAGENO="0091" 85 export cargo had to be filed within 30 days from the effective date of the schedule. In 1961, Congress enacted P.L. 87-346 which added section 18(b) to the Shipping Act, which requires that tariffs showing the rates on export and import cargo be filed. The tariff must be on file and in effect in advance of the date of shipment of the cargo. New rates and rate increases may be effective on 30 days notice (except with special permission) and rate decreases are effective on filing. The purpose of the 1961 action by Congress was to end the instability of rates then prevalent in the U.S. foreign commerce, by requiring the filing of these tariffs in advance of the vessel s movement. It also was intended to ai~iiFE1ie enforcement of the nondiscrimination provisions of the Shipping Act. Since that time, Congress has reaffirmed the importance of the tariff system through the enactment of two laws -- P.L. 95-483, the Controlled Carrier Act and P.L. 96-25, the anti-rebating amendments to the Shipping Act, 1916 -- both of which could not be implemented without the tariff system in place. Q~stion 4(b) How many tariffs are presently on file at the Commission? Answer - At the end of Fiscal Year 1981, a total of 3819 tariffs were on file with this agency. There is a continuing flow in the receipt of new and initial tariffs and the contrasting cancellation of inactive filed publications. It is believed that this figure is closely representative of the total tariffs of record as of December 16, 1981. Qj~iestion 4(c) I understand that there are employees at the FMC referred to as "tariff analysts." Specifically, with what duties are these employees charged?" Answer - Basically, the Analyst is charged with the responsibility of ensuring all new and/or initial tariffs are filed in compliance with section 18(b) and the Commission's tariff filing rules contained in its General Order 13 (46 C.F.R. 536). These requirements relate largely to format requiremen ts. -The Analyst also initiates tariff rejections, when appropriate,, and communicates with industry representatives either by letter or informally to discuss tariff related problems. The tariff analysts prepare recommendations to the Commission involving complex tariff issues and, in some cases, personally presents recommendations for Commission consideration in open meetings. In general, the position of Transportation Industry Analyst position can be compared to that of a traffic manager in the transportation industry or a pricing manager in the carrier industry. PAGENO="0092" 86 Section 18(b) authorizes the Commission to grant a waiver in the timely filing requirement for rate increase upon a showing of good cause by the carrier (the so-called special permission authority'), One of the important responsibilities of the Transportation Industry Analyst is to review petitions of this nature and, upon weighing all the pertinent facts, prepare an appropriate recommendation for action by the analyst's superiors. Finally, the good order, prompt availability and expert interpretation of the Commission's library of some 3000 carrier tariffs is a continuing responsibility of the Transportation Industry Analyst. *~q~~tion 4(4) Of the tariff pages filed with the FMC during the last fiscal year, what percentage were rejected? For what reasons were they rejected? Answer - During fiscal year 1981, the Commission received a total of 392,626 tariff pages of which 4,432 pages (approximately 1 percent) were rejected. The rejections were issued for one or more of the following reasons: Permanent filings failed to comply with temporary filing; Improper cancellations of previous pages; Short notice of tariff changes; Increases on less than 30 days notice; Unclear and indefinite tariff provisions; Previously rejected matters necessitated rejection; Non-Compliance with General Order 13, Revised (46 C.F.R. 536); Duplicating and conflicting rates; Telex filings other than rate change; No effective date of tariff page; No FMC number identifying tariff; No symbols indicating effect of late change; Failure to cancel previously issued pages; or Prohibited alterations in writing. What other countries require that ocean tariffs be filed with their government? Answer - We are advised by industry sources that Brazil, Korea, Taiwan, the Philippines and Canada, require that copies of tariff matter as applied to their foreign trades be submitted to the respective governments. We do not believe the requirements of these countries are as extensive as those imposed by section 18(b) of the Shipping Act, 1916. PAGENO="0093" 87 Question 5 What are your views concerning the legalization of rebating? What is the economic difference between rebating and price cutting? Answer - Rebating is a form of price cutting which can be destructive to carriers and discriminatory towards shippers. The difference between price cutting and rebating is substantial. Some, in fact, have used the analogy that the difference is similar to an overall reduction in taxes and cheating on y.our income taxes -- both methods accomplish the same goal (paying lower taxes) but the latter method is discriminatory and disruptive. The same is true of rebating versus price cutting. Both methods result in lower rates but the lower rates go only to selected shippers, those willing to cheat. Rebating undermines the trust and confidence between shippers and carriers. Obviously, carriers will only give rebates when they think it is in their best interest. The tendency, therefore, is to give rebates to more important clients, current or potential. In essence then, larger, more powerful shippers will be blessed with the "discount' while others may in fact wind up paying higher prices to offset the revenue loss to the carrier. The unique characteristics of liner shipping (high constant costs and unused capacity) have historically made the industry vulnerable to "whipsawing" by large shippers. In summary, then, rebating represents an unhealthy form of discrimination that most sophisticated exporters and importers recognize as being in no one's long-run interest. This realization helps explain why even shippers support anti-rebate measures. Shippers are victims of rebating activity. Do you believe that civil penalties provided for in H.R. 4374 are adequate? answer - Yes, the proposed civil penalty provision under H.R~ 4374 should be adequate to deter the proscribed practices. Question 7 (a) Approximately how many applications for freight forwarder licenses does the FMC receive annually? Answer - In Fiscal Years 1980 and 1981 approximately 167 and 181 applications, respectively, were filed with the Commission. (b) How many of thes~appli~catipn.s were rejected? PAGENO="0094" 88 Answer - Voluntarily Denied Withdrawn F.Y. 1980 11 45 F.Y. 1981 8 7 (C) For what reasons [were these applications rejected]? Answer - The usual reason for a denial (or a voluntary withdrawl of an application) is a finding that the applicant has willfully violated the Shipping Act, 1916, or the Commission's forwarding regulations in such a manner as to indicate unfitness within the meaning of the 1916 Act. A common example is illegal forwarding combined with apparent fraud: charging an export shipper for nonexistent cargo insurance, secretly inflating freight or warehousing charges, falsifying shipping documents, etc. Less frequent reasons for denials/withdrawals include a lack of forwarding expertise, inability to obtain a surety bond, and direct shipper connections. Since independent ocean freight forwarders control an estimated 90% of this country's non-bulk oceanborne exports, the Commission attempts to screen out any applicant whose conduct would not be conducive to a favorable export climate. Question 8 Would you please explain what type of bond is currently required of freight forwarders and what that bond is intended to ensure? Answer - The bond required of ocean freight forwarders is a combination indemnity bond, financial guarantee and errors and omissions bond, intended ~o comport with the requirements of section 44(c) of the Act.-' Currently, the Commission requires a bond in the basic amount of $30,000. The bond must be increased by $10,000 for each branc~i office through which a forwarder provides ocean freight forwarding services. * "The Commission shall prescribe reasonable rules and regulations to be observed by independent ocean freight forwarders and no such license shall be issued or remain in force unless such forwarder shall have furnished a bond or other security approved by the Commission in such form and amount as in the opinion of the Commission will insure * financial responsibility and the supply of the services in accordance with contracts, agreements, or arrangements therefore." PAGENO="0095" 89 The primary purpose of the bond requirement is to ensure that applicant forwarders are, and licensed forwarders remain, solvent -- a minimum requirement for any fiduciary. The bond requirement, moreover, allows the market place and facts to govern the determination c~f who is financially sound, rather than a large Federal Government staff. Direct financial protection to exporters and carriers is a secondary aspect of the bond requirement. The theory is that competition among numerous forwarders combined with a minimum of regulation, is more beneficial to exporters than a very small number of large, conglomerate forwarders who can afford the multi-million dollar bonds that would be required to offer full protection to exporters. Question 9 Former Chairman Kanuk, during her appearance before the Subcommittee on June 18, stated that there might be a substantial cost involved in the enforcement area and the tariff area in regard to implementing the provisions of H.R. 3637. Would you please elaborate on what costs you would expect the Federal Maritime Commission to incur in order to enforce the provisions of H.R. 3637. Answer - Chairman Kanuk's statement was made during questioning in response to another witness's indication to the Committee that H.R. 3637 would not result in any increased cost to the Commission. The tariff filing which would be required by H.R. 3637 imposes an obligation on carriers who do not now file tariffs with the FMC. Any increase in tariff filing translates into an increase in cost to the FMC because every tariff must be examined and processed in accordance with General Order 13 (46 C.R.F. 536). Additional costs would also result because investigatory functions relative to the Commission's obligation to enforce the unjust discrimination provisions of the Shipping Act's jurisdiction over carriers operating in the U.S. foreign commerce but utilizing Canadian or Mexican ports. In these times of extremely tight budgets, any increase in operating and personnel costs to the Commission cannot be characterized as insubstantial. PAGENO="0096" 90 3~feirt'raI ..~i~iri1in,e (t'ilIIlIioojun lth,eI;rirr~hrir, D.c. ~nos February 12, 1982 tI~. (!I~HIr t~tI The Honorable Slade Gorton Chairman Subcommittee on Merchant Marine Room 126 Russell Senate Office Building Washington, D.C. 20510 Dear Mr. Chairman: Enclosed are comments by the Federal Maritime Commission or the Staff Working Draft of S. 1593. The Commission has, in addition to our prepared testimony, previously offered detailed analyses of the provisions of the bill and has filed responses to written questions from both Senators Gorton and Inouye. At this time, we would like to offer our views in narrative form on certain of the policy issues in the bill, most notably the standards and procedures for handling agreements. We also offer technical comments in an Appendix to this letter. These comments are confined to matters of form and consistency of language. The time allowed for comments does not permit us to submit a more comprehensive analysis of the Staff Working Draft. We have chosen to confine our comments to previously unaddresmed Issues important to the Committee and to the Commission. We would be happy to provide more details with regard to our position or particular provisions of the bill if requested. The staff draft has made significa~rt advances over current law and previous Legislative proposals by creating a procedure designed to ensure prompt implementation of agreements. Under section 5 of the draft, agreements would become effective within 60 days of filing unless the Commission institutes a hearing either on its on motion or on complaint by an aggrieved party. It is our view that this procedure will guarantee prompt. implementation of the vast majority of agreements. Even under current law, the number of agreements subjected to formal pre-implementation adjudication is quite small. The new procedure of section 5, coupled with other provisions of S. 1593, should further reduce this already minor category of agreements while promoting the expeditious processing of agreements. Further refinement of the Staff Working Draft~ should, however, address the Commission's past difficulties in administering the Shipping Act's pre-isplementetion approval responsibilities. The Commission has been criticized for PAGENO="0097" 91 initiating proceedings or~ protests, initiating proceedings on its own motion, and failing to initiate proceedings. If the Commission elects to initiate an investigation into the approvability of a newly-filed agreement, it must do so without operational data on the actual impact of the agreement. This Jack of data requires the Commission to engage in wide-ranging investigations based on allegations and, suspicions which may ultimately prove unsupported. These problems will continue under S. 1593 as presently `drafted. To alleviate these problems, the Commission proposes that its review of the effects of an agreement be limited to the post-implementation phases of the agreement's operation. ` The Commission believes that many of the difficulties of the past procedures relate to the speculative nature of Commission review prior to operational experience under the agreement. The most rational and least' burdensome regulation of agreements can occur only after an agreement has been in operation for a' sufficient time to provide the Commission and all. affected parties actual evidence of the effects of the agreement. Proceedings can then focus on evidence of actual event's and the shipping public will have assurances that agreements will not be marched through the quagmire of formal'hearings on speculative or ephemeral matters. This alteration of current procedures would retain what we believe are valid concerns, of earlier Congresses, while eliminating fruitless, time-consuming regulatory hearings. The effect of the, above-suggested alteration would be to' allow agreements to go into effect unless rejected for failure' to comply with the provisions of section 5. Commission Investigations of agreements would he confined `to the "post-approval" phase of the aqre~ment and could be initiated by the Commission on, its own motion or by the complaint of a'n `affected privateparty, Such a f)roceclure may permit a downward `adjustment of' the 6O~dey time frame o. section 6 (a) . It aLso obviates the need for th~ det~ii1ed upportinq st~tenent required by section 5(a) of the Staff Draft. Section 61(j) would become the'operative paragraph governing Commission' proceedings on agreements. The following n~ijusLmcnts to the, language of subsection 6(j) would he appropriate: "(j) HEARING ON AGREEMENTS -* The COmmission may, at any time after an a~reoment [~ approved or ml rL: into effect, institute an investigation and conduct a hearing pursuant to section 13(e) to determine if the agreement (continues tol meets the standards of suhsect.ion (c), and 94-856 0 - 82 - 7 PAGENO="0098" 92 if not, whether such agreement should he disapproved, canceled or moclified.~! Any agreement which is th~ subject of such an investigation and hearing shall remain in effect during the investigation and hearing. Under section 6(j) the Commission may institute a proceeding at any time, but not until, it has good and sufficient reason to do so. Thus, the Commission can gather the evidence, ascertair~ the facts, and then decide whether a hearing is warranted.2! We suggest that if the Committee would favor some mechanism to protect carriers and shippers from the effects of a truly predatory agreement prior to its effective date, consideration should be given to granting the Commission authority to request a United States District Court to enjoin the implementation of the agreement pending inquiry by the Commission. Such authority is similar to that of other agoncies.~' We contemplate that use of this procedure would be confined to situations in which an agreement on its face contemplated activity violative of a revised section i2. S tandards for_Agreements Section 6(c) of S. 1593 sets forth the standards for action on agreements that are ordered to a hearing. It directs that the Commission shall disapprove any agreement that it ftnd~ 1/ See our comments, intra, on r~visioris to the standards set forth in section 6(c) of the Staff Draft. We have also proposed revisions to section 12 (Prohibited Acts) which will affect proceedings on agreements. 2/ We would suggest that section 6(i), which authorizes the Commission to disapprove any agreement for failure of a proponent to comp1v with a subpoena or discovery order in a proceeding, be amended to include failure of the parties to an agreement to respond to an orde' issued under section 17(a) . That section replaces the present sect ion 21 of the Shipping Act. See 6ppendix page 5. 3/ Federal Trade Commission, 15 U.S.C. 53; Wational labor Relations Boar 29 U~S.C. 160(j); Occupation~l Safety and Health Review Commission, 29 U.6C. 661.. PAGENO="0099" 93 will operate in violation of any provision of the t~ct, is unjustly discriminatory or unfair as to specified persons including carriers, shippers or ports, or will operate to the detriment of the commerce of the United States. These standards contain language identical to that currently in section 15 of the Shipping Act, 1916 with the important exception that secton 15's public interest standard has been deleted. The Committee staff has particularly requested comments on whether the standard of "detrimental to commerce" should be retained under the new Shipping Act of 1982. The inclusion of the standard "detrimental to commerce" by the drafters of the 1916 Act recognized that a variety of circumstances could. render agreements considered beneficial by carriers to be contrary to the general interests of the commerce of the United States. The Alexander Committee's investigation of the steamship industry revealed widespread abuses which were deemed inherent to the system of conferences and agreements whichhad developed in the industry. TWO alternatives were possible: either the bonferences and agreements could be prohibited altogether, or they could be brought. under some form of government control.. The Committee believed that the elimination of conferences and agreements would ultimately do more harm than goal: "To terminate existing agreements would necessarily brinq about one of two results: the lines would either engage in rate wars which would mean the elimination of the weak and the survival of the strong, or, to avoid a costly struggle, they would consolidate through áomrpon ownership. Neither result can be prevented by legislation, and either would mean a monopoly fully as effective, and it is believed mote so, than can exist by virtue of an agreement." H. Dec. No. 805, 63rd Cong. 2nd Sess. at 416 (1914). .everntneiit control was seen as the best means to retain the benefits of the conference system while curbing its inherent abuses. Among the recommendations of the Committee is the following: "Ihat all carriers engaged in the foreign trade of the United States, parties to any agreements, understandings, or conference arrcingernents hereinafter referred to, be required to file for approval with the lnter~3tate Commerce Commission a copy of all, written agreements (or a complete memorandum if the understanding or agreement ~is oral) ontered into (1) with any other steamship companies, firms, or lines engaged directly or indirectly in the American trade, or (2) with American shippers, railroads or other PAGENO="0100" 94 transportation agencies. All, modifications and cancellations of such agreements or undo rstand i ngs as may be made from time to time should also be promptly filed. The Commission should be empowered to order cancelled any such agreements, or any parts thereof, that_itmay find to hethscL1m1nat1ngoLunfa1r1ncharacter~ordetrimenta]to the commercial interests of the United States," II. Dec. No. 605, 63rd Cong. 2d Sess. at 119, 420 (1914). (emphnsi'~ supplicdj `This recommendation formed the basis for the "unjustly U iscr imi na tory" and "detr imental to commerce' standa rds wh ich appear. in section 15 of the Shipping Act, 1.916. S. 1593 quite correctly favors the swift implementation of most' agreements and attempts to ensure minimal government involvement and complete immunity from the antitrust laws. Given these commendable objectives, the Commiss ion supports exploration of alternatives to a "detrimental to commerce" standard which allay concerns which have arisen on the uses of that standard, We understand that obiections to the "detrimental to commerce" standard are based in large measure upon the arqument that it is to') vague a standard for the Commission to implement in a consistent and fair manner and for the regulated industry to be sufficiently apprised of the legal standards to which its agreements must conform. Like many other phrases in American statutes, the term, "detrimental tQ commerce" has been refined through case law to acquire a set of me~nings easily understood by affected interests. The insertion of the "public interest" standard in the 1961 amendments to the Shipping Act led to emphasis in the Courts arid the Commission on development of `guidelines under that standard. Controversies over the applicability of the "public interest" standard have consequently overshadowed development of "detrimental to eoiiiimmc'rce" inquir ies. Case Jaw wi, ich has given mean ing to "detr irrien to I to commerce" illustrates the kinds of agreement activities which may be of valid concern to the public. For example, in Port Utilities Commission of Charleston v. Carolina Co., 1. U.S.S.13. 4~1, 73 (1925) the Commission's predecessor found that agreements which resulted in foreign domination of a large per tion ot U.S. commerce was "detr imenta.l to comm~.rce." `An ajrecinent which impedes free choice among alternatives provided by technicalchan'je has been found by the Commission to he "detrimental to commerce." Swift & Co. v. Gulf & Southern Atlantic Elavazia Conference, `6 F.M.B. 215, 226 (196)). PAGENO="0101" 95 The Commission has determined that it would be `detrimental to commerce" for a conference to require that a merchant obligate himself in five trades in order to get contract rates in a single trade. Dual Rate Cases, 8 F.M.C. 16, 50 (1964). Likewise, In Aareement-U.S.Atlantic&Gulf/Austraua-New Zealand Conference, 9 F.M.C. 1, 9 (1965) the Commission concluded that the extension of a dual rate scheme to cover both Atlantic/Gulf and the Great Lakes would be "detrimental to cOmmerce." In Ag~eement Nos. 9902-3etal., 21 F.M.C. 911, 915-916 (1979), the Commission found that a joint service agreement which resulted in overtonnaging in a trade may be `detrimental to commerce." While the remaining standard of approval - that of unjust discrimination - is an important protection for parties that may be affected by a proposed agreement, it nevertheless is not broad enough to reach an agreement which, while not operating in violation of any provision of the Act nor having an unjustly discriminatory effect, may still cause substantial harm to U.S. commerce. An example of such an a3reement would he an arrangement among carriers which would block implementation of lnnov.~ t i v~ ttan~ot t rt svs tees , such as into ma ii] transportation arrang~m~'t;. The Administration has opposed on vagueness grounds the continuation of both the "unjustly discriminatory" and "detrimental to commerce" standards of section 6(c)(2) and (3). At the same time, the Administration shares the Commission's concern that provisions must be retained which address potential "abuse of conference power" and `predatory practices."Y After a great deal of internal research and consultations with representatives of the Administration, we believe that deletion of the "detrime'ntal to commerce" standard can be accomplished by revisions to the Prohibited Acts section of the bill. The Administration and the Commission are mutually satisfied that refinement of the Prohibited Acts section of the bill provides a means by which concerns over the effects of certain agreements can be reconciled with the widespread desire to eliminate wasteful government interference, at the pre- 4/ See letter of the }lonorable Drew Lewis, Secretary of Transportation, to Senator Slade'Gorton, dated February 5,. 1982. PAGENO="0102" 96 implementation stage of an agreement's life. Both the Administration and the Commission have endeavored to confine amendments of the Prohibited Acts provisions to circumstances which reflect actual problems identified by Commission case law. We therefore strongly urge that the following language be inserted in section 12 and that, with these amendments, the - standards of section 6(c) (2) and (3) can be deleted: (e) By Carriers 1~cting In Concert--No Conference, joint service, or any other agreement entered into with respect to any activity described in section 4 may-- (1) result in a concerted refusal to deal (group boycott); (2) utilize a device or means which sets conditions or otherwise restricts the ability of a shipper to select a carrier in a competing trade; (3) directly restrict through any unjust or unfair device or means the entry of any carrier who would otherw~e be willing and capable of serving the trade;-' (4) restrict the employment of intermodalism or other technological innovations by member carriers; or (5) engage in any predatory practice designed to eliminate the participation of any non-member cartier in the trade. The position stated herein also contemplates insertion in section 12 of language whichtransfers the "unjustly discriminatory or unfair" standard of section 6(c) (2).. Drafting adjustments would be necessary to make the language of secion 6(c)(2) compatible with the languägewe have proposed in section 12(e). 5/ To the extent that the Committee deems qualifications or capabilities to be an issue which requires. further definition, we suggest that the Committee Report reference language from the Merchant Marine Act, 1936, ~46 U.S.C.A. §1171(a) (2) and (a) (3).~ . PAGENO="0103" 97 Tariffs Under the provisions of S. 1593, tariff-filing requirements establish a central repository for carrier price information. The availability of this price information is a central component of a competitive ocean transportation system. Unlike ariffs in domestic surface modes and other utilities, tariffs in the foreign ocean trades are not part of a regulatory scheme which controls the levels of rates or requires approval of rate levels by a regulatory body. Increases can be implemented only on 30-day notice. This requirement protects American importers and exporters from sudden rate fluctuations whichcan hamper their ability to compete effectively in international markets. Rates can be lowered On immediate notice. Concern that tariffs impede price flexibility isquickly allayed by examining the history of rate levels in major U.S. liner trades over the past decade. This completes our prepared comments with regard to the Staff Working Draft of S. 1593. If you have any questions concerning our response or if we may be of assistance with regard to any other matter, please do not hésitate to contact me. Sincerely I Alan Green, Jr. / ~hairman Attachment cc: The Honorable Bob Packwood The Honorable Daniel K. Inouye PAGENO="0104" 98 TARIFF Y~STEM STUDY I~/\RT I I. INTRODUCTION The Office of Regulatory Policy and Planning undertook at the direction of the Commission a study of the tariff filing system as it exists within the FMC. The objective of the study is to examine the validity today of the premises upon which the tariff filing requirements of the Shipping Act were' based.1' The first phase of this part concerns the internal use of the files in the effectuation of non-tariff Commission programs such as agreements, formal decisions, enforcement, etc. This analysis is based upon a questionnaire directed toward various Commission staff. A second phase consists of evaluation of the use of the Commission tariff files by persons outside the agency. That analysis is based upon interviews of tariff watch services, analysis of user charge vouchers for duplication of tariff material, and discussion with frequent outside users. In a subsequent part, we will discuss the trade significance of a public tariff system derived from interviews with shippers and carriers., Thereafter, we will prepare our conclusion on the efficacy of the, present statutory and regulatory system. 1/ Section l8b, the foreign tariff filing provision, was added to *the Shipping Act, 1916, by Public law 87-346 in 1961. ~ PAGENO="0105" 99 II. INTERNAL USE A. In General This section is a summary of responses to the tariff study question- naire. The respondents indicated that they had frequent recourse to the tariff files. The majority found the tariffs important and necessary for their work, and when asked of the consequences of an abolition or curtail- ment of the files indicated that their jobs would be difficult, if not impossible, to perform. If the information had to be collected from sources outside the FMC, the process would be more expensive, time cc)flSUIfllfll, and less reliable. All types and elements of the tariffs were examined, with foreign tariffs, overall rates, rules, commodity descriptions, and special charges receiving the most scrutiny. Uses for the tariffs ran from special dockets and investigations to rate comparison reports on specified commodities and cost analyses and planning strategies. Use of the tariff was a matter of necessity in most situations. While a number of difficulties are encouqtered in extracting information from tariffs, these impediments do not influence the use of tariff data. However, respondents indicated that standardization of the system would speed use and result in less confusion and error and faster completion of cases. To make the tariff files more current, reliable, and accurate, respondents recommended certain changes in the system's format and procedure: standardization and simplification of filing requi rements and forms, computerization of information, upgrading of training of tariff personnel, clearer delineation between current~and cancelled page~ in the tariff, and a change in the Commission's examination process. On this last point, the feasibility of spot-check examinations, periodic in-h PAGENO="0106" 100 depth rev i iws md LnCOUr iq an n t 1 1 ~O ii ci toj I 1 thL sh nq ndus h y were mentioned as well as chanq'; imed at reducing the time lags between receipt of tariff material and physical filing and increasing the access to the tariffs. B. Specific Responses to the Questionnaire There was an 85 percent.response (57 out of 67) to the tariff study questionnaire that ORPP sent to members of eighteen departments in the Commission as shown below: RESPONSES TO QUESTIONNAIRE Office Sent Received Managing Director 3 3 Secretary 1 General Counsel 5 3 Law Judges 8 7 Data Systems 2 1 Energy & Environment 3 3 Consumer Affairs 1 1. Agreements 12 10 Cert. & Licensing 4 3 Investigation & Hearings 7 5 Field Offices 16 15 Tariffs (Special Projects & Settlements) 5 5 57 67 To simplify the presentation, the questions have been grouped into categories for current usage. importance, and recommel\dations for change in the system. PAGENO="0107" * lol CUlW~ IF USAGE Q: How many times per year, on avwage, do you use the information contained in the various tariffs on file with the Commission? A: Responses to the question of frequency of use ranged from never used" to "daily used." The breakdown in utilization was roughly as shown in Graph A. More than half of the respondents fell in the "zero to twenty" range. The zero users arose mainly from the Bureau of Certification and Licensing and the Office of Energy and Environmental Impact. Q: Describe those aspects of your work that require the use of the information contained in the tariffs. Please be specific, identifying which tariffs are used ineach area of work, which particular tariff elements, and explaining how and fOr what programs the data are utilized. A: The answers to the questions of which aspects of the tariff files were most often used were quite varied. Most respondents indicated that they used all types and elements of the tariffs, but that foreign tariffs were of particular importance. . Conference and non- conference material was handled and most tariff elements were cited -- rates,rules, and commodity descriptions most often. The uses for the tariff information were widespread: from special and informal dockets to overcharge cases, rate disparities, and public inquiries. Tariff and element use depended mainly upon the particular office involved. See Graph A. IMPORTANCE Q: How critical is the information obtained from the tariffs in regard to your. work and the mission of your office or bureau? A: The breakdown o.f the responses concerning tariff importance is shown in Graph B.. The majority of respondents found the tariff information very important. (Obviously, those who never used the files found them of not much; importance, and one respondent stated that in order to be useful, much research was needed to obtain accurate tariff information.) Those finding the information very important described it as "vital" for investigations, decisions, and substantiation of cases. A number. stated that the tariffs were necessary for regulation directed by the Shipping Act. The impact on programs of an unavail- ability of tariff data would be substantial accordi~g to most respondents Many would find it "difficult' or "impossible" to continue their. a programs, would entail added expense and delay in the effort to get the relevant information from other sources where possible, and would jeopardize proper enforcement of statutory requirements. . PAGENO="0108" 102 (~`\tIl /~ FREQUENCY DISTRIBUTION OF THE USAGE OF INFORMATION CONTAINED IN VARIOUS TARIFFS ON FILE WITH THE COMMISSION PERCENT OF TOTAL RESPONSES 12.0 18.0 24.0 30.0 -_- - 1 ____~~~~ ZERO ~ 12.2 10 10-20 ___ ____ P4 E _______ 20 - 30 -50 _ - 75 11 0 Y A 100 R UAILY ~ 11 £3 NO RESPONSE~2.0 PAGENO="0109" IflU-<-4 -4 H 0 -U > m r'i m z -4 -~ 0 ~Tt H 0 -n -4 `1 > ~ mwzouiflm~ no 2. `4 0 Z -4 >. -C .2 -4 In z -C -4 2 -I -D PAGENO="0110" 104 Q: Could, the information neccs~;r~ to your work which is currently obtained from the tariffs be a:quired from other sources if the Commission's tariff files `wnro not available? If so, from where? A: Responses to the question of the existence of other sources outside the Commission are shown in Graph C. The other sources most fre- quently cited were the carriers, conferences, parties to the proceed- ings, and tariff filing services. Many respondents qualified their .answers by stating that no adequate replacement could be found for the Commission's files and that the reliability of much of their work should be questioned if they depended on parties outside of the Commission for tariff information., RECOMMENDATIONS FOR CHANGE Q: Would'you use the tariff files more frequently if they were standard- ized, simplified, or otherwise easier to use? A: The responses are detailed in Graph D. The rationale for those who responded negatively was that necessity, not simplicity, was the reason for using the files. No matter how confusing the tariff system, if the job required the information, `the tariff files would be used. However, of these negative responses, a number did comment that. while standardization would not necessarily increase usage, it would speed the'process considerably and result in less confusion and error and faster completion of cases. ` Q: For what other programs or studies do you think the Commission could use the current tariff system more effectively? A: The response for other programs to use tariff information was not extensive. Among the specific programs suggested were in-depth trade and rate studies, carrier profiles, economic analyses/impact'studies, and forecasting models and policy impact studies for strategic planning.. A few respondents could not envision use of the tariff files for additional programs'until the present system was made workable for present programs. Q: Do you believe that the information contained in. the Commission's tariff files is reliable, reflecting the rates in effect at a given time? . . A: Responses to this question a~e depicted in Graph E. ` While most respondents found the Commission's tariff files reliable, most stated so with reservations. Many felt that the tariffs reflected the rates in effect at a given time, bit whether these stated rates were actualized depended upon the carrier. Many noted that misfilings and the slow filing procedure threw doubt on reliability. PAGENO="0111" muzc3uWIflV I > -C w In z 0 In C z C') Ph z a -C In In p "3 "3 01 0 -no -1° 10 I C, -l 0111 ~U) > r ~ In `-4 0 H U) ~rn PAGENO="0112" 106 Li WOULD CHANGE IN THE TARIFF SYSTEM INCREASE THE USAGE? FERCENT OF TOTAL RESPONSES 0.0 12.0 24.0 38.0 48.0 80.2 -~ I __________ T ~ NO z - -;~ ~ ____ D __________ E 0 YES __ ___ NO RESPONSE !3.2 PAGENO="0113" 107 ~¼I1I L THE RELIABILITY OF THE INFORMATION CONTAINED IN THE COMMISSION'S TARIFF FILES PERCENT OF TOTAL RESPONSES 5.5 14.5 28.5 42.5 58.S 75.5 ~ -- YES-RELIABLE ~ r I Y P NO-NOT RELIABLE 1 ~I. S o R ~ SOMETIMES RELIABLE 5.0 NO RESPONSE ~ 94-856 0 - 82 - 8 PAGENO="0114" 108 Q: What changes in the sysiew won 1 you suqqest to make the information more current, reliable, accurote, and available? A: Suggestions for systems changes ran along three lines: format, availability, and personnel. In format, respondents called for a standardization and simplification of filing requirements and forms, commodity descriptions and codes, rules, and rate structures. For availability, many suggested microfiche or computerization, with terminals available in district offices, and the establishment of process and review schedules to ensure currency. Finally, the need for a better-trained staff in tariff filing andhandling was often suggested. Many felt that if the process were simplified, tariff analysts would be freed from clerical duties and could actually analyze. rates. Q: What major modifications would you like to see in the current system through amendment of statute, modification of B. 0. 13, exemption or otherwise? A: Not many suggestions were made for amendment of Commission statutes or operating rules, besides those related to simplification or standardization. (One respondent did call for statute amendment to equalize shipper and carrier positions in Commission misrating cases.) The changes recommended on the whole were seen as enabling Commission personnel, members of the shipping industry, and the general public greater access, usage, and understanding of the tariff files. C. Special Use of Tariffs by the Bureau of Tariffs The questionnaire technique was not used in the Office of Foreign Tariffs or the Office of Domestic Tariffs, Bureau of Tariffs, because it was feltthat the results would be distorted. We did not want to include staff activity directly associated with legal obligations of carrier~s to file tariffs nor with the formaland technical requirements for tariffs. Accordingly, we sought to eliminate staff activities, such as tariff receipt and filing, examination, rejection, special permissions, tariff criticisms, and other program activities which flow directly from tariff filing regulations. PAGENO="0115" 109 The newly effective manageern information system in effect in the Bureau of Tariffs has provided a means to segregate functions associated with the requirement to file tariffs from other activities which utilize the tariffs as an informational resource. Thus, it can be seen that practically all of the activity of the Examination Branch deals with tariff regulations and as a function should be excluded from a study of internal use of the tariff files. (See Graph F.) The analysis branch, however, includes three specific activities: those related to tariff regulation~ those that use tariffs as an information source pertinent to non-tariff functions~ and those apparently unrelated to tariffs. Graph G reflects this division of work. The pertinent categories for examination are general inquiries (consumer activities, information requests, industry education), regulatory research (docket support, rulemaking, testimony evaluation, testimony preparation, enforcement inquiries), and analytical research (rate studies, rate applications, statistical compilations). These categories roughly contain those activities which use tariffs but are not directly related to tariff filing requirements. About 35 percent of analyst time was spent on these activities. The significance of these programs appears to track the program activities for the other agency components discussed above since these activities appear to be performed as service for other components. III.' EXTERNAL USE OF THE FMC T/\R[FF FILE A. Tariff Services In the discussions with the tariff watching services which utilize space at the Commission to conduct their operations, questions similar PAGENO="0116" 110 IT1X,-4-4 c~c)u T~Q ~Z1r~~m~ r~r ~ U~L ____________________________ - ~I~J TOTAL TIME ~- U) f~ ~ PERMANENT FILINGS TEMPORARY FILINGS m I) cC) c5~ H -~ ~-4 REJECTION LETTERS m >>cr) 0 RESEARCH PROJECTS z > H 0 z GENERAL INQUIRIES w > 0 I LOCATING TARIFFS PAGENO="0117" P E R C E N T C F V F I U E L~ FY lOT QUARTER tllhiifflJ FY 2ND QUARTER [LW]] FY 3RD QUARTER L~J FY 4TH QUARTER w I F- -j F- 0 I- OFFICE OF FOREJCN TARIFFS - ANALYSIS BRAL~ QUARTERLY TIME ALLOCATION FY80 Q4.FYD1 01.02 AND Q3 Iii I Lii z I U) Lii a z -J Lii I Lii 0 U) Ii. ii: I- Lii N 8 1 U) Lii I- U PAGENO="0118" 112 to those of the internal study cot:erning usage, importance, and recommendations for change were posed. Tariff watching services photo- copy and research rates, tariffs, and tariff changes at the agency daily for their clients. The clients represent most facets of the shipping industry: liners; carriers; conferences; independents; forwarders; and port authorities. The number of clients each watcher services depends upon the size of the firm. One service deals with more than 800 customers worldwide including some 365 liners, 50 to 60 shippers, and many of the major conferences. Liners, both conference and independent, most often contract with the tariff watching services for information. NVOs and freight forwarders do so infrequently. Shippers use of the services is growing rapidly. The watching services' coverage of the elements of the tariff files depends on the needs of the client. The most heavily regarded parts of the tariff are the rates, commodity descriptions, and special charges. The services, though usually only involved in the collection and presentation of the data and not its analysis, project that their clients use the tariffs as a basis for planning strategies and costing policies. Firms offering filing services use the tariffs at the RIG more extensively. For example, in filing their own tariffs or changes, some independents have directed the tariff services to merely customize those conference tariffs already on file with the Commission. One new use for the tariffs, in a series of rate comparison reports on specific commodities, is especially attractive to shippers and~other industry insiders concerned about the rate wars and market shares. PAGENO="0119" 113~ When asked about the imporI~itic~ of the Commissions tariff files, the watching services echoed responses in the tariff study questionnaire. All stated that if there were no statutory requirements for filing or maintaining tariffs with the FMC or anyone else, they would obviously be out of business. If the statutes were amended so that carriers were required to keep open tariff files but not necessarily at the FMC, the watching services anticipated an increase in expense in collecting the needed information, as well as the potential for serious abuse of the system. The watching services feel that the FMC is presently the best available place for maintenance of the files. They highlighted, however, some of the problems existing in `the FMC's system and made some recommen- dations for change. `Concerning the reliability of the files, the firms said that the `one to two week lag between receipt of the tariff'by the FMC and its filed appearance in the binders injured the reliability of the information. The lag has been reduced ~y a new handling of cancelled pages,.but this change has in itself creat~d more difficulties in tariff'' avaflability, With the cancelled pages kept in binders with the current pages, the services are finding it more difficult to determine what is really in effect. One of the services faced, this same problem in creating its own tariff library and adopted a practice of placing only one tariff in each binder and keeping the current and cancelled pages in separate sections. In this way it is easier to distinguish what is in effect, but not impossible to locate changes that the tariff has uncf~rgone Two different approaches toward examination pf the tariffs by the FMC were discussed with the watching services First all the firms agreed PAGENO="0120" 114 that the cursory examination th( (~n~ission pertons now on many tariffs could be eliminated and a slot-check system be instituted. Under present conditions the examinations are a waste of time, money, personnel, for the resources allocated toward this job are not sufficient to deal with the huge volume of work to be done. Discussion centered on whether the shipping industry could police itself -- if competitors were encouraged to examine each other's filings and report any faults to the Commission. As it stands now, the tariff services state that when they see discrepancies of some sort in the course of their work they try to bring them to the tariff examiners' attention. It is hoped that by encouraging self-policing the tariff filing system could develop an internal cleaning procedure to improve the quality of tariffs filed. Secondly, some of the watchinQ services suggested that the Commission schedule periodic in-depth reviews of the tar~iffs, especially those of conferences and large independent carriers which are most often used as models for the filings of others in the industry. In the watching services' view, thorough periodic examinations would encourage firms to file correctly the first time, while providing a viable system for the Commission to operate in. Any streamlining of the examination process would require adjustment of the personnel involved as well. The tariff watching services all anticipate a strong move toward computerization of the entire system for filing tariffs and changes, maintenance, and publication. Such a move will require a simplified system capable of utilizing modern communications and data processing equi pment. PAGENO="0121" 115 B. Government Agencies and thn Public We were also able to measure the utilization of the Commission tariff file by the public. While the present procedures do not (and properly so) log visitors to the tariff file, personnel in the Tariff Control Center are aware of the regular usage of on site tariff files by government agencies. The Department of Agriculture uses the tariffs about two to three days per week. Department of Defense, Department of State (AID), andthe General Services Administration also are regular users. We understand that these agencies require tariff information in their capacities as shippers. Other agencies, Departments of Transportation, Health and Human Services, and Justice are occasional users. Finally, about three non-government visitors per week inspect various tariffs. We were also able to ascertain those persons who had requested duplication of tariff material. During an appropriate ten-month period of Fiscal Year 1981, 294 requests were made, broken down as follows: Attorneys 119 Steamship companies or agents 34 Tariff consultants (freight auditors) 23 Freight forwarders 21 Tariff services 20 Shippers 18 NVOCCs 13 Ports 9 Consultants 7 Government & Universities Conferences 4 Domestic transportation 3 Other 31 PAGENO="0122" 116 The requests ranged from dupi cation of a single tariff page to duplication of entire tariffs. Of course, the specific purpose to be served by.the tariff information is unknown, but it certainly can be assumed that it served some business purpose. IV. Conclusions Based Upon This Aspect of the Inquiry The tariff file is integral to a number of functions at the Commission as reflected by the substantial use and dependence upon the tariff system by employees of the Commission. For instance, in many docketed activities judges consider tariff information to be a critical factual element. Likewise, investigators and trial attorneys considered tariff information essential for enforcement activities. With reference to the agreements program, there is some consideration of tariff information. While it is arguable that these functions could be continued without an inhouse tariff file, an alternate information source would be expensive and with a loss of overall informational capability for the Commission. The desirability of a tariff file is even greater in terms of the potential that the tariff file represents. Clearly, the tariffs would have been more widely used if the data were more accessible. This is particular'y true in terms of economic analysis and the evaluation of agreements where tariff information has not been used comprehensively to develop a record for Commission consideration although there is no question that such information would have been highly probative in terms of measuring conipe- tition and price structure. The overall utilization of the tariff file exteri~ally is somewhat difficult to measure becauso we nre not fully acquainted with the extent or the purpose that clients of tariff watching services have in mind when~ PAGENO="0123" 117 using information derived from thr I IC tan If file. Similarly, the requests for duplication of tat I information does not reflect any particular purpose or any particular need for the information. Never- theless, it is demonstrated that persons outside of the Commission are aware of the file and do make use of it. In conclusion, it can be seen that the tariff system as an informational source is useful to the staff and meets a commercial interest outside of the agency. Of course, this type of determination does not ultimately decidethe question of whether the objectives of the Congress in setting up sectioTi 18b are currently valid. In the next phase of the study we will devote ourselves to the impact on trade of the tariff file itself. We will be looking at the implicit impact of the public tariffs system resulting from the general availabi'ity of tariff information at the Commission and generally. At that time information should be available for measuring the efficacy of the tariff system. Office of Regulatory Policy and Planning Wm. Jarrel Smith, Jr., Director Questionnaire analyzed and tabulated by Susan M. Banks, ORPP Graphs A-E Dorothy K. Webb, ORPP Graphs F-G Office of Management Evaluation and Review PAGENO="0124" 118 TARIFF SYSTEM STUDY PART II I. INTRODUCTION This is the second of three parts of a study by the Office of Regulatory Policy and Planning (ORPP) of the tariff filing system as it exists within the FMC. The objective of the study is to examine the validity today of the premises upon which the tariff filing requirements of the Shipping Act were based.!' The first part of the study concerned the internal use of the files in the effectuation of non-tariff Corirnission programs such as agreements, formal decisions, enforcement, etc. That analysis, published on October 1, 1981, was based upon a questionnaire directed toward various Commission staff. The second part consists of evaluation of the impact of the tariff filing system on external users -- shippers and freight forwarders. That analysis is based upon interviews of importers, exporters, and freight forwarders. A further phase of this part, presently underway but not completed, involves the external utilization of the tariff system by liner operations and con- ferences. In a subsequent part, we will prepare our conclusion on the efficacy of the present statutory and regulatory system. l"Section 18b, the foreign tariff filing provision, was added to the Shipping Act, 1916, by Public Law 87-346 in 1961. PAGENO="0125" 119 II TARIFF USAGE BY SIIIPIERSAI4D IR[!CIIT IORWARDERS A. Survey Design Critical to an examination of the efficacy of the tariff system is an evaluation of the utilization of the system by external concerns -- shippers and freight forwarders. The ORPP interviewed 25 firms engaged in the import and export of various commodities. A list of the firms interviewed and their principal import/export commodities is attached as Figure 1. As can be seen from that list, those interviewed include some of the largest importing! exporting firms in the United States, as well as. some very small shippers. The nature of the commodities imported and exported varies substantially among the firms, which are located in various geographic locations throughout the country. In addition to the shippers, nine freight forwarders were interviewed by ORPP The attached Figure 2 lists the freight forwarders whose opinions were solicited. In conducting its interviews, the ORPP utilized a guide containing numerous questions relating to the size of the interviewee; the importance of ocean transportation to the firm; and the firm's attitudes towards concepts such as shippers' councils, closed conferences, and conference and independent carriers, as well as questions relating directly to the tariff system. The questions listed in the attached Fiqure 3 are strictly those pertaining to the tariff system The tariff questions were designed to elicit infor- mation concerning the interviewee's usage of the tariff system, the importance of ta~ ~ffs to the inte,vu~iee the necessity of'~naintaining a PAGENO="0126" 120 I `ire 1 SHIPPERS INTERVIEWED BY ORPP Name of Firm Bardon, Inc. Bridgestone Tire Company of America Carborundum Co. Foremost-McKesson, Inc. The Getz Corporation Hooker Chemical Company I. Magnin & Co. International Multifoods J. C. Penny Co. Kinney Shoes Kobrand Corporation Levi Strauss International Pfizer International Inc. Polysius Corporation Sears, Roebuck and Co. Spiegel Suizer Brothers U.S. Borax and Chemical Company ________ Line of Businessj/ Clothing Importer Tire Importer Exporter of Abrasives, Graphite Products, S Insulating Materials Foodstuff Exporter Consumer Goods Importer Importer/Exporter of Food Products Importer/Exporter of Mmmi xl Water Importer/Exporter of Tire & Sporting Goods (Imports Also - Raw Materials Rubb Rochester, NY Exporter/Importer of Photographic Apparatus East Aurora, NY Exporter/Importer of Children's Toys (leiports ulso - music units) Exporter of Paper Product: Exporter of Chemicals, Foodstuffs, and Machinery Exporter of Chemicals and Plastics Importer of Ready to Wear ond Gift Lines Exporter of Grain and Flo:r, Importer of Gluten and MiMing Machi nary Importer/Exporter of Comsr or Goods Importer/Exporter of Shoe~ Importer of Wines Spiri.~ CA Exporter/Importer of Clot mg and Apparel Exporter of Chexiicxl o and Pha rixaceuti eels Importer/Exporter Imp~'tcr of Consx:xrr Goal Electronic Fqtii~xoemt, a:~i Auto Accessories Importer of Coesuxixr Go,:~ Importer/Exporter of n4i ~i ng Materials Equipment Exporter of Sodium Borate Boric Acid Locati on Los Angeles, CA lorrance, CA Iliaqara Falls, NY Los Angeles, CA Chicago, IL Sun Francisco, CA Mew York, NY Buffalo, NY Carnation International City Products Corp. Del Monte Corporation Draco Marine, Ltd. Dunlop Tire and Rubber Corp. Eastman Kodak Company Fisher-Price Toys Sen Francisco, CA San Francisco; CA Niagara Falls, NY Brisbane, CA Puffalo, NY lieu York, NY Now York, NY New York, NY San Francisco, York, NY Atlanta, GA Chicago, IL Oil. Brook, IL Ni: York, NY Ii Angeles, CA i/This refers to the line of busiiieerxs it concerns international trade. PAGENO="0127" 121 iq're 2 FREIGHT FORWARDER~c INTERVIEWED BY ORPP Name of Firm Location Albert E. Bowen, Inc. New York, NY Casey Overseas Corp. Indianapolis, IN L.E. Coppersmith Inc. Los Angeles, CA J.K. Ebberwein, Inc. Savannah, GA Lusk Shipping Co., Inc. New Orleans, LA Mohegan International Corp. New York, NY Ohanneson Worldwide San Francisco CA Ted L. Rausch Co. of Oregon Portland, OR Charles A Tague Inc Philadelphia PA PAGENO="0128" 122 1. Do you use tariff what source: IjuIre 3 (a) FMC files (b) tariff service (c) your own tariff files (sut~criptions) (d) forwarders (e) steamship company representatives 2. Do you make use of a tariff watch service? ___________ purpose? 3. If you subscribe to tariffs, or maintain the services of a watching service do you do so in order to assess what your competitors are paying, or do you do so in order to assess which carrier is offering the best freight rate? ______________ I Tariff S Ltd Interview Guide information in your export/import activities? From If so, for what 4. If you do not subscribe to tariffs, or use the services of a watching firm. what is your reason? 5. Do you think tariff rates should be available publicly? What would he the consequences of eliminating t'e requirement that carriers publish tariffs? PAGENO="0129" 123 6. Do you believe that the current rcquirement to file tariffs at the FMC should be retained? Why or why not? Have you ever utilized the tariff files at the FMC? ~_ ~ *. ~ *_**.__.*~ .*_~ .. .** ~ ~_ 7. Is the public nature of-tariffs sufficient to ensure fairness and no discrimination, for shippers? Is discrimination among shippers a concern of yours? - 8. Do you think ocean tariffs are too complex? If so, how would you propose they be simplified? 9. (a) Do you utilize FAK rates? -__________ What is your opinion of such rate? (b) How would you feel about a system similar to that utilized by CAST -- a per container rate system? 9~-856 0 - 82 - 9 PAGENO="0130" 124 (c) What is your opinion of a clam rate system, whereby commodities are grouped according to various classes? (d) Would you be in favor of a tariff classification system based upon either Schedule B or TSUS/\? 10. Should dual-rate contracts be extended to intermodal movements? Explain. 11. Should rates be based solely on cost considerations? Explain. PAGENO="0131" 125 tariff system, the complexity of the present system, the role of discrimination, and any possible changes that could be made in the present system. Most of the questions are of the open-ended variety. Usage of this type of question enabled the interviewer to develop through probing a thoughtfully conceived response. B. General Survey Results The overwhelming sentiment of shippers and forwarders interviewed was that publicly available tariffs are a necessity. Virtually all interviewees felt that thelack of a system of publicly available freight rates would lead to chaos. This sentiment was reflected in the fact that most interviewees utilize tariffs in some publicly available manner either through subscriptions or tariff watch services. Discrimination, rate instability, misratings, and the inability of shippers to easily ascertain the total transport costs of shipping a commodity were factors cited by most shippers as their rationale for needing a publicly available tariff system. The study revealed quite clearly that the principal payers of the freight favor retention of the current system. Most interviewees were not concerned with discrimination; however, many shippers not presently concerned with discrimination, did indicate a concern that discrimination may occur if tariffs were not publicly available. Based upon the ORPP interviews, it was determined that shippers generally prefer rate stability to a condition of instability (even when that instability results in declining rates). Shippers prefer stability becausefor most, the nature of their business necessitate; setting the retail price of their PAGENO="0132" 126 commodities six - nine months in advance. Thus, in developing the total landed costs, it is necessary to be able to predict with a degree of accuracy the ocean transportation costs. Many shippers interviewed felt that publicly available tariffs contribute to their ability to develop the total landed costs for specific commodity movements. * Many of those interviewed had never utilized the FMC as a source of tariff information; and thus, it was not surprising that many did not see an overwhelming need to have the Conrnission act as a repository for tariffs. However, since most intervmewees felt that there is a strong need to have publicly available tariffs, when pressed for an alternative method of ensuring public availability, the interviewees concluded that the present system whereby the FMC acts as a repository is the most viable and effective. Virtually all interviewees felt that tariffs are too complex. However, most acknowledged that shippers are generally responsible for the complexity of tariffs as a resultof shippers seeking separate and distinct rates for each item traded. Some interviewees suggested per container rates or a class rate structure as an alternative to the present complex tariff classification system. Many felt a definitive need for a standardized system, such as one based upon Schedule B. Most interviewees, however, recognized that trans- portation costs must be based upon a value of service philosophy rather than a cost of service one; and consequently, there will always be a certain degree of complexity inherent in the system. PAGENO="0133" 127 C. ~p~cjfic Survey Results Use of Tariffs Q: Do you use tariff information in your export/import activities? From what source: (a) FMC files (b) tariff service (c) your own tariff files (subscriptions) (d) forwarders Ce) steamship company representatives A: Of the 25 shippers interviewed, all make use of tariff information. Many utilized tariffs from a variety of sources. Of the 25, 14 subscribed to the tariffs of s~ `mship lines. Sonie shippers estimated that such subscripti~.~ cost from $3,000 - $6,500 per year depending upon the number of steamship lines whose tariffs were subscribed to. Eleven shippers, some of which subscribe to tariffs, indicated that a principal source of tariff information is direct contact with steamship company representives. Only four of the shippers interviewed cited tariff watching services as a source of their tariff information. Some shippers obtained tariff information from industry trade associations which they belong to. All of the nine forwarders interviewed listed contact with steamship line agents as the principal source of tariff information. Only one of the nine. subscribes to tariffs, with others citing the prohibitive cost as the rationale for not subscribing. Q: Do you make use of a tariff watch service? If so, for what purpose? A: As noted previously, only four of the 25 shippers interviewed made use of a tariff watch service. The principal reason given for usage of a watching service was that the complexity of tariffs requires either the employment of a full-time staff to follow tariffs or the services of a watching firm. Q: If you subscribe to tariffs or maintain the services of a watching service, do. you do so in order to assess what your competitors are paying or do you do so in order to assess which carrier is offering the best freight rate? A: Of the shippers thateither subscribe to tariffs or maintain the services of a watching firm, 15 responded to this question. The results were somewhat surprising. Only six of the 15 responded that both the price paid by competitors, as well as the best available freight rate were the rationale for using tariffs. Only four carriers specifically cited the best available rate as the reason for following tariffs. Other shippers cited an inability PAGENO="0134" 128 to rely on rate clerks providing correct infoniution, the need to understand various tan II rules, and the necessity of auditing freight bills as major nea~ons for utilizing tariffs. Each of these responses could be translated into a quest by shippers to ascertain the best available freight rate. Thus, tariffs can be clearly viewed as an information source utilized by shippers. Q: If you do not subscribe to tariffs, or use the services of a watching firm, what is your reason? A: Most shippers that did not subscribe to tariffs or utilize a watching service, felt that the easiest and most efficient method of determining rates was through direct contact with steamship company representativec. Some shippers expressed a preference for certain carriers (be it U.S. flag, conference, or non-conference) and thus were willing to accept the rates charged by those carriers; since for those shippers, ocean freight rates were only a small portion of their coninodity's total landed value. The Necessity of Publicly Available Tariffs Q: Do you think tariff rates should be available publicly? What would be the consequences of eliminating the requirement that carriers publish tariffs? A: The nine freight forwarders interviewed were quite vociferous in their connients on this question. All those interviewed felt that tariffs must be available publicly. Consequences cited by the forwarders included chaotic rate changes, rate wars, discrimination, misratings, and varying interpretations of rates. The shippers interviewed were not quite as vociferous as the freight forwarders; however, most shippers including the largest shippers (or those that stand to gain the most from abolition of the tariff filing requirement because they would likely be able to exert the most power in setting the freight rate) stated that it was necessary to have publicly available tariffs. Nineteen shippers out of 24 re- sponding to the question (79.2 percent) indicated that publicly available tariffs are a necessity (see Figure 4). Of those shippers responding in the negative to this question, most felt that it would be to their advantage to individually negotiate freight rates. It should be noted, however, that many extremely large shippers did indicate that they were in favor of retaining publicly available tariffs. Most shippers ci ted chaos as the probable result of elimination of publicly available tariffs. Discrimi nation was mentioned often, as was the inability to negotiat~ rates when a shipper trades thousands of commodities. The creation of instability and an aura of secrecy was also mentioned often. PAGENO="0135" 129 figure 4 SHIPPER RESPONSES TO THE QUESTION: SHOULD TARIFF RATES BE AVAILABLE PUBLICLY? PAGENO="0136" 130 Q: Do you believe that the curient requirement to file tariffs at the FMC should be retained? Uhy or why not? Have you ever utilized the tariff files at the lUG? A: None of either the freight forwarders or shippers interviewed had ever made use of the FMC tariff files. In spite of this, however, all of the freight forwarders felt that it is necessary to maintain publicly filed tariffs; and the 1MG is the most effective repository for such tariffs. The shippers were not nearly as unanimous as the forwarders in their viewpoint. Of the 23 shippers responding to the question, only 12 felt that it was necessary to have the FMC act as the repository for tariffs. It is interesting though that some shippers, who were not in favor of having publicly available tariffs, did in fact note that if it were deemed necessary that tariffs be available public]y, then the FMC would be the1most effective pg~itory. Many of the shippers who did not feel that it was necessary to retain the 1MG filing requirement were however in favor of maintaining publicly available tariffs. When pressed as to how tariffs would be main- tained publicly without being filed at the 1MG, some suggested simply allowing the carriers to n~intain their own published tariffs would suffice. However, most shippers when pressed for an alternative to the FMC filing requirement were reluctant to admit that probably the most viable means of maintaining publicly available tariffs was through the use of the 1MG as a repository because it lends integrity to the system. Discrimination Q: Is the public nature of tariffs sufficient to ensure fairness and no discrimination for shippers? Is discrimination among shippers a concern of yours? A: Of the 21 shippers responding to this question, 13 indicated that they were not presently concerned with discrimination. Interestingly, however, some of the shippers who indicated they were not presently concerned with discrimination did indicate in response to the question concerning the consequences of the elimination of publicly available tariffs that such an action would result in discrimination. Most of the shippers not concerned about discrimination did indicate that they felt that larger volume shippers were entitled to some benefits because of the large volume of their shipments. Unfortunately, this answer reflects an apparent misunderstanding of the nature of dis- crimination since assessing lower rates to volume shippers need not necessarily be discriminatory. The economist's definition of dis- crimination is charging different prices to buyer~' when the costs of production are the same. Since volume shipments could reduce the unit cost of the shipments, charging lower rates to reflect this cost saving is not technically discriminatory. PAGENO="0137" 131 Of the eight shippers That indicated a concern over discrimination, many felt that the prusunt tariff system was not that effective in preventing discrimination. It should be noted that most shippers did acknowledge that one of the reasons for the complexity of the tariff system (and consequently, the possible existence of discrim- ination) is the fact that; all shippers attempt to negotiate specific rates for each of their commodities. Consequently, it is likely thatfreight rate differences for similar coninodities may appear to be discriminatory; but in reality, each shipper is responsible for the disparity. Of the nine freight forwarders interviewed, five indicated a concern with discrimination while four did not. Since the freight forwarders overwhelmingly support retention of the tariff system in order to prevent discrimination, it is likely that those indicating a lack of concern about discrimination presently, believe that the present system discourages discrimination. Thus, there is no need to be concerned about it. Many of the freight forwarders felt that some discrimination exists and will always exist. The Co~g~lexity of Tariffs Q: Do you think ocean tariffs are too complex? If so, how would you propose they be simplified? A: The nine freight forwarders responded overwhelmingly that tariffs are toocomplex. Some suggested standardization based upon a Schedule B method of classification while others suggested a more generalized coirniodity classification system. Of the 23 shippers responding to the question, 17 (73.9 percent) felt that tariffs were too complex. Some suggested a need for standardization while many indicated a need for per container rates. Of the six shippers who felt that tariffs were not too complex, four (67 percent) only shipped a very limited number of commodities. Thus, it is apparent why they did not feel that tariffs were too compl ex. Q: Do you utilize FAK rates? What is your opinion of such rates? How would you feel about a system similar to that utilized by CAST -- a per container rate system? What is your opinion of a clas~ rate system wherchy commodities are (trouped according to various classes? Would you be in favor of a tariff classi- fication system based uton either Schedule B or TSUSA? This series of questions was used as a probing technique in examining alternative methods of structuring tariffs as well as filing there. Questions were also asked concerning computerized filing of tririlfs. PAGENO="0138" 132 A: The freight forwarders provided mixed reviews on FAK and per container rates. Theft reaction was split with some favoring FAK and per container rates and others not favoring such rates. Some of the freight for~:erders favored a class-type rate structure while many felt that a classification based upon Schedule B nomenclature would help resolve the standardization problem. Of the 22 shippers responding to these questions, 16 indicated that they were in favor of having FAK or per container rates available. Very few had actually made use of an FAK rate. Many shippers that favored per container, rates did acknowledge the fact that shippers of high-valued commodities would benefit from per container rates while those of low-valued conTeodities would not. The shippers were relatively favorably di~posed in terms of standardizing the tariff classification system. Some were in favor of a class structure and/or usage of either a Schedule B nomenclature or a BTN (Brussels Tariff Nomenclature) classification system. Some shippers suggested that bunker surcharges and currency surcharges be included in the individual comodity rates. Many shippers strongly favored the usage of a computerized tariff filing system. Miscellaneous Tariff Questions Q: Should dual-rate contracts be extended to intermodal movements? A: Only seven of the shippers responded to this question. Six of the seven were against extending dual-rate contracts to intermodal movements. Most felt that such an extension would eliminate the flexibility the shipper has in selecting the inland carrier. Q: Should rates be based solely on cost considerations? A: The shipper responses to this question were varied. Most shippers acknowledged that rates cannotbe solely based upon the costs of transporting a container. Most agreed that the value of service principle is important in setting rates. Those in favor of rates being based solely on cost considerations did acknowledge that such a principal would certainly benefit shippers of high-valued items. PAGENO="0139" 133 III. COMMENTS FROM SHII'PERS REGARDING TARIFFS This section highlights specific comments from the shippers interviewed concerning the nature of the tariff system. The following comments were received in response to the questions: Do youthink tariffs should be available publicly? What would be the consequences of eliminating the requirement that carriers publish tariffs? A medium-sized New York City importer stated, Yes, rates should be available publicly. It is absolutely necessary in order not to be discriminated against." A medium-sized importer and manufacturer of industrial goods stated, "Yes, tariffs should he available publicly. Otherwise, shippers would be subject to misratings, and would be at the mercy of carriers." A large importer/exporker of food products noted that, "There are substantial benefits to having rates published. A central filing requirement is necessary. Without such a requirement, discrimination would be encouraged as well as destructive rate making. Shipping practices must be above board." From a large eastern importer of manufactured goods, the following comments were elicited: "Yes, if tariffs' were not available publicly, it would create an atmosphere of secrecy and rate instability would result. It would remove one of the checks and balances necessary for rate stability." An exporter of chemicals, foodstuffs, and industrial products, who stated that he was not presently concerned about price discrimination, noted that, "If tariffs were not published, there would be discrimination." A medium-sized exporter of industrial coemodities stated that, "Yes, rates should be available publicly. Eliminating the public filing requirement would force shippers to negotiate rates -- provide no stability -- and there would be chaos." From one of the large~; t United States importers of consumer goods came the following succinct comment, "Rates must be published." `p PAGENO="0140" 134 Possibly the most revealing comment was received in response to the question, is discrimination among shippers a concern of yours. A large importer of manufactured goods stated that: "Under the present system, discrimination is minor; however, changes in the tariff filing system could alter this. The more information on public file the better." PAGENO="0141" 135 IV. CONCLUSIONS BASED UPON THE SHIPPER FORWARDER INTERVIEWS Based upon interviews with shippers and freight forwarders, it is apparent that those groups believe that publicly available tariffs are a necessity. Moreover, it was felt that in order to maintain the integrity of the system, tariffs should be maintained at the FMC. The majority of shippers (importers/. exporters) interviewed felt that the lack of publicly filed tariffs would result in chaos, rate instability, and discrimination. All freight forwarders interviewed cited a need for publicly available tariff information. In their opinion, the absence of such information would lead to chaos in the industry. The FMC was seen as the most effective repository for such information. The tariff system can be viewed as a source of information. It is important to shippers that tariff information be publicly available in order to ascertain the lowest possible freight rate available for the movement of a specific commodity. Tariff information is also utilized by shippers as a check on the rates being charged their competitors. While *many shippers indicated that at present price discrimination was no~ a concern of theirs, many stated that the reason it is necessary to maintain the tariff filing requirement is to prevent discrimination. Thus, it is clear that while presently shippers are not generally concerned about price discrimination they are concerned that the absence of publicly filed tariffs would lead to discrimination Apparently therefore the present tariff filing system is relatively effec-li'.e in preventing disciimination a fact which some shippers attested to 4. Virtually all interviewees iqrt~d that the present tariff system is toj complex Many shippers howeve acknowledged that shippers are the cause ofl~ much of the complexity as a result nf each seeking his own individual rates PAGENO="0142" 136 Per container rates, a class system ol rates, computerized filing, and classi- fication based upon Schedule B were all methods mentioned of simplifying the existing structure. Throughout the interview process, it became quite apparent that something must be done to simplify the system. The present classification system appears to be burdensome to the general shipping public. Office of Regulatory PoliCy and Planning Wm. Jarrel Smith, Jr., Director Questionnaire analyzed and tabulated by: Jay A. Copan, Chief Economist Research conducted by: Robert G. Adam, Economist Catherine K. Fratter, Economist Florence A. Pappas, Economist Austin L. Schmitt, Economist Figure 4 Prepared by: Dorothy K. Webb, Statistician Mr. BIAGGI. Now, one final question. This bill does not address itself to the loyalty agreement. Do you have any views on the value of loyalty agreements and whether the current restrictions should be changed, kept, or abandoned? Mr. GREEN. We know of no reason, sir, why loyalty agreements should be abandoned. We know of no reason. Mr. BIAGGI. Thank you. Mr. Snyder? Mr. SNYDER. No. I am going to submit my questions in writing. Mr. BIAGGI. Thank you very much, Mr. Chairman. Mr. GREEN. Thank you, Mr. Chairman. I enjoyed it. Mr. BIAGGI. A fine statement and very informative, and thank you for your supportive position also. Next we have Mr. James Patti representing the Maritime Insti- tute for Research and Industrial Development, and Gloria Cataneo Rudman, director, administration and corporate affairs, Joint Mari- time Congress. Mr. Patti? STATEMENTS OF C. JAMES PATTI, VICE PRESIDENT, MARITIME INSTITUTE FOR RESEARCH AND INDUSTRIAL DEVELOPMENT; AND GLORIA CATANEO RUDMAN, DIRECTOR, ADMINISTRATION AND CORPORATE AFFAIRS, JOINT MARITIME CONGRESS Mr. PATTI. Thank you, Mr. Chairman. Mr. Chairman and members of the subcommittee, my name is C. James Patti. I am vice president of the Maritime Institute for Re- search and Industrial Development. The Maritime Institute is a nonprofit association of companies who are signatories to contracts with the International Organization of Masters, Mates & Pilots, PAGENO="0143" 137 ILA, AFL-CIO, and which operate U.S.-flag vessels in all aspects of the U.S. foreign and domestic shipping trades. The Maritime Institute greatly appreciates this opportunity to present our views on H.R. 4374, to amend the Shipping Act of 1916. Our comments will be of a general nature as this subcommittee will be receiving detailed comments on the specific provisions in this bill from many of our member companies. At the outset, we wish to compliment you, Mr. Chairman, for your sponsorship of liner regulatory reform legislation and for your commitment to achieve a more efficient and effective regulatory environment for ocean liner shipping in our foreign trade. We agree wholeheartedly with your assessment that altering the regu- latory scheme of the United States is "mandatory if we are to effec- tively compete within the international maritime marketplace." Legislative initiatives designed to streamline and improve liner regulation are essential if the United States is to harmonize its laws with "the real world" of international ocean shipping. It has been pointed out repeatedly over the years that the United States stands virtually alone in its strict regulation of the ocean shipping industry. The Shipping Act of 1916, the cornerstone of Federal reg- ulation of international liner shipping, has simply not kept pace with the dramatic changes in the ocean shipping industry since its enactment 65 years ago. The natural but unfortunate and danger- ous result has been a decline in the share of liner cargoes carried by U.S-flag vessels. According to the Maritime Administration, U.S.-flag liner vessels again saw their participation in our Nation's export-import trade drop a whole percentage point last year, from 27.5 percent in 1979 to 26.5 percent in 1980. We believe the most serious problem inherent in the existing reg- ulatory framework is the extension of antitrust principles to the liner shipping industry. While we support the elimination of the so- called "public interest" test, we believe that this will only reduce the effect of the antitrust laws during the approval process. Al- though a positive step, it does not itself statutorily overrule the ju- dicial decisions which have resulted in an inequitable treatment of U.S.-flag carriers in relation to their foreign counterparts. Conse- quently, we prefer the approach embodied in 5. 1593, namely a grant of complete antitrust immunity to authorized conference ac- tivities. The record compiled by this subcommittee during consideration of the omnibus bill in the last Congress is replete with examples of the negative impact and disruption caused by the application of American antitrust laws to international liner shipping operations. Vessel operators are hesitant to cooperate even in the most limited ways for fear that their actions will nonetheless be attacked by the Justice Department and they will be liable for criminal penalties and treble damages. Shipping stability and efficiency is therefore sacrificed to avoid the threat and risk of prosecution. Similarly, the application of our antitrust laws is a serious im- pediment to the revitalization of the U.S.-ftag merchant marine. These laws are much easier to enforce against American carriers than against their foreign counterparts. Foreign carriers can make arrangements or concessions to improve their competitive position, PAGENO="0144" 138 often by providing shippers outside of the United States with bene- fits on routes other than those to or from the United States. Finally, the current application of the antitrust laws inhibits the rationalization of sailings and formation of joint services by U.S.- flag carriers. This is a serious handicap confronting the American fleet in that it prevents our fleet from achieving the same pricing and cost benefits that foreign carriers derive from rationalization. Eliminating the antitrust inhibitions to rationalization should result in a more coordinated use of facilities, vessel space, equip- ment, and terminals; a more efficient system of port calls, and a reduction in capital and operating expenses. It is clear that the application of antitrust concepts-an ap- proach we have tried for at least 20 years-has not done the job; that our merchant fleet has been diminished rather than promoted by the enforcement of these laws. We believe it has been demon- strated that the public interest will be best served by exempting ocean liner shipping activities from antitrust constraints and by re- lying on an updated Shipping Act as our regulatory framework. An important corollary to the grant of antitrust immunity to conference activities is the clarification of Federal Maritime Com- mission jurisdiction over intermodal transportation arrangements. The ability of carriers in U.S. foreign commerce to establish through intermodal rates and to have such rates filed with and subject to a single agency will lead to the development of an effi- cient intermodal network. As stated in the Senate Commerce Committee's report on the Ocean Shipping Act of 1980, the lack of clear antitrust immunity for such arrangements "inhibits conferences in U.S. trades from agreeing among themselves on the charge to quote shippers who choose to use conference facilities for the inland leg of a foreign door-to-door movement and it clearly frustrates the growth of an innovative, efficient, and economical transportation service." The successful utilization of intermodalism results in greatly increased productivity and benefits everyone from the carrier to the shipper to the consumer. While the FMC has exercised its jurisdiction over such arrangements, the Justice Department has continually ques- tioned the FMC's authority in this regard. We support .a clarifica- tion of the law in this area and urge that H.R. 4374 be so amended. The need for expediting Federal Maritime Commission proce- dures is also necessary. To the extent that pl~ing time limits on FMC action will reduce delay and contribute to a more efficient operational climate for U.S.-flag vessels, we support such time limits. We also agree that the burden of proof in a Federal Mari- time Commission proceeding should be borne by the opponent of an agreement. Mr. Chairman, we understand that there may be a proposal to eliminate the tariff filing requirement of the 1916 Shipping Act. We strongly oppose this suggestion and believe that it would ad- versely affect the vital interest of shippers and U.S.-flag carriers. Without the tariff filing requirement, we believe that the exist- ing protections for shippers against discriminatory pricing prac- tices would also be eliminated. The tariff requirements result in fair and open competition among carriers by insuring that carriers actually charge shippers the rates advertised. Without such re- PAGENO="0145" 139 quirements, the law of the jungle would prevail to the detriment of the small shipper and the small shipowner. In conclusion, we believe H.R. 4374 is definitely a step in the right direction and clearly evidences a desire to pursue legislative initiatives necessary for the revitalization of the American mer- chant marine. We recommend, however, that this subcommittee consider the additional provisions contained in S. 1593 which we believe would improve H.R. 4374 and would help reestablish the primacy of the Shipping Act of 1916, thereby enabling the U.S.-flag liner fleet to compete more effectively in the world of international shipping. Thank you very much, Mr. Chairman. Mr. BIAGGI. Ms. Rudman. Ms. RUDMAN. Thank you, Mr. Chairman and members of the subcommittee. I am Gloria Cataneo Rudman, director of administration and cor- porate affairs of the Joint Maritime Congress. I appreciate the op- portunity to appear before this subcommittee on behalf of David A. Leff, executive director of the Joint Maritime Congress, who is very sorry that he cannot be with us today. Mr. SNYDER. Ma'am, could you pull that mike a little closer? Ms. RUDMAN. Yes, sir. The Joint Maritime Congress represents over 100 U.S.-flag steamship companies engaged in nearly every form of waterborne commerce. I will be brief this morning since the subcommittee will be hear- ing extensive testimony on H.R. 4374 over the next 2 weeks from a variety of witnesses-including several of our member companies. I would like to assert, however, that regulatory reform is vital to re- verse the alarming downward trend in the size and financial stabil- ity of the U.S. liner fleet. The subcommittee and you especially, Mr. Chairman, should be commended for taking needed action in this area. Our liner company members participate in a variety of shipping activities and consequently are affected in different ways by differ- ent Government regulations. For this reason, there is not total and complete consensus on every aspect of regulatory reform. There is, however, general agreement that innovative measures are needed to revamp our regulatory network for the health and growth of our industry. Not only our own liner operators, but foreign operators as well, recognize the need for extensive maritime regulatory overhaul. Earlier this year, the Council of European and Japanese Ship- owners, better known as CENSA, whose interests differ from our own, pointed out the unreasonable burden imposed on our own shipping and that of other shipping nations by our laws. As the* CENSA Chairman asserted, the U.S. fleet "~ * * could again * * * become viable with the aid of fiscal incentives and reform of the regulatory straitjacket that shipowners have to suffer in trading with the United States." Thus, even interests that are contrary to and competitive with U.S. interests recognize the need to free ship- ping from regulatory restrictions that do not exist elsewhere. The legislative history of the 1916 act shows that its drafters rec- ognized that however desirable antitrust principles may be for do- 914-856 0 - 82 - 10 PAGENO="0146" 140 mestic industry, the unique needs and international nature of the shipping business make it unsuitable for the rigid imposition of those principles. The Justice Department's enforcement of anti- trust laws subjects U.S. carriers to rules which foreign carriers do not have to honor and are contrary to practices in international commerce. It also places our merchant marine at a severe competi- tive disadvantage. The only effect of subjecting the U.S. merchant marine to antitrust laws is to enhance the position of competing foreign carriers who are able to provide shippers with the services they need with the support of, or noninterference by, their flag governments. Thus, the Department of Justice should no longer be empowered to prosecute authorized activities under the Shipping Act. The absence of a single reliable source of regulatory policy and enforcement often stifles and sometimes paralyzes industry deci- sionmaking. The erosion of the antitrust immunity which the Shipping Act of 1916 was intended to create has severely injured the competitive position of American carriers and has resulted in uncertainty, con- fusion and instability in the liner trades. Only a clear legislative directive can undo the damage to the maritime policies of this country caused by intrusions of the Antitrust Division of the Jus- tice Department under the subjective tests of the Svenska doctrine. H.R. 4374 seeks to clarify the current system by removing the vague public interest test thereby minimizing the effect of the ap- plication of antitrust laws. But this approach does not go far enough. While the removal of the public interest criteria will streamline the agreements procedure, failure to grant blanket anti- trust immunity will not per se remove the threat of antitrust pros- ecution by the Justice Department-they will still have the statu- tory authority to impose treble damages and criminal penalties. This is the only sure approach which will completely remove the peril to which our member companies find themselves subject when conducting commercially accepted business practices. Accord- ing to a survey of our members, which the Joint Maritime Con- gress conducted in response to a request by the President's Task Force on Regulatory Relief, virtually all of our liner companies identified the threat of antitrust prosecution as the most detrimen- tal problem they face in competing in world markets. Mr. Chairman, we believe that H.R. 4374 offers the maritime in- dustry a more sensible regulatory system than our present struc- ture. Particularly, we favor provisions which guarantee the partici- pation of at least one U.S. carrier in each conference, shift the burden of proof to those who challenge agreements, and expedite FMC proceedings for approval of agreements, which I might add is another issue that has been brought to our attention when we sur- veyed our members on tax relief. Furthermore, we believe the treatment of Shippers' Councils em- bodied in this bill would put the United States more in harmony with the world marketplace. We would suggest, however, that the bill be broadened in other areas as well. For example, intermodal transportation systems could be enhanced if this legislation removed the uncertainty asso- ciated with the legality of ocean conferences entering into agree- ments with truckers, railroads, airlines, or their various rate bu- PAGENO="0147" 141 reaus. Furthermore, we agree with the precept that jurisdiction over these intermodal agreements should be vested in one agency to avoid delay, expense, and uncertainty of multiple proceedings in disparate Federal agencies. Antitrust immunity should be extended to these agreements as well. Regulatory reform, however, means reform not abolition. Regula- tions soundly conceived, sensibly written, and effectively enforced are the alternatives to predatory competition, and they are neces- sary to protect the American consumer and U.S.-flag fleet. For these reasons, we would like to take this opportunity to reaffirm our support for an FMC armed with the regulatory authority and procedural tools necessary to enforce rigorously our country's mari- time laws. Indeed, weakening or abolishing-as has been proposed in recent weeks-the FMC's role could be disastrous; not in the public, not in the shipper, and certainly not in the U.S. carriers' interests. We believe that maritime regulatory reform is important both to the industry and to the Nation. A comprehensive reform of the reg- ulatory system would improve the U.S.-flag liner fleet's competitive posture. This, in turn, will confer multiple benefits upon the econo- my by bringing jobs to the shipbuilding and ship-operating sectors, as well as to supporting industries. A strong fleet is more than just jobs, however, it is a direct investment in our Nation's military and economic security, increasing our defense sealift capability and al- lowing us to carry a larger percentage of our oceanborne trade. Regulatory reform, in and of itself, is not necessarily the panacea for the industry; it must be viewed in terms of a more broad and far-reaching maritime policy. Congress has taken the first step toward developing a more sensible maritime regulatory program that must be part of that policy. To this end, we wish to commend the subcommittee for its actions and look forward to working with you and the subcommittee members toward achieving such a policy. Thank you. Mr. BIAGGI. Mr. Patti, if blanket immunity is granted, as you re- quested, what is left to be regulated? Mr. PATTI. What should be done, Mr. Chairman, is by clarifying the law, by taking the Justice Department out of the liner shipping industry, we are not similarly proposing that there be no rates filed with the Federal Maritime Commission; it should still have that authority and hopefully will be exercising that authority under its new chairman to actually regulate the shipping industry and have clear defined jurisdiction over the industry. Mr. BIAGGI. You are not proposing to limit the authority of the FMC, are you? Mr. PATTI. What we are proposing is that the so-called public in- terest test and the antitrust laws be taken out of liner shipping. We are not proposing to restrict, cut back or limit the Federal Maritime Commission, no. Mr. BIAGGI. Will the agreements have to be filed and, if so, why? Mr. PATTI. Why do we support filing of agreements? Mr. BIAGGI. Yes. Mr. PATTI. We believe, as Chairman Green said earlier, that that is probably the cornerstone of the whole liner industry and the PAGENO="0148" 142 shipping industry. Carriers need to know what rates are being pub- licized, they need to know whom they are going to be competing with. We do not want to advocate rate wars, undercutting. We be- lieve shippers similarly need the protection of filing the tariffs. Mr. BIAGGI. You have stated that the U.S. carriers are at disad- vantage as compared to foreign carriers. Why do you find a propos- al to eliminate tariffs as dangerous? Europeans do not require tariff filings. Mr. PATTI. We are primarily concerned with what will happen with respect to the trade-U.S.-foreign trade. Cross traders, third- flag nations, vessels of nations that are not really in the same busi- ness the American operators are in, namely to make some money. There are various operators, flag vessels, that can operate without really seeking to make a profit. They may be able to charge less than competitive rates in order to secure the cargo that enters and leaves the United States. We believe that that would seriously disadvantage American-flag operators. We believe our operators need that protection. Mr. BIAGGI. Mr. Snyder? Mr. SNYDER. Thank you, Mr. Chairman. Following along the chairman's last question. You are aware of the fact that our colleague from Michigan, in regard to the Canadi- an diversion bill, offered an amendment to do away with tariff fil- ings. I believe on page 6 of your statement you state that your fear is that existing protections to shippers against discriminatory pric- ing practices would be eliminated. You represent shippers? Mr. PATTI. No, sir. Mr. SNYDER. Could you tell us what shippers you talked to in ar- riving at that conclusion? Mr. PATTI. I will admit that we have not talked to any shippers, Mr. Snyder. Mr. SNYDER. You have not talked to any shippers? Well, if tariff filing requirements were eliminated, would not sections 16 and 17 of the Shipping Act continue to outlaw undue or unreasonable pref- erence? Undue and unjust discrimination between shippers and ports? Mr. PATTI. Yes, I believe it would. Mr. SNYDER. I have a little problem seeing how you reached that conclusion if that law remains in force and effect. Could you help me? Mr. PATTI. I could try to for the record. Mr. SNYDER. In other words, you do not want to do it right now? Mr. PATTI. Yes, sir. Mr. SNYDER. I did not mean to confuse you that much. You state that without a tariff filing requirement, there would be, and I quote, "law of the jungle situation." Is that how you de- scribe the U.S. foreign commerce prior to 1961? Mr. PATTI. Again I would like to answer that I do not honestly know the answer to that firsthand. Mr. SNYDER. Well, this book only goes back to 1960 but liners were getting 28.6 percent of the business in 1960, and in 1978, which is the most recent date, they were getting 28.6 percent of the business. PAGENO="0149" 143 .1 do not know why you would refer to it as the law of the jungle and not be prepared to tell me why you say that. Mr. PATTI. I apologize for not being prepared. Mr. SNYDER~ If, in fact, tariff filings were not required, would not carriers continue to have their tariffs published by commercial tariff watching organizations? Mr. PATTI. Again no firsthand knowledge of that. I am sorry. Mr. SNYDER. Well, areyou suggesting that you will just come in here and make statements that certain things are going to be true without any facts to support them whatsoever? Mr. PATTI. Again all I can say is that we apologize, if that is what we have turned out to do today. I am sorry. Mr. SNYDER. Well, do you want to tell me that you have done otherwise? Mr. PATTI. No, sir. Mr. SNYDER. If I am ever in trouble, I do not want you arguing my case to the jury. Thank you. Mr. HERTEL [presiding]. I want to follow the same line of ques- tioning as Mr. Snyder. My colleague has been very helpful in raising the issue with me regarding tariff filing requirements, and I notice the same state- ment on page 6. I understand that you are taking Mr. Singman's place today. However, I am surprised that in his prepared remarks he would devote only two paragraphs making those kinds of accu- sations and giving you nothing to back them up. I think it goes to the heart of the question that we just heard. The issue of stopping the tariff filing requirements for American shippers was raised be- cause of the chairman's bill which was going to ask foreign ship- pers to do that. It took us to the logical question of why do we re- quire American shippers' carriers to do that? We have yet to hear an answer. We do not hear an answer this morning even though it is raised by Mr. Singman's prepared statement on his own. The question being; obviously throughout our economy we do not require different products to have their prices filed ahead of time, and yet we are still able to go after monopolies, after illegal deal- ings. So what is the reason you are backing tariff filing require- ments? There is a reason, I guess, an open-ended question. Is there any reason? Mr. PATTI. Again the reason that we have for including that, and again I apologize for the lack of substantive backup material, it is just simply our belief that by having the entire tariffs filed, by having all individuals playing, in effect, by the same set of rules and knowing what is being charged and publicized, that it would, in fact, lead to a more efficient, more orderly transportation system. Mr. HERTEL. So it has nothing to do with competition at all? Mr. PATTI. Only in the sense that we are concerned that without the tariff filing that it may lead to noncompetitive practices in that particular field. Mr. HERTEL. In what way? Mr. PATTI. Again, as we have described a possibility of rate wars, the possibility of undercutting, the possibility of charging rates which may not be competitive. PAGENO="0150" 144 Mr. HERTEL. Well, I suppose we could say that about any indus- try in this country. It would be much more orderly if we had every- body file their prices with the Federal Government anytime they wanted to sell something or change the price. .1 do not think busi- nessmen in this country would be happy if they have to give 30 days notice. I agree, it would be easier for shoppers and so forth, but that has nothing to do with the free market, it has nothing to do with the kinds of duties that our Government should have under the Constitution or in a free market society, in a capitalist society. You are really not making a case for it. You are just saying that it would be orderly if it is done, if it is continued, but there is really no prevailing reason, no compelling reason to continue the tariff filing requirements. Do you have any information that it has worked, that it has averted any problems, that you have been able to catch any illegal- ities at all through the tariff filing requirement? Mr. PATTI. No, sir. Mr. HERTEL. You are certain you do not have any reasons that could be submitted later? Mr. PATTI. We might. I do not have anything with me on that. Ms. RUDMAN. May I add something? Mr. HERTEL. Yes. Ms. RUDMAN. With regard to the competitive business regarding why we feel the tariff rate should be filed, particularly when you are discussing the Canadian Diversion problem, it is not looked upon as something that is going to be the cure all and eliminate companies such as CAST doing business. It is just to give the American operators just a little bit of an equal footing in terms of at least knowing what the carriers on the other side of the fence can offer. Mr. HERTEL. I see your point. That is why Mr. Snyder and I are proposing that we do just the opposite. Since Canadian carriers are doing so well, and the bill is aimed at them because they are lower- ing prices and adjusting prices and being competitive. This is good for American businessmen that want their goods shipped, too. That is why they are choosing to go that route. Then why not let the American shippers have the same advantage of flexibility? That is the issue. How do you respond to that? Ms. RUDMAN. I would respond that I do not see how it can help the U.S. merchant fleet which is, of course, why we are here. We are representing the U.S.-flag operators. If they can at least see what the-their competitors are going to offer, all they are asking is that they post their tariffs. They are not asking for anything more than that. Just that they can see what their competitors are offering. We just simply cannot see how it can be an encroachment upon the jurisdiëtion of a Federal-of another government asking just to file a tariff. Mr. HERTEL. You do not see that when you tell somebody that they have to file a tariff 30 days in advance and they cannot change their price. You do not see that as an encroachment upon competition or the carrier? PAGENO="0151" 145 Ms. RUDMAN. I do not want to go that far in terms that they cannot change their rates. It is just we are simply asking that they be able to file a rate and that they be required to file a rate so that American ship operators can then perhaps offer a lower rate. Mr. HERTEL. Do you not think that American companies would be in the ball game so that they could say, Well, how much are they offering you? We will beat that by $50 or $400 as we do busi- ness in other areas. Would not American shippers have that ability if we took off the tariff requirements involving them? Ms. RUDMAN. Mr. Hertel, I do not believe that is allowed but I am not sure in terms of open communication with shippers and carriers. Mr. HERTEL. I think we better find that out because I think it is clear that, in fact, it is allowed. It is legal. That is the basis of the system. How much you are going to charge; what is the other person's price? We can beat that price. Mr. Snyder? Mr. SNYDER. Thank you, Mr. Chairman. Mr. Patti, you talked about, on the bottom of page 3 and 4, about rationalization and what the results of that would be. What you suggest there would be a reduction in capital invest- ment which would make fewer ships available for the national de- fense aspects of the maritime industry. Mr. PATTI. That is definitely not our goal. Our goal is that if you increase the efficiency and economic competitiveness of the Ameri- can merchant marine, you ultimately develop more ships and have more ships flying the American flag, increase the cargo of Ameri- can vessels and, in fact, boost up our American industry. We are not trying to suggest that we decrease the American merchant marine. Mr. SNYDER. Are you familiar with the bill that I have intro- duced in regard to bulk carriers that authorizes the Secretary of Transportation to negotiate bilateral, agreements similar to the UNCTAD formula of 40-40-20. Mr. PATTI. Yes, sir. Mr. SNYDER. How do you feel about the liner business? How would you feel about a similar bill in regard to liners? Mr. PATTI. My basic-my first reaction would be to support that basic legislation, yes. Our position has always been in support of bilateral shipping agreements, especially in those instances where our trading part- ner or another nation has taken an action or undertaken a practice to discriminate against shipping, so, yes, I support it. Mr. SNYDER. Do you agree with that, Ms. Rudman? Ms. RUDMAN. Yes, I do. We would feel that that would eventual- ly have to be part and parcel of any maritime policy that comes forth. Mr. SNYDER. In discussing that with the people who are involved in the bulk price, they determined that if they got "a fair share," that they would be able to operate without ODS. I will not pose that direct question to you at this time because I think it would require more study than you have been able to give PAGENO="0152" 146 to it-if you have not looked at it in regard to liners, and I doubt that you have. It also strikes me that if, in fact, Ms. Rudman, you are looking toward getting more of the business at a lower shipping fee, and Mr. Hertel's amendment might allow it to happen, you might be able to make more money with smaller charges. Would you comment on that? Ms. RUDMAN. I am not quite clear with regard to Mr. Hertel's statement regarding open discussion between shippers and liner op- erators. Mr. SNYDER. You testified against his amendment on page 5, if you can call it that, but that is what it is. Ms. RUDMAN. No. In terms of his original question, that is one of the problems with our system in terms of, there is not open com- munication between shippers and carriers, largely because of the conference system. Mr. SNYDER. If, in fact, there were no requirement for filing, would you not publish your rates for the information of shippers? Ms. RUDMAN. If there was no requirement? Mr. SNYDER. Sure. Ms. RUDMAN. If there was no requirement, would we file? There would be no need to file. Mr. SNYDER. I did not say file with FMC but you would advertise your rates, would you not? Ms. RUDMAN. I am sure we would. Mr. SNYDER. And your competitors would be advertising their rates. If they did not advertise them, shippers would tell you, "Why I can ship that on A, B, C line for a little less." You would know what the rates were. It would not be any deep dark secret, would it? Ms. RUDMAN. I suppose not, sir. Mr. SNYDER. I mean things that you buy in your daily living, you are in a position to compare prices between Grand Union and A&P if you want to go look, are you not? Ms. RUDMAN. That is right. Mr. SNYDER. And you can check prices in the newspaper. You probably decide one week you are going to one store instead of the other because the, price is a little bit better. Why would that same economic principle not apply to shipping? Ms. RUDMAN. We do not believe it applies to shipping because we are talking about an international marketplace as opposed to a na- tional marketplace. As Mr. Patti pointed out, the rules for us are quite different for the other players in the game. Mr. SNYDER. That is right, that is what Mr. Hertel wants to do. He wants to make everyone play by the same rules. Foreign ships are able to take American cargo out of Canada because they do. not have to file their rates, and he wants to give you that same advan- tage. Ms. RUDMAN. For the record, I would very much like to submit an additional statement directly on the Canadian diversion legisla- tion. [The statement was not received.] Mr. SNYDER. Thank you, Mr. Chairman. Mr. HERTEL. Thank you, Mr. Snyder. PAGENO="0153" 147 I would like to thank both of you for coming today and just making a statement. We are obviously in agreement as to the goal and that is to have more American jobs and more American ship- ping. It is just a question of how we get there. Really we are talk- ing about the same approach in reverse regarding the Canadian di- version question. Thank you very much. Mr. Peter Finnerty, vice president, Public Affairs, Sea-Land In- dustries, Inc. STATEMENT OF PETER J. FINNERTY, VICE PRESIDENT, PUBLIC AFFAIRS, SEA-LAND INDUSTRIES, INC., ACCOMPANIED BY WIL- LIAM J. COFFEY, ESQ., SENIOR COUNSEL, SEA-LAND INDUS- TRIES, INC. Mr. FINNERTY. Thank you, Mr. Chairman. I am Peter J. Finnerty, vice president, Public Affairs, Sea-Land Industries Inc. I am accompanied by William J. Coffey, senior coun- sel with the company. Mr. Chairman, we welcome this opportunity to appear before you and this subcommittee to testify in strong support of H.R. 4374, a bill amending the 1916 Shipping Act. It is a much needed measure whose enactment will reinstate a single and exclusive competitive framework for America's international liner commerce. As a matter of record, our company and affiliates comprise the transportation group of R. J. Reynolds Industries, Inc. Most notable of our group is Sea-Land Service, Inc., the world's largest container transportation system operating 44 U.S.-flag vessels without gov- ernmental operating subsidy. With added investment in 81,000 con- tainers and 46,000 chassis, it serves 180 ports and cities in 52 coun- tries. Total revenues for the Sea-Land group in 1981 are expected to exceed $1.6 billion. In recent years, this subcommittee has led the effort to identify and remedy regulatory obstacles which have greatly inhibited the proper development of America's international ocean trade and have contributed to the continuing decline of our Nation's mer- chant marine. During 1980, the subcommittee favorably reported H.R. 4769, the omnibus maritime bill. Title II of that bill also dealt with reform of the Shipping Act. Regrettably, the legislative time- table, did not permit final house approval of those Shipping Act re- forms. Earlier, the subcommittee was instrumental in the enactment of the 1979 Shipping Act amendments which have greatly reduced the incidence of unlawful rebating and like practices in America's for- eign trades. Similarly, the subcommittee favorably considered and led the way to enactment of the Controlled Carrier Act of 1978, a measure intended to require State-controlled carriers, notably those from Eastern-bloc nations, to observe economic rates and gen- eral marketplace rules as are adhered to by private enterprise car- riers. Clearly, Mr. Chairman, for many years there has been broad bi- partisan support in the Congress for maritime regulatory improve- ment measures. PAGENO="0154" 148 President Reagan, both before and since his election, has spoken of the need for maritime policy reform. His designated spokesman in this area, Secretary of Transportation Drew Lewis, has firmly stated his agreement that legislation to revise the 1916 Shipping Act is necessary. Federal Maritime Commission Chairman Green has taken a similarly welcome and constructive stand. This is a time, Mr. Chairman, when your initiatives and the long efforts of the subcommittee may at last be fully rewarded. Our company is prepared to assist you in every way necessary to assure the successful consideration of the bill presently before us. H.R. 4374 is a bill containing a number of amendments to the 1916 Shipping Act. It is a finely tuned measure clearly intended to place U.S. shipping policy back in step with the rest of the mari- time world. This position is one which the United States occupied from 1916 until about 1957 when a series of Supreme Court deci- sions began to debilitate the venerable 1916 act. Enactment of H.R. 4374 will enable the Federal Maritime Com- mission-the Commission-to adopt a number of procedural changes which should both improve and lessen the regulation of in- ternational maritime commerce. These will benefit cargo owners and carriers alike. Enactment of the bill will also enable the Commission to approve agreements providing for the rationalization of services and thus provide U.S.-flag carriers with the tools to compete effectively within the international maritime marketplace, while continuing to avoid the potential of monopolistic abuse. In the liner shipping world, the absence of an ability to rational- ize services because of Shipping Act and related antitrust uncer- tainties is a serious U.S.-flag competititive handicap. The enact- ment of your bill will remedy this glaring defect, and enable U.S.- flag carriers to properly enter into arrangements to coordinate use of facilities, vessel space, equipment and terminals. The frequency and scope of vessel port calls would be made more efficient. A con- siderable conservation of costly fuel would be achieved. Capital and operating expenses should be reduced. The ability of our industry to offer an efficient and economical transportation service to our shipper customers will be greatly enhanced. Our foreign-flag competitors have been able to rationalize their services for many years, an advantage denied to U.S. carriers by the Department of Justice. Many of our major competitors are, in fact, consortia of carriers, operating under agreements that give them the efficiencies and economies of scale which we so greatly need. We cannot emphasize too strongly the need for the enact- ment of a bill that will allow U.S.-flag carriers and conferences in U.S. trades to rationalize their services. I will not summarize the many details of your bill, Mr. Chair- man, but would like to discuss certain of its provisions. Also, with your permission, I will suggest certain amendments which we be- lieve will strengthen the bill. The key to this bill is its strengthening of the antitrust immuni- ty provisions for described categories of conference and carrier ac- tivities and, in so doing, its reestablishment of the primacy of the Shipping Act and of the Commission in the regulation of liner ship- ping. Federal Courts and countless interventions before the Com- PAGENO="0155" 149 mission and the Courts by the Department of Justice, have greatly weakened the enabling statute of the Commission by which we are governed. Between 1916 and 1954, the Shipping Act was clearly the law of the land for ocean liner shipping. Agreements when filed were to be assessed solely by its terms. Approval of an agreement by the Commission after thorough consideration and scrutiny, gave an ab- solute exemption from the antitrust laws to all activity carried out pursuant to terms of the agreement. In 1954, however, this very rational structure began to deterio- rate. In the Isbrandtsen case, the Court of Appeals for the District of Columbia decided to inject the antitrust laws back into shipping activities. The decision gave rise eventually to the "public interest" test commonly associated with the Svenska proceeding commenced before the Commission in 1964 and decided by the Supreme Court of the United States in 1967. Svenska, in turn, led quickly to the Carnation and the Sabre cases which further restricted the ability of carriers to operate ef- fectively and with certainty under an approved section 15 agree- ment. These cases have been relied upon by the Department of Jus- tice in their numerous interventions before the Commission, each of which has been intended to nullify the essential antitrust ex- emption authority contained in the act and administered by the Commission. Why is this of such great importance? In very simple terms, car- riers can no longer be assured that the agreements under which they operate, even after full consideration and approval by the Commission, are in fact immune from subsequent attack and dras- tic penalties under the antitrust laws. For a foreign-flag operator, domiciled abroad, this may largely be a matter of some inconvenience. For a U.S.-flag carrier, however, it is of critical importance, because it is only we U.S. carriers that have to suffer the full brunt of the Justice Department attack. Other nations have adopted blocking statutes and regulations, and taken aggressive diplomatic measures to protect their flag car- riers from Justice's unwanted and unwarranted intrusions. U.S.- flag carriers are afforded no such comfort. Indeed, this explains why Justice has regularly attacked agreements among U.S.-flag carriers before the Commission, but has turned a blind eye to con- certed activities of our foreign competitors on many, many occa- sions. The elimination of the "public interest" language from the Ship- ping Act will bring this unfortunate story to a long overdue conclu- sion. It will in turn reestablish with clarity that certain activities are proper under the Shipping Act, and therefore fully exempt from the application of the antitrust laws. The importance of elimi- nating this provision cannot be overemphasized. Section 2 of your bill would allow a marked departure from the present act, in that it would allow conferences to close their mem- berships by precluding carriers from membership, subject only to a requirement that at least one U.S.-flag carrier must be admitted. For Sea-Land, this is perhaps the provision in the bill most diffi- cult to assess. At first blush, the idea of closing a conference is ap- pealing, and is a step towards bringing the United States into PAGENO="0156" 150 greater harmony with the way much of the world conducts its ship- ping business. Indeed, it would confer legitimacy on present de facto practices in certain of our country's noncompetitive trades with Third World nations. Yet, in the much larger trades with industrialized nations and other countries approaching that designation, the provision is prob- ably meaningless. There is ample competition from many inde- pendent lines in these trades, often resulting in overcapacity. Con- ferences here normally seek to recruit, not preclude members. This closed conference proposal is hardly akin to the traditional closed conferences prevalent in the rest of the world, in which practices such as fighting ships, deferred rebates and discrimination exist, and are lawful, and antitrust laws unheard of. On balance, we believe this closed conference provision should not be retained. It will undoubtedly be misinterpreted by shippers, and has already provided a basis for opposition to the bill. In most instances, it will not materially aid conferences or carriers. We wish to suggest an alternative to this provision for your con- sideration. Sea-Land has long held that strong, competitive, open conferences, having a competitive rate initiative capability, are a most desirable competitive structure for shippers and carriers alike. In such instances, incentives to rebate are greatly lessened, economies of scale can be obtained, and yet shippers may be fully assured of responsive conference pricing. As shippers have testified before Congress on many occasions, conferences provide an important measure of rate stability and service to the trades they serve. A strong conference will also lessen the need for Government regulation of the trade since the independent neutral body policing mechanism, which I will discuss shortly, will become more effective as the conferences grow more viable. One provision in H.R. 4374 around which some controversy may arise is the matter of authorizing shipper councils. Our company views this as an issue to be thoroughly discussed by shippers, and thus we take no position on its inclusion in the bill. However, we do believe that the power of shipper councils should be limited to consultations, and not extend to actual negotiations with carriers. As presently drafted, H.R. 4374 does not address the issue of in- termodal ratemaking. In our judgment, there is an urgent need to amend the Shipping Act and to specifically confirm the authority for conferences and individual ocean carriers to establish thorough intermodal rates, and to have the, filing of and adherence to thor- ough intermodal tariffs subject to regulation by a single agency, the Commission. We do not seek to have economic or other regulatory jurisdiction over inland carriers conferred upon the Commission, nor do we rec- ommend any changes to the antitrust regime which presently ap- plies to those inland carriers. Though intermodal rates have been a growing and important feature of international commerce since 1972, there continues to be uncertainty about the questions of regu- lation and permissible scope. At present, it is a regular business practice for individual ocean carriers to negotiate divisions of revenue and services with individ- ual inland carriers. The role of the conference is a subsequent one, PAGENO="0157" 151 and largely consists of agreeing to and publishing the resultant through rates. The conferences do not and, in our judgment, should not, involve themselves with operational decisions, such as divi- sions of revenue and establishment of routes, which are properly for individual carriers to decide. We urge that H.R. 4374 be ex- panded in a way that will finally and properly resolve this matter. We are submitting an amendment which may be helpful in resolv- ing this issue. It is our view that a helpful mechanism for eliminating malprac- tices in a trade is a requirement that an independent neutral body police the obligations of all liner carriers in the U.S. foreign com- merce, not just the conference and its members. H.R. 4374 contin- ues this requirement for conferences and members, but we believe it should be extended to include all competing carriers in a trade. Additionally, there is a considerable controversy over the confi- dentiality of neutral body records. If these entities are to function as a fully effective mechanism and in the manner intended, it is essential that their records be statutorily exempt from obligatory disclosure to any governmental agency. Without such a provision, the effectiveness of these neutral bodies will be greatly weakened. It is also well to recall that given the number of major trading partner nations that have adopted blocking statutes, the ability of the courts or of Government agencies to obtain records under the law from neutral bodies will become severely limited, except again in the case of U.S.-flag carriers. On the other hand, preservation of neutral body record confidentiality may encourage other nations to raise obstacles to carrier cooperation with independent neutral bodies. We are submitting an amendment for your consideration which will hopefully assist the subcommittee in resolving these two neu- tral body policing issues. During the course of your consideration of this bill, the possibil- ity certainly exists that one or more witnesses may propose the elimination of tariff filing, and also the elimination of penalties for rebating by ocean carriers. It is our strong position that this would be a most-inadvisable step, one that would adversely affect the vital interests of shippers, U.S.-flag carriers, and the national de- fense as well. Shippers could become subject to blatant economic discrimina- tion and widely fluctuating rate changes which would severely affect efforts to expand America's export markets. Carriers would find their ability to fairly and competitively price their services greatly diminished. In the rate wars that would inevitably ensue, several U.S.-flag carriers would invariably fall by the wayside. Future military sealift and related national defense needs would thus become increasingly dependent upon foreign-flag carriers. Exporters and carriers alike are very dependent upon the docu- mentation and traffic services that are provided by the hundreds of ocean freight forwarders located throughout the United States. Indeed, the great majority of liner export shipments from the United States are arranged by them. H.R. 4374 would eliminate any licensing requirements for for- warders, and impose a uniform bonding provision as well. We urge that both of these items be reconsidered. PAGENO="0158" 152 For 20 years, the Commission has been authorized to license for- warders and impose a reasonable bonding requirement upon them. Licensing is intended to enable the Commission to preclude irre- sponsible, unqualified persons from establishing themselves as for- warders, to the consequential detriment of their customers. Simi- larly, a reasonable financial bonding requirement is intended to insure that "fly-by-night's" do not enter the business and almost as quickly disappear into bankruptcy, leaving the unhappy exporter with a loss of the freight moneys he has paid. It is our recommendation that the Federal Maritime Commis- sion's powers to issue freight forwarders licenses to qualified per- sons be continued. Additionally, we recommend the bonding re- quirement not be based upon a $50,000 to $100,000 scale, but rather be a more realistic and current one, which is closely related to the geographic scope and traffic volume of the individual forwarder's business operations. We would leave the amount of the bonding re- quirement largely within the discretion of the Commission, which should be empowered to adjust this level as changes in the forward- er's operations occur. We do not believe that continuation of these requirements would impose an unreasonable regulatory burden upon the Commission, the forwarder industry, or the countless users of their services. At present, maritime labor agreements are exempted from Com- mission jurisdiction unless the provisions of such an agreement provide for an uneven assessment formula. We strongly support the continuation of exempting such agreements from Commission jurisdiction. It may well be that we are misinterpreting the intent of H.R. 4374 on this point. It appears that the result of the addition of a new definition of "agreement" which simply excludes "Maritime Labor Agreements" from its terms may very well be interpreted as reinstating Commission jurisdiction in this area. We strongly urge that this be clarified, and that the current statutory framework for Maritime Labor Agreements in the Shipping Act be left intact. There is a continuing uncertainty as to the possible applicability of the Shipping Act and of the antitrust laws to ocean transporta- tion services being performed between foreign countries. We recom- mend the bill be amended, or that its legislative history make clear that the antitrust laws are specifically inapplicable to the follow- ing: First, instances involving the relay or transshipment of foreign- to-foreign cargoes at U.S. ports. Second, instances involving the movement of foreign-to-foreign cargoes across the United States in a landbridge operation. Third, instances of moving cargoes between a contiguous nation and another foreign nation via the United States. Fourth, instances involving the movement of all cargoes between foreign countries, including U.S. Government-impelled cargoes. It is certainly the intention of H.R. 4374 to foster reliable and re- sponsible service by carriers, and to facilitate efficient and timely regulation of the various aspects of international liner shipping. In our view, these cannot be attained unless the definition of common carrier in section 1 of the 1916 act is amended to apply to all par- ties within the United States who are arranging and providing in- PAGENO="0159" 153 ternational ocean liner transportation to or from points in the United States. We are submitting an amendment on this point for your consideration. This concludes our testimony on H.R. 4374, Mr. Chairman, except to again express our strong support for the enactment of this bill. I hope that our comments and suggestions will prove to be constructive and helpful. If we can assist or answer any questions, or if any additional information would be helpful, we would be more than happy to provide it. Thank you. [The following was received for the record:] PAGENO="0160" 154 PROPOSED AMENDMENTS TO H.R. 4374 AMENDMENTS TO THE SHIPPING ACT, 1916 APPENDIX TO STATEMENT OF PETER J. PINNERTY, VICE-PRESIDENT PUBLIC AFFAIRS SEA-LAND INDUSTRIES, INC. OCTOBER 6,1981 PAGENO="0161" 155 Amendment 1- Page 3, Line 6 Add the following to Sec. 1.: "Notwithstanding any other provision in this Act, the term `cOmmon carrier by water in foreign commerce' includes a common carrier or its agent or other representative within the United States that advertises, solicits, arranges, provides for, or otherwise participates or engages in the transportation by water, or by land and water, of property originating in or destined to the United States, directly or indirectly, between a United States port or point and a foreign country." The term "through transportation" means transportation pursuant to a through intermodal rate between a U.S. point in a foreign country, whether in the import or export trade, by two or more carriers at least one of which is a common carrier by water in foreign commerce." The term "through intermodal rate" means the single rate charged by a carrier subject to this Act in connection with through transportation". Amendment 2 - Page 3, Line 17 Add the following to Sec. 2.: `(2) The first sentence of the first paragraph is amended by adding after the phrase `pooling or apportioning earnings, losses or traffic;' the words `fixing through intermodal rates;' 94-856 0 - 82 - 11 PAGENO="0162" 156 Renumber Sec. (2) - (7) accordingly. Amendment 3 - Page 7, Line 20 Add the following to Sec. 4.: (c) Section 18 of the Shipping Act, 1916 (39 Stat. 735), as amended (46 U.S.C. 817), is amended by adding at the end of that section the following: "(d) The participants in each agreement approved under Section 15 which in whole or in part fixes or regulates carrier transportation rates, fares, charges, classification rules, or regulations by vote of the parties, and each carrier not a member of such an agreement, shall engage the services of an independent neutral body to police the obligations of carriers under this Act or approved agreements. The Commission may disapprove any such agreement, or shall suspend for up to twelve months the tariff or tariffs of any such agreement or non-member carrier, whenever it finds, after notice and hearing, inadequate policing of such obligations by such agreement or non-member carrier. (e) On any anniversary date of an agreement approved under Section 15, national flag lines that are parties to such agreement may file an application for a competitive rate initiative with the Commission, and the Commission shall, within ten (10) days require such agreement to be amended to provide that each carrier bound thereby has the right to take independent action on matters required to be in tariffs filed under this Section if: PAGENO="0163" 157 (1) such carrier requests that the agreement members approve a tariff amendment upon such matter and the amendment has not been adopted within a specified period of time, not less than thirty days thereafter; and (2) such carrier, thereafter, gives the agreement members not less than thirty days notice that it is exercising independent action on the matter; and (3) the other agreement members have the right to take matching independent action to be effective on the same date or not more than ten days thereafter. For purpcses of this Section, the term "national flag line" means a common carrier by water in foreign commerce whose vessel or vessels, engaged in th~ transportation of passengers or property between the United States and a particular country included with the scope of the agreement, are documented under ~he laws either of the United States or that particular country. * Any amendment made to an agreement pursuant to this Section shall expire on the next anniversary date of said agreement. * It shall be the duty of every carrier taking independent action to comply with the tariff publication and filing requirements of this Section unless the agreement provides for compliance by other means. Whenever a rate becomes effective pursuant to independent action under this Section, that PAGENO="0164" 158 rate shall be deemed to be the carrier's tariff rate." (d) Section 21 of the Shipping Act, 1916 (39 Stat. 733), as amended (46 U.S.C. 820) is amended by adding the following new paragraph after the second paragraph: "Notwithstanding any other provisions in this Act, an independent neutral body may not be compelled to provide access to or copies of any self- policing records, statistics, reports and other information to the Commission or other governmental body". Renumber Sec. 4(c) - (d) accordingly. -4- PAGENO="0165" 159 * PETER J. FINNERTY Vice President. Public Affairs May 20, 1982- Honorable Mario Biaggi Chairman Subcommittee on Merchant Marine H2-531 House Office Building Annex II Washington, 0. C. 20515* Dear Mr. Chairman: Your staff recently called my attention to your letter dated October 8, 1981 containing several questions of me concerning H.R. 4374. I hasten to provide this belated response to your inquiry. Question 1: You state that an open conference and a right to take competitive rate initiatives (a right of independent action) is a desirable competitive structure for shippers and carriers alike. Would this structure be supported by independent carriers? If not, why not? Answer 1: Sea-Land is an independent carrier in certain major trade laneS and Sea-Land obviously supports the structure. Other independent lines should also support it if they sincerely want to achieve an improved and competitive liner shipping marketplace. Open conferences coupled with independent action benefit shippers and independent carriers by injecting increased flexibility and responsive- ness into the conference structure. Question 2:, Could you explain why there should be policing of independent carriers by a neutral body? Answer 2: All liner carriers engaged in U. S. trades should adhere to their agreed tariffs and avoid malpractices, whether conference lines or non-conference carriers. Independ- ent neutral body policing has proven to be e superior means of maintaining effective compliance in U. S. trades. Question 3: What is your opinion of an amendment to the bill that states that when agreements are filed they must be considered presumptively in the public interest and consistent with the standards of the 1916 Shipping Act? * -- - SEA-LAND INDUSTRIES. INC. P.O. Box BOO. helm. New jersey 08530 : Tel: ~2Ol' 632 2241 PAGENO="0166" 160 Honorable Mario Biaggi. Page Two May 20, 1982 Answer 3: With an adequate indication of prohibited practices set forth in the Shipping Act, as amended, it would be entirely appropriate to amend the bill to presume consistency to the standards. Reintroduction of `public interest" considerations should be avoided. Question 4: Would closed conferences and the right of independent action provide the stability and flexibility the shipping industry requires? What would the impact be on independent carriers? What impact would this have on rate structures? Answer 4: Closed conferences are destabilizing with or without a right of independent action. There is nothing destabi- lizing about open conferences that antitrust immunity, authority to rationalize, and establish joint ventures and consortia couldn't cure. Closed conferences destabilize trades outside U. S. foreign commerce with the Europe- Far East trade being a prime example. Active, healthy independents engage in that trade, but the rates and the trade are unstable. Questioh 5: It has been alleged that our open conference system results in higher freight rates to our shippers, thereby reducing their ability to compete in world markets. Do you have any hard data on the effect of closed conferences on shippers in those trades that are serviced by closed conferences? Answer 5: The open conference system is erroneously blamed for an absence of authority to rationalize service to achieve efficiencies that would otherwise benefit shippers and carriers alike. I don't have "hard data", but the vast majority of U. S. shippers have expressed their prefer.. ence for open conferences and it is open conferences that are a key element of the Shipper-Carrier Agreement on the regulatory bill. Question 6: Could you explain. "contract coverage" as is being proposed by the larger shippers and àñy problems associated with the proposal? Answer 6: Shippers and carriers have agreed that it is not necessary to require two separate loyalty contracts for port-to- port and intermodal movements. Allowing shippers the option on whether to extend .the conference loyalty contract to intermodal movements is sufficient. PAGENO="0167" 161 * Honorable Mario Biaggi * Page Three May 20, 1982 Question 7: This bill prohibits the payment of compensation by a carrier to a forwarder unless the forwarder certifies that it has no beneficial interest in the shipment. Present law requires similar certification. Do you have any reason to believe the bill's certification will not work as well as existing certification requirements as an enforcement tool? Answer 7: I do not. Question 8: With respect to enforcement of the beneficial interest situation, would complete disclosure of shipper affilia- tions by ocean freight~ forwarders and general FMC enforcement powers be sufficient to prevent the practice of carriers passing rebates through a dummy forwarder? Answer 8: The final version of the bill adequately dealt with this issue. Question 9: Someone recommended that ocean freight forwarders be allowed to trade by forming export trading companies. The recommendation was made that either Section 5 of H.R. 4374 be adopted ....or that Section 1608 of- the Omnibus Budget Reconciliation Act be made permanent. * What is your view of these recommendations? Answer 9: Again, the final version of the bill adequately dealt with * this issue. Question 10: To assist the FMC in meeting their more important obligations, are there any activities that can realistically be dispensed with, and would this require legislative * * action? Answer 10: The FMC administers certafn functions that could be reduced or streamlined. It would not be necessary, nor would it be wise, to legislate reductions in the FMC's functions simply to achieve a reduction. Such a reduction might result in serious adverse effects on the liner shipping activities in U. S. commerce. * * One legislative step that should be taken, would be repeal of the "rate-of-return" provision as it relates to the regulation of the domestic non-contiguous trades. Question 11: Do you foresee any problems in placing non-vessel operating common carriers under a bonding requlre:nent, and do you believe this to be necessary? Answer 11: I foresee no problem and I believe it is necessary to bond NVOCC's in order to ensure that reputable and proper service is maintained. 1 trust this response will help to complete the record on this vitally important legislation. Sincerely, *~ 1/ P~F:ms * ~ cc: Honorable Paul N. McCloskey, ~r. R.Zh Berg V W. F. Ragan, Esqulre * PAGENO="0168" 162 Mr. HERTEL. Thank you very much. Let me ask a few questions and then call on Mr. Snyder. Sea-Land is the only vessel operator, foreign or domestic, that is opposed to closed conferences. What disadvantage to Sea-Land would be created if we authorized closed conferences with inde- pendent right of action, specifically Sea-Land. I know you touched on the overall question in your testimony, but let me ask, would not Sea-Land be in a better position if closed conferences are au- thorized in the overly fluctuated tonnaging that is now inherent in the U.S. trade? Mr. FINNERTY. I would like to go back to the beginning of your question. In the last week or two, I am under the impression that we may not be the only carrier opposed to closed conferences. It may be that when other carriers appear before the committee, they may indicate a different position on that issue. With respect to the difficulty that the closed conference embodies in this proposal and in the Senate bill proposed to us, we find that in our many conversations with shippers and in conversations with certain parties in the Government, the grant of this ability to ex- clude certain carriers from conference membership is perceived to be some sort of a tremendously strong competitive tool. In our opinion, it is not. In our opinion, the heart of this bill and the true issue involved in this entire difficulty in liner trade for many years is antitrust immunity and the primacy of the Federal Maritime Commission in applying a rational and sensible U.S. scheme of regulation on the industry. This country is the only nation in the world that seeks to apply its domestic antitrust law to liner shipping activity in the in- ternational trade. Mr. HERTEL. If we legalize the closed conferences and also pro- vide for the rights of independent action, would this coupling not provide the flexibility that the shipping industry requires to permit the reliability of service? Mr. FINNERTY. I would think not, Mr. Hertel. The right of inde- pendent action or, as we refer to it in our testimony, as a competi- tive rate initiative, is intended to be a flexibility that would exist in a conference scheme so that the conference would be sufficiently responsive to changes in the conditions of the marketplace or the demands of the shipper such that a minority of conference mem- bers would not have to resign from the conference in order to be responsive to their customers. I think that issue is somewhat differ- ent than the open and closed issue and has to be looked at in the context of the total question of antitrust immunity for the market- place. I would suggest that if the proponents of closed conferences were to enact a legalization of closed conferences, and failed to solve the antitrust immunity question, these closed conferences will not work. The deficiency in the open conference system of the United States is not that the conference is not closed; it is that the Depart- ment of Justice has denied the conference system antitrust immu- nity and, more specifically, that it has leaned very heavily upon the U.S.-flag carriers in trying to compete in that marketplace on a reasonable basis with foreign competitors. PAGENO="0169" 163 Mr. HERTEL. Let me follow up on that response. If rationalization is desirable and an activity that exists world- wide, such as shipping conferences, how can rationalization be ef- fective if there is no intraconference discipline, a discipline which can only be enforced by membership restriction regarding confer- ences? Mr. FINNERTY~ Well, I would contend that an enormous amount of the rationalization efficiency can be achieved under an open system. We need only look to the record of what has been extended to the foreign-flag carriers in:our trades. In the Pacific, the so-called Japanese Six operates six companies basically as one with the full blessing of our Government. They have achieved very considerable efficiencies in rationalization of their sailings, of cross-charter of their space, et cetera. In the Atlantic, you can look to Atlantic Container Line or the new consortia arrangement between Dart and Manchester and cer- tain other carriers calling both at the United States and Canada. Enormous efficiencies and rationalization can be achieved in an open conference system. Mr. HERTEL. What you are saying, I guess, in that reply is that we really do not need a conference because it does not have to be restrictive, and if you cannot enforce discipline, you really do not need a conference, you can do this in the free market again. Mr. FINNERTY. You are going to have a complete rationalization of service between carriers without the ability to talk to one an- other? I do not think that will work. Mr. HERTEL. Rationalization in that regard with antitrust immu- nity. Mr. FINNERTY. You are going to give a blanket antitrust immuni- ty? Are you talking about the bill now or a separate proposal? Mr. HERTEL. I am talking about where the bill is going. Whether the language needs-whether it needs to be expanded. Mr. FINNERTY. I guess I missed the point, but I fail to see how, absent a conference, there would be a mechanism or an administra- tive means for discussing, agreeing to and implementing the var- ious steps necessary for the carriers in the trade to function in a manner that will provide the service that is needed by the import- ers and exporters in that trade. It is the conference mechanism that has, for over 100 years now, provided that essential adminis- trative machinery. Mr. HERTEL. I am not sure it could not be done informally, too. But let us ask one last question and follow up to your earlier re- marks. What is the essential difference between what you call competi- tive rate initiative capability and the idea of abandoning tariff filing? Mr. FINNERTY. The difference between a competitive rate initia- tive and the abandoning of tariff filing? Well, the competitive rate initiative is founded upon the operation of the conference scheme as we basically know it today with continued tariff publication and adherence. It would permit a number of carriers in a conference to take an action under certain prescribed circumstances that would otherwise be overruled by a majority of the carriers in the trade. PAGENO="0170" 164 On the other hand, a discontinuation of the publication of and adherence to tariffs, I think, would result in basically a dissolution of the scheme of things as we know it today. We would first and foremost be completely open to the attack of State controlled carri- ers in our trades because the mechanism through which the State controlled carrier statute functions, as you know, is through over- sight by the Commission of the tariff filing mechanism by those carriers. Second, the entire notice, if you will, not only to carriers, but im- portantly to customers, to the importers and exporters of what rates and conditions of service are being made available by carriers to like situated shippers, with like commodities, would be basically no longer in existence as I understand the proposal. I think that it perhaps appeals to some in the context of what they feel comfort- able with in a domestic atmosphere. But as we have been trying to get across for many years, we are not talking about a domestic sit- uation in shipping. We are talking about a total international mar- ketplace with a very extensive and growing involvement of foreign governments by way of known and unknown subsidies and political motivations for many of the entrants in that marketplace. Consequently, I think the proposal tends to greatly confuse and cloud what might otherwise be termed a hypothetical proposal. Mr. HERTEL. I think again we are after the same thing; and I might touch on H.R. 3637 for a minute, since we talked about it earlier in our approach to it. I think we could agree privately, and maybe we can agree today publicly, that if H.R. 3637 was passed in its present form it would not really change the problem that it is addressed to change; that is, if you require foreign carriers to file 30 days in advance, that is not going to change what you just spoke about; that is, the better situation there in competitively as to subsidies or whatever you take into account in individual situations. By having them file, that certainly will not change their cost- competitive advantage, would it? Mr. FINNERTY. It would seem to me, Mr. Hertel, that it would be a very considerable improvement on the present ability that such foreign carriers have to discriminate blatantly between shippers in this country, in this business, in which we are regulated and they are not. They can do as they choose and we cannot. Mr. HERTEL. If in fact you were not required to file, then would you not have that same kind of ability to be flexible and therefore be as competitive as possible? Mr. FINNERTY. No, sir. We have antitrust laws in this country. We have the entire balance of the Shipping Act; we have common carrier responsibilities; we have requirements under other statutes in this country that would still not be applicable to that carrier; and to say that because they are not applicable to that carrier, our problems would be solved just simply by eliminating tariff filings I think is, respectfully, a gross oversimplification. Mr. HERTEL. Well, we are talking about eliminating the whole section 18 in that amendment. But we have tried for years and I am new in this area, on this committee; we have tried for many years to do it with the regulatory scheme. PAGENO="0171" 165 What you are telling us today is there are a lot of problems with the regulatory scheme but in the same instance we are still pursu- ing that direction. I really am trying to make an improvement for the future for American industry by raising the question of the elimination of the tariffs. If we dealt with the two major problems as I see from your testimony today, the antitrust immunity ques- tion and intermodal rates, if we dealt with those two, is not that moving then in the right direction clearly for you. Second, does not that then put the amendment in a different light because, I agree, we are dealing with a foreign situation, a worldwide situation. Mr. FINNERTY. Yes, Congressman, I would say so. It is a move in the right direction. However, I do not know of any of the difficulties that have cropped up in the past number of years of a regulatory nature as you have described them that have emerged from the tariff filing requirement. It is the Justice Department intervention and the lack of clarity in the Shipping Act, because of the intrusion of the antitrust laws that has created the difficulty in this country that is complained of not only on this side of the ocean, but by many for- eign governments as well. I think that this proposal in the bill is a very welcome step in the right direction. I think that the different circumstances that we have today, that have not existed in years past, is the likelihood that this adminis- tration is going to make the tough decisions that Mr. McCloskey referred to earlier. I think with those decisions, we will move out of the confusing situation that has existed. Mr. HERTEL. I would like to apologize for taking so much time. This is the first time that I have chaired this committee and, as you noticed this morning, they had to go all the way down to the end of the line to reach me. Mr. Snyder, I apologize for taking so much time. Mr. SNYDER. That is all right. Your questions are always good. How many of the liner companies own their own containers and the tractors to pull them on land? Mr. FINNERTY. I do not know off the top of my head, Mr. Snyder. I think that it is fair to say that a number of the other American carriers lease their equipment, which is to say they use a different method of financing the equipment. They, of course, in the final analysis pay for it, but I do not know how many own them as op- posed to leasing them. Mr. SNYDER. Well, do not some of them contract with land car- riers for the land leg of the ship? Mr. FINNERTY. Oh, yes, sir. Mr. SNYDER. As opposed to owning them outright? Mr. FINNERTY. Well, I think even those that contract with the land carrier for-be it rail or be it truck, for the inland transporta- tion, they still either own or lease the chassis and container as part of-- Mr. SNYDER. Not the tractor? Mr. FINNERTY. Not the tractor; that is correct, sir. For the most part, they are not in the trucking business, nor are we. Mr. SNYDER. You do not own your tractors? Mr. FINNERTY. We only own the tractors that we use in the ter- minal area. PAGENO="0172" 166 Mr. SNYDER. You do not own the tractors that pull the container in from some point? Mr. FINNERTY. That is correct, Mr. Snyder. That is an activity that is accomplished by the American trucking companies engaged in the particular route that a container is moving. Mr. SNYDER. Is it a subsidiary of R. J. Reynolds? Mr. FINNERTY. No, sir. Our pickup and delivery operation, to the extent that one existed in the ICC-regulated trucking business in the continental United States, was part of the domestic intercoast- al and coastwise operation which we shut down in 1978. Mr. SNYDER. Now, if, in fact, we accepted your recommendation on intermodal ratemaking, would you establish a rate for both the land leg and the sea leg as one rate, and file that with one agency. And you recommend FMC? Mr. FINNERTY. Yes, sir. Mr. SNYDER. We have, I guess, eight liner companies or there- abouts, and they are dealing with eight different trucking compa- nies by contract. Under your recommendation those trucking com- panies would be relieved of filing their rates with the ICC and therefore, would be in the same competitive advantage or disadvan- tage as the shipping companies would be under Mr. Hertel's amendments. Is that not correct? Mr. FINNERTY. They would be in the same situation, Mr. Snyder, as domestic truck operators with comparable labor costs, compara- ble equipment costs in a domestic economy. Mr. SNYDER. What you are saying, Peter, is that you do not want Mr. Hertel's amendment that says, we do not file any rates, on the shipping that we do, but we want the same situation for the truck- ing companies that are carrying the load from the point of origin to our ship, because we do not want a separate filing with them with FMC. We want it all in one package where it is not divided out. Mr. FINNERTY. No, Mr. Snyder. What we are proposing is that level of Federal Maritime Com- mission regulation that would apply to ourselves as ocean carriers. To the extent that the Interstate Commerce Commission would wish to regulate the inland carriers under the existing or perhaps a changed situation, that would be something that the domestic ICC could address. If it was in the best interests of the domestic transportation scheme to require them to file tariffs, that could be decided by the ICC. Mr. SNYDER. But your recommendation is that they not have to file with ICC, on page 7? My question is related to your recommendation concerning inter- modal ratemaking. You say, that through intermodal tariffs should be subject to regulation by a single agency, the Commission. I just point out what I believe to be an inconsistency. Mr. FINNERTY. Mr. Snyder, Bill Coffey has been helpful in re- minding me that in the case of the truck carriers-and by the way, there are not just eight, there are thousands, because it varies with each port that would be served by an ocean carrier, the truckers are still required to file tariffs at the ICC. The truck division of the through intermodal rate is therefore broken out and available under existing requirements at the ICC. PAGENO="0173" 167 Mr. SNYDER. I understand they are currently required to file, but I understood you to recommend on page 7, that they be subject only to filing a regulation by a single agency. It says, subject to reg- ulation. It does not say, filing. Subject to regulation by a single agency, the Commission, which to me means at least no regulation by ICC and they do not have as much regulation over the 1981 Act as they used to have, but it seems to me that you are moving in the same direction for those thousands of truckers that you do not want to move toward with the deepwater carriers. Mr. FINNERTY. I did not intend that, Mr. Snyder. Again, I was trying to communicate or convey Sea-Land's position on seeking a single repository for the ocean carriers' tariff filing and an indica- tion that at the same time we were not seeking to try and expand the regulatory authority of the Federal Maritime Commission over inland carriers. Mr. SNYDER. OK. Mr. COFFEY. Mr. Chairman, may I add something to that-Mr. Snyder, with your permission? Mr. SNYDER. I have the time. Go right ahead. Mr. COFFEY. The intent of our suggested amendments and the thrust of this paragraph, which may not be as artfully worded as it should be, is basically to clarify that conferences themselves may in fact file through intermodal rates with the agency that regulates conferences, the Federal Maritime Commission; therefore, it is the logical one we suggest in our amendments. It does not in any way affect the negotiation of rates between ocean carriers and individu- al inland carriers. If the inland carriers are regulated by another agency such as the ICC, they would continue to be regulated in the same manner. It is only the final rate that is filed by the through intermodal tariff and that is paid by the shipper. The through rate is filed by the conference and paid by the shipper. It would not in any way affect the regulation between an ocean carrier and individual inland carrier. Mr. SNYDER. It just imposes additional obligation on some ship- pers if, in fact, you prevail in that. A shipper could look at the FMC and see what the total cost was from point of origin to desti- nation overseas. But a shipper who might be right near your termi- nal and pulls that stuff himself would have no way of knowing what the sea leg costs would be. Mr. FINNERTY. He can look at the port-to-port tariff and see what that ocean rate is. It is a separate ocean carrier rate. Mr. COFFEY. This in fact would give the shipper more informa- tion of comparison of rates. He could look at the conference through intermodal rates and the separate port-to-port rates and make his own calculations and choose the least expensive. Mr. SNYDER. I have taken enough time on that intermodal thing. But one other question on the Hertel proposal, and you go into it on page 9, Peter, is the situation you think might develop if re- quirements to file tariffs are eliminated. Is that what happened prior to 1961? Mr. FINNERTY. No, sir. As we both know, it is not what happened prior to 1961 but, of course, this is 20 years later. There are many, many, many more State-controlled carriers today than there were PAGENO="0174" 168 then. We now have containerization in international commerce. One has to look very carefully at the suggestion to simply take the tariff filing requirement out and expect the balance of the statute to continue to function the way it did before. We have a new cir- cumstance in world trade today and indeed a different shipping act than existed in 1961. It is our belief that to suggest simply taking out the tariff filing requirement would end up in chaos. Mr. SNYDER. Well, I do not know what all of these differences are. Maybe you can enumerate those at some point, depending upon your response. I do not see that containerization relates to whether rates are filed or not. Maybe you can explain that if you want to amplify on your answer for the record. What that relation- ship might be does not really hit me. At the bottom of page 9, did you mean "impose" instead of "oppose"? Mr. FINNERTY. Yes, sir. It is a typographical error. Mr. SNYDER. OK. I have a little bit of trouble with that bonding business. Am I correct-and I am not sure that I am-that that bond is not used in any way for indemnification? Mr. COFFEY. It is my understanding that it is available. Mr. SNYDER. It is? Mr. COFFEY. Yes, it is. Mr. SNYDER. Then I am in error. I understood that it was not; it was only to show that it was a strong company or something and I had a little problem with that. Mr. COFFEY. No, sir. Mr. SNYDER. At the bottom of page 11, you suggest an amend- ment redefining the definition of "common carrier" of the 1916 act. Am I correct in assuming that this redefinition would cover the Canadian diversion situation? Mr. FINNERTY. It certainly would cover any companies that are doing the things that are enumerated here within the United States. It might not relate to Canada, unless they did those things within the United States, Mr. Snyder. Mr. SNYDER. We have not seen the amendments, I do not believe. Mr. FINNERTY. I am sorry; we did provide copies and we have an- other one here if you would like. We did give copies to the commit- tee this morning, and I apologize for getting them here today late. Mr. SNYDER. Apparently, the minority did not get them. I am not complaining particularly about it, but I just assumed that is what you were driving at. Now, does Sea-Land participate in any foreign trade as a cross- trader? Mr. FINNERTY. Yes, sir, quite a few, and it is a very important business to us. Mr. SNYDER. Do they belong to any conferences in that connec- tion? Mr. FINNERTY. No, we do not. Mr. SNYDER. Have you ever belonged to conferences in your cross-trading? Mr. FINNERTY. I would suspect not, but I do not know. I would be happy to check that, Mr. Snyder, and submit it for the record. PAGENO="0175" 169 The major difficulty, of course, is that in most instances the car- riers in a conference, in a cross-trade, do not want new members. Mr. SNYDER. If you look that up and find out that you have been, then I would like for you to also give us some idea in the answer as to what your experience was, perhaps why you got out: whether you or were forced out or got out voluntarily. Mr. FINNERTY. Yes, sir. Mr. SNYDER. Any experience that you can give us on that. Now, in your suggestion for open conferences, is it your idea that you could move in and out of conferences at will? Mr. FINNERTY. Not at will so much as basically continuing the existing system, Mr. Snyder. I believe there are certain notice peri- ods and timeframes that are provided for in terms of application and effective date of membership and resignation and financial ob- ligations. Mr. SNYDER. Did you not-I may be in error about this-let me put the question this way: Is it your impression that closing of U.S. conferences would have repercussions in any other international trades? Mr. FINNERTY. Well-- Mr. SNYDER. Somebody made that argument during hearings on the Omnibus bill and I thought it was you. Maybe it was not. Mr. FINNERTY. I think the arguments you may have in mind, Mr. Snyder, is the point that we have consistently made and continue to make about the UNCTAD code. Were the UNCTAD code to be put into effect overseas, it will exclude American-flag lines from the foreign to foreign trades and likely result in the dumping of extra tonnage in the U.S. trades, which would remain open. Mr. SNYDER. Mr. Chairman, I ask unanimous-consent to submit some more questions. I have some more but the hour is getting late and we have another witness. I have a 1:30 appointment. I am sure you do, too. Will you give my unanimous-consent request? Mr. HERTEL. Without objection, so ordered. [The following was received for the record:] SEA-LAND INDUSTRIES, INC., Iselin, NJ., June 10, 1982. Hon. GENE SNYDER Ranking Minority Member, Subcommittee on Merchant Marine, Committee on Mer- chant Marine and Fisheries, Washington, D.C. DEAR CONGRESSMAN SNYDER: This is -a belated response to the questions you pro- vided subsequent to the hearing on HR. 4374. Please accept my apology for the delay, but the questions were mislaid. I trust this response will satisfy your needs. Question 1. (A) In response to one of my questions at the hearing, you stated that simply taking out the tariff filing requirement would end up in chaos. As I request. ed at the time of the hearing, would you please enumerate, for the record, what differences there are between the pre-tariff filing period around 1961, and the pres- ent time? Answer 1. (A) The filing of tariffs with the Federal Maritime Commission is a means of establishing the official rates and services provided by ocean carriers en- gaging in United States ocean common carrier activity. Without tariffs, the FMC would have no means of applying applicable portions of the Shipping Act to the - trade that the agency is charged with regulating. Importantly, the State Controlled Carrier and Anti-Rebate provisions would be rendered almost useless if no tariffs were available to the FMC. Beyond mechanical or administrative aspects, it is necessary to look at the changes in world liner shipping in the last twenty years to understand why circum- stances now lead to the - retention of tariff filing. Many foreign governments have PAGENO="0176" 170 entered the liner commerce field. The most prominent is the merchant fleet of the Soviet Union, but numerous other fleets are now active under respective flags of registry; including flags of convenience. Growing numbers of foreign countries now impose a form of sovereign regulation and in some instances that includes tariff filing. FMC regulation is very different than ICC regulation. It is much more flexible. FMC does not set or limit changes in ocean rates in foreign commerce Many foreign governments are now attempting to interfere in liner shipping by preventing changes in rates and service. The U.S. liner fleet and the economic structure and circumstances of liner com- merce in U.S. trades has changed dramatically since pre-1961. The U.S-flag liner fleet in foreign commerce is no longer thousands or even hundreds of ships. Less than 200 ships are now in active service for the nine remaining U.S-flag liner com- panies in foreign commerce. Only one of those companies is not subsidized by the U.S. Government. U.S. maritime policies now deny a competitive tax treatment, saddle U.S-flag carriers with public interest tests that handicap their ability to compete with foreign lines and impose a completely obsolete set of rules and regula- tions that include an onerous 50 percent duty over vessel maintenance and repairs in foreign shipyards. A particularly beneficial aspect of U.S. governance of ocean common carrier serv- ice has been the fair and balanced manner in which liner carriers have provided service to shippers, large and small. Shippers similarly situated are assured they will be provided with service on a comparable basis with other shippers in a like situation~ State controlled foreign lines and growing foreign government intrusion into the private sector liner shipping marketplace necessitate U.S. government defense of open access, fair and reasonable circumstances of competition in international ship- ping. Some advocates of "deregulation" fail to comprehend the enormous difference between America's domestic markets and economic competitive activity beyond U.S. control, in international trade. In the latter, as the U.S. Government withdraws its oversight, foreign governments are now pressing to assert their influence to control the lucrative trade involved. If tariff filing were dropped, shippers here and abroad would be left to attempt to fend for themselves. This sort of chaos arose in earlier years and led to enactment of the current structure. The vast majority of U.S. shippers have agreed with ocean carriers in the recent shipper-carrier agreement related to H.R. 4374 that FMC tariff filing and enforcement should be retained. One must wonder why government officials issist they know better than the users and providers of an important eco- nomic activity in the private sector. Question 1. (B) And how those differences are relevant to whether or not tariffs are filed at the FMC? ____________ Answer 1. (B) The discussion above in 1. (A) noted that FMC tariff filing is needed to permit continued enforcement of the Shipping Act. Healthy, competitive liner commerce in U S trades is a goal that can benefit shippers and carriers alike found ed on proper public disclosure of information just as is done at the Securities and Exchange Commission and many other U.S. agencies. Question 2. In your statement submitted to the Subcommittee, you state that the carriers would find their ability to fairly and competitively price their services greatly diminished if the tariff filing requirement eliminated. Question 2. (`A) Could you explain how the ability to fairly price their services would be diminished? Answer 2. (A) Yes. As explained above,, public disclosure contributes substantial benefit to shippers so that those similarly situated are treated in a comparable fashion Shippers and carriers are aware of with whom and what they are competing. With- out filed tariffs, the entire process would deteriorate. Foreign governments coUld deploy competitive ships to take over the trade. Carriers would slide into rebating and therefore unfair conditions would prevail in pricing Question 2. (B) Could you explain how the ability to competitively price their serv- ices would be diminished? Answer 2. (B) As explained in the previous responses, public disclosure through public tariff filing at the FMC assures all concerned full knowledge of the prices and terms of service provided in relevant liner trades. To revert to no public disclo- sure would result in a very unhealthy international market subject to competitive abuses and eventual control by foreign governments. Limiting the focus to a hypothet- ical elimination of tariff filing without answering the more fundamental and criti- cal aspects of future international liner shipping, would amount to "fiddling while Rome burns." The issue, I respectfully suggest, is ultimately not going to turn on PAGENO="0177" 171 whether the 1982 amendment of the Shipping Act retains tariff filing. The real issue is whether the United States of America will begin to exert a leadership role with the world community of trading nations to mutually (intergovernmentally) agree upon the specific rules of competition which are to govern international liner shipping. Thank you for this opportunity to respond to your questions. Sincerely PETER J. FINNERTY, Vice President Public Affairs Mr. HERTEL. In regard to the amendments that you asked about, I have a copy here; we received this just this morning. In regard to page 11, where Mr. Snyder asked you about that particular amendment under the scope of coverage, let me ask, in looking at the làngüage of that paragraph and also the language of the amendment, regarding section 18 on page 2 of the amendments sheet, whether that is aimed really at the question that has been raised before in regard to H R 3637 and Canadian diversion Is this a different way Of having these carriers publish their rates and come under the tariff filing regulation? Mr. FINNERTY. What we are talking about here, Mr. Hertel, is the first paragraph on page 1, I believe. It says, add the following to section 1, and begins "Notwithstanding," et cetera. That is the only paragraph that I think is applicable. Was there another that you were referring to? Mr. HERTEL. No. That is really it. Is that what it is aimed at? Mr. FINNERTY. Well, the point that we are making, Mr. Hertel, is that comparable to other regulatory arrangements in U.S. law, to do with, for instance, insurance, sale of pharmaceutical commod- ities, the Federal communications area, et cetera, if one engages in a certain activity inside the borders of the United States, then one subjects himself to the jurisdiction-and I think that is really the word-the jurisdiction of the United States. This amendment is in- tended to try and clarify what might be missing elements, if you will, under which some carriers slip through the applicability of the Federal Maritime Commission jurisdiction. Those are parties that engage in the business and yet not have to live by the require- ments of the agency. Mr. HERTEL. I take it from that answer that it is aimed at the same approach as H.R. 3637? Mr. FINNERTY. Well, H.R. 3637, I think, is aimed at a specific contiguous national question, which we wholeheartedly support and which we think is probably a major element in what this para- graph would address. But again I want to restate that the thrust of this paragraph in redefining a common carrier by water, goes to the issue of the uni- form applicability of the statute, of the enabling statute of the Fed- eral Maritime Commission, to all parties that are to be regulated by that statute. It undoubtedly would bear on the question that is contained in H.R. 3637. Mr. HERTEL. Well, that is the answer that I was trying to get to my question. I think it might be more helpful the next time if that was discussed in a frontal way with the committee in your testimo- ny, since you did raise the question of tariff filings and rate penal- ties, and then two pages later come back to an issue that certainly directly related. 914_856 0 - 82 - 12 PAGENO="0178" 172 It also would help if the amendments and testimony arrived at the committee a day or two earlier, as the rules state. Mr. FINNERTY. Mr. Hertel, this paragraph was sent to the sub- committee's counsel some months ago in a personal letter by myself to Chairman Biaggi in response to his request, as a conse- quence of the hearing on H.R. 3637. I imagine it is entered in the record of that hearing on that legislation. Mr. HERTEL. Do you have anything to add at all? Mr. FINNERTY. No, sir. Mr. HERTEL. Well, thank you very much for your testimony and your time. Mr. Thomas O'Neill is here, the general counsel to the National Association of Beverage Importers. He is our last witness today. STATEMENT OF THOMAS E. O'NEILL, GENERAL COUNSEL, NA- TIONAL ASSOCIATION OF BEVERAGE IMPORTERS, WASHING- TON, D.C. Mr. O'NEILL. Thank you, Mr. Chairman. In the interest of time, I would like to excerpt a little bit from my statement, and I now offer it for the record in its totality, if I may. Mr. HERTEL. We appreciate that very much. [The following was received for the record:] PAGENO="0179" 173 PREPARED STATEMENT OF THOMAS E. O'NEILL, GENERAL COUNSEL, NATIONAL ASSOCIATION OF BEVERAGE IMPORTERS Basic Position This position paper details the views of the National Association of Beverage Importers, Inc. (hereinafter, NABI) on two basic issues raised by H.R. 4374. 1. Closed Conferences 2. Shippers Councils NABI expresses its support for the copç~p~ of Shippers Councils, with certain essential modifications, and its opposition to closed conferences. The National Association of Beverage Importers NABI is the national trade association for importers of wine, spirits and beer. Its members import products from many countries throughout the world, but the heaviest volume of imports is from the European area. NABI members support U.S. flag carriers; and excluding carriage of goods through the Great Lakes, which is not served by U.S. carriers, somewhat less than half of the ton- nage of beverage alcohol imports is carried by U.S. flag vessels. NABI members, as well as other beverage alcohol importers, ship pri- marily with the carrier members of the North Atlantic Westbound Freight Association, the Continental North Atlantic Westbound Freight Association, WINAC, and the Iberian Conference. To give some index of the volume of imports in- volved, shipments of wines and spirits from the United Kingdom to the United States constitutes the largest commodity class both in tonnage and in dollar volume. For many years, importers of beverage alcohol products have been dis- satisfied with ocean freight rates which are unilaterally determined by the carriers. The present freight rates for the carriage of wine and spirits from the United Kingdom to North and South Atlantic ports, contain a large subsidy for other, lower valued items. High freight rates exist in spite of a volume of nearly 50 million gallons of spirits imported from the United Kingdom. Coupled with brandy, gin and cordial importations from Common Narket countries, the volume is over 65 million gallons. This is the equivalent of over 27 PAGENO="0180" 174 million cases of spirits in 750 milliliter bottles. Such shipments in containers would fill over 27,000 40-foot containers. Adding shipments of Common Market wines to this figure, there would be approximately 38 million cases of wine which would equal about 40,000 containers if imported in the 750 milliliter size. This would equal a total yearly container entry into the United States of spirits and wine of 67,000 containers. It would mean shipment of over 186 containers of imported wines and spirits into the United States each and every ~ of the year, including Saturdays and Sundays. In spite of this tremendous volume of wine and spirits -- not to men- tion 34 million cases of beer imports -- the wine and spirits importers have been unable to effectively negotiate for reasonable rates for the simple reason that they have been negotiating as individuals, and not as a group. Background Once again, the House of Representatives, through H.R. 4374, as well as the Senate, by way of 5. 1593, have begun hearings on shipping policy. The House vehicle for present consideration of revised shipping laws is H.R. 4374, which has for its purpose to improve the international ocean commerce transport- ation system of the United States. This appears to be a continuing effort which goes back to at least 1977, when both the House and Senate looked at broad is- sues involving shipping policy. Public Law 95-843 strengthened certain provisions of the Shipping Act of 1916, in regulating the rate-cutting practices of state- controlled carriers operating as "cross traders" in the international liner trade. Another piece of legislation, Public Law 96-25, strengthened the pro- visions of the Shipping Act of 1916 which prohibits illegal rebating. The interests of NABI members is most direct in connection with this continuing effort in both the Senate and the House to deal with conference auth- orities, intermodal activities, and shippers councils. NABI is currently opposed to the Senate approach to the Section 15 amendment, which appears to "authorize" the pooling of earnings, rationalization of sailings, etc., in the context of new authority of conferences to limit membership. Whereas current Section 15 of the Shipping Act merely points to the necessity of filing full details of certain anti-competitive actions with the FNC, the Senate would seek to bless such acti- vities with authorization. Such a carte blanche approach is not present in PAGENO="0181" 175 H.R. 4374 with respect to conference and carrier activities. However, the moderate approach of the House does propose closed conferences, and the concept is objectionable as anti-competitive. On the shippers council issue, the House Bill is most restrictive, primarily because of the requirement that a shippers' council be "broadly rep- resentative." There are also onerous filing requirements for a shippers' council in the House version. The Senate view of shippers councils is much more moderate and NABI generally endorses the text of the Senate proposal. In short, the following is the NABI position on the present House and Senate Legislative efforts: 1. Closed conferences are totally objectionable as anti- competitive. 2. If the Congress disregards this objection, the House approach to closed conferences is the lesser of two evils. 3. Shippers councils are not acceptable as a `trade off" for closed conferences. 4. Again, if Congress should approve the House approach to closed conferences, the Senate approach to shippers councils should be approved. The foregoing selective approach brings forth a somewhat rhetorical question as to why it is necessary for both the Senate and the House to take a basically different tack on shipping problems at this session. More important, why is it once again necessary for the Senate and House to proceed on shipping problems with what would appear to the outsider as no apparent communication between these two learned bodies? Shippers Councils It is not certain how testimony will develop on the shippers council issue within this Committee. We would cite two experts who appeared at the Senate hearing on September 23, 1981. The U.S. Council of the International Chamber of Commerce has ad- dressed the issue of shippers councils' most succinctly as follows: The Bill would provide authority to established shippers' councils with extensive authority, but this does not PAGENO="0182" 176 adequately address how shippers' councils would be structured. We are fearful that the notion of shippers councils is primarily being used here in hopes of a counterbalance to closed conferences, thus legitimating the latter. However, as we have seen little evidence of shippers' councils outside the United States being able to truly counterbalance closed conferences, and we would caution against the assumption that establishing ship- pers' councils will, with anti-trust immunity, automatically constitute an effective equalizing force. Buttressing this appraisement of the power of shipping councils was the statement by Mr. 3. F. Muheim on behalf of the standing Committee on European National Shippers' Councils: We have practically given up to consult with the respective conferences, because it is more or less just not a consultation as we understand it, just a listen-and-report activity, without proper commercial reaction by the conferences. NABI fully agrees with the foregoing appraisals. If there are to be shipping councils, these must be so organized as to be able to negotiate effectively with the carriers. The reason for underscoring the volume of traffic controlled by beverage alcohol importers on pages one and two of this position paper is the fact that in spite of this volume, the importers neither collectively or indi- vidually have been able to negotiate reasonable rates with the carriers. There is a current and urgent necessity for beverage alcohol importers to be auth- orized to negotiate with the carriers on a commodity basis, through the authorization of shippers' councils, which would grant shippers and importers an anti-trust exemption for such negotiations. Beverage alcohol products, and most particularly wine and spirits, are high value commodities, and the carriers, rightly or wrongly, have been charging a high rate for the carriage of these goods, based upon their value. The profitability on this heavily tonnaged com- modity provides revenues to the carriers so that lower rates may be charged for other lower valued commodities, it is only fair that the importers of PAGENO="0183" 177 beverage alcohol products be allowed to meet with the carriers and carry on bona fide negotiations, dealing with their own particular freight rates, rather than with freight rates in general. Under the circumstances, a "broadly based" Shippers' Council which covers a broad range of commodities would be of no use to the importers of beverage alcohol products, since importers' interests in the specific freight rates would be lost in the discussions on overall rate structure. As previously stated, NABI favors the Senate approach to the shippers' council issue. Rather than comment on specific changes to be made in the House version, we would merely urge that the House adopt the Senate approach. This would necessarily delete the wording "broadly representative" on lines 1 and 2 of the House Bill. However, this is not the only objection to the House version. An overriding problem in H.R. 4374 is that both carriers and any shippers' council would be placed on equal footing in regard to Federal Maritime Commission filing and approval of agreements under Section 15. On its face, this seems eminently reasonable. In practice, this equal treatment may sterilize any attempt to father an operational shippers' council. The inequality stems from the fact that carriers, under Section 15, must file all agreements, so as to make sure that the anti-trust exemption for this group of competitors is not abused in regard to their treatment of shippers. The shippers, on the other hand, cannot exert similar pressures against the carriers. They cannot agree, among themselves, to favor one carrier, to collectively utilize non- conference carriers, or to be involved in any type of restrictive activity which is generally permissable to the carriers. Accordingly, what is sauce for the goose is not necessarily sauce for the gander. A further disturbing proposal in H.R. 4374 is contained in the new paragraph to be added after the third paragraph of Section 15 (page 4, line 18 of the Bill). This would allow the FMC to hold an informal hearing no later than twenty days after an agreement is filed with the Commission "upon written complaint of any common carrier .. ." Carriers, through dilatory procedure, could conceivably use this procedure to hamstring any ef~orta of a shippers' council to become operational. Thomas E. O'Neill October 5, 1981 General Counsel PAGENO="0184" 178 Mr. O'NEILL. For the record, my name is Tom O'Neill. I am the general counsel for the National Association of Beverage Import- ers, which includes importers of wines, spirits, and beer into the United States. Our basic position here today deals with really two issues. First, we are opposed to `the closed conference aspect; and second, we are supportive of the shippers' council aspect with certain possi- ble revisions. I would like to tell you just a little `bit `about `the National Associ- ation of Beverage Importers in order to show you why our interest is so strong in this situation. NABI is a national trade association of the importers of wine, spirits and beer and its members import products from many, many countries throughout the world, but we are primarily con- cerned with the common market countries. I have detailed some statistics here as far as the United Kingdom is concerned. Scotch whisky and Irish whisky together, constitute the largest commodity class, both in terms of tonnage and in dollar value. For many years, the beverage alcohol importers have been dissat- isfied with the ocean freight rates which we feel have been rather unilaterally dictated by the carriers. The present freight rates for the carriage of wine and spirits from the United Kingdom to North and South Atlantic ports contain a large subsidy for other lower- valued items. High freight rates exist in spite of a volume of nearly 50 million gallons of spirits imported from the United Kingdom. Now, you put this together with some other spirits, gin and cor- dial importations, you come up `with 65 million gallons. Add it all together with the wines, and this means, if you put them in con- tainers, there would be a container entry into the United States of about 67,000 containers a year. This breaks out to 186 containers of imported wines and spirits into the United States each and every day of the year, if they were working on Saturdays and Sundays. In spite of this rather tremendous volume of wine and spirits, plus 34 million cases of beer imports, the wine and spirits import- ers have really been unable to effectively negotiate reasonable rates for the reason that they have been negotiating piecemeal by themselves. We did have a wine and spirits contract up until Sep- tember 3, 1981, which was approved by the Federal Maritime Com- mission, but for reasons that are not pertinent at this moment here, this was really never an effective device, except in isolated instances for negotiating with the carriers. But now we cannot even meet with the carriers; at least under the contract we could meet with the carriers. Currently, under the general merchants contract structure, wines and spirits importers cannot even meet with the carriers. So that should set the stage on why we are very interested in the ship- pers' council's provision of this particular proposal for legislation. We are looking at the present picture; we are opposed, as I say, to the Senate's approach to the section 15 amendment which appears to authorize the pooling of earnings, rationalization of sailings in the context of new authority for the conferences to limit member- ship. Section 15 points to the necessity of filing full details of certain anticompetitive actions with the FMC and the Senate would seek PAGENO="0185" 179 to seemingly bless such authorizations. I am happy to note that this carte blanche approach is not present in H.R. 4374 with re- spect to the conference and carrier activities. The moderate ap- proach of the House does not propose closed conferences and that concept is objectionable as I stated at the outset as anticompetitive Now, I have to go over to the shippers' council issue. The House bill is most restrictive, primarily because of the re- quirement that shippers' councils be broadly representative, and there are also some other onerous requirements which brings me down really to our basic position. One, closed conferences are totally objectionable as anticompeti- tive Two, if the Congress disregards this objection, the House ap- proach to closed conferences is the lesser of two evils. Three, shippers' councils are not acceptable as a tradeoff for the closed conference approach If Congress should approve the House approach to closed confer ences, we would appreciate the Senate approach to shippers' coun- cils for approval. I wish I could have attached myself directly to Mr McCloskey's remarks at the outset where he said, well, maybe we should pass the shippers' council issue a year ahead, I could just fold my papers and go home That would be just fine with me, but I do not think this is what we are dealing with Anyway, I would like to call your attention to some testimony in the Senate on really what a shippers' council does. I feel there is a lot of misinformation about the fact that shippers' councils will, just counterbalance the carriers if they have a closed conference There are some experts that testified over in the Senate The U S Council of the International Chamber of Commerce spoke as fol lows: The bill would provide authority to established shippers' councils with extensive authority, but this does not adequately address how shippers' councils would be structured. We are fearful that the notion of shippers' councils is primarily being used here in hopes of a counterbalance to closed conferences thus legitimizing the latter. However, as we have seen little evidence of shippers' councils outside the United States being able to truly counterbalance closed conferences, and we would caution against the assumption that establishing shippers' councils will, with anti- trust immunity automatically constitute an effective equalizing force Further, Mr. Muheim, who spoke on behalf of the Standing Com- mittee on European National Shippers' Councils, he himself but- tressed this appraisal when he said We have practically given up to consult with the respective conferences because it is more or less just not a consultation as we understand it, just a listen-and-report activity without proper commercial reaction by the conferences Now, of course NABI fully agrees and by NABI, I am talking about the people who are involved in freight. The NABI people who are involved in freight fully agree with these foregoing ap praisals If there are going to be shipping councils, they have to be effec- tively organized so as to deal with the tariffs. I underscored the volume of traffic earlier of beverage alcohol importers to show you that even with the former contract, I should say a specific wine and spirits contract, we were unable to effectively negotiate rates. PAGENO="0186" 180 If a shippers' council provision is put into the law, with or with- out the closed conference aspect, but just looking at shippers' coun- cils separately-unless there is a provision in the bill which would allow the formation of these councils on a commodity-by-commod- ity basis, there is no point, as far as my clients are concerned, in joining in any shippers' council if, for no other reason, than the fact that our rates are higher and there is subsidization in them. You get into a shippers' council where everybody joins in the room and says, we want to discuss rates. That is no good. We want to discuss specific commodity rates and I think really that is the point of my statement. If there are any questions, I will attempt to answer them. Mr. HERTEL. Thank you, Mr. O'Neill. I understand that you are opposed to closed conferences. You prefer the House bill, the House approach if they are gone into. You do not agree that the comprehensive and coupling approach that Mr. Biaggi is trying to accomplish in this bill would create a balanced approach that would further the interests of all involved parties? Mr. O'NEILL. Well, of course, this balance, as I state herein, sauce for the goose is not sauce for the gander. What the shipping lines have been doing for years as far as getting together and agreeing, there is no possibility that shippers can do the same and say, OK, let us only use Sea-Land; let us only use this guy, and we will get our preferential rates. We cannot do that. All we want to do is to be able to meet and discuss specific rates.. In answer to that question, we have a notice about 3 or 4 days ago that the rates were going to be increased in the North Atlantic Westbound Freight Association 16 percent beginning in February. How do you deal with this? I do not know how our people deal with it. Is it right to have a high value commodity like wine and spirits bear a 16-percent in- crease and a lower value get 16-percent increase? We would like to discuss it. Mr. HERTEL. What types of experience with rates have your fellow importers been subjected to when trading between the United Kingdom and nations where there are closed conferences? Mr. O'NEILL. I really do not have any expertise on that. I really, unfortunately, could not answer that question. Mr. HERTEL. Are imports on the increase, have they been in- creasing in the last few years? What are the figures on that for your commodities? Mr. O'NEILL. It depends. Overall, yes, there has been a rather slight decline in the popularity of scotch whisky, due to Gene Snyder's good old bourbon, I guess, whatever. Mr. HERTEL. I thought it was the cancer scare. Mr. O'NEILL. No. Mr. HERTEL. Are profits doing well in the industry right now? Mr. O'NEILL. Some are and some are not. It depends. The A brands, for instance, in the scotch whisky business are doing rather well, which I would characterize as the London syn- drome. Interest rates are going up; you might as well buy the best. The midrange brands of particularly scotch whisky are off a little bit, but right now the latest statistics I saw were holding PAGENO="0187" 181 pretty much even. It is 3 percent up and brandy has gone out of sight and wines are coming up, so really in response to your ques- tion, things are pretty good at the moment as far as the imports are concerned. Mr. HERTEL. Beer is going up as far as imports? Mr. O'NEILL. Yes, sir. Mr. HERTEL. I would think that wine was in a decline because of the increase in domestic consumption of domestic wines in the last few years? Mr. O'NEILL. Yes, sir. They are moving back up also. Mr. HERTEL. Moving back up probably because more people are acquainted with wines and trying them, imports, after they tried the domestic, you think? Mr. O'NEILL. Yes, sir. Mr. HERTEL. Before we leave, I would like to ask if the staff member from Mr. Snyder's office has any questions. STAFF MEMBER. No questions. Mr. HERTEL. Counsel, any questions at all? Mr. RATTI. No questions. Mr. HERTEL. I would like to thank you very much, Mr. O'Neill, and we are going to continue these hearings on this bill, 4374, to- morrow at 10 a.m. The hearing is adjourned. [Whereupon, at 4:24 p.m., the subcommittee adjourned.] PAGENO="0188" PAGENO="0189" REGULATORY REFORM WEDNESDAY, OCTOBER 7, 1981 HOUSE OF REPRESENTATIVES, SUBCOMMITTEE ON MERCHANT MARINE OF THE COMMITTEE ON MERCHANT MARINE AND FISHERIES, Washington, D.C. The subcommittee met, pursuant to recess, at 10:07 a.m., in room 1334, Longworth House Office Building, Hon. Mario Biaggi (chairman of the subcommittee) presiding. Present: Representatives Biaggi and McCloskey. Staff present: Ric Ratti, Rudy Cassani, Cyndy Wilkinson, Ed Welch, Gerry Seifert, Steve Little, Mike Toohey, John Bruce, Bev- erly Rowen, Gwen Lockhart, and Ann Mueller. Mr. BIAGGI. The subcommittee is meeting for the second of three sessions to consider a bill to amend the regulatory aspects of our maritime laws. Yesterday, we heard testimony from the Federal Maritime Com- mission, Sea-Land, and some maritime industry organizations. We also heard from an importer group. Today, we are privileged to re- ceive testimony from those concerned with the shipping and for- warding of goods in the international trade. I would again remind the witnesses that our subcommittee is gravely concerned with the existing regulatory regime that is driv- ing U.S.-flag vessels from the ocean carriage of goods in the inter- national trade. Shippers, I suspect, would be gravely concerned with the deterioration of our fleet, since the alternative is complete dependence on an oceanborne system monopolized by foreign-flag carriers. The negative results of such. dependence are probably un- derstood by most and need not be repeated today. I also want to highlight the fact that our maritime policy has been fraught with conflict among the many segments of the indus- try. My hope' is that today's testimony from shippers and freight forwarders will recognize a need for cohesion and unity among those interrelated segments. I hope that before our next hearing, the executive branch will have come forth with a coordinated and realistic maritime policy. We will then be in a better position to move ahead with this much- needed legislation. Before calling our first witness, I would like to insert into the record a statement submitted by John R. Arwood, president of Trans-Freight Lines. [The following was received for the record:] (183) PAGENO="0190" 184 PREPARED STATEMENT OF JOHN R. ARWOOD, PRESIDENT, TRANS-FREIGHT LINES, INC. Trans Freight Lines (TFL) is a non-conference con- tainership operator sailing nine ships between U.S. North Atlantic, South Atlantic and Gulf ports and Europe. The company is a subsidiary of Thomas Nationwide Transport (TNT), an Australian publicly held corporation. TNT is recognized and accepted as a multi-national conglo~flerate with extensive worldwide operations in all modes of transport. The company is a U.S. corporation registered in Delaware with its principal offices in Secaucus, New Jersey. TFL is fully subject to the tax laws and all other laws of this country - just as fully as if ownership of the company were totally American. Trans Freight Lines was organized in April, 1976 and commenced operations in July, 1976. TFL operates six Singapore flag vessels owned by a sister subsidiary of TNT and charters additional vessels from time to time to meet market needs. Most of these vessels fly one or more European flags, currently German and British. PAGENO="0191" 185 Flag registry, however, is only one aspect of TFL. The company is, for all intents and purposes and without re- gard to vessel registry, an American corporation contributing to the well-being of her economy. Our company is a competi- tive force in the marketplace and provides definite beneficial effect on the foreign commerce of the United States. TFL pays U.S. taxes and aids in the foreign commerce of this country and would, if allowed by U.S. law, make its ships available in the event of national emergency. We should not be set apart s~imply because of the fact of registry of our flag. TFL was constituted with the realization that the ex- istence of an independent carrier in the marketplace would ultimately be beneficial to the commerce of the United States. Therefore, when addressing any proposed legislation or regula- tion, we would encourage that close attention be paid to pro- competitive proposals. PAGENO="0192" 186 This company, moreover, welcomes the opportunity to submit a statement to the Subcommittee with respect to the proposed legislation of H.R. 4374. We are heartened that the Subcommittee is desirous of hearing the views which can be ex- pressed by a strong independent carrier. While we do not presume to speak for independents as a group, we feel we rep- resent a position that is sound in terms of any responsible national maritime policy and, therefore, deserves careful evaluation. TFL has been a non-conference independent carrier since commencing operations across the North Atlantic to Europe in July, 1976. On our first sailing outbound from the United States we had barely enough cargo to pay the cost ~f fuel for the voyage. Today, TFL operates nine container ships serving four trade routes between United States ports and UK/North European ports, each on a weekly basis. In its Northern Service, TFL serves by direct vessel call a range of four United States North Atlantic ports (Boston, New York, Baltimore and Norfolk); in its Southern Service, a range of six South Atlantic and Gulf PAGENO="0193" 187 ports (Jacksonville, Port Everglades, New Orleans, Galveston, Charleston and Wilmington). In its mini-bridge service to and from the U.S. West Coast, TFL serves Oakland and Long Beach through Galveston. TFL also provides fortnightly round trip service to Canada through the Port of Halifax. We have been invited by several of the conferences and rate agreements to join their ranks. While serious con- sideration has. always been paid to these invitations, we have not seen the commercial practicality of doing so in light of solid shipper support, which we believe comes to us fundamen- tally because we are a strong independent line. We have always differed with conferences over rate making policy and practice. Typically, conference allocations and rate structures are designed to relieve member lines from having to compete with one another.. Conference rates customar- ily are the sane for all its members; generally high enough to make it possible for the least efficient member lines to com- pete along with the most efficient. Both sets of member lines benefit from this arrangement: the inefficient lines are not driven out of the trade by the efficient - - and the efficient 94-856 0 - 82 - 13 PAGENO="0194" 188 lines reap greater profits from the higher rates which keep their weaker colleagues in business. The shipping public, as ever, pays the cost. At TFL, obviously, the conference tariff is viewed as the primary benchmark of what price or service we must compete with to remain in a market. That indication is, in turn, only one factor of many considered by our line. We have always set our rates independently. We evaluate the cost to TFL of providing a service and weigh the likelihood that at the rate level under consideration TFL can satisfy the needs of the shipper, while still realizing an acceptable level of revenue. We have no policy of establishing rates at a specific percent differential below the conference tariff. Dur- ing tile North Atlantic rate war, precipitated by the conference in early 1980, when pressure on TFL to slash rates was strong- est, we had many rates higher than those of the conference. As stated, TFL believes in the inherent value of competition. Competition brings inncivation, efficiency and productivity. We further believe that any legislation aimed at improving ocean shipping should endeavor to preserve a competitive atmosphere in any trade. PAGENO="0195" 189 Unfortunately, our analysis of H.R. 4374 concludes that there are sections contained therein which would serve to discourage or eliminate competition. CLOSED CONFERENCES We hold any movement directed toward legalizing closed conferences is dangerous, even in the somewhat re- stricted form presented in Section 2(1) of the Bill. The open conference system, clearly, works. The fact that these cartels have grown and prospered over the last six decades provides powerful evidence that closed conferences are not necessary. Close'd conferences will inevitably restrain com- petition and hinder the innovative progress that has been made in a system of open conferences. We have heard alternative suggestions that confer- ences can be closed, but with the addition of a "Fail-Safe" mechanism in the form of independent action. There is, however, an inherent contradiction in the coupling of closed conferences with the right of independent PAGENO="0196" 190 action. The result could well be the conversion of the con- ference into a multi-pronged fighting ship. We are certain that granting the right of indepen- dent action within a closed conference would lead to attacks by various members of the conference on strong, competitive independents in a sort of search and destroy operation. This could be accomplished by a particular member, or members, making drastic rate cuts on a specific commodity, or group of commodities, that is an important part of the in- dependent's traffic, while other members continued to abide by the existing conference rate. This tactic would divert traffic away from the independent, thus, sooner or later, driving the independent out of the trade. The costs will have been shared by the various conference members, in effect minimizing the losses to the rate-cutting carrier, or carriers, who can then restore the artificially high conference rate to recoup those losses. Existing law gives every carrier the right to join, or withdraw from, a conference; the onus is on the conference to PAGENO="0197" 191 show a potential associate the benefits to be derived from conference membership. Closed conference carriers, if unable to dominate the trade through simple persuasion can, if they have been given the right of independent action, impose their will by invoking this newfound ability "to do their own thing anyhow". Independent action, even within the framework of an open conference, is a dangerous remedy, easily.abused. Re- cently, because of circumstances contrived by members of a con- ference for their own benefit, we have seen the damage that can be done to the ma~ritime industry and, ultimately, the commerce of the United States - all in an 2P!~ conference setting. In the North Atlantic trade inbound from the continent, that con- ference opened a rate war early in February, 1980 by invoking a clause in its conference agreement No. 8210, allowing member lines the right of independent action in an "emergency" (os- tensibly caused by reaction of the conference to the resignation of one of the smallest of its member lines), The resigning mem- ber did not move an overwhelming amount of freight in this trade and the trade was stable. We believe the so-called "emergency" was a disguised tactic really aimed at the ultimate destruction of ourselves - a tactic which quickly deteriorated PAGENO="0198" 192 into the most serious North Atlantic rate war we have wit- nessed in years. In respect of independent action, Agreement No. 8210 is a legal monstrosity. It permitsmenber lines to constitute themselves as an emergency rate committee and to supervise the supposedly "in-dependent" action they take as individual limes. Rates may then be dropped by any "in- dependent" member on virtually zero notice. Conference lines, in other words, have it both ways. If the concept of independent action is to be con- sidered at all, safeguards must be in place to protect the shipper and the independent carrier from the ravages of in- dependently taken predatory rates. A requirement, for instance, that the independently acting conference carrier file with the FMC a tariff notification of each proposed in- dependent action on a prescribed period of advance notice, such as 60 or 90 days. PAGENO="0199" 193 SHIPPERS' COUNCIL We do not accept the necessity of shipper's councils for successful communication of attitude between shippers and carriers. We enjoy what we consider very satisfactory commun- ication with our shippers, both large and small. The justification for the formation of such councils ranges from dissatisfaction with service and lack of flexi- bility in rates - particularly on the down side - to the ex- pressed belief that "we have to fight power with power". The sad fact is that a shippers' council is an idea based on wh~t shippers see as a lack of responsiveness to some very real needs. It is important to recognize, however, that the heart of the problem stems from rates based on protecting the conference's least efficient members, rather than actual cost. Through free market competition, independent carriers force conference carriers to streamline their operations. As an independent trader, you might wonder why TFL wouldn't support this. move wholeheartedly. After all, wouldn't PAGENO="0200" 194 the diminishment of conference powers create additional busi- ness opportunities for the independent? Possibly. But, we night also see the creation of just another bureaucracy. ANTI-TRUST IMMUNITY AND AGREEMENTS In addition to authorizing closed conferences, H.R. 4374 would amend Section 15 of the Shipping Act detrimentally in other ways. For instance, the words "or to be contrary to the public interest" would be stricken. The public interest statute exists as a ground for disapproval of inter-carrier agreements. This change appears to have been inspired by reaction to the Supreme Court's so-call SVENSKA test for disapproval of agreements. The ruling is directed to those who would propose an agreement to the FMC, the terms of which would amount to a se violation of the Anti-Trust laws. In the absence of FMC approval of the agreement, under the SVENSKA standard, proponents would have to make an affirmative showing that the agreement secures important public PAGENO="0201" 195 benefits, furthers some valid regulatory purpose or serves some serious transportation need. The court has held that once an anti-trust violation was established "this alone will normally constitute substantial evidence that the agreement is `contrary to public interest', unless other evidence in the record fairly detracts from the weight of this factor." The Subcommittee's intent in striking this lan- guage is not clear. Even before the public interest lan- guage was added to the Shipping Act in 1961, agreements were frequently examined by the FMC's statutory predecessor with a view toward the perceived benefit of competition. Therefore, striking the text of the 1961 edition would not mitigate the requirement to preserve the benefit of compe- tition factor when considering a Section 15 case. If all that is intended here is an over-ruling of the SVENSKA burden of proof rule, that intention would be consistent with, and would not disregard, past history, There should, however, be something in the statute itself to make the intent clear. PAGENO="0202" 196 This is a matter of some considerable importance. Language should not be left so that deletion of the public interest statement could be taken to mean its converse: that an agreement can be approved even if it is demonstrably con- tr~ry tothe public interest! LIMITS ON COMMISSION PROCEEDINGS While we favor streamlining FMC procedures - Jus- tice delayed can be justice denied - we are concerned that H.R. 4374 is too severe in this regard. Section 2(6) of the Bill restricts the class of those who can oppose an agreement to carriers, shippers, ports or other personssubject to the Act. While complain- ants, in practice, consist mostly of those specified, the public at large has an interest deserving of protection. We support the description of complainants as "any person", as they are in existing law. Those who would want to officially oppose agreements, under this Bill, must be alert and move with remarkable speed. PAGENO="0203" 197 The time limit is "no later than 20 calendar days after an agreement is filed with the Commission." Perhaps the time should be a fixed period of days after the commission has given public, notice of the filing - in the Federal Register, for example. Even if a complainant is able to file a protest on time, he is still saddled with a burden of proof, which, how- ever properly it might rest on him by the end of the case, should not be his responsibility so early in the proceeding. Under this Bill, he must show the FMC "the reasonable pro- ability that the agreement is in violation of this Act," be- cause that is the finding the Commission must make before it can go further. We must emphasize that the hearing and approval or disapproval of Section 15 agreements is an area of great im- portance to the maintenance of effective competition in the shipping industry. The Bill puts time limits on FMC pro- ceedings and restrictions on those who can utilize them. We fear the possibility of bad agreements receiving approval and, therefore, anti-trust immunity by default be- PAGENO="0204" 198 cause of inadequate tine for neaningful FMC consideration. Rubber-stamp approvals could be worse than no approval mechanism at all. Ideally we would like to have these limits made more realistic. If they are to stay, we sug- gest an amelioration of their potentially harmful effects. If there are to be rigid limits on complainants about agreements or the times within which the FMC must hold hearings and issue decisions, then an explanatory statement from the proponents of the agreement, filed with the agreement itself, is urgently needed. This statement should provide all relevant and significant information about the agreement; its purpose; its intent and an explan- ation of its provisionS. The FMC must have this information in any case and should have it from the outset to act within tight decision deadlines. This requirement will not shift the burden of proof - - complainants must still prove violations which they allege constitute grounds for disapproval. PAGENO="0205" 199 TART FFS We strongly support the tariff filing and anti- rebating provisions of the existing law. Tariffs bring order to an industry which can use it. They are essen- tial to open and fair competition. Present requirements do not hamper the flexibility of any efficient or honest operation. Presently, certain vessel operators receive and deliver across boundaries of the United States cargo *which originates at or is destined to points within the United States. Because vf this strategy, these carriers are not regulated by the Shipping Act and other U.S. laws. They need not file rates with the FMC or any other U.S. govern- mental authority although they are directly engaged in the foreign commerce of the United States - their operations im- pact directly on this country's economy and compete for the same cargo as United States port carriers. We would, therefore, favor broadening the definition of "common carrier by water in foreign commerce" to embrace that which is currently under consideration in the Senate: PAGENO="0206" 200 "Common carrier by water in foreign commerce means a common carrier by water between the United States or any of its territories or possess- ions and a foreign country, whether engaged in the import or export trade, and whether or not its ser- vice operates through or originates or terminates at ports of the United States or its territories or possess- ions." Through public tariff filings American port carriers are knowledgeable as to the rates filed by compe- titors. This is not the case with border-crossing carriers in dealing with U.S. carriers or shippers. The system in- vites discrimination, rebates and other malpractices. It constitutes unfair competition, with negative effect upon the commerce of the United States, and should be eliminated. CIVIL PENALITIES Over recent years various violations of the Shipping Act, originally enacted as criminal violations punishable by fine or imprisonment, have been converted into civil violations punishable by civil penalty. The FMC has been empowered to prosecute the alleged violation, to assess a penalty and then collect it - in effect, becoming prosecutor, judge and jury. PAGENO="0207" 201 H.R. 4373 extends this trend to additional sections of the ShippingAct and re-writes Section 32 into catch-all pro- visions for violations not already provided for. The new Section 32 substitutes civil penalities of not less than $5,000, nor more than $25,000, to be determined by the FMC in an in- dividual case. The existing Section 32 distinguishes between a vio- lation of the statute and a violation of an FMC regulation. It sets a maximum civil penalty of $5,000 for the former but a civil penalty in a maximun of only $1,000 for violation of an FMC regulation. The new Section 32 treats the two kinds of violations the sa'me. The FMC might treat then differently, but new Section 32 does not have any such directions to the FMC if it so intends. The new powers to be delegated to the Commission, as well as those already conferred, are sufficiently broad and sweeping to require an accompanying reservation of the right to judicial review. The scope of such review should be de- fined and not left tobe developed in case-by-case proceedings. PAGENO="0208" 202 In any case, we think present criminal sanctions should be left with the judicial process, particularly those of Section 14 where the offenses are especially odious. We will close our testimony with a simple admon- ition: The independent carrier in ocean commerce keeps the conference carrier honest and his rates realistic. We pro- vide the balance and the impetus for competition. We im- plore your wisdom in determining our future - and the future of competition in the maritime industry of the United States. Preserve anti-trust principles, or at least write, in some guarantee that the independent can continue with its compe- titive role. Ren~ove the right of mandatory independent action. Do not authorize closed conferences. Preserve the adversary' role of the Department of Justice. Let me thank you once more for the courtesy of allow- ing me to present the views of Trans Freight Lines with respect to proposed legislation. I sincerely hope our testimony has served to underscore the realities of our international industry. If you require additional input from our group, we will be happy to provide an officer of the company to appear personally before you. PAGENO="0209" 203 Mr. BIAGGI. At this time, I would like to direct the members' at- tention to the October 1981, issue of the U.S. Naval Institute Pro- ceedings. This is a special issue devoted to our merchant marine and it is worth reviewing. I would only quote the cover page: "The present tragic condition of our merchant marine is self-inflicted, caused primarily by Americans, not by forces outside our shores." I hope these hearings will assist in reversing this tragedy. We will have a recess to vote. [Brief recess.] Mr. BIAGGI. William St. John, Jr., chairman, FMC/ICC commit- tee, and vice president, National Customs Brokers & Freight For- warders Association of America. STATEMENT OF WILLIAM ST. JOHN, JR., CHAIRMAN, FMC/ICC COMMITTEE, AND VICE PRESIDENT, NATIONAL CUSTOMS BRO- KERS AND FREIGHT FORWARDERS ASSOCIATION OF AMERICA, ACCOMPANIED BY GERALD H. ULLMAN, GENERAL COUNSEL, NATIONAL CUSTOMS BROKERS & FREIGHT FORWARDERS AS- SOCIATION OF AMERICA; AND MORRIS V. ROSENBLOOM, DI- RECTOR, WASHINGTON OFFICE, NATIONAL CUSTOMS BROKERS & FREIGHT FORWARDERS ASSOCIATION OF AMERICA Mr. ST. JOHN. Mr. Chairman and members of the subcommittee, my name is William St. John, Jr. I serve as chairman of the FMC/ ICC committee of the National Customs Brokers & Forwarders As- sociation of America, Inc. I am senior vice president of the forward- ing firm of W. R. Zanes & Co of Louisiana. We would appreciate the inclusion of our written statement into the record. Mr. BIAGGI. Your written statement in its entirety will be includ- ed in the record. [The following was received for the record:] 9'4-856 0 - 82 - PAGENO="0210" 204 PREPARED STATEMENT OF WILLIAM ST. JOHN, JR., CHAIRMAN, FMC/ICC COMMITTEE, AND VICE PRESIDENT, NATIONAL CUSTOMS BROKERS & FORWARDERS ASSOCIATION OF AMERICA, INC. Mr. Chairman and members of the Subcommittee, my name / is William St. John. I am Chairman of the FMC/ICC Committee of the National Customs Brokers & Forwarders Association of America, Inc., and President of my own forwarding firm, W.R. Zanes & Co. (LA), Inc. in New Orleans. I am accompanied by our General Counsel, Gerald H. Ullman. Our Association has approximately 350 firms in the United States licensed as ocean freight forwarders and/or customs brokers. Affiliated with us are 24 regional forwarder/broker associations doing business in every major U.S. port. The combined membership of the Association and the locals handles the vast majority of general cargo exported from the U.S. via common carriers by water. We speak today to the provisions of H.R. 4374 dealing with ocean freight forwarders. PAGENO="0211" 205 1. The Industry's Problems in the Past TO put our testimony in perspective, a brief review of the forwarder situation prior to 1961 would be helpful. Start- ing in the rnid-l950's our industry was investigated by the 1/ General Accounting Office , the FMC's predecessor and by the Merchant Marine Subcommittees of the House and Senate . The congressional attention was the result of a lengthy investiga- tion of ocean forwarders by a Special Subcommittee of the House Merchant Marine committee which issued a 56-page report in 1956 4/ finding many irregularities and maipractices. A major recommendation was that "an appropriate bill be introduced to provide for the licensing of foreign freight forwarders". P. 56. The reasons for this recommendation are briefly set forth below. A. The Dummy Forwarder The dummy forwarder was a firm established by an exporter under another name for the purpose of illegally col- lecting a brokerage commission from a steamship line. This 1/ Report of Investigation of the Use of Private Export Freight Forwarders, etc., Report No. 1-18522, March, 1955. 2/ Freight Forwarder Investigation - Etc., 6 F.M.B. 327 3/ H. Rept. 978, 86th cong., 1st Sess. (1959); 5. Rept. 1682, 86th cong., 2nd Sess. (1960); 5. Rept. 691, 87th cong., 1st Sess. (1961); H. Rept. 1096, 87th cong., 1st Sess. (1961) 4/ House Rept. 2939, 84th cong., 2nd Sess. (1956). PAGENO="0212" 206 practice was a rebate violation of §16, Shipping Act, 1916. The Special Subcommittee noted that if this practice redounds to the benefit of the shipper, it is one which offends the rebating pro- visions of existing law, and tends to discredit the business of forwarding on a full time legitimate basis" .-~J The dummy forwarder placed honest exporters at a com- petitive disadvantage, it mulcted steamship lines out of sub- stantial revenue and cast the forwarder industry in disrepute for malpractices they did not commit. B. Incompetents in ForWard~ Under the system of regulation prior to 1961, the FMC's predecessor lacked statutory authority to prevent forwarding by incompetent persons. Exporters and ocean carriers suffered thereby. Documentation was improperly prepared, tariffs were misread, shipments were improperly routed and merchandise was confiscated at destination for failure to comply with import requirements. C. Unearned Brokerage In the past some shippers would designate a forwarder to receive brokerage payment from the steamship lines even though little or no work was done. One of the reasons, as the 5/ Ibid, p. 55. PAGENO="0213" 207 GAO report indicated, was that there was "reason to believe that some forwarders make secret kickbacks to officers of the corporation which designate them". P. 43. ID. Lack of Financial Responsibi1i~y Prior to 1961, there was no requirement that a forwarder make any showing that he had the necessary working capital to operate a business. Thus, fly-by-night operators could offer forwarding services, go bankrupt, leaving the exporter with a loss of freight moneys given to the forwarder for transmittal to the carrier. E. Forwarding by Undesirable Persons There being no requirement prior to 1961 in the law that a forwarder need be a person of good moral character, anybody could enter the business with the regulatory agency unable to remove them even when such persons committed serious cr inca. 2. Sponsorship of Licensing Law By Forwarders As a result of the maipractices disclosed in the vari- ous investigations, the organized forwarding industry itself determined to clean house by sponsoring a bill with a two-fold purpose. By requiring that the forwarder be "independent", shipper-connected firms receiving indirect rebates through PAGENO="0214" 208 brokerage payments to a dummy forwarder would be eradicated. Requiring a forwarder to be licensed upon a showing of being "able" to render forwarding services weeded out incompetents. The provision that a forwarder must book or secure the cargo, or arrange for its space and perforn two additional services eliminated unearned brokerage. A bond in the amount to be fixed by the FMC guaranteed that an applicant for a license was able to persuade a surety company that it possessed adequate working capital to operate. Finally, in mandating that a forwarder be "fit", licensees would have to be persons of good moral character. In .1961 P.L. 87-254 was passed incorporating these salutary provisions. 3. Beneficial Results of a Licensing Law The experience since then has been gratifying. The exporting public is assured that the forwarder-licensee is qualified, of good character, financially sound, and free of shipper connections. Forwarders have achieved a professional status and have made a substantial contribution to our export commerce. Relationships with the steamship industry have been excellent. Brokerage paid to forwarders is earned and we are not aware of any complaints in the last twenty years by carriers. The FMC describes our industry as an "integral part' of the PAGENO="0215" 209 commerce of the United States. The Senate Commerce Committee has called us `a highly important segment of the economy of 7/ the United States." 4. Negative Implications of H.R. 4374 This bill, if passed in its present form, will result in disastrous changes in our industry. As the attached article from Westetn Grower and Shipper establishes, the forwarder is "the architect of transport." By eliminating licensing, a body of professional forwarders skilled in their trade will disappear. We will necessarily return to the days when anybody could hold himself out as a forwarder and handle ship-. ments without any technical competence. By deleting the current prohibition against a shipper connection in the definition of ocean freight forwarder (p.2, line 19), the dummy forwarder will soon reappear. It is only a matter of time before unscrupulous shippers seeking to increase their revenue will form forwarding firms and thus obtain illegal rebates. The reference to "compensation" on page 10, line 1 of the bill is unclear and may result in grave consequences to forwarders. A forwarder receives revenue for his services from 6/ Freight Forwarder Investigation - Etc., ~ p. 334 7/ 5. Rept. 691, ~ p. 3 PAGENO="0216" 210 two sources - a forwarding fee from his principal, either the exporter or the consignee, and a brokerage commission, usually a percentage of the ocean freight charges, from the vessel operator. In the 1961 forwarder law, the latter revenue was referred to as compensation." The provisions in the bill that "no compensation shall be paid for ocean freight forwarding services..." is unclear. If the word "compensation" is construed to refer ~ to the forwarding fee received by the forwarder from his principal, the bill could be interpreted to mean that the compensation provisions of the current law (~44(e)) which permit an ocean carrier to pay brokerage to a forwarder have been repealed and such payment would, therefore, be unauthorized. The loss of this revenue from steamship lines would be catastrophic. Depending upon the port, brokerage from carriers represents twenty-five to fifty percent of a forwarder's revenue. Obviously, the sudden elimination of such revenue would wreak havoc on the forwarding industry. The bill should make it clear beyond argument, that the payment of brokerage, a 100 year practice, is not being eliminated. The provision in §5 for a bond approved of no less than $50,000 or no greater than $100,000 will be catastrophic. PAGENO="0217" 211 Surety companies usually require a showing of net assets of at least two times the amount of the bond. This would mean that a forwarder would have to have assets of $100,000 to $200,000 before he could obtain a bond. We state as emphatically as we can that a bond amount in this range will eliminate the great majority of small forwarders, employing 25 people or less, who are the bulwark of the industry and many medium sized firms as well. Entry into forwarding by young and able persons would be virtually impossthle. Only people with substantial wealth could become forwarders. This is not deregulation but more severe regulation that will decimate our industry. If the purpose of a bond is thought to be to indemnify exporters or carriers in the event of a default by a fprwarder, the bond amount would have to be many times the amount in the bill. We believe - as did Congress in 1961 - that the purpose of a bond is to establish in the first instance that one who seeks a license as a forwarder has adequate working capital. The bond amount in H.R. 4374 seems intended as an indemnity to make persons whole in the event of a forwarder default. Exporters have no such protection when a steamship line or others who render services go bankrupt. If we total up the amount of defaults in the last year or two by steamship lines, they would far exceed the total defaults by forwarders in the last twenty years. PAGENO="0218" 212 Fixing the amount of the bond should be left to the expertise of the FMC. Under the new regulations that became effective on October 1, 1981 (46 CFR Part 510) the bond is $30,000 with $10,000 added for each unincorporated branch office. This provision offers a reasonable measure of protection to our exporting public while at the same time makes it possible for smaller forwarders to continue and new applicants to enter the industry. 5. The Support for Forwarder Position In the testimony concerning the forwarder provisions of S.l593, Senator Slade Gordon's bill, strong support for the forwarder position has been forthcoming. Chairman Green of the FMC has noted that section 44 of the Shipping Act was enacted in response to widespread abuses, that the statutory scheme has been successful and that the licensing requirement permits the Commission to eliminate unscrupulous operators. The FMC, therefore, recommended the continuation of the present system. Concerning S .1593 `s requirement of $150,000 bond, Chairman Green stated that it would be a more formidable barrier to entry into forwarder than licensing and he eatimates that one third to one half of current licensees would be eliminated. The Chairman also stated that the removal PAGENO="0219" 213 of licensing would attract incompetent and unscrupulous persons and would detract from a favorable export climate for shippers. The National Maritime Council questions the wisdom of removing the current licensing requirements. So, too, does the Traffic Board of the North Atlantic Ports Association. CENSA has noted that the repeal of the current provisions would present serious practical problems for the carriers. Without licensing there is simply no way that carriers can check on the integrity and ability of the forwarders who will spring up during the daily processing of thousands of bills of lading." CENSA states further that "there is no realistic basis for expecting carriers to determine the existence or non-existence of a beneficial relationship considering the magnitude of shipments that must be handled daily." The result will be "a progressive increase in maipractices which will be difficult, if not impossible, for individual carriers or others to control" with de-licensing leading to "the undermining of the ocean freight forwarding industry to the serious detriment of the ocean carriers and commerce." CASO, representing U.S. flag carriers, likewise agrees that the current law should be retained. PAGENO="0220" 214 6. Proposed Amendments to the Bill We are respectfully attaching hereto suggested changes in H.R. 4374 beneficial to all segments of our export trade. Briefly, these changesare as follows: The term `ocean freight forwarder" is defined in section 1 to prevent the resurgence of the dummy forwarder. There is simply no other way to deal with the problem except to 8/ prohibit a forwarder from having a shipper connection. §5, as re-drafted, retains the licensing of forwarders. Twenty years of experience has conclusively shown that licensing does not curtail entry and has provided exporters, particularly the smaller ones, and ocean carriers with a professional body skilled in the trade, financially responsible and morally fit. Our export commerce can hardly be enhanced by allowing the vital function of forwarding to be performed and the handling of millions of dollars of exporter moneys by an incompetent or a convicted felon. The ~ecific~±on of $50,000 or $100,000 for a bond had been eliminated since it would, as stated above, virtually destroy the industry as we know it today. We cannot believe that the sponsors of this bill wish to see our shipping public served 8/ In this connection, we suggest that the Subcommittee report make it clear that upon enactment the provisions of §1607 of the Omnibus Budget Reconciliation Act of 1981 allow ing~ a .forwarder to have an exporter affiliate are being replaced. PAGENO="0221" 215 by only a handful of forwarders wealthy enough to meet this requirement. The alternative for a forwarder is to seek financing from undesirable sources, hardly a result that the Subcommittee should encourage. The provision for compensation of forwarders by carriers in §5 has been changed to make it clear that the traditional compensation payment by carriers to forwarders for services rendered is not being eliminated. Also, the services meriting such payment have been specified to avoid conflicts between the parties involved. The phrases in the current law of `book or secure the cargo" or `arrange for space" are retained, since they are well known and would not require interpretation and would continue the amicable relationship between forwarders and carriers exicting for two decades. 7. Conclusion The current forwarder provisions of the Shipping Act, 1916, having worked well for twenty years, should not be abandoned. We believe that other segments of the shipping industry will confirm our view. A good law being the books, why change it? We appreciate the opportunity given to us to present our views and we are, of course, pleased to respond to any questions you nay have. Thank you. PAGENO="0222" 216 Proposed Revisions of Ocean Freight Forwarder Provisions of H.R. 4374 Sec. 1. Page 2, line 19 et seq. should read: * * * The term "ocean freight forwarder" means a person in the United States who- (a) dispatches shipments via a common carrier by water; (b) processes the documentation or performs related activities incident to such shipments; and (c) is not a shipper or consignee of shipments from the United States, has no beneficial interest therein, and does not, directly or indirectly, control or is not controlled by any shipper, consignee or any person having a benefical interest in the shipment. * * * Sec. 5. Section 44 of the Shipping Act, 1916 (75 Stat. 522), as amended (46 U.S.C. 841 b), is amended to read as follows: NO person shall act as an ocean freight forwarder unless licensed by the Commission. A license shall be issued to any person found by the Commission to be qualified by experience and character to render forwarding services. A person whose primary business is the sale of merchandise may forward shipments of such merchandise for his own account without a license. (b) No person shall be licensed as an ocean freight PAGENO="0223" 217 forwarder unless he has furnished a bond approved by the Commission that is issued by a surety company acceptable to the United States Treasury Department in such form and amount as in the opinion of the commission will establish financial responsi- bility and the supply of services to exporters in accordance with contracts, agreements, and arrangements theref or. (c) A license may, after notice and hearing, be suspended or revoked by the Commission for willful failure to comply with any provisions of this Act or any rule or regulation promulgated thereunder. All licenses issued prior to the effective date of this title shall be deemed issued under this title. (d) An ocean common carrier shall compensate an ocean freight forwarder in connection with any shipment dispatched on behalf of others only when the ocean freight forwarder has certified in writing to the carrier that it has performed the following services: (A) booked or secured the cargo- for the vessel or arranged or confirmed the availability of space, and (B) prepared and processed the ocean bill of lading, the dock receipt, or other similar documents with respect to such cargo. PAGENO="0224" 218 The Role of the International Freight Forwarder The 1980s are destined to be remembered as the decade of export awareness. Now more than ever, small to niedium sized agricul- tural organizations are realizing the need to export in order to increase profits and help eliminate a S43 billion trade deficit. Although California grown fruits and vegetables are considered by many to be the best in the world, only a small minority of produce growers/shippers are active in the international export arena. Perhaps this is because they believe exporting is complex and requires a major investment in personnel to manage international collection, insurance, export packing and international transportation and documentation. The international freight for- warder, however, plays a vital role in providing the exporter with services f~j~st these exp~rt requirements. . the best medium for collection ar- Take, for example, a produce shipper rangements? Is there a foreign cx- who receives an overseas inquiry change branch at the country of from a Hong Kong buyer. destination?. Before he (the exporter) can make The exporter must inquire about a quotation on selling his product to the cost from his warehouse ~ the this potential client, he must evaluate on-carrier. In other words, what are a number of factors, including the costs of inland transportation numerous varients in transportation from his facilities to the city of costs. He must decide on the mode of export, and what method (truck, transportation, insurance, packing, rail) is he going to use? Should his and how he is going to collect his bill. international shipment be effected He must find out such things as what by ocean or by air? Will it be neces- duties apply to his commodity at the sary to consolidate his shipment? country of destination as opposed to And how will he prepare and process those of his competitor (eg: Mexico the required. shipping documents? or Brazil). lnsurance is another key factor Additionally the exporter must Will this be for the account of the investigate the inspection certificate . seller (CIF) or for the buyer (CNF)? requirements or perhaps even import If the sale is based on a CIF quota- restrictions. tion, what extent of coverage should The exporter must determine how be selected? Finally, once this ship- he will handle the banking. Who is meet arrives st the country of des- 6 WESTERN GROWER a.ssd SHIPPER PAGENO="0225" 219 "The international freight !orwarder has often been re!erred to as the `architect ol transport.'" tination, how will the customs clear- mon carrier) services or are utilizing anceandinlandtransportationtothe the NVOCC in order to provide customer be arrasged? better ocean freight rates to the At highlighted above, planning for exporter. The NVOCC program con- export transaction encompasses a solidates less-than-container-load multitude of considerations. ~ cargo and combines it with other than inventing in an extensive export cargo to earn a volume discount from staff, many seasoned as well as firsi~ the steamship company. time exporters turn to the inter- Air freight has become important national freight forwarder for jiiid- in international commerce and its use ance and attention to these vaiiOiis is widespread among produce cx- porters. Safe and efficient handling Thc,freieht forwarder has often- can only be achieved through skilled times been referred to as the "i~~rt manpower. The air freight forwarder traffic department of the ~ and International Air Transport as the "answer man," and isfile Association (IATA) air cargo agent. "architect of transport" ~ who are familiar with basic cargo viable tool available for the centrali- handling and processing, provide zatiot_on of export arrangements. similar services to those of the ocean It is advisable fist tsi"~porser NVOCC forwarder. consult with his freight forwarder The air freight forwarder, often during the initial planning stages. referred to as a consolidator, is The forwarder can be of tremendous specialized in his field and performs assistance in determining the proper the services in connection with air terms of sale, be it Ex (point of cargo torwarding. 1-Ic will monitor origin), f.o.b. (free on board). CNF the cargo movements includingtrans- (cost and freight) point of destina- shipment and oncarriage sip to final tion. CIF (cost, insurance, freight) delivery. He is also responsible for point of destination, containerization and consolidation. Still, it is suggested that the cx- The air cargo agent who requires porter fully understand these trade special registration with JATA is an terms by obtaining a copy of the 1941 air freight forwarder that acts as an revised American Foreign Trade agent on behalf of individual IATA Definitions available from inter- member airlines.. national freight forwarders and The frei~eiehs forwarder, both ocean international banking divisions, and air, can be considered onhdftllk The Federal Maritime Commis- most valuable tools wrthtntheeiport sion (FMC) licensed freight for- arena. The fsrwiiiler p~e~/ares, warder provides services, the most ~ and processes the numerous frequent being the coordination of documents that may be required. cost effective and efficient transpor- These include - but are not limited tatios arrangements. lie determines to - the required export declaration the bent routing to provide minimum certificates, ocean bills of lading, air transit time at minimal cost. He will waybills. certificates of origin. san)- arrange inland transportation from tary certificates, inspection certifi- the exporter's facilities to the port of rates, foreign documentation, foreign exit. The ocean forwarder arranges customs invoices, and advice notices for the booking of freight with any of shipments for banks. steamship company operating in the Banking and international collec- world be it by charter, by conference tions oftentimes cause much con- or non-conference line, fusion and thus can nerve as barriers In today's transportation industry, to the first-time exporter. Thin need containerization services are be- not be the case when the exporter coming more prevalent. Oceanfreight realizes that his freight forwarder can forwarders are either offering be of tremendous assistance: Where NVOCC (non vessel operating com- letters of credit or drafts are involved, SEPTEMSET1, 1981 the forwarder will make certain that all terms and conditions covering dispatch. documents and collection conditions are complied with, includ- ing the transmission of drafts and documents to the bank and/or prin- cipals involved. Although accidents are not rilanned. they sometimes do haptien. Thus the freight forwarder is e~uipped to provide insuranca infor- mation, and in many cases. provide the insurance coverage. In the event of an accident or loss, the exporter will be adequately covered. Finally. tjse international freight forwarder's responsibility e~cteeds even beyond the above iiifini8 service .,. it extends to theThdftot destination in arranging for unload- ing. customs clearance and. where requested. delivery to the ultimate consignee by means of surface trans- portation. The provision for these services are made possible via ar- rangements with overseas agents or foreign subsidiaries. Theagentsystern is comprised of agreements between the U.S. freight forwarder and an overseas freight forwarder!csstonts house broker (an organization re- sponsible for import arrangements). This system allows for a worldwide communications network which maintains continuous control of cargo until its arrival at the destina- tion. The freight forwarder is an expert in l~7)~ld. He takii~dijui8Thi t~,,~,p,orter through the vaT~i~u~ facets of the total export process~ inland transportation, air and oceais arrangements, consolidation and containerizationu, documentation, banking, insurance, and finally, import arrangements via communi- cations with art overseas agent or foreign subsidiary. He is truly the rigl~arm of the exporter. The titter- national freight fdf~ifdTF~hri eli- minate the d&nplexit~i'oftis'isso ~T~sed withi8i~8iaii~nal trade, as he provides the exporter with acoiisplete service package. 5558 7 9~s-856 0 - 82 - 15 PAGENO="0226" 220 Mr. ST. JOHN. I am accompanied by our counsel, Gerald H. Uliman, and Morris V. Rosenbloom. We speak today to the provisions of H.R. 4374, dealing with ocean freight forwarders. Our members as well as those of the 24 affiliated regional forwarder/broker associations in all major ports handle the vast bulk of general cargo exported from the United States via common carriers by water. Ocean forwarders perform the vital service of coordinating the shipment to the pier, prepar- ing required shipping documents, arranging for vessel space and a host of other highly technical activities necessary to effect an ex- portation. In his September 21, 1981, testimony before the Senate Subcom- mittee on Merchant Marine, Chairman Green of the FMC noted that the regulatory scheme for forwarders was established in re- sponse to widespread abuses in the freight forwarder industry, that the law has proven successful in correcting these abuses, and that regulation has not imposed an unnecessary burden on the forward- ing industry. We concur with the views of Chairman Green that the law has worked well. Prior to 1961, as several official investigations showed, the industry was plagued with the dummy forwarder set up by unscrupulous exporters to obtain illegal rebates, incimpe- tents, forwarders who received brokerage from shipping lines but performed little or no service, fly-by-night operators with no finan- cial responsibility and persons lacking moral character. Due to the efforts of our industry, Congress, after careful study for several years, passed Public Law 87-154 in 1961 providing for the licensing of forwarders, their bonding and the services required to earn brokerage from steamship lines. As Chairman Green noted, the law has been successful and the abuses which plagued all seg- ments of our shipping public were eliminated. Other segments of the ocean carrier industry have supported our position. In testimony before the Senate Subcommittee on 5. 1597 CENSA has outlined the "serious practical problems for the carri- ers" if the current law is changed. CASO favors the continuation of the present provisions on forwarders. So, too, has the National Maritime Council and the North Atlantic Ports Association. The proposed new section 44(b) will cause a grave disruption in the current amicable relationship that has existed between for- warders and ocean carriers since the passage of the 1961 law. That statute made it clear that forwarders could be compensated by carriers for specific services of value rendered. Section 44(b) leaves the matter in limbo. It authorizes compensation to forward- ers "for ocean freight forwarding services" but is not specific as to whether this phrase refers only to fees paid exporters to forward- ers, or includes the traditional compensation, historically known as brokerage, paid by carriers to forwarders. If the intent of this provision is to eliminate brokerage, the result is a loss to forwarders of 25 to 50 percent of their gross rev- enues. This would be a mortal blow. No business can withstand the sudden loss of this amount of its income. Brokerage has been paid for at least 100 years. We see no good reason why it should be dis- continued-as section 44(b) could be construed to accomplish. PAGENO="0227" 221 Assuming compensation by carriers to forwarders is authorized under section 44(b), there is no provision as to the services that a forwarder need render to justify a payment by a carrier. Without the kind of specific language as is contained in the current law, we fear that the present amicable relationship between forwarders and carriers will disappear and arguments will result on the issue as to whether brokerage to a forwarder is merited. H.R. 4374 if passed will result in disasterous changes. With deli- censing, all of the former malpractices will assuredly reappear and a professional body of forwarders will be dissipated. Traditional compensation by carriers to forwarders will be jeop- ardized. The statutorily fixed $50,000 to $100,000 bond will be cata- strophic since it will eliminate the great majority of small forward- ers, employing 25 people or less, and many medium-sized firms as well. We have proposed amendments to the bill in our written state- ment. Our suggestions will preserve the benefits of the current law to our shipping public and will save many forwarders from extinc- tion. The current law has worked well for 20 years. We urge the subcommittee not to abandon its basic provisions. Thank you. Mr. BIAGGI. Thank you, Mr. St. John. Let me clear up one or two things. With respect to your statement, the statutorily fixed $150,000 bond, that is in the Senate bill. Mr. ST. JOHN. It is $50,000 to $100,000 in this bill. Mr. BIAGGI. We do not see such a radical change. Where the cur- rent situation is $30,000 plus $10,000 for each additional office. So it should not impose such a burden on the smaller offices. As far as the section 44(b) is concerned, your point is well made. We will clear it up. Mr. ST. JoHN. Can I comment on the bond provisions? Mr. BIAGGI. Sure. Mr. ST. JOHN. It is true that there is not a great difference be- tween the $30,000 bond required now and the $50,000 bond. The reason why we consider that it would create hardship on the small forwarder and also on forwarders who are attempting to become es- tablished in the business, is that any new blood coming in would have to then generate roughly an additional $40,000 of liquid assets in order to receive a bond of roughly $50,000, compared to $30,000, and someone starting a business, a young person that has been in the forwarding business, would have difficulty doing that. That would mean he would require roughly $100,000 of liquid assets to go into the forwarding business, whereas, now, it requires roughly $60,000. Mr. BIAGGI. Are you representing prospective forwarders or rep- resenting the present forwarders? I think they would be inclined to keep the others out. Mr. ST. JOHN. No. We believe they should have the ability to enter the field. We are not intested in restricting entry into the field. Mr. BIAGGI. How do you respond to the notion that by raising it to $50,000 you make them more responsible? PAGENO="0228" 222 Mr. ST. JOHN. The original legislation was intended to be a bond that would guarantee the shipping public that the licensee had the ability to have-to finance his business as far as his operation is concerned and raising the bond does not necessarily give the ship- per the type of protection that it seems people are looking for; and that is sort of an indemnity against losses and bankruptcies. The amount of funds when there is a bankruptcy runs so far higher than even a $50,000 bond, that to me the difference just does not give the shippers the protection that maybe some people are look- ing for. Mr. BIAGGI. Then you leave us with two ways to go. One, eliminate the bond completely or, two, make it high enough so that it would accommodate that possible eventuality. Mr. ST. JOHN. We believe that not setting an amount of the bond in the legislation is probably the proper direction as far as our in- dustry is concerned. We feel that the FMC, in administering the amount of bond that is required, has taken and made inquiries and have taken a good look at the amount of the bond and have made adjustments through regulation through the years. We think pres- ently the requirement that a $30,000 bond be placed when you enter the industry permits new blood; it permits small operators to operate; and by assessing an additional $10,000 per office, we feel that this is a good arrangement for the additional branch office. We feel this is a good arrangement, because, as someone grows, he has to justify that he is able to support that growth. For example, presently, today, you have some forwarders with maybe 20 offices operating branch operations, and a bond, say, for a forwarder with 20 offices would be rough $220,000. It is above what is suggested by this legislation and to me in that case it is offering the public some protection above what the new legislation would. So our feeling is that the bond should be required and we feel that if an amount is not made, it can be monitored by FMC and they can make adjustments as they are required. Mr. BIAGGI. Well, what would your comment be about various proposals that were offered before the Senate committee? Mr. ST. JOHN. Shipper-related activity? Mr. BIAGGI. Yes. Mr. ST. JOHN. Well, the position of our national association is that we feel the freight forwarder should operate on an independ- ent freight forwarding basis, without shipper-related contact, for many reasons. This type of arrangement, although not exactly what Behring has suggested, but shipper-related to forwarders, cre- ated the problems of the dummy forwarder treated in the 1961 leg- islation. I believe that firms such as Behring and Trans-Freight are very responsible firms. I am not saying there would be problems created with those firms, but I believe controlling the certification is a problem, being able to determine whether or not a forwarder is claiming brokerage on activities of a related company, would be a problem for the steamship interests. They have testified so in the Senate testimony. Mr. BIAGGI. You made reference to 44(b). I told you we will clear it up. Clearly, we have no intention of cutting out brokers' commis- sions. We have a philosophy up here. We try to pass legislation on PAGENO="0229" 223 a constructive basis without doing too much violence to any compo- nent. The operative word is "too much." What is your response tb the argument that the shipper connec- tion prohibition has inhibited the forwarding industry by limiting access to much-needed sources of capital and management exper- tise? Mr. ST. JOHN. Well, I would disagree with that. I think the growth of many of the forwarding firms that you can look at today-does not seem they were inhibited by that. I think firms such as the larger firms can participate in the growth of American exports because they offer many, many services to the exporter who might not be in a position to provide those. They can presently do purchasing, arrange transportation. Under current regulations, they can even participate by quotation in giving a firm quote to an exporter or manufacturer in putting a package together to trans- port something overseas. Certainly, the only thing that is lacking presently in the services they can provide is the financial arrange- ments. But every other phase can be of assistance to any manufac- turer or any small exporter that would have interest in getting into that market. One other thing about that is that we forwarders are entrusted with considerable confidential business information. When we handle a transaction for an exporter, we know his methods of transportation. We know his customer listing. We know his pricing. To me, that type of information under the present arrangements restricts anyone from diverting that information or using it. Some- one could be in the forwarder business and could take that type of information and convert it to his own advantage. We do not sug- gest that the forwarding industry would go that way in whole, but certainly there might be opportunities there that people would not pass up, and I think it opens the door to some abuse. Mr. BIAGGI. This bill prohibits the payment of compensation by a carrier to a forwarder unless the forwarder certifies there is no beneficial interest in the shipper. Present law requires the same certification. Do you have any reason to believe that this bill's certification will not work as well as the existing certification requirements as an enforcement tool?. Mr. ST. JOHN. Well, presently, the certification that is placed or given to the lines gives information that the ocean carrier can de- termine from his own records. He can determine that the forward- er did prepare the bill of lading; he can determine whether or not the exporter paid the freight, whether the booking was made or the space was secured by the forwarder. So he has the ability within his own operation to make these determinations to verify that the certification is proper. I believe he would have difficulty, as was testified on the Senate bill, in determining whether or not the for- warder or shipper are related. Mr. ULLMAN. May I just add, there is a difference in the certifi- cations, although I think there is some tendency by the supporters of the Behring and Transway positions to make them look as if they are one and the same. The certification that is currently in the law is one to the carriers with respect to specific services ren- dered, and the carrier can check that. PAGENO="0230" 224 The certification that is being suggested, that there is no benefi- cial interest in the shipper, there is no way a carrier can check the corporate structure of forwarders to determine whether somewhere in the corporate chain there is a beneficial interest in the shipper. When they use the word loosely, "certification," I do not think that answers the problem. Mr. BIAGGI. I want to thank you, Mr. St. John, Mr. Rosenbloom, and Mr. Ullman. I do not have any further questions now, but we expect to have some later on. We will send them to you and we would appreciate a response for the record. Mr. ST. JOHN. Thank you, sir. We appreciate the opportunity to appear today. [The following was received for the record:] PAGENO="0231" 225 `~A National Association of National Internatsonal Scope." Customs Brokers &Forwarders Association of America, Inc. ONE WORLD TRADE CENTER . NEW YORK, N.Y. 10048 SoS, 1109 Tokpbo,.e 4320050 January 4, 1982 Mr. Rudy Cassani House Merchant Marine Subcommittee Room 231 House Annex 2 2nd and "0" Street, S.W. Washington, D.C. 20515 Re: H.R. 4374 Dear Mr. Cassani: Pursuant to our conversation I am enclosing herewith a redraft of responses by our Association to Subcommittee questions concerning the above bill. The attachment to our earlier response has been removed and all references thereto have been deleted from the enclosed responses. We welcome the opportunity to meet with you and Admiral Ratti on the forwarder provisions of this bill. Sincerely yours, /&~t~~__ Gerald H. Ullman General Counsel GHU :bdl Enc 1. PAGENO="0232" 226 Ric,c~Cyndy; Gerry; Steve, Gwen; RECORD QUESTIONS TO BE ANSWERED BY THE NATIONAL CUSTOMS BROKERS AND FREIGHT FORWARDERS ASSOCIATION OF AMERICA FOR INCLUSION IN THE RECORD OF THE HEARINGS ON H.R. 4374, MARITIME REGULATORY REFORM LEGISLATION ___________ _____________ 1. Section 44(b) is intended to prohibit the payment of any forwarding fees or brokerage commissions unless the forwarder is bonded and so certifies. There is no intent to change existing relationships and fee systems. Would striking the word `compensation" in section 44 (b) and inserting the words `forwarding fees or brokerage commis- sions" solve your problem? ANSWER: The forwarding industry is gratified to be advised that the proposed section 44(b) is not intended to change existing relationships between forwarders and shippers and carriers. Striking the word "compensation" in section 44(b) and inserting the words "forwarding fees or brokerage commissions", while helpful, would not entirely solve the problem. While the suggested insertion would clarify that the bill does not intend to eliminate the brokerage revenue traditionally received from carriers, in our opinion it is desirable to spell out the services that a forwarder must perform before he has earned brokerage. Otherwise, we could revert to the problem of "unearned brokerage" referred to in our written testimony (pp. 3-4) whereby abuses would arise. As we have indicated (p. 10), to avoid the problems that arose in the past and to prevent exacerbation between carriers and forwarders the services should be specified as we have done in our sug- gested revision of section 5 wherein we propose an amendment to section 44(d) of the current law. Our draft conforms to the brokerage provision of Sen. Gorton's bill and provides assurance to ocean carriers that brokerage has been legitimately earned by forwarders. 2. If we retain the existing provisions of section 44 with respect to licensing, bonding, and procedure, is there anything you feel should be added or deleted, and why? * ANSWER: The current licensing provisions in subparagraphs (a) ,~(b), (c) and (d) of section 44 have worked well and need no basic change. Chairman Green has so testified. If a change PAGENO="0233" 227 is made, in our proposed revision we have suggested a few modifications that we believe have merit. For example, the current law provides for the licensing of a forwarder found by the Commission to be "fit, willing and able'. While this phrase was in vogue years ago in transportation licensing laws, ~the word "willing" seems superfluous, since every applicant for a license is obviously willing and the word "fit" is somewhat amorphous. Our suggestion is that a license be granted upon a finding by the Commission that the applicant is "qualified by experience and character to render forwarding services". We have also suggested a change in section 44(c). Under the language of the current surety bond filed by the forwarder with the FNC, it is not clear whether the proceeds of the bond run in favor of the exporters only or are available to carriers and others suffering a loss by reason of a default by a forwarder. This question has not been resolved either by any FMC ruling or court decision. TO make it clear that the bond is intended for the protection of exporters only (if Congress so.desires) the language in this subparagraph has been changed. 3. What are your views on permitting ocean freight forwarders to trade by forming export trading companies? If this is per- mitted, wouldn't we have to adopt something similar to section 5 of H.R. 4374 with respect to beneficial interests? ANSWER: This question raises the basic issue as to whether a forwarder should be licensed if he has an exporter affiliate. If such an affiliation is deemed desirable, a section similar to section 5 of H.R. 4374 would have to be adopted. The forwarding industry is unqualifiedly opposed to a forwarder-exporter affiliation. This issue has previously been before the Committee. We made it clear then, as we do now, that allowing such relationship is a retrogressive step harmful to all segments of our shipping public. Forwarder-exporter affiliations will result in rebating, the mulcting of carriers of monies they should not have to pay in brokerage and the conferring of an unfair advantage upon the affiliated for- warder over the independent licensee. Ocean carrier representatives, speaking through CENSA and CASO, agree with our position, rejecting the notion that a mere certification by the forwarder that it has no exporter affiliation would solve the enforcement problem. CENSA is entirely correct when it says that such an affilia- tion will result in "progressive increase in malpractices PAGENO="0234" 228 which will be difficult, if not impossible, for individual carriers or others to control'. 4. Why would the unlicensing of the freight forwarding industry lead to the failure of freight forwarding companies? ANSWER: The unlicensing of forwarders would have a catastrophic effect on the industry. As we indicated in our statement, the body of professional forwarders developed over the last twenty years would disappear. Slowly but surely the incompetents, the financially irresponsible and even the criminal element will drag the industry down to its level. For a legitimate forwarder to survive he will have to match the improper practices of the lowest element. The legitimate forwarder simply could not compete and in the end the skilled and responsible forwarder will disappear, all to the great detriment of our export commerce. 5. What do you think of the statement that the opposition to the beneficial interest exclusion (similar to that enacted recently in the Omnibus Budget Reconciliation Act) is solely based on the fear of small freight forwarders of being over- whelmed by bigness rather than the old fear of rebating or discrimination? Please provide us with any other related comments, data, or supporting materials you consider pertinent. ANSWER: We welcome this question since it gives us the opportunity to respond to the many inaccuracies in the testi- mony of the Behring and Transway witnesses which could, if unanswered, result in misleading the Committee into erroneous conclusions. Transway International Corporation has described our Association as "certain individuals representing the interest of small forwarders" in their opposition to the forwarder- exporter affiliation clause. Our Association speaks for approximately 400 licensed forwarders and customs brokers and its 24 local, affiliated associations doing business in every major U.S. port. The combined membership of the two groups handles the vast majority of general cargo exported from the U.S. via common carriers by water. TO say that our Association represents "the interests of small forwarders" is egregiously wrong. There are many small forwarders in our group, but virtually every large forwarder PAGENO="0235" 229 is also a member, including the two largest forwarders, one a public company and the other privately owned. We represent, therefore, a cross section of the industry, large, medium- sized and small. On page 2 of its statement, Transway says that "small forwarders were the unintended beneficiaries of the over- regulation.;of the forwarding industry embodied in the shipper connection prohibition'. On the next page it notes the fact that its forwarding subsidiary, Universal Transcontinental Corporation (UTC) was one of the "primary sponsors" of the legislation enacted in 1961. UTC did take an active role in the passage of the 1961 law. But it is absurd to believe that UTC would have sponsored the law if it was intended primarily to benefit small forwarders only. The prohibition against shipper connections favored all forwarders, since it eliminated the "dummy forwarder" problem which had plagued the industry, including UTC. This ban in the industry-sponsored bill was instrumental in persuading this Committee in 1961 to legalize brokerage by carriers to forwarders, much to UTC's benefit. On page 4 of its statement Transway says that the current law prevents a forwarder from shipping its own property, ~u~h as household or office furniture, in the foreign commerce of the United States. This is incorrect. The FMCstaff informal- ly ruled years ago that the prohibition against a shipper connection did not apply when a forwarder exports proprietary cargo intended for its own use. Transway contends that the major effect of the prohibi- tion against shipper connection was to protect the small, family owned forwarders from competition by multi-business organizations, thus prohibiting a freight forwarder from being part of a diversified business entity. (p.6) We see nothing wrong in protecting the small forwarder, but again, this statement has no basis in fact. A forwarder is entirely free to be part of a diversified business entity. Transway is a good example. On page 2, it indicates that amongst its operations are freight forwarding, marine transportation, truck trailer and manufactur- ing and the marketing, distribution and transportation of liq.uified petroleum gas. Transway is a giant in its field and is not prohibited from diversifying. It can engage in any business activity it wishes, except one, exporting. PAGENO="0236" 230 On page 7 Transway states that "Small, marginally financed forwarders can no longer adequately supply the type and quality of services required by today's shippers'. This would indeed be surprising to the many thousands of 13.5. exporters who use the service of small forwarders, employing 25 people or less. Transway contends (pp. 9-10) that the problem of en- forcing the law if a forwarder-exporter affiliation is permitted can be solved by a complete disclosure of the shipper affiliation by the forwarder and by a certification to the carrier that it has no beneficial interest in the goods, such as is contained in section 5 of H.R. 4374. Behring takes a similar position. Both are wrong. Prior to 1961, such a disclosure and certification was required, but as this Committee found in 1956 it was useless in dealing with the dummy forwarder problem. * Today, when forwarders are handling several mil- lion more shipments than they did prior to 1961, the enforcement of the prohibition against brokerage where there is a forwarder- exporter affiliation is just impossible. The Commission cannot police millions of shipments a year and as CENSA and CASO have indicated, neither can the carriers. The result: wholesale rebating and disrespect for our laws. Behring's argument is that it should be allowed to be an exporter because it can make sales that some u.s. manufacturers are reluctant to make in view of their lack of expertise in dealing with a foreign market. The Committee should give this argument short shrift. There are many people not the manu- facturers of the goods who are more than willing to sell overseas without the necessity of creating serious problems for all segments of our shipping industry. Export trading companies are designed for that purpose and with or without the additional advantages that would be afforded by the current bill pending in Congress, they have the expertise to handle any sales. Just as there are unscrupulous exporters who in the past formed dummy forwarder firms to obtain illegal brokerage commissions, so too, the possibility cannot be ignored that some unscrupulous forwarders may take advantage of the elimination of the forwarder-shipper prohibition to form exporting companies and siphon off the business of their export- ers. As our witness, W. St. John, indicated to the Committee, PAGENO="0237" 231 the forwarder is in possession of highly confidential business infornation belonging to his exporter. The forwarder knows the method of transportation, the pricing, the destination, the volume and the overseas customer. Given the opportunity, some forwarders could clandestinely form exporter companies, fail to disclose this to the FMC and then take business away from their customers. Behring states that there is little danger of this happening since for the most part the business involved would be that of `middlemen" and that they are "so sharp that they are not going to be dealing with a forwarder who could be in the same business". This response, of course, begs the question. The middlemen would have to know that the forwarder is in the same business and there is no reason to believe that the middlemen would have such information available. If a forwarder in the Gulf has an exporter affili- ate in New York, the chances of. the "middlemen" knowing this are practically nil. In summary, our concern is not that the small forwarder would be overwhelmed by bigness if a forwarder-exporter affiliation were permitted. Rather, we have learned from bitter experience and the investigations of three federal agencies have established (see p. 2 of our statement) that it would only be a matter of time before the dummy forwarder would reappear in force if a forwarder-exporter affiliation were permitted. The result would be a return to abuses that would be harmful to legitimate exporters and forwarders and to ocean carriers deceived into making unlawful payment. Congress should not permit this to happen merely to satisfy the expansionist programs of two large forwarders out of approximately 1,500 licensees. 1/4/82 PAGENO="0238" 232 Mr. BIAGGI. Peter Ortiz, chairman, transportation committee, American Association of Exporters & Importers, accompanied by Edwin A. Elbert and Hubert Wiesenmaier. STATEMENT OF PETER ORTIZ, CHAIRMAN, TRANSPORTATION COMMITTEE, AMERICAN ASSOCIATION OF EXPORTERS & IM- PORTERS, ACCOMPANIED BY EDWIN A. ELBERT, SENIOR CON- SULTANT, AND HUBERT WIESENMAIER, TRANSPORTATION CONSULTANT Mr. ORTIz. Mr. Chairman and members of the subcommittee, my name is Peter Ortiz. I am general manager, Traffic, of Hitachi Metals America of White Plains, New York, and chairman of the Transportation Committee of the American Association of Export- ers and Importers-formerly the American Importers Association. With me today are Edwin A. Elbert, senior consultant, and Hubert Wiesenmaier, transportation consultant of our association. Today marks our first appearance before this committee under our new name. On September 24, the members of the American Importers Association approved a major change for our association. We have a new name: The American Association of Exporters and Importers, and we have an officially expanded purpose: to repre- sent the interests of American companies who export as well as American companies who import. Internally, this change is less radical than it might appear. Half of our membership has a significant export interest. These compa- nies have come to us for assistance in the export field for some time now. In addition, we have found that increasingly, import issues and export issues are part of a whole-often one cannot be properly addressed without considering the implications for the other. Certainly, that is the case in ocean transportation. We hope that our dual perspective will enable us to be of increasing assist- ance to this committee now and in the future. We appreciate the opportunity of testifying with respect to H.R. 4374. As you are undoubtedly aware, the American Importers Associ- ation was in the forefront of the move to grant Shippers' Councils in the United States the same exemption from the antitrust laws that have been granted to ocean carriers and conferences. In this, we were guided by our concern that Shippers' Councils should not only represent U.S. exporters but importers as well. Also, as you perhaps are aware, in most import trades to the U.S., it is the im- porter who pays the ocean freight charges, and usually nominates the ocean carrier. We are therefore pleased to see that one of the major provisions of H.R. 4374 would grant such antitrust immunity to Shippers' Councils, and, in addition, address a number of ques- tions regarding the relationship between Shippers' Councils and conferences. However, we find ourselves again in opposition to the legislation that would further strengthen ocean carrier conferences at the ex- pense of U.S. importers and exporters-we are speaking of the le- galization of so-called closed conferences. The prevailing idea in this respect seems to be that the legaliza- tion of Shippers' Councils would offset the authorization of closed PAGENO="0239" 233 conferences. We do not agree with this premise. Although we are anxious to secure antitrust exemption for Shippers' Councils, we will not support legislation which also includes the authorization of closed conferences. We are quite pleased, of course, that one of the main purposes of H.R. 4374 is to authorize U.S. Shippers' Councils, and we therefore feel it is appropriate that we restate the major concerns we ship- pers have in respect to the effective cooperation of Shippers' Coun- cils and conferences. The purposes of Shipper's Councils are: One, to unite U.S. shippers to give them sufficient bargaining strength to obtain adequate services at minimum cost from liner ocean carriers; Two, to balance the considerable power of conferences in setting rate levels by adopting mechanisms that mandate the settling of disputes between a Shippers' Council and conferences; Three, to provide shipowners, Government agencies, port au- thorities and other persons subject to the Shipping Act with a means of communicating with shippers, and of obtaining an au- thoritative shipper viewpoint; and Four, to allow shippers to take the initiative in collaborating with shipowners, conferences and Government bodies in assessing the suitability of existing services, and to investigate the possibili- ties of more economical alternatives. We would also like to comment on section 11, covering OFF and NVOCC. Our members use their services extensively and we strongly favor a licensing system for forwarders as well as NVOCC's, and in addition they should furnish bonds. However, we believe that the amount of the bond should not be specified in legislation but should be at the discretion of the Federal Maritime Commission. Our written testimony submitted earlier to this committee pre- sented our views in more detail. We would be glad to address any questions this committee may have. [The following was received for the record]. PAGENO="0240" 234 STATEMENT BY THE AMERICAN ASSOCIATION OF EXPORTERS AND IMPORTERS BEFORE THE HOUSE COMMITTEE ON MERCHANT MARINE AND FISHERIES SUBCOMMITTEE ON MERCHANT MARINE ON H.R. 4374 OCTOBER 7, 1981 __________ American Association of Exporters and Importers: 11 West 42nd Street New York, N.Y. 10036 ----- _*_*.. -- *. ~-- INTRODUCTION -- The American Association of Exporters and Importers (formerly American Importers Association) is fully aware of the necessity of bringing the Shipping Act, 1916 up to date. However, H.R. 4374, as was the case in previously proposed legislation, strengthens the ocean carrier conference system at the expense of the exporters and importers, who are the users of ocean trans- portation. SHIPPERS COUNCILS -- We support the provisions providing for anti- trust exemption for Shippers Councils but do not believe the pro- visions go far enough. In order to settle disputes between Ship- pers Councils and Conferences we suggest a provision for mandatory Commercial Arbitration and the requirement that conferences submit financial data to the Councils when requesting increases in tariffs. CLOSED CONFERE -- We are opposed to the provisions providing for so called "Closed Conferences' as wew feel that such confer- ences are harmful to the interests of shippers, as well as being contrary to the present Administration's position for freer competition. FREIGHT FORWARDERS -- Our Association favors a licensing system as well as provision for forwarders to furnish bonds. We are, how- ever, opposed to the establishment of fixed limits in the bill and suggest that the amount of bonds should be determined by the Fed- eral Maritime Commisssion. PAGENO="0241" 235 Mr. Chairman and members of the Subcommittee: My name is Peter Ortiz. I am General Manager, Traffic, of Hitachi Metals America of White Plains, N.Y. and Chairman of the Transportation Committee of the American Association of Exporters and Importers (formerly the American Importers Association). With me today are Edwin A. Elbert, Senior Consultant, and Hubert Wiesenmaier, Trans- portation Consultant of our Association. Today marks our first appearance before this Committee under our new name. On September 24, the members of the American Import- ers Association approved a major change for our Association. We have a new name: The American Association of Exporters and Import- ers, and we have an officially expanded purpose: to represent the interests of American companies who export as well as American com- panies who import. Internally this change is less radical than it might appear. Half our present membership has a significant export interest. These companies have come to us for assistance in the export field for some time now. In addition, we have found that increasingly, import issues and export issues are part of a whole--often one can- not be properly addressed without considering the implications for the other. Certainly that is the case in ocean transportation. We hope that our dual perspective will enable us to be of increased assistance to this Committee now and in the future. We appreciate the opportunity of testifying with respect to H.R. 4374. 9~-856 0 - 82 - 16 PAGENO="0242" 236 As you are undoubtedly aware, the American Importers Associa- tion was in the forefront of the move to grant Shippers' Councils in the United States the same exemption from the antitrust laws that have been granted to ocean carriers and conferences. In this we were guided by our concern that Shipppers' Councils should not only represent U.S. exporters but importers as well.1~As you per- haps are aware, in most import trades to the U.S., it is the impor- ter that pays the ocean freight charges, and usually nominates the ocean carrier. We are therefore pleased to see that one of the major provisions of H.R. 4374 would grant such antitrust immunity to Shippers councils, and in addition addresses a number of questions regarding the relationship between Shippers Councils and conferences. However, we find ourselves again in opposition to legislation that would further strengthen ocean carrier conferences at the ex- pense of U.S. importers and exporters--we are speaking of the legalization of so called "closed" conferences. The prevailing idea in this respect seems to be that the legalization of Shippers Councils would offset the authorization of closed conferences. We do not agree with this premise. Although we are anxious to secure anti-trust exemption for ~ Shippers Councils, we will not support legislation which also includes the authorization of closed conferences. PAGENO="0243" 237 We are quite pleased, of course, that one of the main purposes of H.R. 4374 is to authorize U.S. Shippers Councils, and we therefore feel it is appropriate that we re-state the major concerns we ship- pers have in respect to the effective co-operation of Shippers Councils and conferences: The purpose of shippers councils are -- 1) to unite U.S. shippers to give them sufficient bargaining strength to obtain adequate services at minimum cost from liner ocean carriers. 2) to balance the considerable power of conferences in setting rate levels by adopting mechanisms that mandate the settling of disputes between a Shippers Council and conferences. 3) to provide shipowners, government agencies, port authorities and other persons subject to the Shipping Act with a means of communicating with shippers, and of obtaining an authoritative shipper viewpoint. 4) to allow shippers to take the initiative in collaborating with shipowners~ ~& conferences government bodies in assessing the suitability of existing services, and to investigate the possibilities of more economical alternatives PAGENO="0244" 238 AlA -spent considerable time and effort to gather information about the operations and effectiveness of Shippers' Councils abroad; as a result we have become convinced that Shippers' Coun- cils in the United States could solve a number of problems that shippers have had with the manner in which conferences have acted. Some of these problems are: 1) Rate policies of Conferences: Over the years, we have often questioned what can be gained by simple consultation with conferences. In many cases we could not help but feel that conferences may deliberately inflate their ori- ginal demands with the intention of making token reductions later on in the interest of public relations. Furthermore, in trade routes where foreign governments exercise a strong influence over conference activities and the setting of rate levels, conferences have reportedly shown insufficient cooperation with Shippers Councils. 2) Surcharge Polices of Conferences: U.S. shippers, and shippers worldwide are increasingly criti- cal of surcharges imposed by conferences. At present such major surcharges are Bunker Surcharges, Currency Adjustment Surcharges and Port Congestion Surcharges. Although surcharges should be only temporary in nature, bunker Surcharges in particular have become a regular cost item for shippers. Conferences seem to use the bunker surcharge far too liberally as a tool to circumvent the prescribed process of increasing rates. PAGENO="0245" 239 3) $upplemental Service Charges by Conferences: During recent years many conferences serving U.S. trade have implemented certain port service charges that heretofore were included in the carriers' basic ocean freight rates. Today such supplemental charges represent a considerable cost item to shippers. Again there is a widespread belief among shippers that supplemental service charges are used as a tool to generally increase carrier revenues without relevance to the actual apportionment of increases in Port Terminal and handling costs with reference to general rate levels. Let me now turn to the specific provisions of H.R. 4374. In regard to the authorized activities of Shippers Councils, the provisions of H.R. 4374 are, in the whole, rather broad; but if U.S. Shippers Councils are to be truly effective in representing the interests of importers and exporters, the following principles should be included in the amendment to the 1916 Shipping Act: C) Surcharges - As we indicated, conference policies on surcharges have a dramatic impact on the shipper's cost of ocean transporta- tion. We therefore strongly suggest that any such surcharges together with any supplementary service charges be added in H.R. 4374 to the authorized list of consultation and negotia- tion subjects. PAGENO="0246" 240 B) Ezchange of Information - Sec. 15a (a) provides for the exchange of information, how- ever, falls short of mandating conferences to communicate with shippers' councils in a prompt and orderly fashion and submit any financial data in support of requests for rate increases, or the increasing of surcharges, or supplemental charges. In our study of European Shippers Councils we were impressed by the fact that conferences in Europe by and large submit financial data to shippers councils, and in the event of dispute, independent accountants may be consulted for their opinion on whether or not the underlying cost factors justify general rate increases or increases in surcharges. A) Settlement of Disputes Between Shippers Councils and Conferences - There are no.provisons in H.R. 4374 that would require the settlement of disputes between conferences and shippers coun- cils. We suggest that both conference and shippers' councils agreements must include provisions for the arbitration of such disputes. While H.R. 4374 addresses a number of important points in re- gard to authorized activities of shippers councils--we are puzzled why the bill fails to mandate conferences to cooperate with Shippers Councils in an orderly and effective manner, PAGENO="0247" 241 as ether proposed bills have suggested. We feel that it is absolutely neccesary that appropriate provisions--mandating conferences to deal with shippers councils--be included in H.R. 4374. Last, *but not least, we would like to comment on our opposi- tion to closed conferences. We have always understood that the 1916 Shipping Act reflected the American belief that some govern- ment regulation was required to prevent conferences from abusing their market power. Such abuses are forestalled in U.S. trades because the Act, in concert with anti-trust laws provided for an "open" conference system, i.e. a system that permits any carrier willing and able to serve a particular trade, to join the confer- ence in that trade--or to remain independent. This philosophy of free competition has served the entire U.S. economy well, and we believe that these same principles created a competitive environ- ment in our international liner services that made it possible for U.S. shippers to compete successfully in world markets. In sum, the very existence of strong competitive forces in the liner shipp- ing industry has been of vital importance for our trades, and have usually been the only and last resort for U.S. shippers to obtain fair competing rates from conference carriers. During the past few years U.S. carriers seem to have embraced the notion that most of the problems beseeching the U.S. maritime industry stem from the proliferation of independent (non-confer- ence) services in major trade routes, and the entering of an PAGENO="0248" 242 increas~iTg number of third-flag carriers. The argument was thus established that the liner shipping industry needs to "rationalize" its services--and rationalization may come about easiest through the formation of closed conferences. We sympathize with the problems our carriers have to compete more effectively within the concept of `open" conferences--and we do acknowledge that ways should be found to put U.S. carriers at least on equal footing with their foreign-based competitors from a regulatory and legal point of view. Let us also remember, however, that the trade routes where U.S. carriers seem to suffer the most are our INBOUND routes, where the respective conferences are headquartered abroad. Consequently, conference policies are often slanted in favor of the dominant foreign carriers, and we often face situations where foreign government agencies cause transportation needs to be subjugated to their national trade policies. We therefore see no reason why the U.S. should foresake its free-trade philosophy, if by so doing foreign transportation and trade interests would clearly be put at an additional advantage. A "closed" conference with sweeping anti-trust immunity would do just that. Much has also been said about the benefits deriving from the rationalization of carrier services for shippers. Even if we were to accept for a moment the general principles underlying rationali- zation theories, we cannot overlook the fact that rationalization PAGENO="0249" 243 will workfor a conference only if its outsider competition has been greatly reduced or eliminated altogether. Consequently, rationalization through closed conferences would, we believe, concentrate on the elimination of competition. Limited competition or no competition will, however, invariably lead to higher freight cost for shippers, and to cartel-like behavior by conferences. We know of no instance where cartels, have provided better service at cheaper prices to consumers as proponents of closed conferences would have us believe. To give you an example: the American public was told for years that the telephone industry was able to provide better service because one company controlled the major portion of the facilites in this country. Now that this monopoly has been broken, we find that service can be provided at rates considerably below those previously charged. Finally, we would like to briefly comment on Section 11 cover- ing Ocean Freight Forwarders and Non-Vessel-Operating Common Carri- ers. Our members use their services extensively, and we strongly favor a licensing system for Forwarders as well as NVOCC's, and in addition they should furnish bonds. However, we believe that the amount of the bond should not be specified in legislation, but should be at the discretion of the Federal Maritime Commission. PAGENO="0250" 244 Mr. BIAGGI. Thank you, Mr. Ortiz, for summarizing. We will put the entire statement in the record. What facts do you have to suport the various shipper statements that closed conferences would stifle competition? Has this been the case in the non-U.S. trade? Mr. ORTIz. Could we have the question again? We are having a problem hearing properly. Mr. BIAGGI. Pehaps this will work a little better. What facts can you offer to support the contention that closed conferences will stifle competition? Mr. ORTIz. Mr. Chairman, we are opposed to the closed confer- ence system, because we consider a closed conference a cartel. It must be remembered that this country has and is laboring under the oppression of another cartel called OPEC. This cartel has con- sistently set prices according to what the market will bear. Only through competition will this cartel lower prices. We feel that the situation with ocean carrier cartels is somewhat analogous. Mr. BIAGGI. I am not so sure that your answer is sufficiently sub- stantive. You still have the independents that are out there func- tioning. They provide sufficient competition, don't they? Mr. ORTIz. Our views are presented within the scope of an open conference system, not a closed conference system. Mr. BIAGGI. Well, they would not be in the closed conference. There would still be many independents. Mr. ELBERT. Mr. Chairman, if I may comment. We have been very much disturbed by this move over the past years. We do not see why this industry is different from every other industry in this country or in the world. It has been a pri- mary part of our competitive system and open market system through our antitrust laws to prevent the establishment and exist- ence of cartels. As far as we are concerned, whether it is a cartel in the communications business or a cartel in the oil business or a cartel in the ocean shipping business, it has the same basic prob- lems. There is nothing to indicate that a cartel is going to be of advantage to the shipper. As a matter of fact, as I said previously, in every other type of business, it has been open competition, which has benefited the users and not a cartel type of operation. Mr. BIAGGI. I understand what you are saying, but the fact is, your position would be sound if the whole world was functioning under the same rules, but they are not. The fact is, we do have an antitrust-strict antitrust provisions with respect to this industry which is unique. It is different. You say it should not be treated differently. I may share that sentiment. But we are dealing with reality. It is treated in a fashion that puts it in a competitively dis- advantaged position with relation to foreign shippers and trade. Mr. ORTIz. Mr. Chairman, can I further explore that subject by elaborating more on our position with respect to closed confer- ences? Mr. BIAGGI. Let me hasten to assure you that it is not our inten- tion to eliminate competition. We do not want a locked-in situation where abuses almost inevitably flow. PAGENO="0251" 245 Mr. ORTIz. Our concern is how this measure is going to affect the cost of importing and exporting our goods and also the conse- quences to the entire economy. We also must view the benefits derived from downward pressures on rates caused by competition. Also, we are looking at the techni- cal improvements and greater efficiency that competition forces carrier managers to achieve. We do not seem to feel that we would gain this in a closed conference setup. Mr. BIAGGI. Let me ask you, we have foreign conferences. They have not stifled competition, have they? Mr. ORTIz. They have not? Mr. BIAGGI. Let's not belabor that one. Mr. McCloskey. Mr. MCCLOSKEY. Mr. Ortiz, our problem is that when we look at exports from this country to, say, Africa, through an open confer- ence and European exports to Africa through a closed conference, we find U.S. shippers paying almost twice what the European ship- pers are paying to ship the same item, say, a refrigerator to Africa-or take Brazil. That would indicate that the closed confer- ence is not charging the exporters more than the open conference; that the open conference, by means of having all the ships dumped into it at anyone's suggestion, is going out 60 percent full instead of 80 percent full and are charging higher rates as a result. Can you comment on that disparity in freight rates between the closed conference from Germany to Africa, and our open confer- ences between this country and the same destination? Mr. ORTIz. I would like Mr. Wiesenmaier, who studied this, to comment. Mr. WIESENMAIER. In general terms, it can be said that you will always find situations and examples cited that will support the contention that closed conferences provide a more stable-- Mr. MCCLOSKEY. We are talking about rate alignment. Do any of the three of you have any facts to dispute the figure that I just gave you? Mr. WIESENMAIER. We are not entirely familiar with the-- Mr. MCCLOSKEY. You are an importing association that has re- cently also become an exporting association. Tell me your experience with exports. Are you able to export goods from the east coast to Africa at the same price as your Euro- pean competitors? Answer yes or no. Mr. WIESENMAIER. I could not answer. Mr. MCCLOSKEY. Then your testimony is not very valuable. You express an opinion but you have no facts to back it up. Mr. WIESENMAIER. I think the idea of the closed conferences are-- Mr. MCCLOSKEY. I am not speaking of the idea. I am speaking of whether the rates are lower than open conference rates are. That is what affects our exports. Mr. ELBERT. Mr. McCloskey, you are assuming that those rates are lower because of the closed conference. Mr. MCCLOSKEY. I do not know that. Mr. ELBERT. It could be that the reason is that the American shipping lines might not be as efficient, or there might be other factors. PAGENO="0252" 246 Mr. MCCLOSKEY. Do you have any knowledge of these factors? Mr. ELBERT. No. I do not think anybody has gone into it either in the committee or otherwise. I think it is unfair to pin the lower rates on the fact that there may be a closed conference from a Eu- ropean country to West Africa-- Mr. MCCLOSKEY. I think it is unfair then to reach an opinion that you will pay higher costs by a closed conference if you do not know what you are talking about. I am trying to determine what facts you have. Do you have any facts at all to indicate that a closed conference from the United States to Africa is going to charge higher rates than an open conference other than your speculation that a cartel would ordinarily raise rates? Mr. ELBERT. No. Mr. MCCLOSKEY. I do not mean to be critical, but I would like to have some exporters from the United States give us some factual information on why we are paying higher rates than the Europe- ans to ship the same goods to the same destination and roughly the same distance. Mr. ELBERT. The only answer I can give you is, as far as I can see, you have not had before this committee witnesses representing our larger exporters. Maybe if you went to them, you would get the answer. Mr. MCCLOSKEY. Does your association represent exporters? Mr. ELBERT. Our people are on both sides. We have just moved into the export field and we are not prepared to give you an ex- haustive analysis of it. Certainly, people like Eastman Kodak and General Motors and others certainly are in a position to give you the information as to why those rates are so much higher than they are from Europe, if anybody is. I do not think we at this point are in a position to do that. Mr. MCCLOSKEY. Let me say, without being critical, I would ear- nestly solicit any facts you can develop on these points, because the difference in opinion and speculation as to what might happen that runs through your testimony, and the factual situation that this committee has found in examining the rates of the closed and the open conferences are much different. We do not find that in com- paring the rates of closed conferences with open conferences, the facts to back up your speculation that somehow closed conferences will hurt our shippers: I do not want to speculate on the reasons, either. I would hope that expert witnesses on export matters could give us expert infor- mation. Mr. BIAGGI. The gentleman might be interested in knowing that in the third session of our hearings, we will have some large ex- porters. We had some testimony on the Senate side from large ex- porters. Interestingly enough, no one has been able to provide any hard data to justify the difference. In relation to Mr. Ortiz' testimony, he and I had a little bit of colloquy and we talked about closed conferences. I mentioned inde- pendents. On a worldwide basis independents range from 15 to 40 percent where there are closed conferences. So the competition still remains. PAGENO="0253" 247 You concentrate on the evils of closed conferences. Can we assume that you have no concern with the granting of greater and clearer antitrust immunity to the conferences if such a grant is not accompanied by the right to close those conferences? Mr. ORTIz. I am not hearing. Mr. BIAGGI. You talked about the evils of closed conferences. Can we assume that you have no concern with the granting of greater and clearer antitrust immunity to conferences? If we do that, is it not accompanied by the right to close those conferences? Let's say we grant immunity without closing conferences? How do you feel about that? Mr. ELBERT. You mean antitrust immunity and open confer- ences? Mr. BIAGGI. Right. Mr. ELBERT. This we have had no objection to and have support- ed it in the past. The only thing we ask is that there is equal anti- trust immunity for the shippers who, up to this point-I am talk- ing about both exporters and importers, do not have the same legal rights that the conferences do. Mr. BIAGGI. Mr. McCloskey? Mr. MCCLOSKEY. Mr. Ortiz, as we tried to work out this antitrust immunity for Shippers' councils, we have had different testimony from different shippers' organizations as to whether or not they feel Shippers' Councils are in order or whether or not they would want to participate in those councils, particularly whether the rules of those councils might not end up with the large shippers dominating the smaller shippers, or vice versa. If we are to legiti- matize shippers' councils, do you feel there might be any benefit in doing that now so that shipper's councils could go through the or- ganizational process to try to iron out these difficulties that many shipper seem to worry about? Mr. ORTIz. Yes, assurely, yes. Mr. MCCL0SKEY. In your testimony, you mentioned that you have studied the European shippers' councils and you have found that they have had some success; is that correct? Mr. ORTIz. That is correct. Mr. MCCLOSKEY. Those European shippers' councils have had success, have they not, in dealing with closed conferences? Mr. ORTIz. That is correct. Mr. MCCLOSKEY. What has been the conclusion then on your part that leads you to the feeling that a shippers' council in the United States could not deal with a closed conference in the United States, as they have apparently done in Europe? Mr. ORTIz. We are aware of the European scenario with regard to closed conferences. We just do not think that this really gives shipper the best position. Mr. MCCLOSKEY. That is my point. You say that is an opinion, but what are your facts to justify that opinion? The facts are-and you testified here-that the European shippers' councils dealing with European closed conferences have had better results than we have had in this country. So why would you then, if they have been successful there, why would you not be equally successful here? What are the facts to justify that concern? PAGENO="0254" 248 Is it a kneejerk opposition to closed conferences, or is it one reached on factual analysis? Mr. ELBERT. The organization as such has been more successful than we have been here because there is no organization here per- mitted to negotiate with conferences. The fact that they are more successful in quotes "than individual approaches" here is not sur- prising. That does not say that they are doing all that could be done. Also, in studying them, we come across some interesting things. We find very often that they have not gained what they have wanted. Mr. MCCLOSKEY. Isn't that always going to be the case? Mr. ELBERT. They will look down the road and say, if we do not get it this year, we will get enough information in the next year to determine how it will work out and we are willing to play that game. In this country, we find that shippers, both sides, exporters and importers, want to have much more prompt results. Mr. MCCLOSKEY. It is fair to say, is it not, that no shipper in this country is satisfied with that kind of situation? You want change, isn't that correct? Mr. ELBERT. That is correct. Mr. MCCLOSKEY. And one of those changes is to allow you the same antitrust immunity as the conferences. Once you have reached that point that you have had antitrust immunity, and let's say we pass this bill immediately and get the closed conferences and the deregulation a year hence, so that we give your Shippers' Councils a year to mature and work out intramural rivalries, work out means of intermediation and accommodation, once you have done that, do you have any factual data at all that your Shipping Councils would not be able to deal adequately and fairly with closed conferences? Mr. ORTIz. Mr. Chairman, Mr. McCloskey-- Mr. MCCLOSKEY. If the answer is no, just say so and we will give you 30 days to submit the information. What is the answer? Mr. ORTIz. Although we are not aware of what the facts of a closed conference will be with respect to a shippers' council, we can generally view the effects that a shippers' council will have on the current conference system as we have it right now, the open con- ference system. We don't know what the closed conference will yield to us. It is foreign to us. It is anticompetitive and although those might be suppositions or principles, we still have to stand on those principles. Mr. MCCLOSKEY. All I am saying is, if you have made a study of the European system as you say you have in your testimony, surely here would be examples that would come readily to your mind of where those shippers' councils have been out of balance with ship- ping in closed conferences. That is what we are trying to get, hard evidence to support or reject this conclusion that you reach that somehow we cannot operate this system as well as they have in Europe. Clearly, the European system is preferable to us. They are paying lower rates. Whether it is Shippers' Councils or some other fact as Mr. Elbert indicates is the case, that is what we need in this record. Any help you can give us in the factual experiences in PAGENO="0255" 249 Europe and what can be attributed to open conferences and what can be attributed to the shippers' councils, closed conferences, or whatever, would be very helpful. We are talking about speculation. We have plenty of facts in front of us. Any help you can give us would be appreciated. Mr. ORTIz. We would not like to be in a situation to review both systems on an apple-to-apple basis, because it is not so. Mr. MCCLOSKEY. Everything you export is going to be competing with French or Belgian goods shipped through a closed conference to your competing destinations. We want to have both of you to get the lowest prices. We also want to have the U.S. shipping confer- ences and rebuild a merchant marine we can be proud of. Those dual goals put us in conflict with the lowest possible rates. We would like to accommodate you. I am appalled that the private in- dustry factor, which is generally so filled with facts, does not seem to be able to produce any for us in this field. Mr. ORTIz. In which field, Mr. McCloskey? Mr. MCCLOSKEY. The fields of that experience about which you are free to give opinions but have no facts to back it up. I am speaking of the European situation, the Shippers' Councils and the closed conferences, which seem to produce lower rates than our lack of shippers councils and our open conferences. Any facts we can get about that European situation in which you have given this opinion as speculation that might back up your opinion and speculation. Mr. BIAGGI. Recess to vote. [Brief recess.] Mr. BIAGGI. John M. Brady, chairman of the Traffic Board, North Atlantic Ports Association; accompanied by Richard A. Li- dinsky, Jr., special counsel, Traffic Board. STATEMENT OF JOHN M. BRADY, CHAIRMAN, TRAFFIC BOARD, NORTH ATLANTIC PORTS ASSOCIATION, BALTIMORE, MD., AC- COMPANIED BY RICHARD A. LIDINSKY, JR., SPECIAL COUNSEL, TRAFFIC BOARD, AND DIRECTOR, TARIFFS AND NATIONAL PORT AFFAIRS, MARYLAND PORT ADMINISTRATION Mr. BRADY. Thank you, Mr. Chairman. My name is John M. Brady. I am the manager of the Transportation Management Divi- sion of the Port Authority of New York and New Jersey. I am ac- companied today by our special counsel, Mr. Richard A. Lidinsky, Jr., who is the director of Tariffs and National Port Affairs for the Maryland Port Administration. I would like to submit the Traffic Board's written statement for the record. Mr. BIAGGI. Without objection, so ordered. Mr. BRADY. I would also just briefly like to summarize some of the views of the ports, with the understanding that each port is free to file more detailed individual comments with the subcommit- tee for the record. Member ports who serve on the Traffic Board include the Massa- chusetts Port Authority, the Delaware River Port Authority, the Philadelphia Port Corp., the Maryland Port Administration, the PAGENO="0256" 250 Virginia Port Authority, and the Port Authority of New York and New Jersey. We are pleased to note that H.R. 4374 contains many concepts that we fully support-shippers' councils, accelerated agreement approvals, and simplification of civil penalties. Focusing on those sections of the bill which would affect the ports, we would like to make some comments and constructive criticisms. Section 2(1), which provides for closed conferences: the Board can recognize that closed conferences may be desirable and even necessary from time to time. However, we would like to see two safeguards built into this new conference right. One would be that section 2(1) be amended to require that closed conferences provide the member with the right of independent action. Ports in our range feel that such an amendment requiring the flexibility or perhaps 10 days' notice to the conference of a would-be independent carrier can go a long way to ending the situ- ation we experience where some of the carriers have such an option in the South Atlantic Conference but do not in our range, and often hide behind such inflexibility and divert cargo out of our range, southward. The second would be that closed conference agreements should also specify what ports they are going to serve in the agreement. Section 2(3), the elimination of the so-called public int9rest test for FMC agreement approval-the majority of the Board can support this change and we hope that it will accelerate agreement approv- al. However, for the record, the Massachusetts Port Authority does not share our views and favors retention of this public interest test. Section 2(5), which places deadlines on the FMC for agreement approval and hearing upon complaint: while we can fully support the 30-day commencement of an agreement action and the 180-day final action, we feel that the requirements in 2(6) to file a written complaint within 20 days of the agreement filing is unrealistic, in view of the Federal Register's publication lag and time for analysis. We would therefore support an amendment to the subsection al- lowing for 20 days for complaint "after the publication of notice of agreement in the Federal Register." Section 3 gives us the guidelines for forming shippers' councils. There seems to us no proper role for the Federal Trade Commis- sion in this process. For our part, ports will feel more comfortable with these shipper council organizations if section 3(c) could be amended to require the council's agreement to provide a list of ports that will be utilized under the agreements. Finally, sections 1 and 5 deal with the roles of ocean freight for- warders in our industry. While we do not purport to be an expert in this vital operation, as ports we are in close contact with this group and feel that its present level of participation and regulation is very good, and we expressed some concern about forwarders' changes in our testimony on Senate bill 1593. Therefore, we would like to associate ourselves with the general comments of the National Association of Freight Forwarders and Custom House Brokers. Thank you. Mr. Lidinsky and I would be glad to answer any questions you may have. PAGENO="0257" 251 Mr. BIAGGI. I want to pursue the line that Mr. McCloskey initiat- ed, and perhaps you might be able to make some contribution. So far, we have not been successful. Do you have any hard data on the effect of closed conferences on shippers in those trades that are serviced by closed conferences? Mr. BRADY. No, we do not have any data on that. Mr. BIAGGI. Let us talk about a proposal that would permit inde- pendent action in the closed conference. What is your stated pur- pose for that suggestion? Mr. BRADY. Well, we realize that the closed conferences will be able to deal with the rate situations and with the shippers' councils and be able to take care of most rate situations. But in the case where we have an American carrier and foreign carriers blocking any kind of action to maybe reduce the rate, the American-flag car- rier would have the right and the option to meet the foreign com- petition. Mr. BIAGGI. Well, let me give you another scenario and see if you would characterize it as an evil. You have a closed conference and they have some independents out there and they permit one of the members of the closed conference to leave and compete against the independent until he drives the independent out of the trade. Then he is permitted back into the closed conference. How would you characterize that scenario? Mr. LIDINSKY. That is a conceivable scenario, Mr. Chairman, but on second thought, I would think that if the members of a closed conference have the cohesion and the desire to come together and "close" that conference, they should, as a closed conference, be able to exercise rate initiative or rate aggressiveness, or whatever you want to term it, to lower that rate to meet the independent's rate. Mr. BIAGGI. Well, that would be one course. I understand that one; I do not quarrel with that. Mr. LIDINSKY. You know, I can understand members of a closed conference feeling that if you provide the right of independent action, you are just leaving the door open and you are going to sign the death warrant of the closed conference before it even gets un- derway. But as we view it, this independent action would be, in effect, a safety valve for members to know that if the conference does become incoherent and not challenging independent's rates, a member could then go out and face that competition. As Mr. Brady said, our experience with this frustration over in- dependent action comes from the experience of the ports in Virgin- ia, where they have lost considerable business from Kentucky and other inland States to southern ports where carriers calling at Nor- folk, closer to Europe, and calling at Charleston and Savannah, far- ther away from Europe, say, "Well, gee, we would like to lower our rate at Norfolk, but we cannot because we do not have the right of independent," and that has shifted cargo southward. So, that is where we are coming from on this. Mr. BIAGGI. I understand what you are saying, but I would have to have some concern about the scenario that I offered. Whether it is realistic or whether it could develop into common practice is an- other matter. You make a recommendation to eliminate "other persons subject to the act." Why? 9~-856 0 - 82 - 17 PAGENO="0258" 252 Mr. LIDINSKY. We make that recommendation because, as ports, we have other members in our association-private terminal opera- tors-and many of them have become frustrated with the agree- ment approval process at the Maritime Commission and feel that the activities that we engage in, which are largely of a rental nature, let us say, to a carrier or transactions between a terminal operator and other parties subject to the act, are of such a limited scope that we do not feel the full process of agreement approval under section 15 is really needed or valid any more. We had a case that culminated today regarding Baltimore where we submitted a lease for approval a couple of years ago and it took about 3 months for the lease to be approved. The parties were standing on the sidelines during that time. A year and a half or so into the lease, a dispute arose concerning a part of the lease. We went back to the Commission and asked for a resolution of this lease that they had approved. The Commission put the lease through the environmental impact process over a word dispute and now, a couple of months after taking the case back to them, the commission decided this morning to decline our petition to have them step in and resolve the dispute in the case. These are the kinds of frustrations that ports sometimes experi- ence. Again, the position that we state here is also espoused by the National Association of Stevedores, and that is that we are in busi- ness to help importers and exporters and carriers of all flags and that we should not be spending our time bogged down at the Com- mission. That is why we support this "other persons" change. Mr. BIAGGI. I could not agree with you more. Your response seems to call to mind the same kind of testimony we had in connec- tion with applications for. port dredging and new projects. It just lingered and lingered sometimes as much as 20 years before you finally attained your objective. Who would oppose such an action, Mr. Lidinsky or Mr. Brady? Mr. LIDINSKY. The other person exemption? Mr. BIAGGI. Yes. Mr. LIDINSKY. At least on the Senate side, I did not see any oppo- sition from anyone in the maritime industry. I would assume your opposition would come from the Justice Department. Mr. BIAGGI. Justice? Mr. LIDIN5KY. Yes. Mr. BIAGGI. How about the shippers and the carriers? Mr. BRADY. I would not think so. Mr. BIAGGI. Thank you very much. Mr. LIDIN5KY. Thank you, Mr. Chairman. Mr. BIAGGI. It might comfort you to know that a number of other witnesses have testified as far as the time constraints that you thought were unrealistic. The committee has taken serious note of that. [The following was received for the record:] PAGENO="0259" 253 T~T.T7~~ ~ JOHN M. BRADY The Poet A~thoetty of NeetYotkoetdNoetJotoey lWoVd TtadeCoettot, Sito64-E Neat Yotk, N.Y 0042 212) 466-8323 HHOHaCV Chaaatea DOUGLAS 46. BINNS CHESTER H. G000LEY RONALD KENNEDY DAVID J. ZIOLKOWSKI Matylood Poet Adettiet)ttt~t~oo The WoOd Wade Ceettot Balhtetote BaIVetote. MD 21201 13011 659-4482 Sooeetaty THOMAS A. BUTLER The Poet Aattho6ty of Nata VotE a Id Neat Jetty lWoIdTttdeCetee Sty)te64-E Neat hoE N.Y. 10048 12121 466-8324 Eoeyyt,ye Caat',tee RINO MOOICON) Matoaoh000fttPoetAyyfhoy Bootoet. Moat. 02110 WILLIAM J, TORPEY Pal) Rot Poet Aytho,fy Fall Rae. MOSt. 02721 ROBERT ft. SILVA Neat LocAte iCe I a lo Joy Neat Lodoet. Coeo. 06320 PRANK W. DUNHAM. JR. 215ay Poet Dotat Coetetosoet A)b,etV, N.Y. 12202 JOHN M BRADY N oat Yok ad N eat Jayoy Neto Yok. Neat Yok 10048 MICHAEL LITTMAN Boooklyo Chaetbo of Coeteteoye Booklyet, N.Y. 11242 GEORGE P MOHR Dolaatae Rio Wet Atlhoify Coetdoet, Noat Jettyy 08101 0. FRED DISONA, JR. Ph)ady)pha Poet Cypoaf,00 Phiady)pha Pa. 19106 DAVID J. ZIOLKOWSKI May)ad Poet AOhetiytafioh Balietoot, Md. 21201 ARTHUR 46. JACOCKS Nofolk, Va. 23510 STATEMENT OF THE TRAFFIC BOARD NORTH ATLANTIC PORTS ASSOCIATION ON H.R. 4374 A BILL TO IMPROVE THE INTERNATIONA.L OCEAN COMMERCE TRANSPORTATION SYSTEM OF THE U.S. THE SUBCOMMITTEE ON MERCHANT MARINE OF THE HOUSE MERCHANT MARINE AND FISHERIES COMMITTEE JOHN M. BRADY, CHAIRMAN RICHARD A. LIDINSKY, JR., SPECIAL COUNSEL OCTOBER 7, 1981 PAGENO="0260" 254 THE TRAFFIC BOARD OF THE NORTH ATLP~NTIC PORTS ASSOCIATIQ~I ON H. R.4374 Thank you, Mr. Chairman. My name is John M. Brady and I am Manager of the Transportation Division for the Port Authority of New York/New Jersey and serve as Chairman of the Traffic Board of the North Atlantic Ports Association. I am accompanied today by our Special Counsel, Richard A. Lidinsky, Fr., who is Director of Tariffs and National Port Affairs for the Maryland Port Administration. The Traffic Board was formed in 1961 to monitor all rate, competitive, and regulatory activity which might affect the ports in our Association which stretch from Maine to Virginia. Member ports who serve on the Traffic Board include the Massachusetts Port Authority, the Port Authority of New York/New Jersey, the Philadelphia Port Corporation, the Delaware River Port Authority, the Maryland Port Administration, and the Virginia Port Authority. I might add Mr. Chairman that while the statement I am about to give represents the collective views of the Traffic Board, each port is free to file more detailed, individual comments with the subcommittee for the record. PAGENO="0261" 255 The Traffic Board is most grateful for this opportunity to present our views on H.R. 4374, a bill to improve the inter- national transportation system of the United States. We wish also to commend your Mr. Chairman for your continued leadership for our country and our industry, not only in this important area of maritime reform legislation, but in related areas such as fair regulation of cargo movements to our nation's ports and facing the crucial area of port channel development. The ~affic Board has been very active in both this Congress and the last on the question of Federal Maritime Com- mission reform. It has been our general policy, whether it be the ~4C or the Interstate Commerce Commission, that we want to encourage and support meaningful change for an industry that has certainly changed dramatically since the Shipping Act, 1916 and needs statutory adaption for the decades ahead. In the process of encouraging change, it is our responsibility to our member ports, as well as the carriers and shippers using our ports, that that change be for meaningful purposes and that all parties to the international waterborne transaction retain present rights and opportunities. In the 96th Congress, our member ports were very involved in con- sideration of H.R. 6899, its predecessor bills, as well as companion PAGENO="0262" 256 bills in the Senate. The same is true today, as we testified recently on S.1593. we are pleased to note that H.R. 4374 contains many concepts that we fully support --- shippers councils, accelerated agreement approval, and simplification of present civil penalties --- so we would like to focus on those portions of the bill which would affect ports and make some comments and constructive criticism on them. Section 2 of the bill contains two measures of great port interest. The first deals with the option to be provided conferences to be "closed." The Board can recognize that this condition may be desirable, even necessary, from time to time; however, we would like to see two safeguards built on this new conference right. One would be that Section 2 (1) be amended to require that closed conferences provide members with the right of independent rate action. Ports in our range feel that such an amendment, requiring such flexibility on perhaps ten days notice to the conference by the would-be"independent" carrier, can go a long way to ending the situation we experience where some carriers have such an option in South Atlantic confer- ences, but do not in our range ,and often hide behind such rate inflexibility and divert cargo out of our range southward. PAGENO="0263" 257 This independent action right would also serve to allay the fears that have been expressed in the past that the closed conference would encourage high rates and lack of shipper solicitation activity. Closed conference agreements should also specify what ports are going to be served in the agreement, so that we can exercise our right to complain about such agree- ments we dislike. Also, in Section 2(4) of the bill is the elimination of the so-called "public interest' test for FMC agreement approval. The Board can support this change and hope that it will accelerate agreement approval. we would like to add that we have testified in support of the total elimination for "other persons subject to the Act' such as ports, private terminal carriers and stevedores from even filing Section 15 agreements at all. Many ports and other parties have experienced unneeded delay at the FMC on these agreements and their exemption could be useful to the industry. We would hope that the subcommittee would give this concept serious con- sideration, particularly the views of the National Association of Stevedores who are in the forefront of this regulatory change. PAGENO="0264" 258 At the same time we want to stress that the Board has also testified and it is our formal position that we want to continue the filing of port tariffs at the Commission per Section 17 of the 1916 Act and General Order 15. Such a filing requirement is not a burden on ports and is in the competitive interest of shippers and ocean carriers alike who are keenly aware of differing port charges. Section 2(5) would place deadlines on the FMC for agree- ment approval and hearing upon complaint. While we can fully support the thirty day commencement of agreement action and one- hundred eighty day final action, we feel that the requirement in 2(6) to file a written complaint within twenty days of agreement filing is unrealistic in view of the Federal Register publication lag and time for analysis --- we would therefore support an amend- ment to this subsection allowing twenty days for complaint `after publication of notice of the agreement in the Federal Register." Section 3 gives the guidelines for forming shippers' councils. There seems to us no proper role for the Federal Trade Commission in this process --- in fact the F'TC will probably serve to bring about a fear to form such ~uncils on shippers parts. For our PAGENO="0265" 259 part, ports will feel more comfortable with these shippers councils organizations if Section 3 (c) could be amended to require the council's agreements to "provide a list of ports to be utilized under the agreement." Finally, both Sections 1 and 5 deal with the role of ocean freight forwarder in our industry. While we do not pur- port to be expert on this vital operation, as ports we are in c],ose contact with this group and feel that the present level of participation and regulation is very good and we expressed some concerns about forwarder changes in our testimony on 5.1593. Therefore, we would like to associate ourselves with the general comments .of the National Association of Forwarders and Custom House Brokers. In conclusion, Mr. Chairman, the Traffic Board congratulates you on the intent and goals of H.R. 4374 and pledge to work closely with your staff not only on the changes we have suggested today, but also in the task ahead of passage of this important measure. Thank you and Mr. Lidinsky and I will be glad to answer any questions you may have. PAGENO="0266" 260 Mr. BIAGGI. Mr. Lawrence Berman, senior vice president, admin- istration and law, Transway International Corp.; accompanied by Richard Kurrus, counsel, and also by Robert J. Frulla, director of government affairs. STATEMENT OF LAWRENCE BERMAN, VICE PRESIDENT, ADMIN- ISTRATION AND LAW, TRANS WAY INTERNATIONAL CORP. WASHINGTON, D.C., ACCOMPANIED BY RICHARD KURRUS, COUNSEL, TRANSWAY INTERNATIONAL CORP., AND ROBERT J. FRULLA, DIRECTOR, GOVERNMENT AFFAIRS, TRANSWAY IN- TERNATIONAL CORP. Mr. BERMAN. Mr. Chairman, gentlemen and ladies, my name is Lawrence Berman. I am senior vice president, administration and law, of Transway International Corp.-a corporation listed on the New York Stock Exchange, having principal offices at 747 Third Avenue, New York, N.Y. I am accompanied today by Mr. Richard Kurrus of the firm of Kurrus & Dyer in Washington, D.C., special counsel to us for maritime matters; and Mr. Robert Frulla, our di-* rector of government affairs, stationed in Washington, D.C. I am here to give testimony with respect to H.R. 4374. I have submitted a statement and would appreciate it if that statement would be put in the record as though read. Mr. BIAGGI. Without objection, so ordered. Mr. BERMAN. Thank you, sir. I would like to summarize our position, sir, and before doing that state to you that Transway International Corp. is the parent com- pany of a wholly owned subsidiary, Universal Transcontinental Corp., which is a foreign freight forwarder and customs broker li- censed by the Federal Maritime Commission. Mr. Chairman, we believe that the licensing of ocean freight for- warders should be retained. Licensing of freight forwarders has proven to be an effective function of the Federal Maritime Commis- sion that has tended to protect the shipping community from un- scrupulous and incompetent competitors. However, we strongly support the provisions of H.R. 4374 that would permit the affiliation of an ocean freight forwarder and a shipper and would prohibit a forwarder from receiving compensa- tion from a carrier with respect to any shipment in which the for- warder has an interest. These provisions would continue and im- prove upon the necessary and beneficial changes to the Shipping Act by section 1608 of the Budget Act. By permitting the affiliation of a forwarder and a shipper and prohibiting a forwarder from receiving compensation from a carri- er with respect to a shipment in which the forwarder had a benefi- cial interest, this bill, as well as the Budget Act amendments, ade- quately protects against illegal rebating through the device of a dummy freight forwarder. Since the Budget Act became law, representatives of small for- warders have made a number of inaccurate and unsubstantiated statements concerning the consequences of eliminating the prohibi- tion of shipper-forwarder affiliations. The most common of such specious claims has been that the restriction on receipt of compen- PAGENO="0267" 261 sation for a shipment in which the forwarder has a beneficial inter- est is unenforceable. I do not believe this to be the case, as the section is self-enforcing by virtue of the required certification contained in section 5 of H.R. 4374. If the committee decides to continue the licensing provisions of section 44 of the act, we urge that section 44(e) be amended in the bill to include that "no beneficial interest" have a certification requirement. If section 5 of the bill is retained, we suggest that the language of the proposed section 44(b) be amended to clearly apply in the case of forwarding services only to compensation from a carrier. We doubt that the authors of the bill intended to prohibit a shipper from compensating a forwarder with respect to a shipment in which the forwarder has a beneficial interest. I think I can summarize by just saying, sir, that the law as it now exists by virtue of the Budget Reconciliation Act is, in our opinion, workable and will be to the advantage of the shipping public. Mr. BIAGGI. It has only been in place a short time, so you have not had much experience with it, have you? Mr. BERMAN. We have not had much experience, sir, but we have been in the freight forwarding business since 1925. Mr. BIAGGI. I am talking about-- Mr. BERMAN. I understand. As a matter of fact, the law in 1961 that has been referred to so many times by the association was sponsored by Universal Transcontinental Corp. Our position, sir, is that this is not 1961; this is 1981. And you rightfully are holding hearings on a bill to change what the law has been because times have changed. Mr. BIAGGI. I think someone raised the point somewhere along the line that when you have a forwarder with a beneficial interest, there is a question of possible conflict with relation to confidential- ity; he has a number of other clients. How would you respond to that? Mr. BERMAN. I would respond to that with respect to any for- warder who would use confidential information for the benefit of a company which is affiliated with him-it would be unwise for a competitor of the affiliated company to use that forwarder and he should use other forwarders. It seems to me that competition would take care of that problem. Mr. BIAGGI. But there is a real potential liability if he did use the forwarder. Would you admit that there is a potential liability? Mr. BERMAN. I would admit, sir, that an unscrupulous forwarder might, if it were unbeknownst to the client that there was an affili- ation with a competitor, misuse it. Mr. BIAGGI. On a realistic basis, it is not very probable. Is that what you are saying? Mr. BERMAN. What I am saying, sir, is that the affiliation which we are talking about should be known; there should be a require- ment for a declaration of affiliation to the Federal Maritime Com- mission if licensing is continued so that the Federal Maritime Com- mission and the public are appraised of an affiliation. PAGENO="0268" 262 In that case, sir, anybody who used that forwarder and was in a competing business with that affiliate would just be doing some- thing that he would not, in good business judgment, do. Mr. BIAGGI. There have been some allegations that it would be impossible for the Federal Maritime Commission to enforce the re- strictions in the Budget Reconciliation Act prohibiting forwarders from receiving compensation for forwarding shipments in which they have a beneficial interest. Could you comment? Mr. BERMAN. Yes, sir. We are of the opinion that the certifica- tion requirement is self-policing. Now, the argument you have heard this morning about the certification requirement not being self-enforcing is predicated on an allegation that the present certifi- cation for other items gives the carrier the opportunity to check the certification for those items. I should mention to you that Transway International Corp. has another wholly owned subsidiary-Coordinated Caribbean Trans- port, an ocean carrier-and CCT relies on the certification. CCT does not investigate the basis of the certification. Therefore, sir, I would tell you that if the certification further re- quires that the forwarder make a declaration that it has no benefi- cial interest in the freight, that is the only kind of certification the carrier has ever needed before. Mr. BIAGGI. Am I correct in presuming that you are finished with your statement, Mr. Berman? Mr. BERMAN. Yes, sir, and I thank you very much, if you have no further questions. Mr. BIAGGI. I guess that is it. Thank you very much, sir. Mr. BERMAN. Thank you very much, sir. [The following was received for the record:] PAGENO="0269" 263 STATEMENT OF TRANSWAY INTERNATIONAL CORPORATION BEFORE THE SUBCOMMITTEE ON MERCHANT MARINE COMMITTEE ON MERCHANT MARINE AND FISHERIES ON H.R. 4374 Mr. Chairman and Members of the Committee: My name is Lawrence Berman, Vice President - Administration and Law, Transway International Corporation (Transway). I appreciate this opportunity to comment on H.R. 4374 and will address the provisions of the bill dealing with ocean freight forwarders. It is our view that the licensing of ocean freight forwarders by the Federal Maritime Commission (the "Commission') should be retained. However, we fully support the provisions of H.R. 4374 that would permit the affiliation of an ocean freight forwarder and a shipper and would prohibit a forwarder from receiving com- pensation from a carrier with respect to any shipment in which the forwarder has an interest. The effect of those provisions would be to continue and, in our opinion, improve upon the changes to the Shipping Act, 1916 (the "Act"), 46 U.S.C. §801 et seq., made by section 1608 of P.L. 97-35, the Omnibus Budget Reconciliation Act of 1981 (the "Budget Act"). Since the Budget Act became law on August 13th of this year, certain individuals representing the interests of small forwarders have been making inaccurate and unsubstantiated statements in PAGENO="0270" 264 the press and in testimony given before the Senate Committee on Commerce, Science and Transportation concerning the consequences of eliminating of the so-called `shipper connection" prohibition. I expect that similar statements will be repeated before this Committee. The intent of these individuals is to mislead and to create confusion in an effort to restore the formerly government- protected competitive position of small forwarders. Small forwarders were the unintended beneficiaries of the over-regulation of the forwarding industry embodied in the shipper connection prohibition. Consequently, the reason for their opposition to the elimination of that prohibition is obvious, and it has nothing to do with concerns of preventing dummy forwarders or illegal rebating. Transway's comments on H.R. 4374 are presented today for the primary purpose of addressing the claims made by the opponents of removing the shipper connection prohibition. We are confident that the Committee will recognize the disingenuous nature of these claims. Transway is a diversified transportation and distribution company with extensive domestic and overseas operations, including freight forwarding, marine transportation, truck trailer manufac- turing and the marketing, distribution and transportation of lique- fied petroleum gas. The stock of the company has been traded on the New York Stock Exchange since 1929. Among the wholly owned subsidiaries of Transway is Universal Transcontinental Corporation ("UTC"). UTC is one of the oldest freight forwarders operating in the United States, having been active in the freight forwarding business since 1925. The company is also one of the largest PAGENO="0271" 265 forwarders, currently employing 272 people in 16 offices in the United States and 3 offices overseas. UTC was one of the primary sponsors of the legislation enacted in 1961 (P.L. 87-254) that added section 44 to the Shipping Act and provided for the licensing of ocean freight forwarders. The 1961 legislation was intended to correct a number of abuses and malprac- tices prevalent within the forwarding industry. We believe that the licensing, bonding and regulatory scheme established by P.L. 87-254 should be continued. The licensing of ocean freight for- warders has proven to be an effective function of the Commission that has tended to protect the shipping community from unscrupulous and incompetent operators. There is, however, one provision in the 1961 legislation that did not work rationally and produced results that had never been intended by Congress. Prior to the recent Budget Act amendments, section 1 of the Shipping Act, 46 U.S.C. §801, defined an independent ocean freight forwarder as a forwarder who is not a shipper or consignee or seller or purchaser of shipments to foreign countries, nor has any beneficial interest therein, nor is directly or indirectly controlled by such shipper or consignee or any person having such a beneficial interest. The above language was intended to address the so-called "dummy forwarder" scheme, whereunder a shipper could establish his own forwarding business and thus use this device for obtaining rebates from carriers. Unfortunately, the provision was inartfully drafted. It went far beyond the simple problem of prohibiting a PAGENO="0272" 266 shipper from using his own forwarding company in order to obtain rebates. This provision is the epitome of purposeless regulation. The pre-Budget Act definition prevented a forwarder from ever being a shipper or consignee in the foreign commerce of the United States. It produced such irrational results as preventing, among other things, a forwarder from shipping in the foreign commerce of the United States its own property (such as house- hold or office furniture) or from purchasing merchandise that would be shipped from abroad. Also, according to decisions of the Commission interpreting the definition, a company could not hold a forwarding license under section 44 of the Act if any parent, affiliate or associate of that company were a shipper or consignee in the foreign commerce of the United States. See, Stute International Inc., 20 S.R.R. 839 (FMC 1981); Bolton and Mitchell, Inc., 16 S.R.R. 87 (FMC 1975); Hugo Zanelli & Co., 14 S.R.R. 2166 (FMC 1976); North American Van Lines, 12 S.R.R. 404 (FMC 1971). These cases held that the mere common ownership of a forwarder and a shipper was sufficient, under the pre-Budget Act provisions of sections 1 and 4 of the Act, to prevent the licensing of the forwarder, even in cases in which no actual control was exercised by the shipper over the forwarder. Also, it made no difference whether the forwarder did not handle the shipments of its associated or affiliated company or whether the forwarder did not receive compensation from a carrier from such shipments. The above results were contrary to the original legislative intent. In passing P.L. 87-254, it is clear that Congress intended PAGENO="0273" 267 to prevent ocean carriers from paying compensation to forwarders in situations in which such payments could amount to rebates. In 1961, the then Federal Maritime Board had completed a series of nationwide hearings on which its legislative recommendations relating to the licensing and regulation of freight forwarders were based, and reached the following conclusion: Malpractices were found including `dummy' forwarding setups where in some cases huge brokerage fees were collected although little or no forwarding functions were performed, as well as a widespread lack of orderly functioning as to charges to shippers. The reports of both the Senate Commerce Committee and the House Merchant Marine and Fisheries Committee recognized the basic purpose of the forwarding legislation to be to make such rebating through dummy forwarders or other devices unlawful. S. Rep. No. 691, 87th Cong., 1st Sess. (1961); H.R. Rep. No. 1069, 87th Cong., 1st Sess. (1961). Two methods for preventing such rebating were created by the legislation. First, the definition of an independent ocean freight forwarder was drafted to prohibit a forwarder from having a beneficial interest in any shipment in the foreign commerce of the United States or having any connection with a shipper or consignee of such shipments. Second, subsection (e) of the new section 44 of the P~ct provided that a carrier may not compensate a forwarder unless the forwarder certifies that it has performed certain minimum forwarding services. This scheme proved to be successful in eliminating the problem of dummy forwarders. However, the overly restrictive definition in section 1, with its unnecessary prohibition on the affiliation of forwarders and shippers, 9~4-856 0 - 82 - 18 PAGENO="0274" 268 went far beyond its intended function. In this prime example of over-regulation, conduct and `associations' which in no way involve the dangers of rebating were made illegal. As a practical matter, the major effect of the shipper con- nection prohibition, as interpreted and enforced by the Commission, was to protect small, family-owned forwarders from competition by multi-business organizations since it is unlikely that any such organization would not include some operation having at least incidental shipping activities. Consequently, there was created a de facto prohibition on a freight forwarder being part of a diversified business entity. This result was never intended by Congress; the 1961 legislation was not meant to mandate that ocean freight forwarders be small, "mom and pop" operations. In addition, the shipper connection prohibition was out of step with the realities of the modern commercial world where corporate diversification has been a dominant trend for some time. The pre-Budget Act definition in section 1 was incapable of accomodating the existence of holding corporations, such as Transway, or other types of business entities having a number of independent, profit generating units. Such entities are commonplace today. Not only were forwarders and potential forwarders harmed by the effect of the shipper connection prohibition, but shippers suffered as well. The prohibition inhibited the development of a modern, efficient forwarding industry by limiting access to much needed sources of capital and management expertise. The ocean shiping industry has seen dramatic changes and innovations since PAGENO="0275" 269 1961. Unfortunately, forwarding has not kept pace with the other segments of the industry. Small, marginally financed forwarders can no longer adequately supply the type and quality of services required by today's shippers. Also, a common concern among shippers is the possibility of suffering significant financial losses due to the bankruptcy of a forwarder during the period between the payment of freight charges by the shipper to the forwarder and the payment over of those monies to the carrier. Much of the problem of under-capitalized forwarders can be attributed to the pre-Budget Act requirements which had the effect of limiting the size and resources of forwarders. In our own case, UTC's corporate affiliation with Transway has benefitted UTC and its shipper customers. As an example, UTC is currently in the process of installing a modern, state of the art data processing system which will enable UTC to reduce costs and improve the quantity and quality of its forwarding services. This productivity gain would not have been possible without UTC's access to Transway's financial resources. The problems associated with the pre-Budget Act definition of an independent ocean freight forwarder were well-known by both the Commission and Congress for some time prior to the Budget Act. During the Second Session of the 96th Congress, bills reported out of this Committee and out of the Senate Committee 1/ on Commerce Science and Transportation contained provisions 1/H.R. 6899, `The Omnibus Maritime Regulatory Reform, Revitalization and Reorganization Act of 1980' and S. 2585, `The Ocean Shipping Act of 1980." PAGENO="0276" 270 eliminating the shipper connection prohibition similar to those in H.R. 4374. The provisions had received the support of the Commission, and the merits of removing the shipper connection prohibition were fully considered by both Committees. In this respect, recent statements that the Budget Act freight forwarder provisions were a surprise or were enacted without adequate exam- ination are not accurate. The Budget Act amendments were the culmination of a long process of congressional and Commission efforts to correct an unintended and technical problem in the law. By permitting the affiliation of a forwarder and a shipper and prohibiting a forwarder from receiving compensation from a carrier with respect to a shipment in which the forwarder has a beneficial interest, this bill, as well as section 1608 of the Budget Act, adequately protects against illegal rebating and dummy freight forwarding. At the same time, the unintended and negative results of the prior definition of an independent ocean freight forwarder are avoided. The case supporting the removal of the shipper connection prohibition is as compelling today as it was when H.R. 6899 was approved by the Committee during the last Congress and when the Budget Act was passed on July 29th of this year. One of the claims made by those objecting to the removal of the shipper connection prohibition is that it would result in 2/ the "resurgence of the dummy forwarder." This claim is based upon the argument that the prohibition on the receipt of compen- 2/September 24, 1981 statement of William St. John, Jr., before the Senate Committee on Commerce, Science and Transportation. PAGENO="0277" 271 sation with respect to a shipment in which the forwarder has a beneficial interest is unenforceable. This is a contrived argument which has no basis in fact. The Commission's present regulatory and enforcement powers are sufficient to prevent rebating effected by forwarders collecting fees from carriers for shipments in which they have an interest. Since the 1961 legislation, the Commission has been quite successful in detecting wrongdoing much more difficult to uncover than the practice of carriers passing rebates through a dummy forwarder. In the typical transactions among carriers, forwarders, and shippers there presently exists a myriad of possible illegal acts that could be committed. It would be ludicrous to suggest that the only way the Commission could control such illegal acts would be if the Commission monitored each and every transaction. Yet, just such an argument has been made with regard to the enforcement of the prohibition on a forwarder receiving carrier compensation for shipments in which the forwarder has an interest. The fact that the Commission lacks the resources to monitor each shipment handled by a for~zarder is irrelevant. There is nothing to indicate that such monitoring is necessary. The way to fully ensure compliance with the prohibition is to require the complete disclosure of shipper affiliations by ocean freight forwarders. There are a number of methods of achieving this. It is our understanding that the Commission rules implementing the Budget Act changes will require such dis- closure by both new and existing licensees. An additional method PAGENO="0278" 272 is that contained in section 5 of H.R. 4374, which would prohibit the payment of compensation by a carrier to a forwarder unless the forwarder certifies that it 1~as no beneficial interest in the shipment. Carriers would thereby be removed from any respon- sibility for determining whether the forwarder has an interest in a particular shipment. If the bill of lading lacks the required certification, the carrier may not compensate the forwarder. The present certification requirement has worked very well despite the fact that the Commission has not investigated each and every certification made by a forwarder to see whether the services were actually performed. There is no reason why the certification requirement in H.R. 4374 would not work equally well. If the Committee should ultimately amend this bill to continue the licensing of forwarders by the Commission, we suggest that the `no beneficial interest certification item be included in an amendment to the present section 44(e) of the Act (attached is a draft of section 44(e) with the necessary amendments). However, if section 5 of the bill is retained, we ask that the language of its proposed new section 44(b) of the Act be amended to clearly apply, in the case of fowarding services, only to compensation from a carrier. As the section is now written, it would appear to prohibit a shipper from compensating a forwarder with respect to a shipment in which the forwarder has a beneficial interest. There would be no reason for such a prohibition and we doubt that the Committee intends to establish it. The merits of the Budget Act amendments are clear. This beneficial and necessary change must logically be contained in PAGENO="0279" 273 H.R. 4374's comprehensive reform of freight forwarder law. However, regardless of whether the licensing of forwarders is to be continued, it is crucial that the elimination of the shipper connection prohibition be retained in the leglisation. Eliminating the prohibition in ths bill would also have the added benefit of vitiating the December 31, 1983 expiration date for section 1608 of the Budget Act. This would remove the cloud under which shipper affiliated forwarders must now operate. Although the Conference Report accompanying the Budget Act contains assurances that the expiration date was not meant to imply that the changes are merely temporary, the possibility that the `changes may lapse has created uncertainty and negated much of the intended benefit of the Budget Act's attempt to correct the counterproductive over-regulation of freight forwarders. We urge that the Committee retain the current freight forwarder provisions of sections 1 and 44 of the Act with the amendment to section 44(e) which we have suggested herein. At the very least, however, it is vitally important that the provisions of H.R. 4374 clearly eliminate the shipper connection prohibition of pre- Budget Act law. It is our belief that such a course is in the best interests of the forwarding industry and of the shipping community. Thank you PAGENO="0280" 274 Mr. BIAGGI. Mr. Edward Schmeltzer, Esq. of Schmeltzer, Aptaker & Sheppard, representing Behring International. STATEMENT OF EDWARD SCHMELTZER, SCHMELTZER, APTAKER & SHEPPARD, WASHINGTON, D.C., REPRESENTING BEHRING IN- TERNATIONAL, HOUSTON, TEX.; ACCOMPANIED BY KENNETH P. KOSUT, CORPORATE COUNSEL, BEHRING INTERNATIONAL, HOUSTON, TEX. Mr. SCHMELTZER. Good morning, Mr. Chairman. My name is Edward Schmeltzer. With me is Mr. Kenneth P. Kosut, who is the corporate counsel for Behring International, and we are appearing here on behalf of Behring International, whose statement has al- ready been presented to the committee and I understand will be placed into the record. Mr. BIAGGI. Without objection, so ordered. Mr. SCHMELTZER. I would like to summarize in a short way the testimony that Behring has put in the record, and Mr. Kosut and I can answer questions. Mr. BIAGGI. Let the record show that Mr. Kosut accompanies Mr. Schmeltzer. Mr. SCHMELTZER. Behring has been in the ocean forwarding busi- ness since 1917. I suppose we even have a few years on Transway, according to what I heard Mr. Berman say. It has offices in 20 cities in the United States and in many overseas areas: These busi- ness relationships enable Behring to identify opportunities for the sale of U.S. goods abroad. The sources for many of the products that Behring finds can be sold overseas are relatively small American manufacturers who either do not have the expertise or cannot take the trouble to export, or they cannot finance their own shipments. Behring and other forwarders are able to complete such transactions because they do have the exporting expertise and have the ability to fi- nance the shipments. Behring believes that the additional exports that can be generat- ed by freight forwarders who are also exporters or who finance shipments is too important to the export commerce of the United States to be thwarted by artificial regulatory restrictions which prohibit freight forwarders from taking a beneficial interest in shipments, whether or not they receive compensation from carriers on those shipments. Behring believes that the return it will receive from exporting or financing shipments will enable it to operate the exporting part of its business profitably without receiving compensation from ocean carriers on its own shipments or those shipments it finances. Behring also believes that prevention of compensation from ocean carriers to freight forwarders on shipments in which the for- warder has a beneficial interest will not be more difficult to police than under the system that has existed in the past, and I think Mr. Berman spoke correctly as to that. In order to prevent the possibility of rebates, it is only necessary that the statute to be passed or the FMC in its regulations require two things: first, that forwarders promptly report to the FMC any relationship with shippers they now have or may have in the PAGENO="0281" 275 future. And on that first item, I might comment that the Commis- sion has already sent out letters to every forwarder asking for such relationships to be revealed. They did that as soon as the budget resolution was passed. The other is the certification requirement that is already in H.R. 4374. This kind of policing is not difficult. We heard earlier that carriers would not know when shippers were related to exporters. But regulation by certification is what, in fact, has existed in the past 20 years, and this would simply be a continuation of regula- tion by certification. Now, I do not think that anybody here would contend that carri- ers verify the certifications. Very often, the payments of compensa- tion to forwarders are made by data processing machines and they are not in the habit of investigating what is in the certification. A certification can be relied on for a few reasons. One is most people are honest. The second is if they are not honest, they do not want to leave tracks that can be proof of misdemeanors in the future. You do not make a certification that is on record, and is provably false. Behring is especially interested in forming an export trading company of the kind described in S. 734 which passed the Senate on March 18, 1981, and is now pending in the House of Representa- tives. The committee report on that bill-that is, senate report 97- 27-emphasizes the importance of facilitating the export of the goods produced by tens of thousands of small and medium-sized manufacturers and other producers who are not presently in a po- sition to ship their goods overseas. That is where American exports can be increased, and that, I un- derstand, is an important interest of this committee. That is, by having expert freight forwarders go to the thousands of companies out there who do not know about export and saying, "We will buy your goods from you; we will find you markets." Behring and many other freight forwarders are in a position to do this, and this kind of opportunity for exporting should be taken advantage of. The reason that a freight forwarder is in such a good position to be an exporter and find markets for the goods of many small export companies is, first, many of the forwarders have strong overseas connections. Second, they know the export business. Third, they deal daily with ship lines, banks, U.S. manufacturers and their overseas customers, insurance companies, and other busi- nesses that constitute the export community. Fourth, many forwarders have purchasing departments, and Behring has had a purchasing department which has functioned successfully for many years. Fifth, Behring and some other for- warders are presently importers; they are not restricted from being importers, and they do this successfully. Sixth, and last, Behring wants to export, and many other freight forwarders want to export, and should be given the ability to do so, that is, not be restricted from doing so. I want to thank you for the opportunity to present these re- marks. If you have any questions, Mr. Kosut and I will be glad to answer them. Mr. BIAGGI. Thank you very much, Mr. Schmeltzer. PAGENO="0282" 276 As a matter of practical application, I think Mr. Berman, the preceding witness, testified that a declaration be made that they have the beneficial interest and that it be certified and be record- ed. He also talked about the fact that anyone would not do busi- ness with the forwarder if he was fearful, or apprehensive, at least, about the confidentiality element in the relationship. How would a shipper know? Would he be required to go to FMC and check with FMC on where this particular forwarder has a beneficial interest? Mr. SCHMELTZER. The direct answer to your question is that he could ask the forwarder. I cannot see how a forwarder could tell a shipper that he was not related to an exporter when, in fact, he was. Mr. BIAGGI. Well, stop, stop. Mr. SCHMELTZER. OK. Mr. BIAGGI. One of your statements was that most people are honest, and I agree with you. But there are some that are not, and I am not so sure that they would be as candid and as forthcoming as you would have us believe. Mr. SCHMELTZER. Well, we are both talking about the people who are not honest and who are not candid. Mr. BIAGGI. Right. Mr. SCHMELTZER. Let us go into that for 1 minute. Most shippers are producers-a United States Steel, a Delco Battery. Behring cannot get into competition with them unless it builds a plant to manufacture batteries, and neither can any other freight forward- er; not even Transway is in a position to do that from what I know. So, most of your shipments are from direct suppliers, and the for- warders cannot read a label and thereby steal the business. Mr. BIAGGI. Let us leave United States Steel alone. Let us talk about those hundreds and thousands of smaller shippers. Mr. SCHMELTZER. Well, the small shippers are not people with whom any forwarder can compete, certainly not be getting infor- mation off the shipping documents. Another big source is the con- struction companies. These are people that forwarders serve and cannot compete with. The third group you are talking about would be middlemen. The testimony and report related to the export trading company bill, shows that the problem is that there are virtually none of these companies, and if there were, these guys are going to be so sharp that they are not going to be dealing with a forwarder who could be in the same business. What I am saying is that the small group of exporters who could be threatened by this-that is, the exporters who are themselves export trading companies or middlemen-are sharp people; they are people who are going to find out these things. And if any for- warder once double-crosses them and steals their customer, that is going to be publicized; it is out there for the world to see. So, it is something that is imagined but in no way is realistic and in no way can happen. Mr. BIAGGI. I might agree with you to a very large extent, but my assessment of human behavior over the years is that when you have something of value-and that confidential relationship has to be a thing of value-when you have something of value, there are PAGENO="0283" 277 some people who would like to profit from it. I am not saying over what period of time they will profit, but I was just curious. I may be giving you the worst case assessment. Mr. SCHMELTZER. Yes. Mr. BIAGGI. If the beneficial interest exclusion enacted recently is repealed, what sort of impact would this have on firms like Behr- ing? Mr. SCHMELTZER. If Behring were no longer able to export? Mr. BIAGGI. No. The beneficial interest provision that was just enacted in the Budget Reconciliation Act-if that were deleted or repealed, what would be the impact on your company? Mr. SCHMELTZER. If the budget resolution provision were re- pealed? Mr. BIAGGI. Yes. Mr. SCHMELTZER. It would mean that Behring's efforts to export, which are becoming successful-and Mr. Kosut can give you a few instances of the importance of actual cases-Behring would be out of that business. There would be other forwarders who would oth- erwise get into that business who would be out of the export busi- ness. An important source of exports would be dried up; an important source or profits for small manufacturers who cannot or will not export themselves would be dried up. I think, in Behring's view and in my view, it would be a very poor thing to legislate. Mr. BIAGGI. Is it your contention that this present provision is necessary to benefit not only Behring, because I can see your self- interest there, but these hundreds and thousands of small clients of yours? Mr. SCHMELTZER. Well, they are not my clients. These are the ex- porters that the Senate committee was interested in. Mr. BIAGGI. The exporters. Mr. SCHMELTZER. The answer to that is "Yes." In any other coun- try in the world, small exporters are helped by freight forwarders who can also export. If a manufacturer of drill bits in Germany is not in the export business and cannot go through many of the export problems, the freight forwarders in Germany, which func- tion on a much broader basis than they do here, can buy those commodities-can find a customer, buy those commodities, and complete the transaction. That is an important function that can take place and should take place, and was precluded before the budget resolution was passed. Mr. BIAGGI. But could you not do the same thing without having a beneficial interest? Mr. SCHMELTZER. No. Mr. BIAGGI. No? Mr. SCHMELTZER. Mr. Kosut can give you a direct example of that, and I think it would be a good idea. There is a crane manu- facturer, and I think he can talk about that. Mr. KosuT. We have located specific opportunities where, if we have the ability to take some type of beneficial interest in the goods, these manufacturing companies would be willing to have their goods sold overseas. PAGENO="0284" 278 The companies we have located, generally, for two basic reasons, do not want to participate in the export market. One, they are not financially able to; two, they do not have the expertise to enter into an export situation. For example, they do not want to learn about certificates of origin that have antiboycott ramifications. They do not want to mess with that; they do not want to be involved or incur the cost necessary to gain the expertise. However, if we can get in the picture and be in a position to take a beneficial interest, they are more than willing to have their goods sold overseas. Specifically, we have located companies in the oilfield equipment manufacturing business, especially spare parts, and an industrial lifting machinery company. They do not want to be involved directly in the export market, but if we can get in- volved and take a type of beneficial interest-and that beneficial interest may run from as little as advancing funds to a direct "buy here and resell overseas" situation-we have located opportunities where we can increase the export trade of the United States. Mr. BIAGGI. What sort of impact would the exclusion, as enacted, have on the majority of independent freight forwarders? The exist- ing situation-the legislation that was included in the Reconcili- ation Act-what impact does that have on the majority of inde- pendent freight forwarders? Mr. SCHMELTZER. The only impact I know is that they are given the opportunity to get into the export business. I cannot speak for every forwarder, but I did poll six clients that I have who are freight forwarders. They range all the way from very small people to large forwarders. Three of them said they wanted to be able to export or to fi- nance; one of them that said that was a small fellow. Three others said that it would not hurt them; that so long as there was a bene- ficial interest prohibition against collecting compensation, it would not hurt them and they did not disfavor the budget resolution. Mr. BIAGGI. Thank you very much, Mr. Schmeltzer, Mr. Kosut. Mr. KOSUT. Thank you. Mr. SCHMELTZER. Thank you, sir. [The following was received for the record.] PAGENO="0285" 279 Section 44(e) of the Shipping Act, 1916 Ce) A common carrier by water may compensate a person carrying on the business of forwarding to the extent of the value rendered such carrier in connection with any shipment dispatched on behalf of others in which the forwarder has no beneficial interest when, and only when, such person is licensed hereunder and has performed with respect to such shipment the solicitation and securing of the cargo for the ship or the booking of, or otherwise arranging for space for, such cargo, and at least two of the following services: (1) The coordination of the movement of the cargo to shipside; (2) The preparation and processing of the ocean bill of lading; (3) The preparation and processing of dock receipts or delivery orders; (4) The prepartation and processing of consular docu- ments or export declarations; (5) The payment of the ocean freight charges on such shipments. Provided however, That where a common carrier by water has paid, or has incurred an obligation to pay, either to an ocean freight broker or freight forwarder, separate compensation for the solicitation or securing of cargo for the ship or the booking of, or otherwise arranging for space for, such cargo, then such carrier shall not be obligated to pay additional compensation for any other forwarding services rendered on the same cargo. Before any such compensation is paid to or received by any person carrying on the business of forwarding, such person shall, if he is quali- fied under the provisions of this paragraph to receive such compen- sation, certify in wirting was dispatched that he is licensed by the Federal Maritime Commission as an independent ocean freight forwarder, that he has no beneficial interest in the shipment involved, and that he performed the above specified service~with resepct to such shipment. Such carrier shall be entitled to rely on such certification unless it knows that the certification is incorrect. PAGENO="0286" 280 STATENENT OF BEHRING INTERNATIONAL, INC. 1. Behring International is a custom house broker and an authorized international freight forwarder licensed by various agencies, including U.S. Customs, the U.S. Federal Maritime Commission, the U.S. Civil Aeronautics Board and the International Air Transport Association. Our Company was established in 1917 as Behring Shipping Company, merged in 1963 with South Ports Forwarding Company to form Behring-South Ports Shipping Company, Inc. Our name was changed in 1971 to Behring International, Inc. Behring operates its own offices in twenty cities in the U.S. and, internationally, in Dubai, Saudi Arabia, Abu Dhabi, Paris, Singapore, London, Manila, Lima, Egypt, and, beginning in January of 1982, in Caracas. Behring has over 1,000 full-time employees around the world, generating annual revenues of nearly $200 million. Behring offers a broad range of services to its customers, including PAGENO="0287" 281 ocean and air freight forwarding, customs, non-vessel operating conmion carrier by water, purchasing and expediting, warehousing and export packing. A comprehensive description of the services provided by Behring can be found in the accompanying brochure. Subsidiary and affiliated companies are: Behring International Export Packers, Inc. - Houston Behring International Freight (U.K.) Ltd. - London Behring Overseas Corporation - Houston Panaircraft Services, Inc. - Houston Behring ~.titernational Singapore (Pte.) Ltd. - Singapore * Behring International S.A.R.L. - France Strategic Transportation Company, Inc. - Houston Behring Overseas Philippines Corporation Behring/Caravan - Saudi Arabia Worldwide Material Services, Inc. - Houston Behring has served many industries over the years, such as construction, heavy machinery and equipment, electronic, petroleum and communications, as well as those involving gov- ernment contracts, and has moved millions of tons of industrial cargo. Behring appreciates the opportunity the Couiniittee has given us to comment upon H.R.4374. Behring supports those sections of H.R.4374 which would enable a freight forwarder to take a beneficial interest PAGENO="0288" 282~ in goods and, therefore, act to facilitate and stimulate the export trade efforts of the United States. We feel that H.R.4374 in conjunction with the Export Trading Company legislation currently in committee in the House, will allow freight forwarders to assist U.S. manufacturers in successfully marketing their goods overseas. 2, We believe that the licensing, bonding and regulatory provisions in Section 1 and 44 of the Shipping Act, 1916 (those sections concerning ocean freight forwarders), have as a general matter worked reasonably well, helped to prevent rebating and assured shippers that freight forwarders will be competent t6 ~er- form their export functions. 3. It is, however, the view df Behring, based on experience and careful study, that it and many other ocean freight forwarde~s or their related companies are especially well equipped to participate as traders in the export commerce of the United States; that the pro- ducts of many small American manufac~urers would find export markets and the export commerceof the United States would increase signi- ficantly if ocean freight forwarders were allowed to trade; and that a simple prohibition against collection of compensation by ocean freight forwarders on their own shipments or shipments of related companies would be sufficient to prevent rebates to for- warders who export or are related to exporters. This could be accomplished either by making permanent the amendments to the Shipping Act effectuated by Section 1608 of the Omnibus Budget Re- conciliation Act of 1981, P.L.97-35, signed into law by the President PAGENO="0289" 283 on August 13, 1981 or by enacting Section 5 of H.R.4374 which prohi- bits a freight forwarder from collecting compensation from carriers on goods in which it has a beneficial interest. In order to assure compliance with this prohibition, we suggest the further require- ments that ocean forwarders (1) certify to ocean carriers from whom they claim compensation that the shipment involved is not one in which the ocean forwarder or its related company has an ownership or beneficial interest (a similar requirement is included in Section 5 of H.R.4374) and (2) notify the Maritime Commission promptly of shipper connections. 4. These changes in the beneficial interest rule would enable Behring or any other forwarder to function as an export trading company. A bill to encourage export trading companies is now pending in Congress. That bill, S.734, which passed the Senate on March 18, 1981 should greatly facilitate export trading companies. Senate Report No. 97-27, accompanying S.734, described the purpose of the legislation, in part, as follows: `~The purpose of the legislation is to improve U.S. export performance by facilitating the creation of U.S. export trading companies which could perform export services for tens of thousands of small and medium-sized American producers. Despite the success of trading companies as "export middlemen" for European, Japanese, and Korean producers, such companies have been slow to develop in the U. S. due to deterrents presented by banking regulations, anti- trust uncertainties, and the traditional insularity of the U.S. market. This legislation modifies pro- visions of existing law which have acted to discourage the establishment or expansion of export trading com- panies, and offers modest incentives to the develop- ment of such companies." 94-856 0 - 82 - 19 PAGENO="0290" 284 The former prohibition under the Shipping Act of rela- tionships between ocean freight forwarders and exporters, or per- sons having a beneficial interest in export shipments, is precisely the kind of "deterrent" that has inhibited the development of export trading companies in the United States. It is this deterrent that Behring is requesting the Committee to remove permanently. 5.. Behring's representatives constantly develop trading opportunities, many of which are not brought to fruition either because the large United States exporters who are Behring's customers are not interested in the business (usually because the sales would not be large enough) or because a United States producer who wants to develop a foreign market lacks expertise or is not capable of financing the sale. Behring would like to pursue these opportunities by forming an export trading company, either alone or in a joint venture with an American bank. Behring has' identi- fied potential export sales opportunities in which it would be interested, for example, sales of American oil field machinery and machine parts to the oil producing nations of the world and sales of specialized cranes to nations which are now developing their manufacturing capabilities. The suppliers from whom the Behring export trading company would purchase for its export sales would generally be relatively small companies producing specialized equip- ment. 6. Behring perceives a tremendously large untapped export market for U.S. goods. Whereas most industrialized western countries export in the 25 percent range of their gross national product, the U.S. consumes internally all but about 7.5 percent. PAGENO="0291" 285 Only 8 percent of the 250,000 U.S. manufacturing companies ship their goods abroad with, 100 ir~,~trial giants accounting for one-half of our total export. A freight forwarder like Behring with a large and encompassing domestic and international network of offices providing freight forwarding, non-vessel operating common carrier by water, purchasing and expediting, transportation, communication, data processing, and export packing services and with established financial and marketing data and contacts, would be extremely helpful in bringing an important share of that other 92.5 percent of U.S. gross national product to the export market. To lend support to U.S. manufacturers in the export of' their goods, the supporting entity would require the capability of taking a beneficial interest in those goods. The interest may range from advancing funds to taking title on a purchase and resale basis. Expressed another way, to lend such support, the supporting entity would be a trading company with the ability and flexibility to act in a broad spectrum from the situation of a short run trader or broker working essentially on commissions to a true international export trader offering complete services from the manufacturer's front door to the end door overseas. 7. U.S. Export Trading Companies may be defined as organizations formed specifically to facilitate the export of goods and services produced in the United States. PAGENO="0292" 286 The "package" of services that might be offered to manu- facturers by an export trading company are financing, marketing and sales, insurance, warehousing, trarrsportatiofl, documentation, and overseas servicing. In this sense, an export trading company represents simplifIed "one-stop" exporting capability for manu- facturers who, for whatever reason, are not currently exporting their product. In addition, the export trading company should be capable of taking title to the goods that it trades, thus acting as the vendor to the overseas buyer and not simply as commission merchant. Of the services listed above, one of the most significant is the transportation component and it is in this area that freight forwarders can play a vital role by putting to use years of accumu- lated experience in getting cargo from origin to destination effi- ciently and economically. At Behring !nternational, we look upon ourselves as not simply freight forwarders preparing documents and arranging for carriage, but as cargo managers responsible for providing a complete and highly specialized export service. This involves inland routing via the most economical means; material receiving and inspection; warehousing; export packing and containerization; banking coordina- tion and insurance; foreign port clearances and delivery. In other words, we want to offer a highly specialized export service that completely coordinates cargo movement from the Buyer's door to the Seller's door in the most efficient and economical manner. PAGENO="0293" 287 If the export trading company legislation is designed to promote U.S. products abroad through facilitation of the exporting process then logically the freight forwarder should be permitted to participate as a full partner in the venture. By permitting the freight forwarder to take a beneficial interest in certain ship- ments, while ensuring that the problem of illicit rebating is solved by not permitting payment of brokerage by an ocean carrier, the legislation ensures that the expertise of freight forwarders is used to the utmost advantage in promoting U.S. exports. 8. Participation in an export trading company would not intrude on the fiduciary relationship between Berbing and its customers. The reason Behring is interested in becoming an export trading company is that the exporters with whom it deals as a freight forwarder have no interest in the specialized kind of busi- ness that Behring would handle as an export trading company. Behririg, moreover, would not compete with its customers who are direct pro- ducer/exporters of goods shipped to foreign countries or are engineering and development companies who ship to their own overseas projects. 9. There would be no substantial incentive on the part of an ocean forwarder to collect compensation from ocean carriers on the shipments of its related companies. Behring as an ocean freight forwarder must claim compensation from carriers to help offset the cost of providing specialized ocean freight forwarder services. The economics would be completely different on shipments made by Behring as an export trading company. On its own export PAGENO="0294" 288 shipments, Behring would seldom earn below 10 percent of the sales price of the merchandise. In contrast, compensation from ocean carriers normally ranges from 1.25 percent to 10 percent of the ocean freight and 2.5 percent would be"i reasonable figure to assume as average compensation. A further reasonable assumption is that ocean freight normally constitutes lOto 30 percent of the sales price of United States ocean export shipments. Thus, on a $10,000 sale, Behring as an export trading company would not earn less than $1,000. On the same sale, an independent ocean frieght forwarder would receive, on the average, 2.5 percent of 10 to 30 percent of $10,000 or between $25.00 and $75.00. Thus, there would be little incentive for a forwarder who is also an export trading company to chance violating the law for the small amount of freight forwarder compensation involved. * 10. In conclusion, Behring wants to expand its activities in the export trading field in which it claims expertise, and believes that, if it is allowed to do so, it and other similarly qualified concerns could make a major contribution to the eco- nomic growth of the United States. E~dward Schmeltzer 6' Schmeltzer, Aptaker & Sheppard, P.C. 1800 Massachusetts Avenue, N.W. Washington, D.C. 20036 -(202) 828-1018 Attorney, for Bebring International, Inc. Respectfully submitted, jil ~. (5 Ii~e~L~ Merrill P. O'Neal President Roger R. vans Vice Presi en enneth P. Kosut Corporate Counsel BERRING INTERNATIONAL, INC. PAGENO="0295" 289 B1!IIHIRIG INTERNATIONAL Cargo Management/Making the difficult seem easy 396 PAGENO="0296" 290 Professionalism is The Difference Professionalism. Computer capabilities include: What all this means to you: It comes from years of accumulated * In-house dots processing. Cost savings. experience and proven dependability * In.houae analysis andpmgrammers. Time is money. Behring can help sove as an international freight forwarder. * On-line systems which provide both by suggesting moce economical, We know the ins and outs ef importing trace.track status of cargo in some alternative moths sod carriers, and by and exporting. As an international affices. monitoring shipments to avoid uemec- freight forwarding mmpany, we offer * Teleprucessingnetworkcumpased of essary delays. full-service mpability for handling the hardware and software systems movement of cargo to and from all with leased circuits and terminal Over six decades of international parta of the globe. Efficiently. equipment. freight forwarding experience. Emnomicaliy. * Exception, status, and action i517.That'stheyearllehringShipping liebring provides you with the reports. Company began so a surface freight advantage of doing business with one * Electronic interconnects, tapeand/or frrwarder in New York. firm for the cargo management reporta to match EDP requirements After numerous additions and a name r: n~to d p nd tt :~w Cntrlytem 11 wing nm~itet ?°~fi~i w I service company,with speciallytrained How we da it: Well even package it for you. pro Ic staffing sar offices - jor Basically, in four stages: (1) We select liehring's facility in Houston can cities andporla worldwidetuserveyaar themust appropnatecarnerorcarners provide export packing for any item, every skipping need. fur the aasignment; (2) we arrange from abox of"O" rings too mammoth customs and mnsular clearances; (I) construction project. Serving many industries, including weprepareany orallducumente;(4)we Unusual needs? construction, heavy machinery and supervise thehandbng and movement Behring can meet your special require- equipment, electranim, petroleum and uf your cargo. Simple. Faat. Efficient. mento, too. From providing emergency communications, as well as those Another plus; Bebring has its ascii hand deliveries overoean to moving invalving government contracts, we farilities and peroonnel in many areas hage all platforms anywhere in the"oll bavemovedmillionaaftonsofinduatrial af the worid, as well as its own private patch", llehring can do it. cargo. communications network. Our air freight terminals are equipped with fork lifts, pallet roller bed teucks, and electronic scales. Advantages? From World Headquarlera of B hring point of origin ¶° final destination, Internatiasal at 10700 Nurfhweat Freeway in Houston, Texas U.S.A. delivery. Behring offers your company complete services, worldwide. On land, sea or air-coming and going-we'll get your shipment where you want it Computer Capabilities. TheManagementlnformotion Services division of Behring International beasts one of the moat sophisticated computer systems. Its IBM 4341 system is housed in oar of the moat advanced facilities, complete with safety devices which insure aninter- rupted services to customers and llehring International offices. PAGENO="0297" Recent history includes the move of mrporate headquarters from a mn- gested area of downtown Houston in the spring of 1980 to an ultra-mcsdern, spacious new building in Northwest Houaton. Industry observers have recognized Behring's growth in areas which include Europe, the Middle East, and the Far East Future historians probably will note Behring International, Inc., entries into markets spanning the globe in areas of South America, Afrim, and possibly the People's Republic of China as it continues to grow worldwide. We're forward-looking forwarders. Behring provides rigorous training programs, both in-house and through industry seminars, in our continuous effort to maintain a professional staff of experts versed in all phases of shipping: Freightmovemento. Prepar- ation of documents. Carrier rates. Charter negotiations. Letters of credit and collections. Cargo insurance. Information on foreign and domestic conditions. Customs regulations. Your benefits, Here are just a few of the numerous benefits Behring can offer your mmpany: * Single-invoice billing covering all costs. Prompt notification of carrier departures and arrivals. * Preparation of all required customs and consular documento. * Clearance of all shipments to the U.S. * Preparation of insurance declara- tions and processing of claims. s.-. * Representatives throughout the world. * Priority processing of incoming ~ shipments and coordination of J inbound customs clearances. * Fast and accurate data processing ~ capability. ~ * Private telecommunications network. * Cargo handling facifities. * Unitized or containerized loads. ~- :~g 291 Our Qualifications, with the opening of offices in New Behring is a licensed Custom House Orleans, Los Angeles and New York. Broker and Authorized Freight The company purchased Leslie B. Forwarder in the U.S. and adheres to Canion Customs Brokers, Inc. in 1970 the requirements of major licensing and a year later the corporate name agencies around the globe, including was changed to Behringlnternational, U.S. Customs, the U.S. Federal Inc. Further growth ensued. AnotherNew is alAirTrnprtAsocitinand Yhk ffi w pendthtyar others. were established in Beaumont, Tx., Ourcorporotename-Behrmglnterna- and Lake Charles, La., Miami, Dallas tonal, Inc. - is relatively new, barely and Chicago offices started business nine years old, but the lineage dates in 1973, and the Singapore officewas back 63 years to 1917 when Behring added in early 1974. Additions came - Shipping Company was established, rapid-fire after that The Paris office Peter Behring formed the parent firm was opened, then Saudi Arabia in in New York and more than half a 1975, the same year Behring Intema- century later, his name retains aplace tisnal Export Packers, Inc., was of prominence in the corporation. Sa formed. Baltimore Md., Edison, N.J. does thename of Alan Newhouse,now and Dubai, U.A.E. offices alsoopened Chairman of the Board, who founded that year. South Ports ForwardingofHoustonin Since then, additions have included 1946. His company grew steadily and Tulsa,Boston,Nsrfolk,SanFrsncisco, in 1963 forged ties with Behring. The Seattle, London, Manila, Cleveland, new corporation became Behring- and Camden, Delaware and Aba South Ports Shipping Company. Dhabi. Our most recent addition is The latter name became highly recog- Atlanta, Ga, PanaircraftServices, Inc. nizable asits growthpattem continued was also added in this era. PAGENO="0298" Air Freight Services 292 The far-reaching, fast-paced world of international trade demands a well- staffed, fully equipped organization of worldwide capability, providing door- to-door responsibility that moves material through the red tape of documentation and customs require- ments. Behring International, Inc., offers these important advantages to our customers, with the adaptability that cameo only from an organization of both functions: freight forwarder and cargo agent. We therefore avoid the limitations of one carrier, one stereo- typed system, on a "take it or leave it basis". We work as an integral port of your own distribution system, to establish the best way to move cargo - - monitoring the shipment from origin to final destination. No matter how many sir, ocean and ground carriers are involved, the shipper and the consignee have only one contact... receive only one invoice for services including pickup, documentation, air transport, customs clearance and duties, and final delivery. Behring International, Inc. publishes its own international air tariff. We iooue our own air waybill and maintain continuous coiitrol of numer ous consignments underone maoterair waybifi to authorized foreign agents or overseas offices. Our services include: A. Complete documentation services U.s. shipper's export declaration s Air waybilla * Commercial invoices * Packing lists * Certificates of origin * Consular invoices Special customs invoices * Bank documentation * Phytosanitary certificates B. U.S. Department of Commerce export license application C. Individual account supervision D. Carrier selection and booking E. Marine insurance coverage or placement F. Rate analysis, negotiations and audits G. Messenger service H. Special services * Hand carriers * Charters * Holiday labor * Translations I. Single invoice billing J. Complete expediting services K. General export shipping information L Airport loading inspections M. Document distribution N. C&F or CIF quotations 0. Status reports PAGENO="0299" Air Charters 293 As one of the moot active air charter activity, Behringisfrequentlyinvolved Here again, this service is tied inwith operations in the world, Behring with such commodities as electronics, a complete package, such as inland handles an average of one air charter hospital supplies, machinery, agricul- shipping, packing, aircraft loading, every day of the year. tural products and many others. documentation, and frequently pro- Everything from Boeing 747s to Lock. viding an in'flight escort to insure heed C130s are chartered on behalf of pmperhandlingatthefinsldestination. our clients world-wide. Although oil field related equipmentis always a contributing factor to this TV ~itJ PAGENO="0300" Ocean Forwarding 294 Ocean shipping expertise is offeredto customers at every Behring Interna- tional, Inc. office worldwide. To assure prompt, safe delivery of ship- ments, Behring International provides highly skilled personnel in all areas related to ocean shipping. Here are some of these services: F. Rate analysis, Negotiations and Aodits G. Messenger service H. Special services * Charters * Holiday labor * Translatioss I. Single invoice billing J. Complete expediting services K. General export shipping information L Pier and loading inspections M. Document distribution N. FAS, C&F or CIF quotations 0. Status reports A. Complete documentation services * U.S. shipper's expert declaration * Dock Receipts * Ocean bill of lading * Commercial invoices * Packing lists * Certificates of origin * Consular invoices * Special customs invoices * Bank documentation * Phytosanitary certificates B. U.S. Department of Commerce export license application C. Individual acmunt supervision D. Carrier selection and booking K. Marine insurance coverage or placement New Service: N11OC(1~ Non-Vessel Operating Common Carrier Through aBehringaffihiatedmmpany, Strategic Transportation Company, Inc. weofferdoortodoortransportation at competitive through rates, with single company responsibility and mvered byourown intermodalthrough hO of lading. We keep track of specialty vessels worldwide, allowing so to move horses or houses, and plates or complete manufacturing plants. If it moves in any typecontainerorasa bulkload, we are prepared to handle the shipment. When rates are important, when the sites areremote,whentimingiscruciul, it's time for "Strategic". 2: ~ PAGENO="0301" 295 Other Services Import Services Importing is a highly complicated business, with numerous documenta- tion requirements to accommodate various U.S. Government agencies. Behring International, Inc. can ease "paperwork pains" for bath ocean and air imparts. Our customer services include: Motor Freight Brokerage Behring also can provide motor freight brokerage for both exports snd imports which includes: A. ICC property brokers license *B78-78 * MC 130732 B. Trucking srrangements * Single shipment * Truckloads, multiple truckloads * Long or short term contracts * Domestic freight * Export and import freight * Piggyback * Heavy lift and outsized cargo C. Truck freight rate negotiations * Common carriers * Special commodity carriers * Contract carriers * Classification of import gsoda and duty estimates * Customs clearance * Consumption entries * Transportaton in-bond entries * Informal entries * Warehouse entries and withdrawals * Camels * Custom bonds * Marine insurance * Drawback services * Protests and petitions * Landed cost calculation * Registration of articles for exportation and return * Inbond transportation arrangements * Onforwarding to inland destinations * Warehousing and diatri bution coordination * Transportation strategy * Breakbulk services * Transaction structure analysis/planning for minimizing duty liabifity * TIB. monitoring and export coordination [Whereupon, at 12:08 p.m., the subcommittee was adjourned.] PAGENO="0302" PAGENO="0303" REGULATORY REFORM THURSDAY, NOVEMBER 5, 1981 HOUSE OF REPRESENTATIVES, SUBCOMMITTEE ON MERCHANT MARINE OF THE COMMITTEE ON MERCHANT MARINE AND FISHERIES, Washington, D.C. The subcommittee met, pursuant to notice, at 9:30 a.m., in room 1301, Longworth House Office Building, Hon. Mario Biaggi (chair- man of the subcommittee) presiding. Present: Representatives Biaggi, Patman, Hertel, and Snyder. Staff Present: Ric Ratti, Rudy Cassani, Cyndy Wilkinson, Gerry Seifert, Ed Welch, Steve Little, Beverly Rowen, Mike Toohey, John Bruce, Dave Parker, Gwen Lockhart, and Ann Mueller. Mr. BIAGGI. The Subcommittee on Merchant Marine is meeting today to continue consideration of H.R. 4374, a bill to improve the international ocean commerce transportation system of the United States. Today we will be privileged to hear from witnesses repre- senting liner conferences, American-flag ship operators and ship- pers. The first 2 days of hearings highlighted the deterioration and de- cline of the U.S.-flag fleet. This legislation will not, on its own, re- verse that decline, but we hope it will be an important step in the right direction. So far, I believe it is safe to say that there is overwhelming sup- port for broad antitrust immunity-maybe somewhat broader than there is in this bill. There seems to be a split of opinion on the benefits of closed and open conferences. However, we have not been able to obtain any hard data or facts to support the divergent views. There is support for clarification of intermodal rate setting au- thority that does not conflict with shoreside rate setting authority involved in the movement of goods in international commerce. There have been frank discussions on the filing of rate `structures and their effect on the regulation of international commerce. The freight forwarders have called our attention to a number of regulatory problems. Shippers seem to be uncertain as to the use and impact of ship- pers' councils. Hopefully, we will continue to receive the information and data that can assist us in forging ahead with regulatory reform legisla- tion that is beneficial to the U.S. consumer and the U.S. maritime industry. Before calling our first witness today, I would like to insert the following into the record: (297) PAGENO="0304" 298 A letter from the Department of State, dated October 28, 1981, enclosing: An aide memoire from the Governments of Belgium, Denmark, Finland, France, the Federal Republic of Germany, Italy, Japan, the Netherlands, Norway, Portugal, Spain, Sweden, and the United Kingdom; and A memorandum from the Government of Greece. A letter from the Federal Maritime Commission, dated October 22, 1981. A statement by Frank Drozak, president, Seafarers International Union of North America (AFL-CIO). A letter from the attorney general of the State of New York, dated October 20, 1981. A statement by Alfred Maskin, executive director of the Ameri- can Maritime Association. A letter from Southern Overseas Corp., dated October 14, 1981, with enclosure. A statement by Ralph N. Thayer, chairman of the Water Freight Transportation Maritime Committee of the National Industrial Traffic League. A letter from the Chemical Manufacturers Association, dated Oc- tober 28, 1981. A letter from Matson Navigation Co., dated September 16, 1981. A letter from the Pacific Maritime Association, dated September 21, 1981. A letter from the Honorable Dan Coats, Member of Congress, dated October 27, 1981, enclosing a statement from North Ameri- can Van Lines, Inc. The record will remain open until December 7, 1981. Without objection, so ordered. [The following were received for the record:] PAGENO="0305" 299 OCT Dear Mr. Chairman: The Governments of Belgium, Denmark, Finland, France, the Federal Republic of Germany, Italy, Japan, the Nether- lands, Norway,. Portugal, Spain, Sweden, and the United Kingdom have ruquested that the Department convey to you the comments in the enclosed aide memoire, dated October 14, 1981, on H.R. 4374, a bill to improve the international ocean transportation system of the United States. The enclosed memorandum contains the views of the Government of Greece on the same subject. Yours sincerely, Richard Fai~banks Assistant Secretary for Congressional Relations Enclosure: as stated The Honorable Mario Biaggi, Chairman, Merchant Marine Subcommittee, House of Representatives. 9L~_856 0 - 82 - 20 PAGENO="0306" 300 Aide Memoire The Gove~ents of Belgium, Denmark, Finland, France, the Federal Republic of germany, Italy, Japan, the Netherlands, Norway, Portugal, Spain, Sweden and the United Kingdom ("the governments") wish to bring to the attention of the State Department their views on the bill to improve the international ocean commerce transportation system of the United States (HR.4374) introduced by Congressman Biaggi on 4 August 1981. The governments attach great importance to maintaining good relations with the United States in the maritime field. They regret that, for a number of years, disagreement on the regulation of international shipping practised by the United States has been a major source of friction between the United States and its major maritime partners. Serious problems have arisen owing to the uncertain scope of the anti-trust immunities applied to shipping, to the burden imposed by complex Federal Maritime Commission (FMC) regulation, and to the unilateral application of this system, outside US territorial jurisdiction, to an international trade in which many other nations besides the United States have an equal interest. The governments believe that reform of the US regulatory system would be of benefit to all shipping in US trades. Against this background, the governments welcome the offer by the Department of State of discussions between interested OECD member States with a view to the development of common maritime policies. Similarly, they welcome the attention the US House of Representatives is paying to these important issues. The governments welcome many aspects of HR. 4374. They believe that if a bill along the lines of HR. 4374 was enacted, it would help reduce the friction between the US and its trading partners. However it does not eliminate the unilateral application of US laws to international shipping and on certain other matters of major concern the bill is either silent or does not go far enough to solve past conflicts. PAGENO="0307" 301 The governments particularly welcome Congressman Biaggi's declared purpose, in introducing HR. 4374, of amending US shipping legislation so as to ensure greater recoguition of commercial maritime standards in the regulatory process. The governments strongly support a maritime policy based on commercial criteria and the maximum possible self-regulation by the shipping industry. Specifically, the governments welcome the following features of HR. 4374:- (a) The reduction of the regulatory burden. The governments particularly welcome the provisions for a strict time limit on FT~IC decision-making (although consideration could also perhaps be given to giving agreements provisional approval within 45 days unless a complain-C ant can prove substantial harm); the placing of the burden of proof on the opponents of an agreement; and the deletion of the public interest test as one of the criteria for the approval of an agreement (Sections 2(3),(5) and (6).). The governments consider all these provisions would clarify and simplify the regulatory process. (b) Its provisions for the operation of US Shippers' Councils (Section 3). The governments consider such Councils valuable in giving shippers an influence over rates and conditions of service. The governments welcome the provisions of Section 2(1) of the bill which would permit conferences to limit their membership. The governments believe that such rational±sed conferences would benefit all shipping in the US trades by reducing costs. They also believe that rationalised conferences cannot acquire monopoly power as long as the conditions of conference membership are non- discriminatory and the trade remains open to competition from non-conference lines. The governments presume that, under Section 2(4) of the bill, conferences would be required to admit a US PAGENO="0308" 302 carrier to membership only if such a carrier were willing and available to serve the trade, and that it is not the intention of the bill to give US carriers a veto over the formation of a conference in a particular trade. The governments believe that the bill should not appear to give special privileges in respect of conference membership to carriers of one particular nationality. The governments welcome Congressman Biaggi's stated aim, in introducing his bill, that US laws and procedures should be consistent with those generally accepted in international trade, and his recoguition of the importance of this factor if the US is to compete in international shipping. In this context, the governments would like to draw attention to certain aspects of US regulatory policies which are currently a major cause of friction between the US and its trading partners but which are omitted from the bill. These are as follows:- (a) The present uncertainty about the extent of anti-trust immunities for liner conferences in US trades. This provides a very unfavourable climate for the conduct of international trade: greater certainty is essential if carriers are to plan ahead and invest in improved services. The governments would therefore like to see liner shipping in US trades exempted altogether from anti-trust penalties. (b) Joint service agreements and intermodal operations. Both of these are currently inhibited by US regulation. Both are necessary to enable carriers, and thus their customers, to obtain the fullest benefits from modern container developments and the governments would welcome a provision in the bill permitting both to operate without inhibition. PAGENO="0309" 303 (c) Jurisdictional concerns. Shipping is an international activity affecting countries at both ends of the trade route equally. The governments therefore believe it is urgent to reach a common view on mutually acceptable linits to the territorial reach of each country's jurisdiction over shipping. In particular, the govern- ments would like to see a provision in the bill ensuring that non-US shippers councils can operate without restriction in US trades. The governments would be happy to provide any further elaboration of the above points if this would be helpful. They also hope~ there will be an opportunity for them to provide more detailed comments on the bill at a later stage. The governments would be grateful if the Department of State would convey their comments to the House of Representatives Merchant Marine Sub-Committee to which HR. 4374 has been referred. They would also be grateful if the Administration would take account of these views when it formulates its own position on the bill. WASHINGTON DC 14 October 1981. PAGENO="0310" 304 EMBASSY OF GREECE WASHINGTON. 0. C. MEMORANDUM "Greece has not participated in the recent demarches by the member countries of the Consultative Shipping Group (CSG) on the bills introduced by Messr. Gorton and Biaggi, because she does not share the positions advanced in the aforementioned demarches concerning closed conferences. More specifically, Greece believes that closed conferences hinder free competition in regular lines as well as the right of shippers to use maritime transport services of their choice at the most profitable cost. Nevertheless, Greece shares the opinion that an exchange of views between t~ie United States and the CSG countries would be constructive before the U.S. Administration reaches final decisions on subjects of maritime policy." October 15, 1981 PAGENO="0311" 305 ~J~L iU.t ii ±11intiiiu tI ununt ton lUt htn~ton 11 L L1f~ (~Lt~ afth'~hr1u8~! October 22, 1981 Honorable Mario Biaggi Ctia irman Subcommittee on Merchant Marine H2-531, House Annex #2 Washington, DC 20515 Dear Mr. Chairman: I note that in testimony before the House Merchant Marine Subcommittee on October 7, 1981, Mr. Richard Lidinsky, representing the North Atlantic Ports Association, described an action taken by the Federal Maritime Commission at its meeting of that same date. I am concerned that Mr. Lidinsky's statement may have given the Committee the incorrect impression that the Federal Maritime Commission devoted nearly a year and a half to reach a decision that it did not have jurisdiction over a particular terminal lease agreement. Such an impression would not be an accurate reflection of events. I assume that Mr. Lidinsky will avail himself of the opportunity to correct the record on this point. Nonetheless, I consider it important that the Commission quickly advise the Committee of the background of the matter to which Mr. Lidinsky alluded. Mr. Lidinsky represented that a terminal lease agreement had been submitted for approval to the Federal Maritime Commission approximately two years ago. He further stated that after taking about nine months to approve the lease, the Commission then subjected the agreement to an environmental analysis, in the context of a dispute between the parties over wording, and subsequently found that the Commission lacked jurisdiction over the lease. I request that the record of your deliberations on H.R. 4374 reflect the following facts. The agreement in question (T-3753) was a terminal lease agreement between the Maryland Port Administration and Atlantic & Gulf Stevedores. The agreement was submitted for Commission approval pursuant to the requirements of section 15 of the Shipping Act, 1916 on December 20, 1978. The agreement was approved on February 9, 1979. The entire process took slightly over one month. Mr. Lidinsky's assertion that nine months were required to act initially on the agreement is incorrect. Subsequent to the approval of the lease agreement, the parties to the agreement became involved in a dispute over the computation of charges. The lease contained a provision which required certain charges to be paid by the stevedore after PAGENO="0312" 306 500,000 tons of cargo had been handled at the facility. The particular provision involved read as follows: 3. RENTAL (a) LESSEE shall pay to MPA base rent during the first Lease year of the initial term of this Lease the sum of One Million Eight Hundred Seventy Two Thousand and 00/100 Dollars (1,872,000.00) plus an additional rent computed at a rate of $3.00 per ton for each ton of cargo in excess of 500,000 tons loaded or unloaded at the demised premises during the first Lease year of said initial term. The Maryland Port Administration interpreted the term `cargo to include, for the purposes of this provision, the weight of shipping containers in which the cargo was placed. Atlantic & Gulf objected to such an interpretation and argued that cargo should be defined as the weight of the contents of the shipping containers. In an effort to resolve this dispute, Atlantic & Gulf filed suit in the Circuit Court of Baltimore, and MPA, by Mr. Lidinsky, petitioned the Federal Maritime Commission to issue a declaratory order finding that, for purpose of the subject provision, "cargo" included the weight of the container. The grant of petitions for declaratory orders is discretionary with the Federal Maritime Commission. At no time has there been any doubt about the Commission's jurisdiction over Agreement T-3753. At no time did the Commission find that it lacked jurisdiction over Agreement T-3753. The approved lease agreement was and still is in effect. The situation facing the Commission was one in which commercial parties involved in a contractual dispute had each requested relief from different fora. The subject of the dispute was a contractual provision which did not particularly require the expertise of the Federal Maritime Commission. The Commission does not believe it should become involved in commercial disputes between parties when these disputes can be resolved through commercial means and when there is no statutory or regulatory purpose to be served by FMC intervention. The resolution of the parties' dispute over the meaning of the term "cargo" is purely a contractual matter. "Cargo", in the context here presented, is not a term of art which the Commission is better able to interpret than courts or arbitrators. For this reason, the Commission unanimously PAGENO="0313" 307 denied MPA's request for a declaratory order. I submit that this disposition of the request is a reflection of enlightened regulation by the Federal Maritime Commission and in no way involves a finding that the Commission lacks jurisdiction over the agreement. Mr. Lidinsky's reference to the lease being "put through" an environmental impact analysis can only refer to the fact that the Commission's Office of Energy and Environmental Analysis routinely found that Commission action on MPA's petition for a declaratory order would be of no significant impact. This analysis is required by Congress and is not a matter about which the Commission has discretion. At a time when all regulatory programs are being subjected to scrutiny to determine whether their burdens outweigh their benefits, I find it most disturbing to see the Commission's action of October 7, 1981 on MPA's request for a declaratory order described in a manner which implies that the Commission consumed an inordinate amount of the parties' time approving an agreement and then reversed an earlier position on jurisdiction. The agreement was proved swiftly. The matter was brought to the Commission by Mr. Lidinsky in the context of a commercial dispute between the parties to the lease. The Commission properly exercised its discretion to encourage the parties to resolve their disputes outside the regulatory process. Please do not hesitate to contact me if you have any questions about this matter. Sincerely yours, / I Alan Green, Jr. Chairman cc: Honorable Paul N. McCloskey Honorable Gene Snyder Honorable Dennis M. Hertel Honorable Fofo I.F. Sunia Mr. Richard Lidinsky PAGENO="0314" 308 TESTIMONY OF FRANK DROZAK PRESIDENT SEAFARERS INTERNATIONAL UNION OF NORTH AMERICA1 AFL-CIO BEFORE THE SUBCOMMITTEE ON MERCHANT MARINE COMMITTEE ON MERCHANT MARINE AND FISHERIES HOUSE OF REPRESENTATIVES ON H.R. L~37L4 OCTOBER JO, 1981 MR. CHAIRMAN AND MEMBERS OF THE SUBCOMMITTEE: M~ NAME IS FRANK DROZAK. I AM THE PRESIDENT OF THE SEAFARERS INTERNATIONAL UNION OF NORTH AMERICA, AFL-CIO1 WHICH REPRESENTS UNLICENSED SEAMEN ON U.S.-FLAG VESSELS. THE SEAFARERS INTERNATIONAL UNION APPRECIATES THE OPPORTUNITY TO EXPRESS OUR VIEWS ON THE PROPOSED BILL WHICH WOULD EASE THE REGULATORY ENVIRONMENT WHICH PRESENTLY EXISTS IN THE WORLD OF INTERNATIONAL OCEAN SHIPPIN~3. H.R. 1437q PROPOSES MUCH NEEDED REFORM IN THIS AREA. WE COMMEND THE SUBCOMMITTEE FOR ITS CONTINUED EFFORTS TO IMPROVE AND STRENGTHEN THE UNITED STATES-FLAG MERCHANT FLEET. ALL OF US IN THE MARITIME COMMUNITY HAVE EXPRESSED GREAT CONCERN OVER PAGENO="0315" 309 THE CONTINUING DECLINE OF OUR MERCHANT MARINE. AT PRESENT, THE U.S.-FLAG FLEET CARRIES LESS THAN FOUR PERCENT OF OUR NATION'S FOREIGN COMMERCE. LEGISLATION, SUCH AS THAT PRESENTLY BEFORE THE COMMITTEE, IS VITAL IF WE ARE TO REVERSE THIS DISHEARTENING TREND. THE SEAFARERS INTERNATIONAL UNION SUPPORTS LEGISLATIVE AND REGULATORY INITIATIVES WHICH WILL PROMOTE A VIABLE UNITED STATES-FLAG MERCHANT FLEET CREWED BY AMERICAN SEAMEN. ~JE SUPPORT THE INTENT OF H.R. 4374 WHICH WOULD GREATLY IMPROVE THE REGULATION OF INTERNATIONAL OCEAN SHIPPING AND CONSEQUENTLY CONTRIBUTE TO A STRONGER, MORE COMPETITIVE U.S. - FLAG MERCHANT MARINE. OUR COMI1ENTS WILL BE KEPT GENERAL IN NATURE AND WE WILL LEAVE DETAILED COMMENTS TO THOSE SEGMENTS OF THE INDUSTRY MORE DIRECTLY INVOLVED WITH THE FEDERAL IIARITIME COMMISSION AND MARITIME REGULATION. THE SEAFARERS INTERNATIONAL UNION FULLY SUPPORTS THE CONCEPT OF ANTITRUST IMMUNITY FOR CONFERENCE AGREEMENTS AND ACTIVITIES IN INTERNATIONAL OCEAN SHIPPING. OUR CARRIERS ARE CURRENTLY DISADVANTAGED BY THE EXTRATERRITORIAL APPLICATION OF U.S. ANTITRUST LAWS. NO OTHER NATION IN THE WORLD IMPOSES SUCH A TREMENDOUS BURDEN ON ITS OPERATORS AND U.S. -FLAG COMPANIES ARE SERIOUSLY HANDICAPPED WITH RESPECT TO THEIR FOREIGN COUN- TERPARTS. THE ORIGINAL 1916 SHIPPING ACT SOUGHT TO PROVIDE PAGENO="0316" 310 SUCH IMMUNITY; HOWEVER, REPEATED INTERVENTION BY THE JUSTICE DEPARTMENT HAS SINCE FORCED U.S. OPERATORS TO COMPLY WITH THE ANTITRUST STATUTES WHICH HAS CONTRIBUTED TO THE DECLINE OF OUR U.S.-FLAG MERCHANT MARINE. ANOTHER IMPORTANT AREA WHICH THIS BILL ADDRESSES IS THE CONFERENCE SYSTEM. As IT EXISTS TODAY. THE CONFERENCE SYSTEM DOES NOT PROVIDE AN EFFECTIVE BODY FOR THE EFFICIENT CARRIAGE OF OUR INTERNATIONAL TRADE. CHANGES MUST BE FORTHCOMING IN THE CURRENT SYSTEM WHICH WILL ALLOW OPERATORS TO WORK TOGETHER FOR THEIR MUTUAL BENEFIT. ALTHOUGH THE COMMITTEE HAS MADE IT UNDERSTOOD THAT IT WOULD NOT INCLUDE ANY "PROMOTIONAL" PROVISIONS IN A REGULATORY BILL, WE FEEL THAT THIS IS AN IMPORTANT AREA WHICH MUST BE ADDRESSED. WE ARE IN STRONG SUPPORT OF THE BILATERAL APPROACH TO A STRONGER MERCHANT FLEET. WE FEEL THAT ANY LEGISLATION DESIGNED TO PROMOTE THE UNITED STATES MERCHANT MARINE SHOULD PROVIDE FOR BILATERAL SHIPPING AGREEMENTS WHICH ARE NEGOTIATED WITH THE AID OF AN INDUSTRY ADVISORY COMMITTEE WITH ADEQUATE LABOR REPRESENTATION. THE SEAFARERS INTERNATIONAL UNION THANKS YOU FOR THE OPPORTUNITY TO EXPRESS OUR VIEWS ON THESE SIGNIFICANT LEG- ISLATIVE PROPOSALS. HOWEVER. BECAUSE THIS DRAFT BILL DEALS PAGENO="0317" 311 PRIMARILY WITH THE REGULATORY ASPECTS OF UNITED STATES MARITIME POLICY, THE SEAFARERS INTERNATIONAL UNION RESPECTFULLY URGES THE SUBCOMMITTEE TO ADDRESS THE PROMOTIONAL ASPECTS AS SOON AS IS CONVENIENT. WE WILL BE PLEASED TO PROVIDE ANY FURTHER ASSISTANCE TO YOU OR YOUR STAFF. THANK YOU. PAGENO="0318" 312 STATE OF NEW YoRK DEPARTMENT OF LAW ROBERT ABRAM s Two WoRii TRADE CENTER AT~1v GE~ ERAL NEW YORK. N Y. 10047 October 20, 1981 Honorable Mario Biaggi Chairman Subcommittee on Merchant Marine H2-531, House Annex #2 Washington, D.C. 20515 Attn: Rudy Cassini, Counsel Dear Congressman Biaggi: Enclosed please find my statement in support of HR 4374 to the extent that it would require the bonding of non-vessel operating common carriers (NVOCCs). Although I was unaware that hearings were scheduled on October 6, I hope that you will share my comments with the Committee. I congratulate you on proposing this important and thoughtful legislation. Very truly yours, I.. ROBERT ABRAMS Attorney General PAGENO="0319" 313 House of Representatives Cormiittee on Marchant Marines and Fisheries Subcarrnittee on Marchant Marines HR 4374 STMEME~T OF I~DBERT 1~BR1~MS, NEW YORK ST7~!IE ATIORNEY GENERZ~L I submit this staterrent in support of HR 4374 to the extent that it would, in section 5, require the posting of a bond of at least $50,000 by non-vessel operating cat~n carriers (NVOCCs). Under existing regulations, NVOCCs are rrerely required to file their rates, rules and tariffs with the Federal Maritiise Ccitrnission 46 U.S.C. § 817 and 46 C.F.R. § 536. I believe that the present filing requirenents provide little protection for the public and must be strengthened. Only financially responsible covers should be permitted to accept goods for ship~ent; consurrers should have recourse for their losses guaranteed. Such bonding is already provided for passenger shipping under 46 U.S.C. 817(3), "Financial responsibility for inderroifications of passengers for non-performance of transportation" and 817(d), "Financial responsibility of ~ners and charters for death or injury to passengers and other persons.' ()ean Freight Forwarders are required to be licensed and bonded under 841(b). Such bonding of NVOCCs is needed in light of the experiences set forth below. PAGENO="0320" 314 During the last several years, the New York Puerto Rican carmunity has been victimized by irresponsible, undercapitalized NVOCCs. SalE of these companies advertise along with reputable carpanies in the Spanish-language rredia; others get business because they are nearby, others because they offer lcr~i rates. Sate stay in business for a few years, others for a few xronths. Many go out of business only to reappear under a different nane. The goods they contract to ship are often "lost' or arrive damaged. On occasion, whole shipients do not arrive. Although many of these companies charge extra fees for insurance, few are actually insured. The consurrer, who has left New York for Puerto Rico, alirnst itritediately after parting with his goods, is rarely able to recover his loss. On the rare occasion when a consurrer returns to New York and obtains a judgnent, the company is without assets. During the pest three years, the Puerto Rico Public Service Camrission has obtained approximately $1,000,000 in administrative fines and restitution awards which rexein uncollected. We too have been unable to protect consurrers from these irresponsible operators. Last year, for example, ~e learned of an NVOCC, El Faro de Cabo Pojo Shipping Company a/k/a Capt `s Trans/Ocean, which had collected used household goods fran over seventy consurrers in the later part of 1979 for shipient to Puerto Rico. Unable to obtain credit fran a vessel operating carrier in New York, the carpany PAGENO="0321" 315 contracted, through an alter ego, Jasman Freight Forwarders, Inc. (not a licensed freight forwarder), to have the goods shipped from Jacksonville, Florida to Puerto Rico. When the goods reached Jacksonville, howover, El Faro was unable or unwilling to ireet its responsibilities to its custarers. With no rrcney to pay for the ocean trip and no docurrentation, the goods remained in Jacksonville for over 8 rronths while 70 families awaited them in Puerto Rico, sare in espty hates. The Attorney General brought suit against the coripanies and their principals and won a judgrrent directing, inter alia, restitution and payrrent for the shipping. (State v. El Faro de Cabo Rojo Shipping Co., Index No. 40708/80 Suprese Court of New York, New York County). Hc~ver, because the companies no longer have assets, the jod~rent remains unsatisfied. We wore able, ha~ever, to deliver mast of the goods to the waiting families. Several consurrers have also won judgrrents in the Small Claims Court that have not been satisfied. The El Faro experience is only one of many. If these companies had been required to post bonds, the consumers involved could have recovered their losses. Last year, when the Federal Naritirre Cairmission proposed the elimination of even the minimal filing requirerrents, I joined with the Puerto Rico Federal Affairs Administration, the Puerto Rico Maritirre Shipping Authority, Baltascer Corrada, Resident Commissioner of Puerto Rico, and several concerned congressrren including John Marphy, Thomas 9'r-856 0 - 82 - 21 PAGENO="0322" 316 Ashley and Joseph Addabbo, to oppose successfully the deregulation. (46 C.F.R. 531, 536, Docket No. 80-37). At that tine, I expressed the hope that legislation would be enacted to provide greater protection to the over one million persons of Puerto Rican origin who live in N~~i York City. The proposed legislation is a long step in that direction and I strongly endorse it. IOBERI ABRANS Attorney General of the State of N~ York PAGENO="0323" 317 Statement of American Maritime Association on H.R. ~ submitted to the Subcommittee on Merchant Marine Committee on Merchant Marine and Fisheries Tjnited States house of Representatives Alfred Maskin, Executive Director October 15, 1981 PAGENO="0324" 318 Mr. Chairman and Members of_the Subcommittee: The American Maritime Association consists of 33 companies operating 116 American-flag merchant ships in the foreign and domestic commerce of the United States. Of these 116 ships, approximately two-thirds are liner vessels which significantly would be affected by enactment of the legislation the Subcommittee now is considering. The American Maritime Association strongly supports this legislation -- H.R. 4374, introduced on August 4th by Mr. Biaggi for himself and Mr. Jones. As I believe all of us will agree, our maritime regula- tory procedures, as they exist today, and principally because of Justice Department actions and court decisions which have eroded the original intent of the law, seriously have hampered the ability of American-flag carriers to perform functions which are commercially acceptable throughout the rest of the maritime world. Thus, although our maritime regulations are supposed to apply equally to American and foreign-flag ships, their dele- terious impact has been the most severe on U.S.-flag carriers, simply because they have the greatest exposure and vulnerability to our laws; and as a result it is the U.S.-flag carrier which has suffered the most in competition with its foreign-flag counterparts. PAGENO="0325" 319 Reform of our maritime regulatory mechanism is long over- due and consequently we welcome the introduction of H.R. 4374. For, while H.R. 4374 would apply to foreign-flag as well as American vessels, the effect of many of its provisions would be to unfetter the American merchant marine and enable it to vie with greater effectiveness against its foreign-flag rivals. In particular, we warmly endorse those provisions of the legislation which would enable U.S. liners to rationalize their services and. permit them to achieve enhanced efficiency and reduced costs, while at the same time freeing them from the antitrust uncertainties which have been a major impediment to their ability to compete and to grow. We do, however, regret the fact that H.R. 4374, unlike the legislation now being considered in the Senate, does not address the issue of intermodal ratemaking. Under existing conditions, the ocean liner industry, and thus the shipping public, has been unable to take full advan- tage of the benefits of interinodalism. On the contrary, the doubts surrounding the validity of intermodal arrangements have had a number of damaging effects, including, as Senator Gorton pointed out in introducing 5. 1593, the increasing diversion of cargo from and to the United States through Canadian ports by foreign-flag carriers. PAGENO="0326" 320 We would suggest that the Subcommittee eliminate this deficiency by adding to H.R. 4374 provisions which would authorize conferences as well as individual carriers to establish through intermodal rates and to have intermodal tariffs subject to regulation by a single agency, the FMC. With this addition, we believe that the legislation the Subcommittee now is considering would be of substantial benefit to the liner vessels operated by AMA members, and we would urge the Subcommittee's approval. PAGENO="0327" 321 SOUTHERN OVERSEAS CORPORATION INTERNATIOMAI ~LPEDITERS FOREIGN FREIGHT FORWARDERS + CUSTOMHOUSE BROKERS + F.M.C. NO. 469 P 0. BOX 2110 WILMINGTON, NC 29402 PHONE: 919 / 392-0914 October 14, 1981 TELEX: 80 1221 TWO: 510- 937 - 0311 CABLE "SOUTHOVER" Honorable Mario Biaggi Chairman, Subcommittee on Merchant Marine Committee on Merchant Marine & Fisheries House of Representatives 2428 Rayburn Office Building Washington, D. C. 20515 Re: HR 4374 Dear Mr. Chairman: I am writing in behalf of licensed independent ocean freight for- warders in U. S. South Atlantic and Gulf Ports. We wish to express our appreciation for the time and attention which your committee and its staff are devoting to problems that beset the maritime industry. We wish in particular to commend your attention to that segme'it of the maritime industry of which we are a component, that is, freight forwarding in the foreign trades. We believe that the current discussion of whether the licensing provisions of Section 44 of the Shipping Act, 1916, should be maintained, repealed or modified, is a healthy one. In our opinion, the important considerations are: (1) to avoid revival of abuses relating to the creation by shippers of so-called dummy forwarders as a means of obtaining rebates; and (2) preservation of com- petition, including entry by qualified forwarders and avoidance of artificial restrictions on competition. As to whether this can better be accomplished by licensing as at present or by increased bonding requirements or other measures, we are content to rely upon the judgment of your committee and the Congress. We do, however, have one pertinent concern which we wish to express to your committee; it does not involve any provision in your bill affecting freight forwarders, but is directed against any possible reappearance of a provision, described hereafter which was in the bill before your committee in the last Congress, and is in a pending Senate bill. By way of background, each of the companies for which I speak also engages in the business of acting as a ships agent, as well as the forwarding business, or wishes to preserve its right to do so. None has any ownership affilia- tion with any common carrier by water. We hold forwarder licenses from the Federal Maritime Commission, in good standing; we have been found to be "fit, willing and able"; and there is no blemish on our regulatory record. It is commonplace throughout the ocean forwarding industry for freight forwarders also to engage in other maritime- related businesses. This is particularly true in the ports in which we operate, which are smaller ports in which conditions are vastly different from the ports principally represented, for example, by the National Association of Customs Brokers & Freight PAGENO="0328" ~22 Forwarders of America, Inc., which appeared before this committee on October 7, 1981. The earlier proposal to which we object - and whose reappearance we wish to guard against - first appeared in a Federal Maritime Commission draft legislative proposal in 1979. It would have prohibited another carrier from paying freight forwarder compensation to its agents or to the agents of another carrier. The provision survives today as Section 11 (c) (3) of S. 1593 pending before the Senate Committee on Commerce stating as follows: An ocean common carrier by water shall not pay compensation as provided in this subsection to its agents or any other ocean common carrier or its agents. No explanation or reason for this provision was given. We have been very much concerned, however, that if enacted - at least if not, clarified - it would be given the effect of driving legitimate freight forwarders out of the ship's agency business or ship's agents out of the freight forwarder business for no good reason stated or in fact and for the benefit only of our competitors. Such a provision would be devastating to legitimate independent licensee/agents, particularly in the ports in which we operate, which are smaller ports where the business realities are such that we could not survive just as a freight forwarder on one hand or a ships agents on the other. It would also reverse a decision deliberately and thoughtfully made by Congress when the present licensing law was before the Congress in 1960 and 1961. So far as we are aware, no witness before your committee on H.R. 43714 has advocated the revival of any such provision. We have no reason to believe that this provision might reappear in any bill approved by your committee; and we are encouraged also by a favorable reception to our recent testimony to Senator Gorton's subcommittee, that it will not survive further consideration by the Senate Committee. We thus find ourselves in the position in a sense of opposing a proposal which is not now before your committee and which we hope and believe has already been abandoned. We feel, however, that we cannot afford to take any chance that our silence on the subject might be misinterpreted as lack of interest or otherwise facilitate revival of any such proposal. We therefore are impelled to state our position to your committee as a further bulwark against even a remote contingency that such a provision might hereafter be revived. We believe our concerns with any such provision and compelling objections to it are sufficiently demonstrated in the statement which we submitted on September 24th to the Senate Committee. We respectfully tender it also to this committee and ask that it be received into the committee's record, for its considera- tion should any contrary position be expressed. We would add only these points at this time: Chairman Green of the Federal Maritime Commission and the National Customs Brokers & Forwarders Association have urged in their testimony that abuses in the freight forwarder industry found to exist prior to 1961 when the present law was passed have been corrected under the present law, without PAGENO="0329" 323 burdening the industry. Neither has advocated to this committee any proposal which remotely resembles the 1979 proposal of the Federal Maritime Commission, or the provisions in S. 1593 to which we object. That proposal would burden our companies to the point of driving them out of one business or the other. We submit the statements of Chairman Green and the National Association--both what is said by them, and what is unsaid--as further evidence that there is no justification for any such restriction upon payment of freight forwarder compensation to legitimate licensee/agents. We ask your committee's assistance in guarding against any encroachment upon our rights and businesses in this regard, and very much appreciate its attention. Very truly yours, General Manager SOUTHERN OVERSEAS CORPORATION In behalf of: Southern Overseas Corporation Wilmington and Morehead City, North Carolina Waters Shipping Company Wilmington and Morehead City, N.C. Smith & Kelly Company Charleston, South Carolina, and Savannah, Georgia Southern Shipping Company Charleston, South Carolina, and Savannah, Georgia Fillette, Green & Co. of Tampa Tampa, Florida Southern Steamship Agency, Inc. Panama City and Pensacola, Florida; Pascagoula and Gulfport, Mississippi and Georgetown. South Carolina PJ/nrs CC: Hon. Walter B. Jones PAGENO="0330" 324 September 24, 1981 STATEMENT OF LICENSED INDEPENDENT FREIGHT FORWARDERS IN SOOTH ATLANTIC AND GULF PORTS This statement is filed in behalf of licensed independent ocean freight forwarders in South Atlantic and Gulf ports. They include: Southern Overseas Corporation: Wilmington and Morehead City, North Carolina Waters Shipping Company: Wilmington and Morehead City, North Carolina Smith & Kelly Company: Charleston, South Carolina, and Savannah, Georgia Southern Shipping Company: Charleston, South Carolina, and Savannah, Georgia Fillette, Green & Co. of Tampa: Tampa, Florida We understand that Southern Steamship Agency, Inc., also joins in these comments. That company is an applicant for a for- warder license, and proposes to engage in forwarding in Panama City and Pensacola, Florida; Pascagoula and Gulfport, Mississippi and Georgetown, South Carolina. Each of the companies named also engages in the business of acting as a ship's agent, as well as the forwarding business, or wishes to preserve its right to do so. None has any ownership affiliation with any common carrier by water. We hold forwarder licenses from the Federal Maritime Commission, in good standing; we have been found to be "fit, willing and able; and there is no blemish on our regulatory record. It is commonplace throughout the ocean forwarding industry for freight forwarders also to engage in other maritime-related PAGENO="0331" 325 businesses. This is particularly true in the ports in which we operate, which are smaller ports in which conditions are vastly different from the ports principally represented, for example, by the National Association of Customs Brokers & Freight For- warders, Inc. We note parenthetically that even that Associa- tion's title combines forwarding and customs brokerage. Our concern is directed to Section 11 (c)(3) of S.1593 (and the corresponding provision in Section 605(d) of S.125). That section provides that carriers shall not pay freight forwarder compensation to other carriers or to carriers' agents, for for- warding services. It thus states: An ocean common carrier by water shall not pay compensation as provided in this sub- section to its agents or any other ocean common carrier or its agents. No explanation or reason for this provision has been given, and we are not certain as to either its scope or purpose. We are very much concerned, however, that if enacted, without clarifica- tion, it would be given the effect of driving legitimate freight forwarders out of the ship's agency business, or vice versa, for no good reason, and to the benefit only of their competitors. Like other forwarders our companies cannot survive in the forward- ing business without the right to collect compensation from car- riers, which is far more important to forwarders generally than is the revenue received from shippers. Yet the provision in question if broadly interpreted, would prohibit bona fide for- warder/agents from receiving carrier compensation as long as they also engage in the ship's agency business. If so interpreted PAGENO="0332" 326 licensee/agents would be presented with an impossible dilemma -- despite having acted for many years as both licensed forwarders and agents, with the Commissions knowledge and approval. Either they must give up their agency business or be driven out of the forwarding business. In a time, and under a national administra- tion pledged to deregulation, and a bill S.l593 designed to dereg- ulate the forwarder industry, this would be the ultimate in de- structive regulation. We simply cannot believe the Committee really intends this result. We, therefore, strongly request that Section ll(c)(3) be de- leted from S.1593 (or Section 605(d) from 5. 125, if that should be the Committee bill), or clarified in a way to make it certain that it is not intended to apply to bona fide, independent for- warders -- if licensed, as under the present law, or if bonded and otherwise qualified under a new law. Unless this is done Section ll(c)(3) of S.1593 and Section 605(d) of S.125 threaten the destruction of our livelihood without any reason stated or in fact. Perhaps we are unduly alarmed. We must say that there is some question in our minds whether these provisions were actually intended to apply to licensed forwarder/agents under the present licensing law, or to agents who are not corporately affiliated with carriers. If the section was intended to apply only to carriers and their subsidiaries or corporately affiliated companies, or to a agents who do not also provide bona fide forwarding as a business, then it should be clarified. If it is so clarified, we ourselves PAGENO="0333" 327 have no problem with it, though we remain skeptical of the need or purpose of such a provision. If it is not so clarified then we must object to it in the strongest possible terms. Moreover, it would benefit only our forwarder or agent com- petitors, not our customers. The provision in question is there- fore highly anti-competitive. It is also discriminatory between forwarders who act as agents, and forwarders who also engage in other maritime related businesses such as customs house brokerage stevedoring, terminal operations, etc., but not in agency work. The Committee should know that the provision in question would reverse decisions deliberately and thoughtfully made by Congress when the present licensing law was before the Congress in 1960 and 1961. It was at that time, at one point, proposed by the former Federal Maritime Board, that freight forwarder li- censes and forwarder compensation be denied to carriers and their agents. Congress rejected these suggestions. The only limita- tion upon licenses was to shippers and shipper affiliates. In the intervening twenty years licensee/agents have operated as FMC licensed forwarders, as well as in the business of providing agency services to shipowners and operators, fully subject to FMC regulation, without a blemish upon their regulatory record. In this period there has been not a single complaint by any ship- per or consignee or carrier to the FMC and not a single complaint issued by the FMC, directed to their status as both forwarders and ships' agents. Not only are we unaware of any such complaints ourselves but we have searched the records of the Federal Maritime Commission un- PAGENO="0334" 328 der the Freedom of Information Act, and found none. Under these circumstances there should be a compelling reason to change the law. None has been stated in the record of these hearings or the House and Senate hearings in 1979 and 1980, and we believe there is none. Both shippers and carriers can simply take their business elsewhere if they do not wish to deal with a licensee! agent. The forces of the market place provide ample regulation of their own and have done so without significant problem for twenty years. The Committee may fairly ask, as have we, where this provi- sion came from in the first place and why. We have searched the recent legislative record for some explanation, with very little success. It was not contained in any of the three bills introduced by Senator Inouye in 1979, upon which Senate hearings were held in 1979. It first appeared in a draft of proposed legislation submitted by the Federal Maritime Commission to the House Merchant Marine and Fisheries Committee and Senate Com- merce Committee in 1979. Precisely what the author of this pro- vision intended in 1979 is unknown to us, as indeed is the iden- tity of its author or purpose. This particular proposal was buried in a much longer and complicated bill covering many sub- jects and it was not explained by the Commission in its submittal to Congress, and no FMC witness testified with respect to it. We have been advised by the Federal Maritime Commission's Acting Secretary that this provision was likewise not even mentioned in any of the three Commission meetings in 1979 in which the so- called draft proposed Shipping Act was discussed before trans- PAGENO="0335" 329 mitting it to the Congress (see attached letter). We must wonder whether the Commission itself then fully appreciated what it proposed. While the same provision was later picked up in the Senate bill reported by this Committee last year, no witness testified with respect to it and it was largely ignored or overlooked, as we ourselves overlooked it at the time. The Senate Committee Report itself, last year, did not include it among the changes from existing law which it set forth at page 33 of S. Rept. No. 96-656, or otherwise mention it. The closest comment made in the Committee report was that "compensation may only be paid to a licensed forwarder' -- which leads us to believe that it was not intended to apply to a licensee/agent in the first place, but was intended to apply only to unlicensed agents. This is one of the circumstances which leads us to believe that this Committee itself has rot previously appreciated the impact of Section ll(c)(3), and that it would have wholly unintended consequences. Though our companies do not also operate as non-vessel owning common carriers, Section ll(c)(3) would seem to us to present the same problem to those many forwarders who do act also as NVOCC's. In his statement accompanying the introduction of S.1593 on August 3, 1981, Chairman Gorton stated with respect to the freight forwarder provisions onlythat: the bill eliminates licensing require- ments, while retaining certain safeguards to see that freight forwarders are economically stable and will not act as conduits *for il- legal rebates. PAGENO="0336" 330 In fact Section ll(c)(3), a totally new provision, would render this portion of the freight forwarding industry highly unstable economically and it cannot be justified as necessary to eliminate a "conduit for illegal rebates'. No such abuses were attributed to forwarder/agents prior to the 1961 Act. No charge of any such abuses had been made in 20 years of regulation under the 1961 Act. In a recent Federal Maritime Commission proceeding relating to the licensee/agent relationship no contention was made that it gives rise to or encourages illegal rebates. In five years of in- tensive Commission investigation of rebating and widespread at- tendant publicity there has been no indication that any licensee/. agent has been involved in rebating -- and, of course, if it were, the Commission has ample powers under existing law to investigate and if necessary even to suspend or revoke the licenses of offend- ers. The fact is that an independent forwarder engaging in for- warding and ship's agency work as a business is in no different position in this regard than any other forwarder or agent. It should be noted also that the concern for "dummy forward- ers" provides no justification for Section ll(c)(3). That is a concern and a term directed towards possible abuses arising from shipper/forwarder relationships, not carrier/forwarder or agent forwarder relationships. The term "independent" in "independent ocean freight forwarder" refers to independence of shipper from forwarders, not carriers or ships' agents from forwarders. We note that Federal Maritime Commission Chairman Alan Green stated in his testimony to this Committee on September 21, PAGENO="0337" 331 1981, that the present law has proven successful in correcting the previous widespread abuses in the freight forwarder industry and that it has done so without inposing an `unnecessary burden on the forwarding industry. We agree and add that that fact provides additional denonstration that there is no abuse requir- ing or justifying Section ll(c)(3) which would indeed be an un- necessary and destructive burden on our segnent of the forwarding industry. We point out also that the forwarder industry representa- tive testifying in behalf of the National Custons Brokers & For- warders Association of America, Inc., before the House Merchant Marine Subcommittee in Septenber, 1979, likewise expressed com- plete satisfaction with the existing legislation and Commission regulation of the forwarder industry stating: We do not understand why any change in the current forwarding legislation is be- ing proposed. After 4 years of study, this committee in 1961 produced a statute that has worked renarkably well. As we have indi- cated, licensing has resulted in professional- isn in our industry, and the provisions for brokerage are fair and reasonable to the forwarder and carrier. Why then is any change necessary? We state, as emphatically as we can, that we have a good law on the books and that it should remain just as it is, at least for the forwarders.1/ 1/ Testimony of William R. Casey, Association President, in Hear- ings before the Subcommittee Ofl Merchant Marine of the Com- mittee on Merchant Marine and Fisheries, H.R. 4769,. 96th Cong., 1st Sess. (1979), p. 151. Association counsel Gerald H. Ullman, Esquire, similarly com- mented, in the same Hearings, p. 154: "The forwarding indus- try has really been operating since 1961 in what I could say as unblemished procedures." 9Lt-856 0 - 82 - 22 PAGENO="0338" 332 In 1980 in a rulemaking proceeding the FMC invited public comments as to possible conflicts of interest of persons who act as both licensed forwarders and carriers or agents. In re- sponse in that proceeding likewise, there were theoretical argu- ments as to possible conflicts, but there was not a single docu- mented instance or even allegation of any specific instance of any such problem, as distinct from generalities and theoretical and speculative arguments of any actual conflicts of interest. In that proceeding the Commission found in April, 1981 that allegations of `conflict of interest" had not been substantiated, and it rejected a proposal to deny licenses to carriers and carrier's agents. Congress rejected the "conflicts of interest' argument in 1961. In the absence of any actual demonstrated instance of an actual problem in the ensuing twenty years, and in the absenc3 of even a complaint from any of our customers, we submit that this is a spurious argument for purely anti-competitive purposes. Equally theoretical and speculative arguments can be made as to many other businesses or combinations of businesses. We don't be- lieve this Committee sits to drive people out of business on the basis of such arguments. 2/ We have also heard an argument that a forwarder/agent re- ceives double compensation on shipments as to which it acts in 2/ In FMC Docket 80-13, a rulemaking proceeding involving freight forwarders, a similar provision for denying compensation to carriers or carriers' agents was made, without explanation. It is now under reconsideration by the Commission. PAGENO="0339" 333 both capacities and that there should be a rule to eliminate that possibility, and therefore, presumably, protect the steamship lines. This, too, is a spurious argument, as we believe we have established in the attachment to this statement. In fact the steamship lines have enough clout to look after their own interests and do and will. The double compensation" argument also demonstrates a total lack of understanding of what a forwarder does and what a ship's agent does. A forwarder and ships agent have different functions, and are not paid twice for the same thing. If a carrier who completes a shipment with a forwarder also operates in a particular port with an agent rather than with his own staff, he will still have to pay the agent as well as the forwarder. We do not see what difference there is to the carrier or to the public interest, whether the carrier's payments for forwarding and agency services go to one person or two. The fact is that the only interest that would be served by Section ll(c)(3) is that of our competitors in the forwarding or agency business, who might pick up the business that would be taken away from us. Section ll(c)(3), we respectfully submit, must be considered in the perspective of the fact that freight forwarders are the only segment of the maritime industry requiring an FMC license. Anyone familiar with the 1961 licensing law knows that it was passed in part for the protection of the forwarder industry to ensure their right to collect compensation from carriers. One segment of the industry should not now be permitted to use that PAGENO="0340" 334 federal regulation, originally a shield for their protection, as a sword now to strike at another segnent of the industry, for selfish conpetitive purposes. Many forwarders in the smaller ports went into that busi- ness in the first place in conbination with the agency business because there were no other forwarders available in those ports. Over the years they have made substantial investments of tine and money to develop this forwarding business. All other con- siderations aside, it would be a gross injustice to destroy their businesses today after they have rendered a genuiune service to their shipper clients for so many years. Upon the broader subject of whether there should be substan- tial deregulation of the forwarder industry as proposed in 5.1593, we believe the important considerations are: (1) to avoid revival of abuses reiating to the creation by shippers of so-called dummy forwarders as a means of obtaining rebates; and (2) preservation of competition, including free entry by qualified forwarders, and avoidance of artifical restrictions on competition. As to whether this can better be accomplished by licensing as at present or by increased bonding requirements or other measures, we are content to rely upon the judgment of Congress. Of one thing we are quite certain, however: if the alternative is deregulation or destructive regulation, as the proposed prohibition upon the payment of compensation to forwarders who are also agents in Section ll(c)(3) of S.1593, and as was proposed by competitOrs in the pending FMC rulemaking proceeding, deregulation is far preferable. PAGENO="0341" 335 In conclusion, historically Congress' concern has been with the relationship of shippers and forwarders, and it has rejected efforts to deny licenses and compensation to carriers and agents who also act as forwarders. The thrust of the recent amendment to Section 44 of the Shipping Act, in the Budget Act, was to lib- eralize even the restrictions upon shipper/forwarder relation - ships. A restriction now on forwarder/agent relationships would be inconsistent in philosophy with that recent amendnent as well as a reversal of Congress' decision in 1961 and 20 years of problen-free operation, so far as licensee/agents are concerned. We, therefore, respectfully request that Section ll(c)(3) be deleted from 5.1593. If the Committee wishes to preserve its substance, as to carrier subsidiaries, as distinct from persons not corporately affiliated with carriers, who engage in both for- warding and ship's agency as a bona fide business, we ask alter- natively that Section ll(c)(3) of S.1593 be amended by the acldi- tion of the following proviso: Provided that this subsection shall not apply as to agents who are otherwise quali- fied to act as ocean freight forwarders un- der this section. PAGENO="0342" 336 FEDERAL MARITIME COMMiSSION WASHINGTON. D.C. 7.0573 ~rmo o~ TXE SEc~rrs*y June 11, 1981 Mr. J. Alton Boyer Kominer, Fort, Schiefer & Boyer 1776 F Street, N.W. Washington, D.C. 20006 Dear Mr. Boyer: Reference is made to your May 23, 1981, Freedom of Information Act request (received May 28, 1981) regarding a provision in the Revised Shipping Act prohibiting compensation to agents or carriers. Trans- mitted are all documents within the description of item 1 of your request except for a copy of a Senate staff Working Draft dated March 27, 1980, designated CONFIDENTIAL, which is withheld puThuant to 5 U.S.C. 552(b)(5). With respect to items 2 and 3, the Freight Forwarders section of the Revised Shipping Act was discussed at Commission meetings of June 29, 1979 and July 9, 1979. However, the minutes and transcripts of these meetings show no reference to the specific provision referenced in your request. The particular provision was adopted by the Coir~ission as part of the entire proposal on July 13, 1979, again without any discussion of this specific provision. Copies of minutes and pertinent pages of transcipt are provided. My determination to withhold certain material may be appealed to the Chairman, Federal Maritime Commission, pursuant to 46 C.F.R. 503.34. The charges for supplying this information are $37.30. Please / include the invoice number with your payment. Very truly yours, (L~ C. .Tos~ph C. Polking Acting Secretary Enclosures PAGENO="0343" 337 ATTACHMENT MISCONCEPTION AS TO THE NATURE OF THE SHIPS' AGENCY BUSINESS, AN AGENT'S RESPONSIBILITIES, AND REMUNERATION A forwarder/agent does not receive "double" compensation, even when he acts as a forwarder on shipments which are routed via a ship as to which he also performs agency functions. When so acting he is performing two functions and is clearly entitled to compensation for both. In this context the term "agent" can mean a number of things, even for vessels in liner trades. There are at least five types of ship "agents": Owner's Protective "Agent"; Husbanding "Agent"; Port "Agent"; Sales "Agent"; General "Agent". 1. Owner's Protective "Agent" - The "agent" in this instance is appointed by the owner of the ship to look after its interests, which may or may not coincide with the interests of the charterer (the liner operator). Depending on the terms of the charter (bareboat, time, etc.) the duties of the protective "agent" will vary considerably. Appointments as protective "agent" are usually made on an ad hoc basis and the fees for this service usually are in a stated flat amount. 2. Husbanding "Agent" - Here the "agent" is the servant of the vessel and its master and owners or charterers for husbanding purposes and that alone. In this capacity, the "agent" attends to all needs of the vessel while in port, which include but are not limited to such things as arranging for, obtaining, employing, handling, supplying, etc.: PAGENO="0344" 338 (a) Pilots (b) Tug boats (c) Line handlers (d) Line boat (e) Ship's stores (f) Gangway watchmen (g) Marshalling barges (h) Repairs of all sorts (i) Crew replacements and repatriations (j) Obtaining divers, bilge cleaners, etc. (k) Laundry services (1) Bunkers (m) Doctors, dentists, ambulance and hospital services (n) Berths and shifting if required (o) Crew mail (p) Customs clearance as well as clearance from Quarantine, Immigration and Naturalization (q) Telephone and telex service (r) Transportation for crew and equipment (s) Surveys (t) Stevedoring (u) Cash for master (v) Proper notification to U.S. Coast Guard All of these items are generally handled by the "agent's" boarding representatives, sometimes referred to as the "agency/operations department". Fees likewise are usually in a flat amount. 3. Port "Agent" - In addition to husoanding duties, port "agents" for liner services have other departments which may perform the following additional services: Import Freight Department: (a) Sends arrival notices to importers (b) Collects freight monies due from consignees (c) Collects wharfage due from consignees (d) Arranges formalities for transshipped cargo (e) Prepares hatch lists of cargo to be discharged (f) Issues carrier's release (g) Collects original bills-of-lading (h) Quotes freight rates and maintains tariffs Export Freight Department: (a) Prepares hatch lists of cargo to be loaded (b) Prepares manifests including dangerous or hazardous cargo manifests and forwards to overseas agents in a timely manner (c) Makes certain all cargoes booked are in port and at point of rest (d) Issues any special instructions to stevedores (e) Issues cargo booking and confirmations to freight forwarders and! or shippers PAGENO="0345" 339 (f) Receives cargo for vessel from freight forwarders (g) Freights and signs bills-of-lading on behalf of master for forwarder and/or shipper (h) Collects ocean freight and wharfage (i) Quotes freight rates and maintains tariffs Container Department: (a) Supplies chassis and/or flat bed for containers (b) Matches and obtains containers and chassis for bookings (c) Arranges for stripping and stuffing containers (d) Arranges interchanges between carriers' terminal and the vessel (e) Arranges the leasing or termination of leases on behalf of carrier (f) Determines and collects demurrage from carrier or shipper or consignee as required (g) Arranges inspections and repairs of containers (h) Maintains and reports equipment inventories All "agents", of course, have an accounting department in which all ships' disbursements accounts are collected, checked and billed to the owner for payment to various vendors. The remuneration for a pcrt "agent" as described above varies considerably. The "agent" does not set his fees for services and present them to the world of shipowners and operators; rather the shipowners and operators set the fees, occasionally subject to negotiation with prospective "agents". Port agency fees may be: (1) A flat fee, depending more on what the principal is willing to pay than on services rendered. (2) A fee based on the number of days a ship is in port. For example, a flat fee for the first five days plus a small additional fee for each additional day. (3) A fee based on the number of tons loaded or discharged. (4) A percent of the manifest, usually subject to a minimum and excluding all surcharges. These percentages vary, none remotely approaching 5% and do not have anything to do with who books the cargo. 4. Sales "Agent" - Some liner companies handle all sales matters themselves, while others assign sales responsibility to their port "agent," and still others employ a separate sales "agent." A sales "agent" may or may not be located in the port area, and if in the port area he may or may not be the same as the husbanding or port "agent". PAGENO="0346" 340 He may or may not have territorial limitation on his sales responsibilities. The fees for booking commissions may vary generally running 1-1/4 to 2-1/2 per cent. We know of no case of a port "agent' who receives a booking commission as much as 5%. The booking commission, while measured by successful solicitations and booking, is in fact remuneration for the total sales and representational activity of the sales agent, both that which results in a current booking and that which is not immediately (or perhaps ever) successful. The carrier paying a booking commission is paying for the total sales activity of its sales agent, relieving the carrier of the necessity and expense of maintaining its own local sales office and force. That the payment is limited to cargo actually booked goes to the measure of the payment, not to the consideration for which paid. it is believed that generally forwarder compensation far exceeds agency booking commissions in importance to a licensee/agent. 5. General "Agent" - A general "agent" is one who handles all matters for an owner in a particular range of ports (Atlantic Coast, Gulf Coast, Gulf and South Atlantic, North Atlantic or the entire country). He manages the owner's or operator's affairs including the scheduling of the ships, the selection of port "agents", area sales "agents", stevedores, etc. The general agent may also have to pay all sub-"agents", whether sales, husbanding or port, out of his fees. We do not know what a general "agent" customarily receives in the way of fees. It may be as much as the 5% we have heard incorrectly described as the normal agency fee. We know of no general "agent" who is also a licensed forwarder. It is evident that in any event a forwarder/agent does not perform duplicate functions or get "paid twice" for the same functions. If a forwarder/agent employed by a particular carrier were forced to give up his forwarder or his agency business, because of a rule forbidding payment of forwarder compensation to a ship's agent, the carrier would still be required to pay forwarder PAGENO="0347" 341 compensation and agency fees. That it would then be divided between two persons, rather than all to one, for the same services, hardly advances the carrier's interest or the public interest. The only result would be destructive of the forwarder/agent's interest, elimination of him as a competitive factor in one business or the other, and an arbitrary shifting of that business to a competitor. PAGENO="0348" 342 TESTIMONY 01 BEHALF OF THE NATIONAL INDUSTRIAL TRAFFIC LEAGUE BEFORE SUBCOMMITTEE ON MERCHANT MARINE COMMITTEE ON MERCHANT MARINE AND FISHERIES UNITED STAT~S HOUSE OF REPRESENTATIVES 01 H.R. 4373 OCTOBER 19, 1981 PAGENO="0349" 343 Mr, Chairman, Members of the Subcommittee: My name is Ralph N. Thayer. I am chairman of the Water Freight Transportation - Maritime Committee of The National Industrial Traffic League. Accompanying me today are George F. Avery, Jr., director of International Transportation Services, Stauffer Chemical Company, Westport, Connecticut, Curtis R. Merritt, general traffic manager, ASARCO, Inc., New York City, and John F. Donelan, League Counsel. The National Industrial Traffic League is a voluntary organization of 1,800 shippers, shippers' associations, boards cf trade, chambers of commerce, ports, and other entities concerned with rates, traffic and transportation services of all modes. It is the only nationwide organization which represents all types of shippers using all modes of transportation to move all types of commodities. Our members, directly or indirectly, are responsible for the routing of about 90% of our country's maritime commercial freight. The League's primary concern is to assure that our national transportation system is sound, efficient, well-managed, and privately owned and operated, and that it meets the needs of our nation as well as the needs of shippers and receivers of commercial freight. Throughout our more than 70-year history, the League frequently has been the spokesman for business and industry on transportation matters. The League believes that an absolute minimum of regulation in foreign commerce ocean transportation is desirable because the complexity of international trade doem not permit any one nation properly to exercise jurisdiction. To this end, we believe that where effective competition exists, it should be allowed to act free of federal interference. However, recognizing that effective competition does not exist in all foreign markets, we believe that impartial federal economic regulation is the best method of assuring that shippers, carriers, and the public interest receive equitable treatment. In reforming the federal maritime laws, it is essential that this balance be retained. PAGENO="0350" 344 We have reviewed H.R. 143714, which is designed to improve our country's ocean commerce transportation system. We believe that the proposed measure needs to be strengthened and improved if it is to achieve our common goal of a balanced reform of federal maritime laws so that U.S. shippers and receivers can compete effectively abroad. The first improvement we seek involves the right of independent action. We would urge the subcommittee to mandate this right for each member of a carrier conference as well as for any member of an interconference agreement. We strongly support this right because it provides carriers with the flexibility they need to provide service in today's ever-changing marketplace. We see no benefit to closed conferences because of their anticompetitive nature and their distortion of the marketplace's natural forces. We believe that the most onerous of these effects could be somewhat ameliorated by granting each conference member the mandatory right of independent action. We see this right as crucial to prevent the few powerful members from blocking other members' efforts to supply the innovative and competitive services needed by U.S. shippers and receivers. To further encourage carrier efforts to provide innovative services and to improve a carrier's ability to exercise its right of independent action, we would urge the subcommittee to allow shippers and receivers to enter into rate and service contracts, on a non-discriminatory basis, with individual carriers. This contract authority could be supplementary to conferences' right to seek loyalty contracts. Contracting is being used successfully in the domestic surface transportation industries and is providing shippers and carriers with an extremely useful tool to meet mutual service needs. We would be glad to explore with subcommittee staff the best wording of amendments for instituting this authority. PAGENO="0351" 345 The second improvement we seek involves shippers' councils. Whlle we agree with the subcommittee that there should be some mechanism for shipper/carrier consultation in the private sector, we question whether the establishment of formal shippers councils is the best means for assuring this coninon goal. As an alternative, we would urge that the subcommittee consider the system used in domestic surface transportation. Under this system, shippers are allowed to consult, either collectively, or individually, with dsrriers without having to be members of a formal association designed solely for this purpose. This system has several advantages. The first is that it does not require that shippers be regulated. Consultation is handled through the procedures of the rate bureau - the domestic counterpart to the conference. Shippers are given authority to consult through a grant of antitrust immunity to "other persona" necessary to carry out the bureau's functions. The second is that it allows shippers the flexibility they need to meet the changing demands of the marketplace. Shippers are allowed to work with carriers on mutual problems without having to be concerned about whether they are members of the appropriate consulting organization and how quickly they could become members if they were not. The third is that it eliminates the need for a federal agency to oversee shipper activities since those activities are monitored through federal oversight of the rate bureaus. The fourth is that it would reduce the federal government's paperwork burden since the mechanisms for monitoring carrier activites are already in place. In addition, an approach of this type would save the Federal Maritime Commission from dealing with the knotty regulatory problems of how many shippers constitute a council, how many councils should be allowed, how these councils should be organized, what will be their reporting requirements, and so on. PAGENO="0352" 346 The third improvement we seek invol~ea setting the criteria used by the Federal Maritime Commission to review section 15 agreements. While recognizing the past difficulties in applying the "public interest" teat to these agreements, we still believe that there is a valid public interest consideration in the federal review process. We would urge the subcommittee notto drop this criteria as a review standard and to adopt the following public interest definition, which has the support of the League's general membership - "the interest of the United States in assuring the maintenance of a dependable, competitive common carrier service responsive to the needs of the American shipper in the water-borne foreign commerce of the United States." Although not included in the proposed legislation, there is one other point we would like to make. We would ask the subcommittee to eliminate the current ambiguity surrounding the antitrust exemption for collective action in maritime industry. We would strongly urge the subcommittee to reassert the primacy of the Shipping Act of 1916, and, in doing so, clearly state that shippers, whether acting collectively or individually, have the right to consult with carriers. In conclusion, we commend the subcommittee for this first step toward reforming our federal maritime regulations. We urge adoption of our suggested improvements to assure that any reform measure truly balances the needs of shippers, carriers and the public so that our country can effectively compete in the world marketplace. With the inclusion of our suggested improvements, the League believes we can offer our support to your efforts to achieve our common goal of effectively reforming the federal economic regulation of the maritime industry. We offer our continuing cooperation to these reform efforts and look forward to working with the subcommittee to achieve a balanced reform of these laws. We thank you for this opportunity to present our views, and we respectfully request the opportunity to submit additional comments after our annual meeting which is to take place November 18-20, 1981. PAGENO="0353" 347 CHEMICAL MANUFACTURERS ASSOCIATION WILLIAM M. STOVER Vice President Government Relations October 28, 1981 The Honorable Mario Biaggi, Chairman Subcommittee on Merchant Marine Committee on Merchant Marine and Fisheries U.S. Mouse of Representatives Washington, D.C. 20515 Dear Mr. Chairman: The purpose of this letter is to submit a statement for the hearing record on proposed amendments to the Shipping Act of 1916, HR 4374. The enclosed com- ments provide the viewpoint of the chemical industry on a matter of great impor- tance. The Chemical Manufacturers Association (CMA) is a nonprofit trade associa- tion having 183 United States member companies representing more than 90 percent of the production Capacity of basic industrial chemicals within this country. Total shipments of chemicals and allied products were valued at $162.4 billion in 1960. Chemical shipments contributed a $11.4 billion favorable balance of trade in 1980. ($20.7 billion export vs. $9.3 billion import). Our comments, therefore, represent one of the nation's largest exporters and briefly highlight those areas we consider crucial to assure internationally competitive ocean transportation rates and practices. Thank you for including our statement in the hearing record, and if we can provide any additional information please do not hesitate to call us. Sincerely, / / `1 ~ j I William M. Stover Enclosure 94-856 0 - 82 - 23 PAGENO="0354" 348 Comments of the Chemical Manufacturers Association Submitted to the Subcommittee on Merchant Marrne of the House Committee on Merchant ~ar~ne and F~sherres - on - HR 4374, Proposed Amendments to the Shipping Act of 1916 The chemical industry has supported the successful congressional programs to reduce regulation of domestic transportation. It is our view that shipper, car- rier, and public interests will be best served by minimum government rnvolvement and maximuls reliance on market forces in international transportation as well. Several elements of the proposed legislation would increase regulation and re- duce competition. These would adversely affect the ability of U.~ S. chemical shippers to participate in an increasingly competiive world market. CIA is a nonprofit trade association having 183 United States member companies representing more than 90 percent of the production capacity of basic industrial chemicals within this country. Total shipments of chemicals and allied products were ~ialued at'$162.4 billion in 1980. Chemical shipments contributed an $11.-; billion favorable balance of trade in 1980 ($20.7 billion export vs. $9.3 bil- lion import). Foreign trade is thus a matter of major importance to the chemi- cal industry. As one of the nation's largest industries, we believe maintenance of a favorable balance of trade is crucial to the long term interests of both the chemical industry and the nation as a whole. Our comments briefly highlight those areas CMA members consider as most crucial to assure ocean transportation rates and practices for United States exporters and importers that are inter- nationally competitive. - 1. Closed..Conferq99 are prohibited by the current act. Section 2 (1) of HR 4374 would appear to give conferences the right to limit membership. CMA opposes any change ~;hich would limit the current reguirement for open membership in con- ferences serving the United States. Closed conferences, particularly where there is no right of independent action, could create monopoly. In most cases the majority of the conference carriers will not be U. S. flag carriers responsive to the needs of U.S. Commerce. He do not feel that inno':atiOn will be stimulated in this atmosphere. The exper- ience of C-IA member companies in Europe would indicate that the laws and the economy of the U.S.A. are significantly different from the conditions in Europe. The fact that closed conferences do operate in Europe does not mean that they would serve u.s. needs equally well. 2. Mandatory Right of Independent Action is necessary. The absence of the right of independent action could create a monopoly situation if the majority of the conference carriers are not U. S. carriers and would not be reabonsive to the commercial interests and needs of this country. CiA, tnerefore, supports the principle that ccrmoncarriers as members of a conference, should retain the right of rn~ependant action on rate matters. PAGENO="0355" 349 T~rcuah Intervodal Rates. The availability of through internodal rates acciclifies documentation and facilitates forecgn trada. c:IA s.~oorts a~c.c avaijabiliz~. ntarmodal rates should be pucliahed by each ocean couron carrier and each carrier should retarn the right of independent action ~~ith recird cc such rates. This will greatly benefit the small chemical exporter iac::s the staff needed to track port costs and cnland transportation crarr acroet. the emphasis of advanced, technology and leadership in containerization, U.S. flag carriers are in a unique position to capitalize on the use of through intsrciodal rates. To provide through intermodal rates, ocean common carriers to and from the United States must negotiate a complex series of rates between rorts and inland points in the United States and in foreign countries, We doubt that this type of complex negotiation can be handled in a timely manner tnrough a conference structure. For this reason, we advocate that individual carriers be free to develop and publish these essential rates without confer- ence jurisdiction. It oust be recognized that the flexibility in routing intermodal movements can benefit carrier and shippers. The ability to develop through intermodal routes changes the traditional concept of natural routes from inland points. It is for this reason, the primary responsibility for publication of intermodal rates shculd rest with the carrier. 4. Contract Rates. CNA supports the principle of freedom of shippers and ocean cmrmco carriers to enter into contracts. Contract rates should thus be permit- ted wcth ocean common carriers, similar to the provision for contract rates with railroads in the Staggers Rail Act of 1980. S. Eurden of Proof. ~I4A questions the equity of shifting the burden of proof to the shmpper if there is legitimate objection to approval of a proposed agree- ment. Shippers generally do not have access to all of the relevant data needed to effectively meet this burden of proof. Section 2 (6) of the bill could make it virtually impossible for shippers to exercise their rights. Cream. Fremght Forwards. Recent bankruptcies of freight forwarders, some of vh~ch resulted in shipper losses in excess of a million dollars, justifies the reed fcr better assurance of financial responsibility for freight forwarders. current licensing procedure offers a valuable measure of control to varifc' that forwarders are qualified to perform the services. Forwarders are cycically closely-held service companies who are not required to publish financial data under U.S. law. Traditional credit checks such as Dunn and sradstreet, often giVe little information to assist shippers in evaluating the true financial con- iiticn of these organizaticns. C:~ supports the addition of a bonding requirement in the $500,000 to $1,000,000 rar.ge, an amount consistent with the amount of clients funds that are regularly :-e:d by these organization in the performance of their services. acor-eccates the opportunity to present comments on this rmportant lec~sla- tc:n. e would bc happy to respond to any questrons wnich the subcommituae or have to assist in clarifying our position. PAGENO="0356" 350 /_____~\ .~ .1 .1 ~ **°~` ~ Navigation Company M. S. `NASACZ 0 a 3 S a 5)957 730 September 16, 1981 Honorable Mario Biaggi Chairman V Subcommittee on Merchant Marine Committee on Merchant Marine and Fisheries Longworth House Office Building Washington, 0.. C. 20515 Re: H.R. 4374, Statement for the Record on behalf of Matson Navigation Company Dear.~ Chairman Biaggi: Thank you for your letter of September 3 inviting the comments of Matson Navigation Company on H.R. 4374. We appreciate the opportunity to submit this statement for the record. Subject to the following comments, Matson supports H.R. 4374. Section 1 of the bill adds to Section 1 of the Shipping Act, 1916, a definition of the term "agreement" which excludes all maritime labor agreements. Section 2(2) of the bill deletes from Section 15 of the Shipping Act, the definition of the term "Agreement." The deleted definition specifies that Maritime labor agreements do not come within the definition unless they "provide for an assessment agreement described in the fifth paragraph of this Section." The fifth paragraph of Section 15 requires approval of assessment agreements to the extent they provide for the funding of collectively bargained fringe benefit obligations on other than. a uniform man-hour basis. By deleting the definition of "agreement" from Section 15 but retaining the provisions of the fifth paragraph dealing with assessment agreements and adding the new definition of agreement in Section 1, an inconsistency is created. Matson will defer to Pacific Maritime Association comments on the resolution of this inconsistency. Since it involves labor relations, PMA is the appropriate spokesman for its members, including Matson. PAGENO="0357" 351 The provisions of Section 2(4) of the bill are intended to assure admission to conference membership of at least one carrier operating United States flag vessels. The bill is worded in such a way, however, that the effect is to require disapproval of an agreement which "admits to membership at least one carrier operating United States flag vessels". Section 2(4) should be revised so that the first insertion reads: "or which fails to admit to membership at least one carrier operating United States flag vessels willing to serve the particular trade or route involved." Section 2(5) of the bill should place the burden to show that the agreement should be disapproved on any protesting shipper or carrier as well as on the Commission or any other department or agency of the United States opposing the agreement. Paragraph 2(6) of the bill should be revised to authorize Commission action upon complaints filed no later than 20 calendar days after publication of notice of an agreement in the Federal Re.gister~. The da~eo± publication of notice*, in the Federal Register, rather tharr the date of filing- of the agreement' (aà "the~" bill presently provides) must be used to accord protesting parties notice and due process of law. Proposed new Section l5a(a) of the Shipping Act erroneously ref ers to the "Federal Trade Commission" instead of to the "Federal Maritime Commission". Proposed new Section l5a(a) (7) of the Shipping Act would preclude shippers' councils from discussing or agreeing upon specific commodity rates. That provision should be deleted. Specific commodity rates should be a permissible subject of discussion and agreement between conferences and shippers' councils. Very truly, M. S. Wasacz cc: Honorable Paul N. McCloskey, Jr. PAGENO="0358" 352 September 21 , 1981 The Hon. Mario Biaggi Chairman, Merchant Marine Subcommittee Committee on Merchant Marine and Fisheries Longworth House Office Building Washington, D.C. 20515 Re: H. R. 4374 Dear Chairman Biaggi: Pacific Maritime Association is, as you know, a Pacific Coast multi- employer collective bargaining association. PMA's members consist of ocean common carriers serving the West Coast and West Coast terminal and stevedoring concerns. PMA is the bargaining representative for employers of dock workers represented by the International Longshoremen end Warehousemen's Union (ILWU). PMA also represents certain U.S. Flag employers in bargaining with offshore unions whose members man those vessels. As you will recall, in the 96th Congress the Committee on Merchant Marine and Fisheries favorably reported H.R. 6613 in a manner which excluded mari- time labor agreements and their implementations from section 15 of the Ship- ing Act. The Bill ultimately resulted in the Maritime Labor Agreements Act of 1980. As the Bill passed the Senate, however, Shipping Act section 15 juris- diction was retained over assessment agreements, . . . to the extent they provide for the funding of collectively bargained fringe benefit obligations on other than a uniform man-hour basi~p~j~. gardless of the cargo handled or type of vessel or egujp~ ment utilized PMA believes that, insofar as section 15 of the Act is concerned, the legislation as it was reported by the House Committee and adopted by the House of Representatives was the correct approach, for the reasons set forth PACI FIC MA RI TI M E ASSOCIATiON 635 SACRAMENTO ST. * SAN FRANCISCO, CALIF. . (P.O. BOX 7861) * 94120 * TEL. :(415)3627973 PAGENO="0359" 353 in your Committees Report (H. Rep. No. 96-876). Accordingly, PMA supports the definition of the term agreement set forth in H.R. 4374 as specifically excluding maritime labor agreements from section 15. We note, however, that notwithstanding this exclusion of all maritime labor agreements from the definition governing what agreements must be filed under section 15, section 2 of H.R. 4374, perhaps inadvertently, retains the fifth paragraph of section 15. That paragraph concerns the handling of certain assessment agreements on other than a uniform man-hour basis by the FMC under section 15. If, as PMA believes ought to be the case, the intent was to exclude all maritime labor agreements from section 15, the Bill should consistently strike the fifth paragraph of section 15. If, on the other hand, the Committee's intention was to preserve the status quo as set forth in the Maritime Labor Agreements Act of 1980, the definition of the term "agreement" in H.R. 4374 would have to be modified to make it consistent with the 1980 legislation. PMA very much appreciates the opportunity to comment on the Bill. Yours very truly, William E. Coday President WEC:kk ~ PAGENO="0360" 354 DAN COATS ~ of t~jc Unitcb ~tatc~ 5~~E:5 ~ou~e of ~epre~tntatibt~ F60W~88~066~ 46802 Was~jington, ~.C. 20515 October 27, 1981 Hon. Mario Biaggi Chairman, Subcommittee on :lerchant Macroe Committee on :~erchant Macrot and Fisheries U.S. House of Representatives Washington, D. C. 20515 S Dear Chairman Biaggi: I am writing to request that the enclosed testimony from North American Van Lines, Inc. be included in the record of hearings by your subcommittee on HR 4374, a bill to amend the regulatory aspects of our national shippinq policy. As you will note, North American Van Lines, Inc. is a company with broad and successful experience in the transpor- tation business. I believe the Committee's deliberations will be well served by North American's thoughtful analysis of this legislation. Thank you for your assistance. Singtr lv, Member of Congress DC : cli: kg Enclosure CC: Mr. G. Zan Golden North American Van Lines PAGENO="0361" 355 STATEMENT OF NORTH AMERICAN VAN LINES, INC. BEFORE THE SUBCOMMITTEE ON MERCHANT MARINE, COMMITTEE ON MERCHANTE MARINE AND FISHERIES, ON H.R.4374 North American Van Lines, Inc., is engaged in the business of transporting and forwarding household goods throughout the Free World, and. transporting and arranging for the transportation of commodities within the continental United States and adjacent foreign countries. North American operates domestically as a motor common and contract carrier, an air freight forwarder, an exempt surface forwarder of used household goods, and as a motor carriage broker (through a subsidiary) ; internationally, North American conducts operations as an air freight forwarder and as a non-vessel operating ocean carrier of used household goods. North American, through its motor carrier broker subsidiary, intends to file with the Federal Maritime Commission (FMC) an application for an ocean freight forwarder license. North American appreciates this opportunity to provide the Committee with its comments on H.R.4374. North American supports the amendments redefining the term "ocean freight forwarder" and those contained in Section 5 of the bill, and through its comments will refute the twin specters of unenforceability and abuse various parties have mounted in opposition to its passage. The two common complaints raised against similar amendments found in a bill now under consideration in the U.S. Senate (S.1593) are that they will "open the way for `all sorts of phoney freight forwarder relationships,'" and that "it would be impossible for the FMC staff to come anywhere near policing (the millions of shipments per rear)" it would have to investigate if the bill were to pass.~/ 1/ American Shipper. September (1981), pp. 28 & 30. Statements of Raymond P. deMember, Executive Director of the International Association of Non-Vessel Operating Common Carriers, and Gerald Ullman, attorney for the New York Foreign Freight Forwarders & Brokers' Association, Inc., respectively. PAGENO="0362" 356 The latter objection is used by opponents of changes to the law regulating freight forwarder operations to support the former objection. In their view, "dummy forwarder" operations will spring from the amendments because the prohibitions in the amendments will be unenforceable. As North American will show, however, the claim of unenforceability is without foundation, and the fear of phoney freight forwarder relationships, therefore, is baseless. The first flaw in the enforcement argument is its over- breadth. If "dummy forwarder" operations were established, the FMC would not be forced to examine "millions of shipments" to identify and proceed against them; rather it would be able to direct its enforcement efforts toward the operations themselves. The correct focus for rur~oses of arguing enforceability, therefore, is on individual forwarders and not on individual shipments. And the enforcement burden raised by these parties is, therefore, illusory. The second major flaw in the opposition's enforcement argument is the FMC's asserted lack of manpower to ferret out illegal practices. The FMC will have two able bodies of "deputies" - ocean freight forwarders and ocean common carriers - to assist it in its enforcement role if the amendments become law. Both groups would have strong incentives to render such assistance. If the intensity of their opposition is any measure of the vigilance with which freight forwarders guard their existing business, they will actively protect against abuses in the industry to preserve their individual shares of the relevant markets and to protect the industry's image. Ocean common carriers will take care to avoid the payment of any monies that may be held to constitute rebates, the payment of which is as illegal as the receipt. Finally, opponents' reasoning is undercut by the inclusion in Section 5 of the bill of a provision that would restrict ocean common carriers from paying to freight forwarders commissions on any shipments prior to a freight forwarder's certification in writing that he has no beneficial interest in the shipment. In addition to creating a deterrent to the solicitation and receipt of illegal brokerage payments, such a measure would provide the FMC with an evidence trail in the event it instituted an investigation of a freight forwarder's operation, and thus facilitate its enforcement efforts. PAGENO="0363" 357 Taken together, these flaws reveal the emptiness of opponents predictions that the prohibitions and requirements of the Shipping Act of 1916 could not be enforced by the FMC. Without this factual predicate, and prophesy that the bill will spawn great numbers of spurious freight forwarder operations fails as well. The foregoing reflects North American's view that passage of the bill would not result in the dire consequences predicted by those who oppose the legislation. In scm, North American supports the amendments set forth in H.R.4374 and would urge the Committee to guide the bill through the Congress to passage. However, North American recognizes that there are those who have difficulty dealing with the prospect of such a sudden and expansive relaxation of regulation. Accordingly, North American also supports retention of the FMC's authority to continue licensing and regulating ocean freight forwarders. Under a new scheme of regulation, the FMC could easily retain its existing requirement that applicants for licenses disclose all affiliations with shippers, and by thus identifying potential abusers of relaxed regulation further lessen its enforcement burden. North American submits that less sweeping changes to the Shipping Act of 1916 such as these would allay the fears of those who oppose any measure of reform, and, at the same time, allow an infusion of much needed competition into the ocean freight forwarding industry. PAGENO="0364" 358 Mr. BIAGGI. The first witness this morning will be Albert E. May, executive vice president, Council of American-Flag Ship Operators; accompanied by Hans G. Blocklin, Senior Vice President, Lykes Brothers Steamship Co., Inc.; Harlan P. Breed, vice president, United States Lines, Inc.; J. William Charrier, Jr., director of Gov- ernment Relations, Delta Steamship Lines, Inc.; and W. H. Wil- liams, vice president, American President Lines. Gentlemen? STATEMENT OF ALBERT E. MAY, EXECUTIVE VICE PRESIDENT, COUNCIL OF AMERICAN-FLAG SHIP OPERATORS, ACCOMPA- NIED BY HANS G. BLOCKLIN, SENIOR VICE PRESIDENT, LYKES BROS. STEAMSHIP CO., INC.; HARLAN P. BREED, VICE PRESI- DENT, PRICING-PACIFIC SALES, UNITED STATES LINES, INC.; J. WILLIAM CHARRIER, JR., DIRECTOR OF GOVERNMENT RELA- TIONS, DELTA STEAMSHIP LINES, INC.; AND W. H. WILLIAMS, VICE PRESIDENT, AMERICAN PRESIDENT LINES, INC. Mr. MAY. Good morning, Mr. Chairman. We are appearing collec- tively this morning because of the great importance of this legisla- tion. We appreciate, on behalf of all the CASO members, the oppor- tunity to appear and discuss this with you. Changes in the Shipping Act of 1916 are long overdue, and we are grateful, Mr. Chairman, that you have recognized this need and that Chairman Jones has joined you in introducing this legisla- tion. The challenge of rectifying this dangerous imbalance rests pri- marily with those of us who manage our country's privately-owned merchant fleet and with those who even now are manning our ships and operating our facilities around the world. However, we must look to you for the restoration of a regulatory environment in which we may achieve the efficiencies and productivity necessary to improve our competitive position. The provisions of H.R. 4374 constitute a realistic approach to re- sponsible action by shipping conferences to fulfill their basic pur- pose of providing regular and sufficient service to accommodate the needs of commerce at fair and stable rates. The proposed strength- ening of the conference function will lead to a greater ability on the part of carriers to rationalize their services to achieve a signifi- cantly higher capacity utilization, and enable carriers to share with shippers the resulting economies. Shippers should not have to support the higher cost of service levels far in excess of their collec- tive need. Neither shipper nor carrier should be subjected to the inefficiency of low utilization of expensive capacity. Bilateral maritime agreements are already in effect in many of our trades. The UNCTAD Code is expected to come into being in 1982, but many of the countries with which we trade have already adopted the provisions of the Code. These are separate and highly controversial issues. Although the bill does not attempt a complete revision of the Shipping Act, it goes a long way toward removing some of the main sources of friction and conflict between ourselves and our foreign trading partners. Further, it eliminates a consider- able part of the competitive disadvantage that we, the American- flag sector, have labored under for years. It is our judgment that PAGENO="0365" 359 the regulatory reforms included in H.R. 4374 will reduce further erosion of the U.S.-flag liner industry and that its enactment will encourage new investment in the industry. We would now like to discuss the specific provisions of the bill which we consider to be of primary importance. Antitrust exemptions. As you have noted, Mr. Chairman, in your opening statement on these hearings, it is essential that our ship- ping laws be revised and clarified to provide equal and even- handed treatment for all operators in our foreign trade. Court decisions beginning in the 1950's, together with adminis- trative practices and decisions of the FMC which have followed, have resulted in almost total erosion of the original intent of Con- gress when it enacted the Shipping Act of 1916. Antitrust immuni- ty and the doctrine of primacy of the Shipping Act over the anti- trust laws have been lost. Industry practices which would previous- ly have been lawful as within the scope of approved agreements, or if in violation of section 15 would have been subject to the penalty provisions of the 1916 Act, are now claimed to be subject to retroac- tive application of antitrust treble damage suits and criminal pen- alties. Carriers and conferences are unable to predict with any degree of certainty what actions might later be found to be in vio- lation of the antitrust laws. As the chairman has noted, clear antitrust immunity would be a major step toward the administration's goal of revitalizing our maritime industry by removing a significant handicap created by uneven enforcement. The requirements, standards, penalties and civil liabilities pro- vided in the Shipping Act, as amended, must, as to all the regulat- ed activities of common carriers by water, conferences and other persons subject to the Act, be exclusive of all other laws, including specifically the antitrust laws. We are concerned that the language in section 2 may not fully implement the stated intent of the chair- man. In an appendix to this statement we will suggest an amend- ment for your consideration. RATIONALIZATION AND LIMITATIONS ON CONFERENCE MEMBERSHIP The right to rationalize service and limit conference membership is a means by which shipowners can keep some balance between the supply of tonnage invested in serving a market and the demand for that service. The consequences of both open trades and open conferences have been persistent overtonnaging in U.S. liner trades, leading to the diseconomies of low utilization of expensive fixed cost assets and widely fluctuating rate levels that disadvan- tage the competitiveness and stability of U.S. commerce. Through the years, CASO has consistently supported the right of conferences to limit their membership. However, given the chang- ing circumstances, we give higher priority to obtaining the full benefits of antitrust immunity, rationalization, and pooling within the existing conference structure. With regard to pooling agreements specifically, their beneficial impact on U.S. commerce, shippers and carriers has been docu- mented in several recent studies. With respect to carriers, pools have resulted in a moderation of overtonnaging during cyclical PAGENO="0366" 360 swings, increased vessel utilization and a greater stability in rev- enues. These benefits in turn have provided the basis for carriers to make substantial and innovative long-term investments in the trade. With respect to shippers, service levels have improved, ship- pers have not experienced any deterioration of liner service, and rates have increased at a slower rate, both on a revenue per cargo ton basis and on a revenue per cargo value basis than in trades which are not affected by pooling agreements. SHIPPERS' COUNCILS The establishment of shippers' councils is mainly the business of shippers. Should such councils be authorized, we are prepared through our conferences to establish jointly with such councils pro- cedures to consult on matters of general principle. We must stress, however, as we consistently have, that neither shippers nor our- selves would want or intend that specific rate levels be dealt with in the context of the conference/shipper council relationship. We endorse the definition of shippers' councils, together with the scope of their permitted and prohibited activities, as set forth in H.R. 4374. BURDEN OF PROOF ON AGREEMENTS We concur completely with the principle specified in section 2 (5) and (6) that the burden of proof in a proceeding involving the issue of the approvability of agreements be on the party opposing the agreement. We assume this burden would run equally against the FMC itself were it opposing an agreement. TIMING OF FMC DECISIONS We are in general agreement with the periods of time and proce- dures specified in section 2 relating to the approval of agreements. It should be made clear, however, that if the Commission fails to take action as required under section 2(5) the agreement shall go into effect as filed. In addition, we fail to see the need for-or ad- visability of-the "informal preliminary hearing" called for in sec- tion 2(B). FREIGHT FORWARDERS As with the section on shippers' councils, we will leave detailed discussion of this area to those most directly impacted. Representa- tives of U.S. freight forwarders have outlined to this committee their reasons for favoring existing provisions of law regarding entry into and operation within the freight forwarding field. We support this. We recognize that H.R. 4374 has been carefully drafted to correct a specific problem and to avoid controversy over broader issues such as beset the Omnibus bill in the last Congress. We believe, however, that there are four issues do directly related to the rest of the bill that they should be addressed when legislation is reported out. These are: PAGENO="0367" 361 INTERMODAL RATEMAKING The ability of combinations of carriers to establish through inter- modal rates must continue and be made clear and certain. Intermo- dalism, which began in the early 1970's, has become a significant transport mode in international commerce. Presently, ocean confer- ences, with the approval of the FMC, established thru-rates be- tween an inland point in this country and a point or port in a for- eign country. Such intermodal rates are published in the confer- ence tariff. However, the individual members of the conference agreement negotiate services and the division of revenue with indi- vidual inland carriers. Conferences do not involve themselves in es- tablishing routes or divisions of revenue which, as now, should be left to the discretion of the individual conference members. These practices must be continued in order that the shipping public can avail themselves of the benefits of intermodalism. Specific language in your bill reaffirming Shipping Act jurisdic- tion of intermodal rates and service will promote further innova- tions in the liner trades. This is particularly important now be- cause the Justice Department has persuaded the District of Colum- bia Court of Appeals to grant en banc reconsideration of the deci- sion of a panel of three judges upholding the Commission's statu- tory authority to approve, and thereby immunize from antitrust attack, conference intermodal authority. As considerable amounts of conference cargoes are increasingly moving under FMC ap- proved intermodal arrangements, such conferences can ill afford any further delay in obtaining clear and precise reaffirmation of the Commission's authority. We urge your committee to adopt language similar to that set forth in 5. 1593, which provides clear authority for ocean common carriers or others subject to the Shipping Act to agree with each other or with any combination of air carriers, rail carriers, motor carriers, or other common carriers by water to establish through transportation routes and through intermodal rates or concur in tariffs. Mr. BIAGGI. When did that decision come down? Mr. MAY. The ruling permitting or calling for the en banc review. Approximately midsummer, Mr. Chairman. Mr. BIAGGI. All right. Mr. MAY. Loyalty contracts. Current law regarding loyalty con- tracts should be clarified. It must be made a clear violation if a contract shipper, with the intent to avoid its obligations under the contract, divests itself or permits itself to be divested of the legal right to select the carrier and the shipment is carried by a carrier not a party to the contract. In any dispute, the burden of proof should be on the contract shipper. In addition, it is necessary that a conference be clearly permitted to implement a single contract covering the services, including port to port and intermodal, offered by the conference or conference car- riers will lack the ability to insure that shippers do not so divide their traffic between conference and nonconference services that the expected benefits of rationalization-or even of the conference system-will prove unobtainable. PAGENO="0368" 362 INDEPENDENT NEUTRAL BODY POLICING Conference agreements should be required to engage the services of an independent neutral body to police the obligations of mem- bers. We also believe that nonconference carriers should have to submit to the same policing requirement as conference members. The principle that a filed rate is the only lawful rate that may be charged by a carrier in the commerce of the United States man- dates that carriers be required to uphold the rates and rules their tariffs publish. TARIFF FILING AND REBATE PENALTIES Some may suggest that an end to the tariff filing requirement and the rebating prohibition would have a salutary effect. We strongly disagree. The entire underpinning of U.S. common car- riage philosophy as it applies to the ocean transportation would go right out of the window. One of the most fundamental premises of U.S. law regulating transportation asserts that all U.S. shippers should have access to the common carriage system on a reasonably equal basis. Elimination of tariffs would set the stage for major shippers to exercise their market power at the expense of the smaller shippers. The ability of many shippers to compete effective- ly in the export markets would suffer from the insuing economic discrimination and rate gyrations. Instability of rates would become the rule and an open season would be declared on rebating whether specifically legalized or not. We will soon submit for your review more detailed discussions of: A. Antitrust exemptions. B. Conference structure and tariff filing. C. Pooling and equal access agreements. D. The economic benefits of rationalization. We respectfully request that these be made a part of your record on H.R. 4374. Mr. Chairman, we appreciate this opportunity to appear before your committee to present this testimony, and we will he happy to try to answer any questions which the committee may have. Mr. BIAGGI. With relation to tariff filing, and its elimination, you take a very firm position in opposition to its elimination, and yet there are some shippers who advocate it. Can you tell me what you believe motivates them, or what you believe the grounds for their positions or position are? Mr. MAY. Mr. Chairman, the motivation, I think, flows from two things. First, adoption of the domestic deregulation which we have seen in this country in the past several years, and the feeling that this should automatically be followed in international liner trades. Second, some uniquely situated large shippers might be in a posi- tion to benefit quite substantially from this, because of their market power. You have not seen very many small shippers, if any, urging the elimination of tariffs. This is a complex issue, but the reasons underlining our position are sound. I would like to detail one of them, and then ask one or two members of the panel to elaborate, because this is a vital issue. I think one of the things that those who call willy-nilly for dereg- ulation of tariffs in the liner trades forget is that when you dereg- PAGENO="0369" 363 ulate domestic transportation all of the carriers in all modes and all of the shippers are subject to the same set of economic and legal rules. It is impossible to achieve that same fair competitive situation in international trade because on every voyage we have to observe the laws of at least one, and usually a plethora of foreign countries, as well as our own. We also have to compete with carriers under for- eign flags who are much more responsive to the laws or lack of laws of their own nation's than the laws of the United States. Two examples of the dilatorious effects of this. First, many of the carriers with whom we compete are directly or indirectly govern- ment-owned or controlled. They are instruments of national eco- nomic and political power. I am not speaking here of just the fact that the Russians are coming, although certainly the Communist bloc is the greatest threat. We are faced, wholly or partially with government-owned shipping from countries around the Mediterranean, Israel, Roma- nia, Italy; countries in South America, countries in Africa, China, and Southeast Asia. This is a clear and constant problem that we have today. These government-owned, or related entities can, for a variety of reasons, cut rates. It may be simply to get more traffic. They are not restrained by the strictures of the marketplace as we are. They have the resources of the deep pockets of government to fall back on. This is a very serious situation, and there is nothing that we know of that this committee or the Government of the United States can do about it unless we have tariffs on file to permit polic- ing. Second, we are quite different than, say, the trucking business; If you drive a trucker out of business, the economic cost of replacing that service is relatively so small, and there are so many thousands of carriers, that the person who cuts the rates is not going to bene- fit from the lack of competition, because someone else will fill the gap very quickly. Our situation is quite different. If you drive a modern liner operator out of business, that service is not going to be quickly replaced, particularly by a U.S. carrier, because several ships today cost upward of hundreds of millions of dollars. In addi- tion, you need more millions for chassis, barges, cranes, computer systems, sophisticated marketing, and the rest. Thus, it can be eco- nomically attractive in our business to drive someone off a trade route. Government entities can do just that. There is also a legal problem because there is no way that you can put a U.S. liner operator on the same legal footing with re- gards to antitrust problems as his foreign competitor. Take a single example, a major manufacturer decides to drive a competitor out of a given foreign market. If this is done through predatory pricing, in collusion with ocean carriers it is the U.S. lines and not the foreign who will bear the burden of antitrust suits. So if tariffs are eliminated we are going to be faced, we think, with the same sort of antitrust problems that we have today. There are other problems that we see with the elimination of the tariffs. I would like other members of the panel, if they may, Mr. Chairman, to address that, because it is a terribly important issue. 9L~_856 0 - 82 - ~ PAGENO="0370" 31;4 Mr. WILLIAMS. Mr. Chairman, I think the opponents of the tariff filing system have as their fundamental premise that without a tariff system you can create rate competition, and I would just remind them that that is really not the case at all, because under 18(b) of the act, any carrier or any conference of carriers can reduce rates on a moment's notice, and I have as evidence, the rate war that has been going on in the Pacific for quite some time. So it is not a fair premise that, because you get rid of tariffs you are going to create worldwide free trade and bargain-basement rates, that can happen right now, and is. Mr. BREED. Mr. Chairman, if I may make one observation. I was privileged to be part of the U.S. delegation to the UNCTAD Code sessions in Geneva with Mr. May, and a great deal of time was de- voted to a part of the Code dealing with conferences, and I be- lieve-and Mr. May can correct me-the Code mandates the filing of tariffs with Government agencies. I might also tell you that in the trades we are involved with, the Canadian Government, the Government of the Republic of Korea and the Government of the Republic of Taiwan now require us to file our tariffs with them. Thank you, Mr. Chairman. Mr. BIAGGI. With relation to these larger shippers that you say are unique and might have some benefit by eliminating the filing of tariffs, let me pose this question. Are they damaged by the retention of the filing requirements? Anybody? Mr. Breed? Mr. BREED. Mr. Chairman, if I may. I have been privileged to meet in the last few weeks with several associations of importers, as part of a homebound agreement com- mittee, and the overwhelming desire on their part seemed to be the need for stability in the trades. They have benefitted somewhat by the downward movement of rates over the past 2 years, but they are most concerned about where they will be next year, and I submit that one of their biggest questions was and has been, what will your rates be in the coming years so that we can forecast and tell our buyers how much to buy and where to purchase. I submit that absent the stability which the filing of tariffs gives us, the desired stability these people need for forecasting and plan- ning their forward commitments, would be eliminated. Thank you, Mr. Chairman. Mr. CHARRIER. I would like to make one other point, Mr. Chair- man, with respect to the argument that is often made that the Eu- ropean system generally does not have tariffs, so why do you need them in the United States. We are going to be submitting a memo that addresses the struc- ture of the European system versus the conference system in the United States. In the European system, the absence of tariff filings, and the ability of larger shippers to effectively exercise substantial market power is offset, to a large extent, by the ability of the con- ferences to enter into loyalty agreements with those shippers which have very substantial enforcement mechanisms. The princi- pal one of these is the deferred rebate. Now, the deferred rebate would continue to be illegal under the U.S. system, and so really what you have done, if you eliminate the PAGENO="0371" 365 tariff filing and the regulatory apparatus that goes along with that, is to move one step toward the European system, without adopting the other aspects of that system that are necessary to maintain sta- bility in the trades. Mr. BIAGGI. Mr. May, I still do not believe I received the answer to the question. Perhaps I did not pose the question properly. What benefits or justifies the position of some shippers in their efforts to eliminate tariff filings? You said well, because some large shippers are unique, they might get some benefit. Let me go further. I said would they be injured by tariff filing? Mr. BLOCKLIN. I would say not at all, Mr. Chairman. I cannot find any conceivable argument for that type of a proposition. If in fact it raises everything up to an aboveboard type of situa- tion, that protects, in a sense, the large shipper, but more impor- tantly, the smaller shipper who does not have the bargaining power of the large shipper, and I think it is a fair and equitable way. I think it is the American way, and the way that we should do it. I think there has been a lot of irresponsible criticism of the tariff filing type of requirements of the Federal Maritime Commission, and I hope that when this record is made, and the dust settles on this whole situation, that we will find that there is really an appro- priate place for the Federal Maritime Commission, and certainly the rate filing aspect of the situation is very important, along with the ability of the FMC to exercise judgment that transcends the Antitrust Department and Justice in the matter of penalties for improper rate filing and illegal rebating. Mr. BIAGGI. Thank you. Mr. Blocklin, some have suggested that making rebates legal would be a desirable part of maritime regulatory reform. Would you care to comment on that? Mr. BLOCKLIN. I would. You know, Mr. Chairman, that is a type of thing that is sort of a proposition that we are being asked to do bad to do good. I think every CEO in CASO would find such a proposition unacceptable. What we would get into is a situation where the CEO's would be faced with ultimately setting up private slush funds for this one; private secret arrangements overseas here, numbered Swiss bank accounts; no one wants to get into that. We have traveled this path. It is not a new idea. One hundred and fifty years ago this type of thing was rampant in Europe. They found it totally unac- ceptable, and as recently, in the last decade, several American lines found it, tried it, surreptitiously, with very unfortunate conse- quences. Economically the practice would be profit-eroding, it would be a disaster. It allows the lines to be whipsawed, played off one against the other in kind of a war on the level of brokerage commissions, a war on booking commissions, and I think finally, from a philosophi- cal view it is immoral and unethical, and I think it is totally alien to our American system of fair and decent practice. I think someone said in a previous hearing that it is opening a Pandora's box for illegal activity, and I think that is-and that sums it up pretty well. PAGENO="0372" 366 Mr. BIAGGI. I think Mr. May testified that if we do not have tariff filing then rebates would follow. Mr. BLOCKLIN. Exactly. Mr. MAY. Mr. Chairman, I think my earlier comments to a ques- tion of yours, I think equally apply here. You have no means of controlling, dumping of shipping services into U.S. trades by for- eign carriers, which is not a problem in domestic transportation, of course, particularly, you would have no way to control dumping by Government-owned shipping companies. I think that is another aspect of this whole problem. If you legal- ize rebating, you permit them to dump, and you have no real way to control it. Mr. BIAGGI. With relation to closed conferences, what would pre- vent a conference from taking action to drive out independent car- riers from the trade, and then raising rates? I raised that question once before. It is a common business practice. Reduce prices, devel- op a whole severe competitive situation temporarily, drive your competition out, and then come back in full control and skyrocket the prices? That is one of the arguments against the closed confer- ences. Mr. BREED. Mr. Chairman, if I may, I will try to answer that. I am not sure that I understand the full impact. But closed conferences, per se, are rather meaningless when our trades are open. In other words, closed conferences do not preclude independents from continuing in the trade. So, to have a closed conference in an open trade, and furthermore, a closed conference without the benefit of strong loyalty arrangements, or merchant freight contract agreements is a rather hollow victory. A closed conference standing on its own really has little value. Mr. BIAGGI. Mr. Breed, I heard your response, but I do not think it is as sanguine as that. I believe a strong conference could have negative impact on the independents. Closed conferences and the right of independent rate action, may have to be the price to pay to avoid the shippers' objec- tions to closed conferences. What are your views on that statement? Mr. MAY. Mr. Chairman, we have given that some consideration, and you will note that in our statement we make the point that we have supported the closed conference concept for at least a decade, to my knowledge. The large part of the reason for that was to try to bring our laws into harmony with all of the rest of the world, and that system has worked well abroad. I would specifically call your attention, your memory, to testimo- ny which you have received on several occasions from the Shippers' Councils of Europe, where the shippers work every day with closed conferences, and the witnesses, Mr. Shabon, and the other witness, whom I have forgotten his name, have come in and testified that they find the closed conferences preferable because they are ration- alized, and they keep the costs down. That is one important aspect of this, it has worked overseas. Mr. Chairman, if I may just complete one more thought on that. That is, that we have stated to you that we no longer are given a top priority to closed conferences. We feel that they would be a good long-term goal for the United States. It would bring our laws PAGENO="0373" 367 into harmony, but in order to make them work you have to have very strong tying arrangements, or they are meaningless. What we have decided to focus on now, partially as a matter of political reality, and also because of our own priorities, is to try to get legislation that will give us a very, very clear antitrust immu- nity, one that cannot be whittled away as twice before when the Congress had thought that they had achieved this purpose. We also see great importance as immediate goals in the develop- ment of bilateral arrangements with our trading partners, in re- sponse to the Code, and their own laws, and the need for an im- proved ability to rationalize under the existing conference struc- ture. Mr. BIAGGI. We understand your first priority is the immunity question. I am fearful that this direction will have to come clearly from the White House. There are two conflicting schools of thought at this point. If it is any comfort to you, I know the Secretary of Transportation, Mr. Lewis, is the supporter of some movement in that area, but Justice is adamant, maintaining its traditional position. Mr. MAY. Mr. Lewis is a great ally. It is of great comfort, and we hope he wins. Mr. BIAGGI. I am sure you do. He happens to enjoy good favor with the President. Hopefully it will work out. Would the inclusion of intermodal agreements within the juris- diction of the Federal Maritime Commission run counter to the recent deregulatory effort of the Interstate Commerce Commission? Mr. MAY. Mr. Chairman, would you be kind enough to repeat the question, please? Mr. BIAGGI. If we include intermodal agreements within the ju- risdiction of the Federal Maritime Commission, would that run counter to the recent deregulatory effort of the ICC? Mr. BLOCKLIN. It seems to me, Mr. Chairman, that since the ICC has voluntarily abandoned the idea of ratemaking on the inland rate portion, that sector is then open, and we feel, certainly strong- ly, that the loop should be closed, so that the ocean rate and the inland rate on intermodal rates are a thing that can be filed with the FMC. As far as the intermodal, the inland portion of the inter- modal rate, that segment can be worked out between the particular steamship company and the carrier; in the case where there is a conference, with the conference approval, or as part of the confer- ence rates that are filed with the FMC. I see no conflict in the philosophy-I see a conflict perhaps in some aspirations within the administration about deregulating, and that seems to be the magic mantra these days-to deregulate with- out thought of consequence, but I do not see that-I do not feel that it is inappropriate at all, since the ICC has abandoned that area, to have-if I may have a minute to finish, I will yield the rest of my time-well, I do not feel it inappropriate, and I think that it is open, and I hope that when the court en banc renders its deci- sion in December, that we will get the lower court decision af- firmed. That was a 2 to 1 decision affirming FMC's legality in that area. In fact, if we could play God for a day, I would like to see a way to have Justice withdraw the appeal that it made for a full hearing before an en banc court. PAGENO="0374" 368 Mr. BIAGGI. If you could play God for a day, you would do more than that to Justice. Mr. BLOCKLIN. Yes. Mr. BREED. Mr. Chairman, could I apologize to Mr. Blocklin? I am used to having my own mike, and I am sorry. If I may, Mr. Chairman, it is the water carriers' equipment that is moving inland. It is our chassis, in most cases. They are our chassis, they are our containers, they are an extension of our ocean service, we consider them part and parcel today of our ocean serv- ice, and we feel we should have complete control over them. We continue, my company and all of the CASO members contin- ue to be conference oriented for the reasons expressed before. We submit, in the final analysis, if the conferences cannot have control over the total service they offer, their future existence is in great jeopardy. We feel it absolutely essential that conferences have that authority over their own through services. Thank you, Mr. Chairman. Mr. BIAGGI. Who else besides Justice opposes intermodal agree- ments? Mr. BREED. Mr. Chairman, if I may. I think in some of the earlier dockets, shippers. Mr. BIAGGI. All shippers? Mr. BREED. No, some. Mr. BIAGGI. Why? Mr. BREED. I think you would have to ask the shippers that, sir. I could surmise, but that would be unfair. Mr. BIAGGI. Thank you very much, gentlemen. You left me in a state of suspension, Mr. Breed. I am waiting for the last episode to close. I am waiting for a shipper. I see him. I see him. Mr. BREED. I have already primed him. Mr. BIAGGI. Thank you very much, gentlemen. Mr. MAY. Thank you, Mr. Chairman. [The following was received for the record.] PAGENO="0375" 369 ~ OT Operators December 7, 1981 BY HAND The Honorable Mario Biaggi, Chairman Subcommittee on Merchant Marine House Committee on Merchant Marine and Fisheries H2-531 House Office Building Annex II Washington, D.C. 20515 re: Supplement to CASO's testimony on H.R. 4374 Dear Mr. Chairman: As discussed during our testimony November 5th, on H.R. 4374, enclosed are more detailed discussions of: a. Antitrust Exemption; b. Conference Structure and Tariff Filing; c. Pooling and Equal Access Agreements; and, d. The Economic Benefits of Rationalization (.paper titled "Review of Several Studies Addressing the Question of Whether a `Closed' Conference System Will Result in Higher Prices Than Under An `Open' Or `Competitive' Conference System") We respectfully request that these be made a part of your Record on HR 4374. Our member lines are reviewing a paper on the issue of Through Intermodal Rates and will submit it to you shortly. We would also hope that it could be made a part of your Record. With best wishes. Yours. sincerely, Albert E. May Executive Vice Presiden cc: Hon. Walter B. Jones Hon. Gene Snyder Hon. Paul N. McCloskey PAGENO="0376" 370 CASO APPENDIXA MEMORANDUM RE: ANTITRUST EXEMPTION BACKGROUND In order to clearly understand the need for legislative action in this area, it would be helpful to briefly review the evolution and history of the Shipping Act, 1916, which created a unique regulatory scheme for liner carriers operating in U.S. foreign trades, including Section 15 of that Act which provided for limited acceptance of the international shipping conference system then used throughout the world, and granted immunity from the antitrust laws for agreements which were approved by the governmental agency administering the Act. In the years immediately prior to World War I, the Committee on Merchant Marine and Fisheries of the House of Representatives conducted an intensive two year investigation of the liner shipping industry operating in the foreign commerce of the United States. It found that the industry was unique in a number of respects. The U.S. foreign trades were served by many foreign owned steamship lines as well as U.S. operators, and U.S. imports and exports were also the the imports and exports of many foreign nations with equal interests in regulating and controlling that commerce. The shipping industry was highly capital intensive, which led individual lines to attempt to fill their vessels through intense price competition which, if not controlled, would result inexcessive and destructive com- petitive practices. The rest of the world had solved this pro- blem through a system of conferences of steamship lines in the major trade routes which jointly fixed rates and conditions of competition in the trade. The committee found that such a system could not legally operate in U.S. trades without immunity from application of the domestic antitrust laws of the United States. In its report issued in 1914, the committee concluded as follows: * * * It is the view of the Committee that open competition cannot be assured for any length of time by ordering existing agreements terminated. The entire history of steamship agreements shows that in ocean commerce there is no happy medium between war and peace when several lines engage in the same trade. Most of the numerous agree- ments and conference arrangements discussed in the foregoing report were the outcome of rate wars, and represent a truce between the contend- ing lines. To terminate existing agreements would necessarily bring about oie of two results; the lines would either engage in rate wars which would mean the elimination of the weak and the survival of the strong, or, to avoid a costly struggle, they would consolidate through common ownership. Neither result can be prevented by legislation, and either would mean a monopoly fully as effective, and it is believed more so, PAGENO="0377" 371 than can exist by virtue of an agreement. Moreover, steamship agreements and conferences are not con- fined to the lines engaging in the foreign trade of the United States. They are as universally used in the foreign trade of other countries as in our own. The merchants of these countries now enjoy the fore- going advantages of cooperative arrangements, and to restore open and cutthroat competition among the lines serving the United States would place American ex- porters at a disadvantage in manymarkets as compared with their foreign competitors.' The report recognixed that some degree of immunity from the antitrust laws should be granted to liner operators in our foreign commerce, but recommended that certain disadvantages and abuses of the conference system be eliminated by effective government regulatory control. As a result of this investigation and report, Congress enacted the Shipping Act, 1916, which, with certain modifications, continutes to be the statutory basis for regul ation of the liner shipping industry in U.S. foreign trades. Both the legislative history and plain meaning of Section 15 of the 1916 Shipping Act indicate that the statutory standards of that Act were intended to supersede the standards of the antitrust laws in liner shipping matters. This doctrine of exclusive primary jurisdiction was generally accepted for four decades and was affirmed by the Supreme Court in United States Navigation Co. v. Cunard Steamship Co., 284 U.S. 474 (1932) and again in Far East Conference v. United States, 342 U.S. 570 (1952). These cases, and others, clearly held that the antitrust laws were inapplicable to agreements of shipping lines and conferences within the purview of the Shipping Act, whether approved or not, and the remedies for violations of section 15 were to be found solely within the provisions of the Shipping Act. In addition, for this period of time, the standards for approval and disapproval of agreements had been Shipping Act not antitrust standards, and there was a presumption in favor of approval of the types of agreements not prohibited by that Act. However, in 1954, the courts began to undermine the doc- trine of primary jurisdiction and inject antitrust law principles into Shipping Act matters. In Isbrandtsen Co., Inc. v. United States, 211 F.2d 51 (D.C. Cir. , 1954), the court stated that the Federal Maritime Board, in considering approval of an agreement, must scrutinize the agreement to make sure that the conduct thus legalized does not invade the prohibitions of the antitrust laws any more than is necessary to serve the purposes of the regulatory statute." The most important case which squarely injected antitrust principles into liner shipping regulation was Carnation Co. v. Pacific Westbound Conference, 383 U.S. 213 (1966) in which the PAGENO="0378" 372 Supreme Court reversed two lower court decisions and overturned 50 years of precedent. The Court held that there had been no Congressional intent to grant the shipping industry complete antitrust immunity and, therefore, the implementation of ratemaking agreements that had not been approved by the Federal Maritime Commission was subject to the antitrust laws. Liner carriers and conferences suddenly found themselves exposed to the antitrust laws if they acted in a manner later found to be beyond the scope of their approved agreements. Antitrust ex- posure became paramount to Shipping Act exposure, and the regu- lated shipping industry became potentially liable to treble damages and criminal penalties under the antitrust laws as well as reparations and civil penalties under the Shipping Act. The courts in short order further extended antitrust standards to Shipping Act matters. In Sabre Shipping Corp. v. American President Lines, Ltd., 285 F.Supp. 949 (S.D.N.Y. 1968), cert. denited 395 U.S. 922, the court held that even though the conference lines were operating pursuant to approved agreements, the *rates fixed were so low as to be detrimental to commerce in violation of section 18(b) (5) of the Shipping Act and, therefore, beyond the scope of any approved agreement. The rates found unlawful were found to be retroactively devoid of antitrust im- munity, and a treble damage suit would lie. In Federal Maritime Commission v. Aktiebolaget Svenska Amerika Linien, 390 U.S. (1968) the Supreme Court held that the proponents of an agreement that interferes with the policies of the antitrust laws could be approved only if proponents could factually demonstrate that the agreement is "required by a serious transportation need, necessary to secure important public benefits, or in furtherance of a valid regulatory purpose of the Shipping Act." This was a dramatic change from the previous presumption of approvability for Section 15 agreements intended by Congress, and imposed an affirmative burden and presumption of illegality on agreements submitted for approval. It also continued the substitution of antitrust standards used for judging approvability of agreements. Two other cases have further critically eroded the pre- sumption of approvability of Section 15 agreements and have vir- tually replaced the historic Shipping Act standards for approva- bility with antitrust standards. In Marine Space Enclosures, Inc. v. Federal Maritime Commission, 42.0 F.2d 577 (D.D. Cir 1969) the Court of Appeals held that some ty~~.~of hearing was necessary in virtually all instances where an a~rëement raises significant antitrust questions or when an agreement is protested. The FMC itself, as demonstrated in Canadian American Working Arrange ment/Canadian American Discussion Agreement, 16 S.R.R. 773 ~1976) (CAWA/CADA) has firmly followed the lead of the courts in its administrative handling of section 15 agreements. In that case it meticulously restated the Svenska antitrust standards for approval, and said that "the burden of going forward with the evidence, that is the burden of adducing evidence which shows the need for the agreement, is on the proponents of the agreement." This was virtually the end of the original Shipping Act presump- tion in favor of approval of section 15 agreements. PAGENO="0379" 373 These court decisions beginning in the 1950's, together with the current administrative practices of the FMC which have followed, have resulted in almost total erosion of the original intent of Congress when it enactedthe Shipping Act, 1916. Anti- trust immunity and the doctrine of primacy of the Shipping Act over the antitrust laws has been lost. Industry practices which would previously have been unlawful as within the scope of approved agreements, or if in violation of Section 15 would have been subject to the penalty provisions of the 1916 Act, are now additionally subject to retroactive application of antitrust treble damage suits and criminal penalties. Carriers and confer- ences are unable to predict with any degree of certainty what actions might later be found to be in violation of the antitrust 1 aws. The commercial Shipping Act standards for approvability of section 15 agreements have been abandoned, and strict domestic antitrust standards have been substituted. The originally in- tended presumption of legality for carrier agreements within the purview of the Shipping Act no longer exists, and under the Svenska and CAWA/CADA guidelines now being followed, proponents of agreements must assume the burden of overcoming a presumption of antitrust illegality by demonstrating with factual evidence that the agreement "is required by a serious transportation need, necessary to secure public benefits, or in the furtherance of a valid regulatory purpose of the Shipping Act." The Commission itself has been unable to define the meaning of these vague terms, nor even promulgate guidelines to assist the industry. Again, the proponents of Section 15 agreements are unable to predict with any precision what evidence will satisfy the Commission that the agreement is required by "a serious transportation need necessary to secure public benefits, or in the furtherance of a valid regu- latory purpose of the Shipping Act," in a particular case. As the Chairman has noted, clear antitrust immunity would be a major step toward the Administration's goal of revitalizing our maritime industry by removing a significant handicap created by uneven enforcement. We are concerned that the language in Section 2 of H.R. 4374 may not fully implement the stated intent of the Chairman. To make absolutely clear that conduct or activi- ities covered by the Shipping Act as amended are exempt from application of the antitrust laws and subject only to the Shipping Act and its sanctions, we urge the Committee to adopt the following amendment: On Page 5, line 3, renumber subsection 2"(7)" as 2 "(8)" and insert the following new language as subsection 2 (7): "(7) Strike the sixth paragraph commencing with the words "Every agreement, modification, or cancellation lawful under this section, or permitted under section 14b' and ending "and amendments and Acts supplementary thereto.", and insert the following new paragraph in lieu thereof: The requirements, standards, penalties and civil PAGENO="0380" 374 liabilities provided in this Act shall, as to the activities regulated herein of all common carriers by water, conferences, shippers councils and other persons subject to this Act, be exclusive of all other laws, including specifically the antitrust laws; neither shall the antitrust laws apply (1) to any agreement that concerns or involves intermodal transportation, or other trans- portation and related services between or within any foreign country or place, or (ii) to consultations with or activities of shippers' councils situated outside the United States." PAGENO="0381" 375 CASO APPENDIX B TARIFF FILING IN THE U.S. TRADES Attached is a memorandum which examines in detail the related issues of conference structure and tariff fi.ling. It has been suggested by some, in line with the deregulation trend that pre- vails today, that tariff filing be eliminated for ocean common carriers. Proponents of tariff elimination (and the concept that the filed and approved rate is the only legal rate), point to the absence of tariffs in the European conference system. This argu- ment overlooks the fundamental differences between common carriage philosophy and conference structure in the United States and abroad. Failure to recongize these differences is likely to lead to the destruction of the conference system in the U.S. trades. Equally important, it would lead to major alterations in the cost structure for U.S. imports and exports which would effectively exclude many small and medium size shippers and result in further concentration of market share in the hands of a few large companies. First, as FMC Chairman Green has pointed out, the tariff filing requirement is the "backbone of the non-discriminatory common carriage system." A basic premise of U.S. common carriage law asserts that similarly situated shippers, large and small, should have access to the common carrier system on an equal basis. Elimi- nation of tariffs and the enforceability of tariffs would destroy this principle. In the absence of the tariff system, the largest shippers would be able to exercise their market power at the expense of smaller shippers and U.S. commerce generally. Lacking the volume to force major rate concessions from carriers, small shippers would be placed at an obvious costdisadvantage in competing for export markets. This concern for the competitive rights of smaller busi- nesses simply does not exist in the cultural heritage of Europe and Japan and is irrelevant to the economic and political goals of controlled economies and developing nations. In addition to being subject to blatant price discrimination and ad hoc rebating, smaller companies lacking large sophisticated traffic departments would find it impossible to predict shipping costs either in the short or longer term because of ensuing rate instability. Carriers, in order to remain profitable, would be forced to raise prices to make up for revenue lost through rate concessions to the largest shippers. This would put small shippers at a further disadvantage. Perhaps more significant, it would operate to the overall detriment of U.S. foreign trade as these uneven rate adjustments would tend to make certain U.S. products (those not subject to the negotiating power of large shippers) less competitive in international markets. It is also essential to recognize the difference between the way conferences function in the U.S. and non-U.S. trades. In any stable trading environment there is a balance of economic power between the provider and user of the product or service, in this case the PAGENO="0382" 376 carrier and the shipper. This balance is particularly critical in ocean shipping due to the enormous fixed cost component of providing the service. Because of this, the key to long term carrier profit- ability and low cost to the shipper is efficient utilization of the equipment, or rationalization. In non-U.S. trades, stable, long term service to the entire trade on a given route is provided by the strength of the conference itself. This strength derives primarily from a strong tying device to bind shipper loyalty to the conference (usually a system of deferred rebates) supported by a sophisticated pooling agreement to inhibit destructive behavior by conference members and ensure adequate service. This system deals effectively with the perennial problem of high value cargo skimming by independents which erodes the revenue base on which the conference relies to justify service to the full range of commodities moving in the trade. In the U.S. trades the deferred rebate is and would remain illegal, as would certain other non-U.S. conference devices for enforcing prder and stability in the trade.~/ Given this situation, elimination of the tariff system would shift the balance of power significantly in favor of large shippers (as discussed above) to the detriment of carriers, especially U.S. flag carriers, having a long term commitment to the trade. Large shippers would be free to force significant individual rate concessions from conferences in certain instances, but would have no corresponding loyalty to the conference because of the absence of a strong tying device. The U.S. loyalty contract provisions, already ineffectual because of the absence of deferred rebates are further weakened by `right to route" and other provisions of U.S. law. So large shippers, while able to force concessions on certain volume movements, are still free to use independents where their limited service (usually high value skimming) is cheaper than the conference. The end result would be significant erosion of the revenue base of the conference carrier. The CASO membership is generally in agreement that if, and only if, all the elements of conference functioning abroad were made avail- able in the U.S. trades, the elimination of tariffs could be con- sidered, but still the small shipper problem would remain. In the absence of all the features of the European system - absolute anti- trust immunity for both carriers and shippers, deferred rebates, sophisticated pooling agreements and free ability to rationalize capacity in the trade - the abolition of the tariff system would ultimately destroy the conference system. 1/ It is important to distinguish between the deferred rebate, which is a contractual system agreed upon by all members of a conference, which in effect strengthens the conference and individual , non-con- tractual rebating which tends to destroy the conference system. PAGENO="0383" 377 MEMORRNDUM RE: CONFERENCE STRUCTURE AND TARIFF FILING INTRODUCTION During the past four years extensive debate has taken place in both the Executive Branch and the Congress with respect to a new regulatory policy for the ocean liner shipping industry serving the United States foreign trades. Nearly all the public and private participants in this debate have declared that the existing scheme embodied in the sixty-five year old Shipping Act of 1916 (46 U.S.C. 801 et. seq.) is inadequate today. Such phenomena as intermodalism, containerization, state-controlled fleets, and the aspirations of the LDCs to have merchant fleets obviously were not contemplated when that statute was enacted. Moreover, general agreement exists among those engaged in this dialogue that to the maximum extent practicable, any new environment should be in harmony with that of our major trading partners. This is nothing more than recognition of the international legal principle of the "comity of nations by which each nation respects the laws and usages of every other nation. A major area ripe for "harmonization" is the ocean liner conference system applicable to the U.S. foreign trades. Here, some commentators strongly promote the view that the United States Government should move in the direction of our Western European counterparts. Indeed, Senator Slade Gorton, Chairman of the Senate Merchant Marine Subcommittee, upon introduction of S.l593, his liner regulatory reform measure, stated that his bill "will harmonize our laws with those of our trading partners within the framework of our broader commercial policies." (127 ~ Rec. S.9233 (daily ed. Aug. 3, 1981)). How then is the Western European conference system structured, how does it function, and what are the essential elements of that model? BACKGROUND The Western European conference system is based on the economic reality that the ocean liner shipping industry is highly capital intensive, in contrast to other industries which are labor intensive. Significant amounts of private capital are needed to finance not only the acquisition of the large, complex linehaul vessels, but there must be corresponding large investments in feeder vessels, barges, containers, chassis, cranes, terminals, and the like. In order to justify the vast sums of private monies at stake, PAGENO="0384" 378 the Europeans believe that there must be rationalization of the service in a trade, i.e., a positive effort must be made to equalize the supply of vessels to the demand of cargo moving in a particular trade. Rationalization tends to reduce the amount of capital equipment required in a trade and this, in turn, results in higher utilization of high fixed cost assets, thus lowering the cost per unit. An in- depth study by the University of Wales Institute of Science and Technology demonstrated, for example, that rationalized liner services in the U.S. North Atlantic/Europe trades in 1975 would have resulted in reducing the number of vessels from 36 to 16, improving vessel utilization from 68 percent to 85 percent, saving $200 million in costs and allowing freight rates to be reduced by at least 28 percent. (The University of Wales Institute of Science and Technology, Liner Shipping in the U.S. Trades (April 1978)). Interestingly, iñ~ the United States, practically our entire economic structure is geared toward maximum utilization of assets. DISCUSSION A. Antitrust Laws The primary difference between the conduct of ocean liner shipping business in the U.S. foreign trades and those of the rest of the world is the pervasive antitrust philosophy which permeates the U.S. trades. This philosophy has resulted in the present uncertainty surrounding what is permissable conduct by the liner industry in the U.S. foreign trades. The Antitrust Division of the Department of Justice historically has sought to curtail any expansion of the conference system in our trades. Indeed, an argument can be made that the Department has successfully reversed the original intent of the Congress to make the Shipping Act supreme over the antitrust laws in international shipping matters. This problem is further exacerbated by the activities of the Federal Maritime Commission which has attempted to act as the "flag-blind" arbitrator of the conduct of conferences under the Shipping Act. In reality, however, because of the existence of "blocking statutes" in many foreign countries, the Shipping Act can only be effectively enforced against U.S.-f lag carriers. These statutes prohibit the production of evidence or testimony by foreign witnesses pursuant to subpoenas issued by the Federal Maritime Commission. This disparity, coupled with certain impediments in the statute itself, has contributed to the weak conference system in the U.S. foreign trades. PAGENO="0385" 379 Western European nations take a much more pragmatic approach towards cartels, including ocean liner shipping conferences. The European Economic Community in its antitrust laws recognizes that socially or economically useful cartels may exist, and the ECC Commission has been vested with the authority to exempt a cartel from antitrust prohibitions. (The Treaty of Rome, Article 85, paragraph 3). Useful cartels are those that contribute to improving efficiency in distribution or stimulate technical or economic efficiency. The Western Europeans hold the view that liner conferences satisfy these criteria and, therefore, conferences operate in an antitrust-free, environment. Under the Western European system then, conferences may, and do, employ a variety of cornrnerical means to rationalize services in their trades. B. Conference Structure In ocean liner shipping the Western Europeans have historically employed the "closed" conference, in contrast to the "open" conference, in their trades. In a closed conference, the existing conference members may limit the number of carriers that can become members. The criteria for membership is generally that the applicant is willing and able to provide the necessary standards of service to the trade on a long-tern commercial basis and the volume of cargo in the trade is sufficient to support an additional conference member. Closed conferences are prohibited in the U.S. foreign trades by section 15 of the Shipping Act. Indeed, U.S. law mandates that the Federal Maritime Commission disapprove any conference agreement "which fails to provide reasonable and equal terms and conditions for admission and readmission to conference membership of other qualified carriers in the trade." (46 U.S.C. 814). The Western European experience has shown that for a closed conference to be effective in rationalizing service it must possess three basic tools. First, the conference must have the ability to control the vessel capacity offered by conference members. This requirement relates to vessel types, tonnage, number of sailings, and ports served by the conference members. Second, the conference must have the ability to utilize a strong tying device, such as a deferred rebate system, to effectively induce shippers to patronize conference carriers. Otherwise, some shippers will tend to utilize the independent carrier who prices his services below those of the conference. 9~f-856 0 - 82 - 25 PAGENO="0386" 380 Presently, only the dual rate contract, under which a conference or carrier may provide a contract shipper a maximum discount of 15 percent off the published tariff rate, is permitted in the U.S. foreign trades. This device is a very weak tying mechanism because of certain provisions in section 14b of the Shipping Act, including that relating to the "right to route" cargo. (46 u.S.C. 813). It is an open invitation for some shippers to manipulate the terms of delivery (e.g., changing from shipping on a c.i.f. to an f.o.b. basis with the foreign purchaser so as to avoid their obligations under the dual rate contract). In contrast, the Europeans use the deferred rebate system to bind shipper loyalty. Under this device a conference or a carrier returns a portion of the freight money to the shipper as consideration for that shipper giving all or a portion of his shipments to that conference or carrier, the payment of which is deferred until after the service is performed. It should be noted that under section 14 of the Shipping Act (46 U.S.C. 812) no carrier may "pay or allow a deferred rebate to any shipper." Third, and most importantly, the conference must have the authority to use revenue and cargo pools to curtail unfair and excessive competition among conference members. Pools are a proven way to prevent a conference member from carrying only high valued cargo and to assure that a member satisfies the minimum number of sailing and/or space availability requirements so that an adequate level of service in the particular trade is maintained for the benefit of the shipping community. Incentives and discentives are built into the revenue and cargo pooling agreements to insure equity. Usually the penalties for undercarriage are much more severe than those applicable to overcarriage. However, to the extent that a carrier does not satisfy his service requirement, his revenue and cargo pool shares are readjusted after a period of time. In the U.S. foreign trades, pools have been extensively utilized only in certain South American trades. In some instances, the commercial pooling arrangements implement the provisions of bilateral shipping agreements between the United States Government and South American governments. A recent study by Manalytics, Inc. of the United States/Brazil trades from 1967 to 1976 disclosed that pooling agreements benefit both the carriers and the shippers, in that revenue and cargo pools foster stable freight rates, high vessel load factors, and dependable service to the shipping community. (Manalytics, Inc., The Impact of Bilateral Agreements in the U.S. Liner Trades (May 1979)). PAGENO="0387" 381 Another key element of the Western European conference system is that in their trades they may use `fighting ships" to combat outside competition which threatens to undermine the stability and profitability of conference members. Usually, the outsider is skimming the high valued cargo in a particular trade. The members of the conference jointly underwrite vessels to operate below-cost to drive the undesirable outsider from the trade. Again, however, as is the case with deferred rebates, the use of a fighting ship by a carrier either separately or in conjunction with any other carrier is expressly proscribed by section 14 of the Shipping Act. (46 U.s.c. 812). C. Tariff Filing contrary to U.S. law, under the Western European conference system,. neither conferences nor carriers are required to file tariffs with any governmental body. This disparity has received considerable publicity of late in the current atmosphere of deregulation of the various modes of transportation in the United States. In fact, one major U.S. exporter has referred to the tariff filing requirements of the Federal Maritime commission as an outdated system and "a crutch for the nation's traffic managers." (Testimony of E.I. DuPont De Nemours & Co. before the Senate Merchant Marine Subcommittee on S.l593, dated September 23, 1981). Only the United States has a Federal Maritime commission vested with the statutory responsibility of regulating the ocean liner shipping business. Also, as discussed supra, the Western European conference system isbased on a strong closed conference system with effective tying devices to induce shipper loyalty. This is simply not true in this country, where there is a weak open conference system and a correspondingly watered down loyalty arrangement. Yet another difference between the European and United States conference systems is that in the former there are shippers' councils to represent the interests of both small and large shippers in their dealings with conferences. Again, this is not the case in the United States foreign trades. Indeed, if shippers of identical or similar products collectively agreed to consult with a conference or carrier over freight rates they would most likely run afoul of our antitrust laws. Thus, the legal environment in which the ocean liner shipping business is conducted in Western Europe is strikingly different than that prevalent in the United States. Absent the adoption by the United States of the total Western European conference system, the elimination of the present requirement in section 18 of the Shipping Act (46 U.S.C. 817) for carriers and conferences to file tariffs PAGENO="0388" 382 with the Federal Maritime Commission could be counterproductive and, in fact, a number of adverse consequences could flow to both carriers and shippers alike. First, the filing of rates is the means by which the Federal Maritime Commission enforces sections 16 and 17 of the Shipping Act. (46 U.S.C. 815,816). These sections prohibit a carrier or conference from making or giving undue or unreasonable preference or advantage to any particular person or locality, and practicing unjust discrimination between shippers, ports, and other persons subject to the statute, respectively. t~ithout the tariff filing requirement there would be no basis to determine what was a lawful rate at any given point in time, and lacking this capability, these sections would become essentially unenforceable. Second, lacking published tariffs, freight rates could literally change with every booking, shipping quotes for business would be at the mercy of each shipper's preferential deal-making capabilities with carriers. Third, it would be difficult, if not impossible, for shippers to plan their transportation budgets with any degree of accuracy because there would be no way to know what rates are or will be charged by a carrier or conference. Fourth, as the Chairman of the Federal Maritime Commission, Alan Green, Jr., has testified, the tariff filing requirement is the "backbone of the nondiscriminatory common carrier system." (Statement of the Honorable Alan Green, Jr., Chairman of the Federal Maritime Commission, before the Senate Merchant Marine Subcommittee on S.l593, dated September 21, 1981). Under this principle, similarly situated shippers are entitled to the identical rates charged by a common carrier. Without it the large shipper would be able to conclude lower ocean freight rates with a carrier or a conference while the smaller shipper, due to his lack of leverage of high traffic volume, would not fare well at all. Finally, the lack of a tariff filing requirement would lead to widespread rebating, a practice for which the Congress recently significantly increased the penalties from $5,000 to $25,000 per violation. (PL 96-25, The Shipping Act 1~mendments of 1979). CONCLUS ION As the foregoing amply demonstrates, the Western European conference system is a highly sophisticated mechanism with PAGENO="0389" 383 a number of tools designed to achieve rationalization of services in a trade. Some of these tools as well as some elements of the European model are expressly prohibited by U.S. laws. Moreover, the legislation that is pending in the Congress would not legalize some of these tools and elements, e.g., deferred rebates and fighting ships. Without these tools, a change in conference structure p~ se is of little value, and eliminating the tariff filing requirements in current United States law would have an adverse consequence on both the carriers and the smaller shippers who utilize conference members to transport their goods to and from the United States. PAGENO="0390" 384 CASO APPENDI~~. SUMMARY MEMORANDUM RE: SOUTH AMERICAN REVENUE POOLING AND EQUAL ACCESS AGREEMENTS United States flag carriers participate in equal access and revenue pooling agreements covering the trades with Argentina, Brazil, Chile, Columbia, Peru and Venezuela. Each of these South American nations has enacted cargo pre- ference legislation to promote and protect its own merchant marine. Consequently, competition in these trades is pos- sible only through equal access and revenue pooling agree- ments which mitigate the effect of the cargo preference laws. Equal access and pooling agreements encourage com- petition, by permittingaccess to all cargoes, and by pro- viding financial incentives for lines that meet their cargo carriage goals, and penalties for lines that do not. The agreements therefore permit competition while also serving each nation'5 objective of promoting its maritime industry. This arrangement helps to avoid potential intergovernmental tension. Moreover, by facilitating efficient utilization of resources and by stabilizing the trades, the agreements have reduced costs to carriers, and the carriers have passed these savings on to the shippers in the form of more mod- erate rates. Such agreements encourage innovation and ser- vice for all types of cargoes, whether high- or low-rated. Since the agreements have been in effect, the South American trades have enjoyed exceptional stability, no carrier financial failures have resulted, and rate increases have been slower than in nonpooled trades. The theory that such agreements are anticompeti- tive in these trades is unfounded. Competition is only pos- sible through the cooperation of the carriers and the governments in equal access and pooling agreements, because without the agreements the cargo preference laws would limit access to cargoes. The agreements are demonstrably bene- ficial for all participants. Intervention in the commercial relationships of the carriers through the antitrust laws is unwarranted, would be detrimental to the U.S. flag carriers, to the shipping public and ultimately to U.S. commerce on a whole. Furthermore, imposing U.S. antitrust policy on in- ternational commerce would necessarily lead to increased tension and conflict between the United States and its South American neighbors. PAGENO="0391" 385 MEMORANDUM RE: SOUTH AMERICAN REVENUE POOLING AND EQUAL ACCESS AGREEMENTS Cargo revenue pooling and equal access agreements have become an integral element of U.S.-South American com- mercial shipping arrangements over the past 10 years, and have been of substantial benefit to international commerce and to the shipping public. Moreover, the agreements have played a key role in reconciling the various and often con- flicting national interests and policies of the countries involved, and thus have contributed to the avoidance of intergovernnental conflict and consequent injury to U.S. foreign commerce. The Federal Maritime Commission ("FMC") has recognized these benefits and others in numerous pro- ceedings and decisions approving such agreements. Indepen- dent studies performed for the Maritime Administration ("MarAd") and others have also substantiated such benefits. Notwithstanding the demonstrated advantages of revenue pooling and equal access agreements, the Department of Justice's Antitrust Division ("DOJ") is attempting once again to restrict the FMC's authority to approve such agree- ments, which DOJ. views as being anticonpetitive. It should be noted that DOJ has been unable to establish such anticom- petitiveness or,. indeed, to show any adverse impact of these agreements in the various FMC proceedings in which DOJ has participated. Suchdognatic pursuit of the alleged benefits of "open" competition, in total disregard of the facts pertinent to the industry at hand, while perhaps understandable in view of DOJ's narrow charter, should not be permitted to override the substantial, proven benefits such agreements provide to carriers, shippers and the public ?L1 During the past 30 years U.S. conpanies have entered into various pooling and equal access agreements affecting the trades between the United States and Argen- tina, Brazil, Chile, Colombia, Peru and Venezuela. (A list of the agreements which are presently in place is appended 1/ During the testimony before the House Committee on - Merchant Marine and Fisheries last year by Donald Flexner, Justice Department Assistant Attorney General for the Antitrust Division, Chairman Murphy critized DOJ for its "one-sided narrow views" and charged that DOJ was "unwilling to cooperate with your own administration." In questioning Mr. Flexner, Representative McCloskey specifically stressed that the Justice Department had failed to support its position with a factual basis and that its policy conflicted with the conclusions of pub- lished studies on shipping and trade policy. Omnibus Maritime Bill: Hearings on H.R. 4769 Before the House Committee on Merchant Marine and Fisheries, 96th Congress, 1st Session at 156, 168-69 (Statement of Donald Flexner), July 24, 1979. PAGENO="0392" 386 hereto as Attachment 1.) With the exception of the agreements with Argentina and Brazil, all of these agreements were entered into by the commercial parties at their own instigation. In the instances of Argentina and Brazil, the agreements implement intergovernmental Memoranda of Understanding between the U.S. and the respective governments of those countries. However, even those Memoranda left the terms and conditions of the implementing agreements largely to the commercial parties. An essential motivating factor behind these agree- ments has been the growth of nationalism and the desire of. many South American countries to develop strong national merchant marines. These South American countries have attempted to achieve this legitimate national goal through cargo preference policies and legislation, an approach which President Reagan has characterized as reflecting "the legitimate aspirations and policies of our trading partners." 2, In addition, many of these countries have views of th~ importance and alleged benefits of open competition which differ from those historically espoused in this country. These countries are concerned with the efficient use of their resources and favor increased rationalization of services which will result in higher vessel, utilization levels, reduced costs to carriers, and ultimately in lower costs and better service to shippers. The United States shares many of the same concerns with these countries, as expressed in the Energy Policy and Conservation Act of 1975, 42 U.S.C. § 6362, and the National Environmental Policy Act of 1969, 42 U.S.C. § 4321 et seq. However, United States policy has been dominated byth~ of ten conflicting, but nevertheless primary goal of free competition. Such a goal, at the expense of all others, may be acceptable and even worthwhile, in domestic markets. But in international trade, where other countries' national interests, policies and aspirations are also at stake, untrammeled competition is neither possible nor desirable, and only international cooperation assures the continued free flow of commerce. Moreover, in many instances coopera- tive agreements result in more competition than would other- wise exist in their absence. These agreements typically provide for reciprocal equal access to government-controlled cargoes, which otherwise would be restricted to the respective national flag carriers. This provides the basis for greater competition in carriage of those cargoes than would other- wise exist. Moreover, the pooling agreements typically con- tain provisions which promote at least a certain level of carrier performance through minimum sailing and/or space 2/ Maritime Policy Statement signed by Ronald Reagan, - September 22, 1980. PAGENO="0393" 387 availability requirements, and undercarriage penalties which reduce a carrier's pool share in the event it fails to com- pete sufficiently to earn at least a certain percentage of its share. The pools thus ensure that a carrier will not get something for nothing, and that it must in fact compete aggressively to earn its pool share. Moreover, contrary to popular conception, the pool does not set a ceiling on a carrier's earnings or ability to carry cargo. There are no limitations on the maximum number of sailings a line may make, and while overcarriage is generally penalized to some extent, the penalties are moderate and thus the effects are ameliorated by pool revenue allocation formulas that take into account the level and success of competitive efforts by the other lines (i.e., did they meet their minimum sailing! space requirements). It is all too easy for DOJ to wave the banner of open competition and its alleged advantages. However, divorced from the realities of the industry at hand, such rhetoric means little. Indeed, in enacting the Shipping Act of 1916 Congress itself recognized that unrestrained compet- ition can be destructive in the international martime indus- try, and that other interests warrant the granting of exemp- tions from the antitrust laws for certain agreements, speci- fically including agreements which pool earnings. Thus, in 1914 the House Merchant Marine and Fisheries Committee determined after exhaustive hearings that unfettered compet- ition can be detrimental, particularly in "the long voyage trade where pooling becomes desirable." 3/ The Committee further determined that, absent agreements between carriers, malpractices result in "the gradual monopolization of the trade in given commodities by the more powerful shippers," and the "monopolization of the carrying trade by one or a few of the most powerful carriers." (Alexander Report, S.R.R. 51:24.) The Committee determined that pooling agree- ments among lines result in "lower freight rates for a high standard of service." (Id., at S.R.R. 51:25.) The Com- mittee also determined tliit pooling agreements promote regu- larity of service, and that equalization of earnings encour- ages competition for all cargoes, not merely the higher rated cargoes. (Id., S.R.R. 51:26.) In short, the Committee observe~that while pooling agreements were susceptible to abuse and in need of governmental oversight, id. at S.R.R. 51:32, overall pools were far preferable to "~iit-throat competition." (Id. at S.R.R. 51:25.) These 3/ Committee on Merchant Marine and Fisheries, House of Representatives, Report on Steamship Agreements and Affiliations in the I~merican Foreign and Domesti~~rades, H.R. Doc. No. 805, 63rd Congress Vol. 2 (1964), reprint~d in S.R.R. 51:11 et seq. (hereinafter the Alexander Report), at S.R.R. 51:31. PAGENO="0394" 388 findings formed the basis for the Shipping Act of 1916, and were adopted by Congress in enacting that legislation. Nearly seventy years of experience under the pro- visions of the Shipping Act of 1916, as amended, has demon- strated the Congress' wisdom in encouraging international agreements to stabilize ocean commerce. For example, in the substantial United States/Brazil trade, since the implement- ation of the first equal access agreement through the use of commercial cargo/revenue pooling agreements, the trade has enjoyed exceptional stability, new carriers have entered, no carrier financial failures have resulted and as indicated by the value flows during this period (Attachment 2), ~1 the commerce in both directions has prospered. In fact the ratio of the value of cargo to the cost of shipping the cargo has actually declined since the agreements have been in effect. Ed. The beneficial effect of pooling agreements on u.s. commerce has also been documented in several recent studies of pooling agreements. A study of the United States/Brazil trades from 1967 to 1976 prepared for the Maritime Administration entitled Bilateral Agreements in the U.S. Liner Trades (May 1979), determined that the pooling ~reements had benefitted both carriers and shippers in those trades. With respect to carriers, the study found that the pools had resulted in less overtonnaging during cyclical swings, increased vessel utilization and greater stability in revenues. These benefits in turn had provided the basis for the carriers to make substantial and innova- tive long-term investments in the trade. With respect to shippers, the study determined that service levels had im- proved, that shippers had not experienced any deterioration of liner service, and that rates had increased at a slower rate, both on a revenue_per-cargo-tom basis and on a revenue_per_Cargo-Value basis than in the U.S./Australia and U.S./South Africa trades which are not covered by pooling agreements. The FMC's subsequent South American Trade Study (February 1980) similarly found that rates in the pooled U.S./Brazil and u.S./Argentina trades had increased at lower 4/ Attachment 2 displays the relation between the cost of - ocean transport and the value of the goods shipped in the total Brazil liner trade in both directions, from 1973 through 1980. Attachments 3 and 4 list the principal commodities of the trade in both directions, showing the percentage relationship between ocean freight rate per weight ton and value per ton. The rates are those of a major shipping line, and reflect the usual rates charged by all lines in the trade. Note that in the export display commodities coded 2331 Syn Rubber Latex, and 7135 through 7918 Rail Loco Parts, represented approximately 49% of the total value shipped in 1980. Their ratios of rate to value is considerably below the average for the total trade. PAGENO="0395" 389 percentages than rates in the nonpooled North Atlantic/Continental European trades during the period from December 1972 to December 1977. In explaining the results of this report during a recent FMC investigative proceeding, Dr. R. A. Ellsworth, the FMC's Chief Economist, testified that it can no longer be assumed, as often has been argued dogmatically in.the past, that pools must result in higher freight rates, and that the burden is now on the proponents of "free competition" to prove the contrary. 5/ In conclusion, commercial pooling agreements have beome an integral element of our commercial shipping and international trade relations with many South American coun- tries. Such agreements have proven beneficial both to the commercial carriers and to the shipping public. Moreover, they have provided stability to the trades involved, and have avoided the possible intergovernmental conflict which might otherwise result from the conflicting laws and policies of the United States and many of the South American countries. As noted by the FMC in several decisions, it is far preferable to resolve such potential conflicts through commercial agreements than through intergovernmental con- frontation. b/ Under these circumstances, additional governmental intervention in, and regulation of, the commercial relation- ships of the carriers is wholly unwarranted and in fact would be detrimental to the lines, the shipping public and ultimately to U.S. comnerce as a whole. Moreover, it would likely lead to increased tension and conflicts between the United States and its South American neighbors. Such an exacerbation of international tension is clearly neither warranted nor justified by DOJ's invocation of competitive theories which have little relevance to the realities of international shipping. 5/ Testimony of Dr. Robert A. Ellsworth in Agreement Nor. 10386 as amended and 10382 as amended -- Cargo Revenue Pooling/Equal Access Agreements in the Argintine/United States Trade, FMC Docket No. 80-45, Transcript at pp. 516, 523, and 526-27 (May 14, 1981). 6/ See, e.g., Agreement No. 10066 -- Cooperative Working Arrangement, FMC Docket No. 74-5, FMC , 18 S.R.R. I229~, 1242 (1978). PAGENO="0396" 390 ATTACHMENT 1 LIST OF SOUTH AMERICAN EQUAL ACCESS/POOLING AGREEMENTS PRESENTLY IN PLACE Trades Involved _______________ U.S. Atlantic Ports - Brazil (southbound) -- U.S. Gulf Ports - Brazil (southbound) -- U.S. pacific Coast - Brazil (southbound) -- Brazil-U.S. Atlantic Ports (northbound) -- Brazil-U.S. Atlantic Ports (northbound) -- u.s. Atlantic (N.Y., Phil. and Balt.)-Peru (southbound) U.S. Gulf-Peru (southbound) u.s. Gulf-Colombia u.s. Atlantic-Columbia Brazil-U.S. Gulf (northbound) Brazil-U.S. pacific Ports (northbound) Argentina-U.S. Gulf Ports (northbound) Argentina-U.S. Atlantic Ports (northbound) U.S. Atlantic-Argentina (southbound) U.S. Gulf-Argentina (southbound) FMC Agreement No. Agreement No. 9847 -- Agreement Agreement Agieemen t Agreement Agreement No. 9848 No. 9873 No. 10027 No. 10028 No. 10041 Effective Date 1/1/71 1/1/71 11/10/70 1/30/73 1/30/70 3/30/7 3 Agreement No. Agreement No. Agreement No. Agreement No. Agreement No. Agreement NO. Agreement No. Agreement No. Agreement No. 10044 -- 10064 -- 10066 -- 10320 -- 10330 -- 1038 2 10386 10388 -- 10389 -- 5/ 15/7 3 1/24/7 4 1/10/79 4/11/78 1/22/79 6/ 30/8 0 6/30/80 6/30/80 6/30/80 PAGENO="0397" EXPORTS TO BRAZIL IMPORTS FROM BRAZIL ATTACHMENT 2 i~n i~ 1979 1980 Value (000) $ 737,194 $1,158,798 $1,126,374 $1,087,732 $974,411 $931,856 $995,678 Long Tons 605,533 782,270 506,224 421,647 361,415 320,903 308,673 313,827 Value Per Ton 1,217 1,481 2,225 2,580 2,696 2,904 3,226 3,464 Rate Per W/T 110 146 171 181 182 207 218 244 Rate As % Of Value Value (000) 9.0% $565,849 9.9% $676,592 7.7% 7.0% 6.8% $1,424,667 7.1% $1,593,335 6.8% $1,774,531 7.0% $1,796,193 $739,006 $1,027,149 Long Tons 524,206 485,405 528,447 528,191 491,006 552,043 670,309 656,178 Value Per Ton 1,079 1,394 1,398 1,945 2,901 2,886 2,603 2,737 Rate Per W/T 81 98 95 104 113 123 132 135 PAGENO="0398" 392 ATTACHMENT 3 RATE AS % OF VALUE PER TON EXPORTS TO BRAZIL COMMODITIES 1980 1979 2331 Syn Rubber Latex 4.8% 4.8% 2666 Continuous Gruoped Filaments 17.6% 17.3% 2782 Clay 29.1% 37.9% 5172 0th. Spec. Inter. Chem. Cnpd 9.9% 9.1% 5173 0th. Spec. Acyc. Organ. cmpd. 10.4% 16.5% 5253 Spec. Inorganic Cmpds. 16.6% 16.6% 5881 Thermoplastic Resins 7.g~ 9.2% 6514 Nylon Yarn & Thread 10.8% 12.3% 6623 Refractory Brick 11.8% 12.5% 6644 Float Glass - Rolled, etc. 26.3% 27.3% 6842 Alum. & Alloy wrought 5.5% 6.2% 7135 Intl. Comb. Engines 3.5% 3.9% 7139 Engine Parts 2.5% 2.5% 7234 Const. & Mining Machy 5.5% 5.3% 7239 Const. & Mining Parts 3.9% 2.9% 7286 Indust. Machy 4.8% 4.2% 7431 Air or Gas Compressors 5.2% 5.4% 7649 Telecommunication Parts 4.0% 2.7% 7721 Elec. Appar. for Circuitry 4.6% 4.4% 7761 TV Tubes 6.6% 11.4% 7788 Elec. Machy & Equip. 6.5% 6.0% 7843 Vehicle Parts 3.9% 4.2% 7918 Rail Loco Parts 2.1% 2.2% 8822 Photo Film 2.1% 1.8% PAGENO="0399" 393 ATTACHMENT 4 RATE AS % OF VALUE PER TON IMPORTS FROM BRAZIL COMMODITIES 1980 1979 0148 Meat Prep. Psvd. 3.5 3.8 0340 Fish Fresh or Frzn. 9.5 8.5 0360 Shell Fish, Fresh or Frzn. 3.4 2.8 0577 Nuts 5.8 6.5 0620 Sugar, Confectionary 12.5 14.8 0711 Green Coffee (Beans) 3.1 3.6 0712 Soluble Coffee 3.8 0721 Cocoa Beans 4.6 3.0 0722 Unsweet Cocoa & Cocoa Cake 9.0 3.5 0723 Unsweet Chocolate 2.4 2.2 1214 Tobacco Leaf 10.6 8.6 4245 Caster Oil 3.5 5.1 4248 Vegetable Oil 5~5 5.7 5324 Tanning Materials 13.3 14.1 5520 Flavor & Perfume Oils 6.0 7.5 6416 Bldg. Boards-Woodpulp Veg. Fibers 22.7 25.5 6575 Twine Cordage. Rope 6.6 11.3 6624 Bricks Non-Refractory 31.0 35.4 6786 Steel Pipe, Tubes 16.0 15.3 7135 Diesel Engines 4.2 4.2 7150 Piston Engine Parts 3.7 6.3 7880 Motor Vehicle Parts 14.0 12.3 8510 Footwear 4.2 4.1 PAGENO="0400" 394 CASO APPENDIX 0 ~ REVIEW OF SEVERAL STUDIES ADDRESSING THE QUESTION OF WHETHER A "CLOSED' CONFERENCE SYSTEM WILL RESULT IN HIGHER PRICES THAN UNDER AN "OPEN" OR "COMPETITIVE' CONFERENCE SYSTEM? Introduction Since the introduction of steam powered ships in the late 1800's, ocean carriers which offer regularly scheduled service on the same trade route have formed voluntary associations called shipping conferences. All conferences set rates. In addition, conferences which are "closed" restrict entry into the conference (but not the trade), allocate sailings among conference members, use devices to ensure the loyalty of shippers to member lines, and police the practices of their members. Currently, conferences serving the U.S. trades must be "open" in the sense of accepting new applicants to conference membership, not allocating sailings, and prohibiting loyalty arrangements other than dual-rate contracts. The Department of Justice has taken the lead in arguing that the economic structure of liner trades is not different from that found in other industries. Therefore, since traditional micro- economic theories indicate that collaboration produces a loss of consumer welfare through higher prices and a lower supply of services than would occur absent collaboration, they argue that the joint setting of prices by conferences should be curtailed (or, at a minimum, that the "open" conferences governing U.S. trades should not be "closed"). The Regulated Ocean Shipping Industry, January, 1977, United States Department of Justice. Ocean carriers offering liner service have responded by arguing that "closed" conferences will improve consumer welfare through lower prices that will result from rate stabilization and PAGENO="0401" 395 service rationalization. They argue that the liner industry is characterized by: (a) greatly fluctuating demand; (b) chronic excess capacity; and (c) large fixed costs and small variable costs which require conferences to stabilize rates (which would otherwise fluctuate widely), and prevent increases in concentra- tion which would result from destructive competition during economic recessions. Purpose Of This Paper This paper briefly reviews and summarizes the economic analysis presented in several studies of the ocean common carrier industry. Some of these studies concluded (despite different analytical approaches) that a closed conference system will increase consumer welfare when compared to open conferences or antitrust regulation. Other studies focused on the U.S.-South American trades (which are closely akin to trades rationalized by "closed" conferences) and concluded that shipping rates are not adversely affected by the structure of these trades. The five studies summarized in this paper are: o University of Wales Institute of Science and Technology, Liner Shipping in the United States Trades (1970). Prepared for the Council of EurOpean and Japanese National Shipowners' Associations. o Gunnar K. Sletmo, Ernest W. Williams, Jr., Liner Con- ferences in the Container Age (1981), MacMillan Pub- lishing Co., N.Y. o Harbridge House, Inc., The U.S. Merchant Marine and the International Conference System (1978), prepared for the Maritime Administration, U.S. Department of Commerce. o Manalytics, Inc., The Impact of Bilateral Shipping Agreements in the U.S. Liner Trades (1979), prepared for the Maritime A~i~istration, U.S. Department of Commerce. ° Federal Maritime Commission, South American Trade Study (1980). 9~-856 0 - 82 - 26 PAGENO="0402" 396 I. UWIST STUDY Introduct~fl One of the most thorough analyses was performed by the University of Wales Institute of Science and Technology (IJWIST) in 1978. Sponsored by the Council of European and Japanese National Shipowners' Associations, the study thoroughly reviewed the structure of the shipping industry, effectively rebutted the Department of Justice study, and concluded that: o conferences are not endowed with monopoly power because the threat of entry precludes monopolistic pricing and keeps rates low in order to prevent entry 0 conferences set economically efficient rates by charging different rates for different commodities and routes in order to (a) recover fixed costs, and (b) ensure that the most cargo is shipped so that the fixed costs can be spread over a larger volume 0 conferences promote rate stability at a rate which assures the survival of the most cost-efficient lines while exerting pressure on the least cost-efficient to mend their ways 0 conferences prevent increases in concentration in the trade which would result from destructive competition during trade recessions 0 cost and rate levels in a closed conference will be lower than those in an open conference since a closed conference can rationalize service, improve vessel utilization, and exploit any economies of scale in a ship's size that are available o conference tying arrangements (e.g. dual rate contracts, deferred rebates) help ensure the lowest long-run average costs possible. The studies by Gunnar K. Sletmo and Ernest W. Williams, Jr. and by Harbridge House adopt somewhat different analytical approaches hut reach similar conclusions and present additional empirical PAGENO="0403" 397 evidence validating the economic model presented in the UWIST study. Because The Barriers To Entering A Particular Liner Trade Are Low, Existing Carriers Cannot Exercise Monopoly Pricing Power. The UWIST study examines the contention that conference members set monopolistic prices which are higher than they would be if the conference members were not allowed to explicitly collaborate. UWIST concludes that conferences are unable to price monopolistically because new entry into any particular trade is extremely easy. As a market disciplining mechanism, actual entry is not necessary since the threat of entry will cause a conference to price at an entry-forestalling level: to price any higher would induce entry and be self-defeating. Entry, or the threat of entry, comes from: (a) existing firms and other industries wishing to diversify into ocean shipping; (b) potentially new firms; (c) existing ocean carriers serving other trades breaking into additional trades (cross-entry); (d) *1 state-owned or promoted lines. Entry is easy, because a new entrant will try to "cream skim" some of the more profitable business. Even though the new entrant may offer less frequent service, or operate ships which are below the optimum size for the trade, the new entrant will try to maintain adequate profit *1 In addition, there is also competition from alternative transportation services (i.e. tramp shipping, air freight), through alternative ports (i.e. intermodal carriers) and with domestic products competing with imports. PAGENO="0404" 398 margins by ensuring a higher than average level of capacity utilization by offering attractive rate reductions on a particular trade. Moreover, while containerization has greatly increased the minimum efficient scale to operate a "full service" carrier line, today there are sufficient containerships, containers and other ancillary equipment available for chartering so that there are low capital barriers to entry. And it must be remembered that state owned or operated lines do not necessarily need to make a profit or even cover their costs, since they may serve the strategic or political interests of a foreign country. U~7IST explains that if conference pricing is in fact monopo- listic, than one of two results must follow: either "super- profits" would be earned, or normal or less than normal profits would he earned because exdessive costs would have eaten up the excess profits. Since (as the UWIST study reviews) everyone agrees that super-profits are not earned by shipping companies, those who claim that conferences engage in nonopolistic pricing must argue that costs are excessive. However, UWIST argues -- see infra -- that to the contrary, closed conferences allow rationalization of service which results in lower costs to pro- vide the same service. The UWIST study also noted that the claim that conferences engage in monopolistic pricing is inconsistent with the economic theory and empirical evidence that the price elasticity of demand PAGENO="0405" 399 for many commodities moving in liner trades is relatively inelas- *1 tic. Since the demand for space on an ocean carrier is derived from the demand for the commodity, the demand for shipping space **/ is also inelastic. However, a profit maximizing monopolist (or conference) would not operate on the inelastic portion of the demand curve, because as long as demand is inelastic it is possible to increase total revenues by raising the price (since the quantity sold will not decrease by much). In fact, it is an accepted theoretical fact that a profit maximizing monopolist will keep increasing his price until demand bedornes elastic (and h? would therefore lose total revenues by increasing the price any further). Therefore, since ocean carriers are currently operating on the inelastic portion of the demand curve,. UV7IST concludes that conferences are not pricing monopolistically. Price Discrimination Is Not Evidence Of Monopolistic Pricing, But Is The. Economically Efficient Way To Set Prices. It has been argued that charging different rates ("price discrimination") for commodities which weigh the same and take up *1 "Price elasticity" is the economist's term for measuring the percentage change in the quantity of a good or service sold as a result of a percentage change in the price of the good or service. For example, demand is said to be "price inelastic" when the quantity purchased of a particular good or service is not reduced much even though the price of that good or service is increased a lot. ~/ Empirical studies of the elasticity of demand for imports and exports, and for ocean transport, are reviewed in Chapter 6 of the Sletno and Williams study (see discussion infra). ~`~/ UWIST rejects the alternate conclusion that ocean carriers are not trying to maximize profits, which Ut-lIST concludes is extremely unlikely. PAGENO="0406" 400 the same amount of space is a mark of monopolistic pricing. However, the UWIST study agrees with the great majority of econo- mists that charging different rates is the economically efficient pricing technique in a business characterized by large "joint and common" fixed costs, and is simply responding to the fact that shippers of some commodities will be more sensitive to higher rates than others (because they can use other means of transpor- tation or have access to local markets). Conference members have agreed to sail a regular schedule between ports. Once a commitment has been made to sail, all the expenses incurred in operating the ship (including the relatively large capital costs) can be considered a "fixed cost": that is, the costs will not vary depending on how much cargo is aboard. In setting rates for particular commodities between different ports, the conference is faced with a dual problem. Enough must be charged to transport the commodities so that the fixed cost incurred on the voyage will be recovered in addition to the direct cost associated with loading, unloading, stowing, and handling of the cargo. Yet at the same tine, the conference does not want to set a rate for any particular commodity so high that the shipper looks to alternative means of transportation or decides it is not economic to export the good at all (since then the shippers of the remaining cargo would have to pay even more of the fixed costs). There is general agreement among economists that the proper solution is to set rates to reflect a division of fixed costs in proportion to "what the traffic will bear." Those most sensitive PAGENO="0407" 401 to higher rates, because they feel that the goods cannot be marketed at higher prices reflecting the higher transportation cost, would be charged the smallest proportion of fixed costs (everyone pays at least the variable costs of shipping their commodities). This form of price discrimination -- known as "Ramsay" or "inverse-elasticity" pricing -- is acknowledged to be economically efficient. What does not make any sense, as the UWIST report explains, is to charge a single container rate (a FAK -- freight all kind -- rate) for all cargo, since this would (a) lead some shippers not to send their goods on the carrier; and (b) since less cargowould remain to be shipped on the carrier, everyone would then have to pay an even higher. portion of the fixed cost. A Conference Sets Rates: (A) By Adding To Short-Run Variable (Directly Attributable) Costs Enough (Assuming Normal Capacity Utilization) To Cover A Portion Of The Fixed Costs And A Net Profit; And (B) Low Enough To Forestall Entry. The long-run average, cost curve (LRAC) expresses the average total cost of providing varying amounts of cargo space (i.e. ship size, number of ships) at a normal level of vessel capacity utilization. The curve (shown below) falls continuously as the amount of cargo space provided increases, reflecting technical economies of scale in ships' size. ~4MOUftJT OP CfrR&o SPACE PAGENO="0408" 402 However, UWIST notes that once most economies of scale have been realized, a carrier will price as though its long-run average costs were constant. Therefore, prices (rates) will be set in terms of current short-run average costs. The LRAC curve is associated with normal levels of vessel utilization. Because demand for vessel space fluctuates greatly, however, a company must be able to provide capacity for all the cargo that it is offered (in order to retain the good will of its customers and prevent competitors from getting established). Therefore it must keep some capacity in reserve so that a less than full vessel will be considered "normal" or average utilization. But, as tIWIST explains, this means that if demand for cargo space is great the cargo can be carried on existing ships at little additional cost (handling costs, etc.) since the ship is already making the voyage. Thus, transportation will be at a lower unit cost than would be feasible if the liner company planned to provide such space for long periods, because then the carrier would need a larger (more expensive) ship so that the current peak demand would only equal the "normal" capacity utilization of the larger vessel. Therefore, the short-run cost curve will cut below the long-run cost curve as shown below: fr$4OUNT O~ Pj~OU' )ED PAGENO="0409" 403 Since the long-run cost curve is not the envelope of the short- run curves as in traditional economic ("static marginalist *1 equilibrium") theory, there will be no equilibrium price. Instead, prices will fluctuate on a regular basis (given fluctua- tions in demand). At any given time, prices will be set by adding enough to the current short-run costs to cover a contribu- tion towards fixed costs (i.e. overhead, capital costs) and net profit. Yet at all times, prices must be low enough to forestall entry. The need to set rates at entry forestalling levels exerts constant pressure on .the least efficient members of a conference to improve their efficiency. Although membership in a conference results in a common pricing policy for member lines, it does allow them to fix rates which are above the normal cost of pro- viding shipping space (without inducing entry). Conferences Prevent Increases In Concentration Resulting From Destructive Competition During Trade Recessions. One of the most important functions of a conference is to maintain rate discipline among member lines during trade reces- sions, when capacity utilization is well below that at which `rátés are set. Because fixed (i.e. capital) costs are such a large part of total costs, during bad times there is pressure on individual lines to cut rates in order to increase use of their v ~ PAGENO="0410" 404 vessels. In the absence of a conference in a trade, this pressure is more likely to lead to a rate war and the exit of some lines from the trade, thereby increasing concentration. Yet, UWIST explains, it is not the most efficient companies which would survive a rate war, but those carriers with the lowest "paying out" costs and the longest purse strings. "Paying out" costs are the expenses which a business must meet in the short-run, so that they are influenced by the way in which a carrier finances its capital. A company which finances its ships out of retained earnings or equity will have lower paying out costs than one which finances its ships out of debt borrowing. In addition, it probably will not be the most efficient firm which remains because many carriers are subsidiaries of larger corporations or are owned or operated by a state, to whom they may turn for financial support during troubled times. A company mi~jht provide such suppor.t in the expectation of profits during the upswing, while a state might support its line for non-economic reasons (i.e. political, strategic, earn foreign currency). Because A Closed Conference Can Rationalize Service And Exploit Any Economies Of Scale In A Ship's Size That Are Available, Cost And Rate Levels Would Be Lower Than Those In An Open Conference. Unlike the "open" conferences governing U.S. trades, "closed" conferences not only agree upon what rates to set, but may rationalize their service to ensure that it is provided most efficiently. Thus, while regularly scheduled service would continue to be provided, the conference would allocate sailings and ports of call in order to provide that service at the lowest possible cost. For example, rather than have two half-full ships PAGENO="0411" 405 sail similar routes, it could arrange to have one full ship sail that route. Thus, UWIST argues that a closed conference will generally lead to an average cost and rate level which is lower than that prevailing in an open conference. Conference Tying Arrangements (Dual Rate Contracts, Deferred Rebates) Ensure The Lowest Long-Run Average Costs Possible. A frequent criticism of closed conferences is that conference tying arrangements are against the public interest. However, UWIST carefully explains that any financial advantage a shipper might have from always being free to make immediate use of services provided by non-conference competition will, in most cases, be more than offset by the higher than otherwise conference rate we will be obliged to pay when shipping by the conference. As was discussed above, one of the factors determining liner shipping rates is the normal level of capacity utilization, because the conference must always have sufficient reserve capacity at hand. But if the conference can accurately determine and plan on shipper requirements, it can fill its vessels more fully thereby providing transportation at a lower unit cost. Under the "dual rate" contract system, contract rates tend to reflect the real cost of supplying shipping space on a long-term basis when carriers know how much space will be required by shippers, whereas non-contract rates tend to reflect the real cost of supplying such shipping space on a long-term basis when carriers are uncertain about shippers' intentions to use their vessels and must keep additional capacity in reserve. Under the deferred rebate system, the net rates (rates minus rebate) reflect PAGENO="0412" 406 the more accurate conference knowledge of shipper requirements, whereas the full tariff rates tend to reflect the increased conference uncertainty about shippers' intentions. In any individual case, a non-conference carrier may offer a better rate. But in the long run these shippers who use conference carriers will be better of f (because of lower-long-term transpor- tation costs) by adopting a mechanism which ensures that shippers *1 will continue to use conference carriers. Thus, it is in the interest of consumers of shipping services that government agencies not seek to ban tying arrangements nor render them ineffective by arbitrarily limiting the size of the loyalty bonus which a conference may pay. */ This explains why, in general, there is wide spread support amongst shippers for tying arrangmements where they exist and why the usual source of conference information regarding disloyal shippers, is loyal shippers who want the conference to take action to ensure that disloyal shippers do not underquote them in freight. PAGENO="0413" 407 II. SLETMO & WILLIAMS STUDY Introduction Sletmo and Williams approach the question of conferences (i.e. whether they are necessary, and if so, what kind of con- ference is best) from an "industrial organization" viewpoint. Because conferences reflect market behavior (conduct) by the liner industry, the authors argue such conduct cannot be correctly interpreted without a thorough understanding of the basic elements of the industry's market structure. Therefore, their study focuses on the economic realities of the liner industry in order to provide a basis for an economic evaluation of conferences and their practices. The authors' conclusions support the UWIST study's theoretical economic explanation. Closed conferences are found to be signifi- cantly superior to "open" or weak conferences (found in the U.S. trades) because they are more efficient in rationalizing service, ensuring high vessel utilization, and limiting overtonnaging. Moreover, although an actual comparison cannot be made with a situation of "free competition" because all liner services have been (for the past 100 years) organized into conferences, the authors suggest that such competition would result in either long-term instability and cutthroat competition, or a greatly reduced offering of scheduled services catering primarily to shippers of high-value goods (for whom it is not practical to hui1c~ up inventories to allow for full ship loads). PAGENO="0414" 408 Conferences Do Not Exercise Monopoly Power Sletmo and Williams clearly conclude that conferences do not exercise market power. They thoroughly examine market structure, and conclude that there are numerous contraints on the exercise of market power by conferences. They note that conferences are being pressured on three fronts: high-value cargo, high-volume. low-value cargo, and medium-price commodities. In recent years, high-value cargo has been targeted by air freight. carriers and by state-owned and operated (COMECON) liner companies. Although it is the shippers of this high-value cargo who would mind the least paying for a greater percentage of fixed costs of a voyage, the presence of alternative means of transpor- tation greatly constrain the conferences' ability to raise these rates. Sletmo and Williams review evidence which suggests that air freight may be skimming off more than 25 percent of liner revenues by taking this high-value cargo (which is only a negligible share of the tonnage so that liner costs are not reduced any measurable degree). COMECON has also offered especially attrac- tive rebates on these high-value cargoes. On the other hand, high-volume low-value cargoes are the subject of renewed attack by tramps, neobulk operators and COMECON companies. Fuel price increases have hurt the fast liner vessels far more than the generally slow tramp vessels. As these alter- native means of transportation become increasingly attractive, the conferences ability to raise rates is obviously constrained. PAGENO="0415" 409 Finally, even medium-priced commodities can hardly be con- sidered a "captive" market. Sletmo and Williams conclude that conference pricing is constrained because of low barriers to entry, intra-conference competition, inter-conference competition (because of minibridges and landbridges), actual or potential competition from other lines, and alternative sources of supplier markets. Finally, the bargaining power of shippers (often increased through the formation of formal shipper councils) serves as an important constraint on conference power. An Economically Efficient Use Of Liner Services Requires Either Price Discrimination Or Government Subsidies The pricing problems of a liner conference, faced with the need to recover large fixed costs (relative to low marginal costs), are similar to those faced by the modern toll road, the bridge, or a railroad. Price discrimination, frequently criticized as being inequit- able, is actually the. economically efficient pricing technique because utilization is maximized leading to lower rates for all shippers as fixed costs are spread over a large number of shipments. While this does not entirely eliminate the problem of equity, it *1 certainly reduces its significance. *1 As the authors note, the only other economically eff i- cient alternative is to charge a uniform rate which is low enough not to discourage anyone, and because fixed costs will not be recovered, make up (subsidize) the difference. PAGENO="0416" 410 Because Of The Economic Characteristics Of The Liner Industry~ Efficient Resource Allocation Can Only Be Achieved Through Some Form Of Market Regulation. Sletrno and Williams conclude that there are several charac- teristics of the liner industry which mean that an economically efficient allocation of resources can only be achieved through some form of market regulation. These include: (1) liner carriers committed to making voyages on a regular schedule; (2) the fixed costs of making a particular voyage are large compared to the marginal costs of handling the cargo on that voyage; (3) each shipper fills only a very small portion of the ship; (4) the products are highly differentiated by value; *and (5) capacity is tremendous relative to demand -- a relatively small nunber of large vessels can satisfy the demand in a trade. Therefore, Sletmo and Williams conclude that efficient and reliable liner services can only be maintained by a regulated market. Market regulation is necessary in order to efficiently price transportation services, prevent disasterous rate wars in which the survivors might not be the most efficient carriers (because surviving vessels could be the state-owned fleet from COMECON countries) and to ensure that services are provided at the lowest possible cost. Regular And Reliable Service Can Be Provided By Closed Conferences At The Lowest Cost Because They Can Maximize Vessel Utilization. Liner companies are in the business of scheduled services. Their raison d'etre is the maintenance of reliable and regular scheduled services, even when it means sailing half empty. PAGENO="0417" 411 Therefore, they have large fixed (including capital) costs associated with making these voyages. Because marginal costs are low, individual carriers have a great incentive to cut rates in order to increase vessel utilization. But of course, other carriers respond in kind and once again there will be too many ships sailing below full utilization. Sletmo and Williams argue that the inability of open con- ferences to function effectively has resulted in the inefficient use of vessels in the trade. "It may have promoted `competition,' but not lower rates; on the contrary, unit costs have been driven up . . . inefficiency and resource allocation increases rapidly with decreasing load factors. Load factors decrease with increasing competition." "If available cargo is sufficient to fill only half of all conference vessels on a route, "production" cannot be reduced accordingly, unless the conference is permitted to coordi- nate or rationalize its services." . 94-856 0 - 82 - 27 PAGENO="0418" 412 III. HARBRIDGE HOUSE STUDY Introduction In 1978, Marad commissioned a study of the U.S. Merchant Marine and the international conference system by Harbridge House, Inc. The purpose of the study was not to create a new economic model of the liner trades, but rather to explore the impact of various regulatory regimes on U.S.-f lag shipping com- panies.~ Nonetheless, the study does provide some analysis of the industry structure and compares the impact on shippers of con- tiñuing the existing open conference system versus allowing a greater degree of cooperation among shipping lines (through closed conferences and rationalization). The Industry Is Characterized By Great Rate Instability The Harbridge House study states that because of the cost structure (high fixed, low marginal costs), and the cyclical demand for shipping, there is a tendency towards price instability. The industry could react to this rate instability in several ways including: price leadership and de facto oligopolistic pricing; formation of conferences; or tumultuous rate wars and bankruptcies leading to loss of service. Increased Cooperation Would Result In Greater Benefits Based on its analysis, Harbridge House concluded that open competition (presumably enforced through unilateral imposition of U.S. antitrust laws) could lead to short-run benefits of lower PAGENO="0419" 413 rates and more service, but this could be followed by instability, greater concentration and/or reductions in service. Allowing increased cooperation would, on the other hand, lead to rationali- zation and lower cost structures which could be passed on to shippers in the form of better service and rates, and increased investment in technological improvements. The study also con- cluded that increased cooperation would be generally highly beneficial to U.S. flag carriage. PAGENO="0420" 414 IV. MANALYTICS STUDY OF THE IMPACT OF BILATERAL SHIPPING AGREEMENTS IN THE U.S. LINER TRADES Introduction In recent years, the U.S. government and the U.S.-f lag carriers have entered into varioUs agreements with a few foreign countries and their flag carriers. These agreements reserve the carriage of certain cargoes to a specified number of participants (usually the national flag liner carriers), and permit coopera- tive arrangements. Marad asked ManalytiCs to empirically examine the effects of the U.S. agreement with Brazil. The study is especially interesting because the trade bears a closer resemblance to rationalized trades than most other U.S. international trades. Manalytics examined the Brazil trade from 1967 through 1976 and compared the Brazil trade to two trades which do not have the bilateral arrangements: the U.S./AUstralia and U.S./South Africa trades. The Manalytic study supports the economic conclusions reached in the UWIST and other studies concerning closed conferences. Pooling Agreements Did Not Have Any Detectible Impact On The Flow Of Commerce Between The United States And Brazil As trade has increased between the nations, resulting from macroeconomic factors in those countries, liner capacity and service grew sufficiently to meet the needs of shippers. Utiliza- tion rates for carriers in the trade improved, overtonnaging was moderated during cyclical cargo periods, and the stability in the trade allowed the carriers to make long-term investments in equipment and ships. PAGENO="0421" 415 Service In The Trade Improved Manalytics also concluded that the service levels in the trade improved, higher freight rates did not occur as a result of these rationalized conferences, and individual shippers did not experience deterioration of liner service. U.S.-Flag Carriers Have Benefitted From Participation In Bilateral Agreements The authors concluded that a policy of bilateralism, which fostered rationalized conferences, could have a stimulating influence in other less developed U.S. liner trades. It was concluded that this policy would stimulate capital investment and innovation,, particular the replacement of conventional ships with more modern equipment. Utilization of capacity would improve and service levels would improve with a downward pressure on costs which would be translated into a downward pressure on freight rates. PAGENO="0422" 416 V. FMC SOUTH AMERICAN TRADE STUDY Introduction In February, 1980, the staff of the Federal Maritime Commis- sion extensively examined the argument that revenue pools in the South American/U.S. trades result in larger freight rate increases than would be the case if the pool did not exist. Conscious of *1 the lack of supporting data in this area, the FMC staff decided to empirically test the proposition that pools result in higher freight rate increases. Once again, the study ~s interesting because the South American trades are more closely akin to trades rationalized by a closed conference. Data on freight rate changes from two of the largest pooled trades, the U.S./Brazil and U.S./Argentina trades, were compared to similar data from a highly competitive non-pool trade, the U.S. North Atlantic/Continental Europe trade. The most recent data available from the FMC's Office of Data Systems was utilized. The staff compared the freight rates on the top 10 moving commodities that were in effect in December, 1972 to the effective freight rates on these same commodities as of December, 1977. This comparison included all surcharges (e.g. bunker, currency) and statistical adjustments were made in order to properly compare commodities. */ The staff noted that supporters of this conclusion generally do not document their contentions with data, but con- clude on the basis of micro-economic theory that anti-competitive arrangements such as pools must result in higher freight rates. PAGENO="0423" 417 The Non-Pooled North Atlantic Trades Had Larger Freight Increases Than The Rationalized South American Trades The comparison for the outbound trades indicates that the North Atlantic trade experienced a higher median freight rate increase than either the Argentine or Brazil trade. The North Atlantic trade experienced a 11.66 percent larger increase than did the South American trades. For inbound trades, similar results were obtained. Rates increased 9.14 percent more in the North Atlantic trades when compared with Argentina and 23.82 percent more than the rates in the Brazilian trade. During a recent FMC proceeding, Dr. R.A. Ellsworth, the FMC's chief economist at the time the study was conducted, testified at the behest of a party opposing FMC approval of a pool, that as a result of this study it can no longer be assumed that rationalization agreements which contain pools must result *in higher freight rates. Under adverse cross-examination, Dr. Ellsworth defended both the methodology and conclusion of the staff study. (See transcript in FMC Docket No. 80-45, at pp. 516, 523, and 526-27 (May 14, 1981)). PAGENO="0424" 418 CASO ANSWERS TO WRITTEN QUESTIONS OF REP GENE SNYDER RE HR 4374 1. Question - on page 7 you state that rationalization has provided the basis for carriers to make substantial and innovative, long term investments in the trade. What specific instances are you referring to? Answer - There are numerous instances where the ability to rationalize has provided an incentive for carriers to make substantial and innovative investments in new companies. The fact that all of these examples. involve foreign-flag carriers point up the need for reform of our laws regulating international-U.S. operators. Specifically, when preparing our testimony we had the following rationalized services in mind: a. Atlantic Container Line (ACL) - this company is composed of five formerly independent liner companies, each of which owns two vessels in ACL's ten ship fleet. AlT of the units in this fleet are of comparable size, speed and service capabilities, and operate in direct competition with American carriers in the North Atlantic trades. b. Dart Container Line - this is a combine of four vessels owned by three different companies. c. Caribbean Overseas Line (CAROL) - this is a combine of four companies who joined together to offer service between the Caribbean and Europe. d. Associated Container Transport (ACT) - this is a combine of four other companies to provide service in the Europe to Australia trade. e. South Africa-Europe Container Services (.SAECS) - this combine includes all of the members of a conference in a relevant trade. It consists of eight companies, two of whom are shared operations of two or more former competitors. There are many other examples such as Overseas Container Lines (OCL); the TRIO group; SCAN; ACE etc. The Japanese situation is a case study in itself; twelve former companies forced into a set of mergers by governmental fiat now operating in various groupings worldwide including service in the U.S. trade with FNC sanction for their shared and pooled operation. This list is not exhaustive, but it certainly illustrates the fact that rationalization has provided the basis for carriers to make substantial and innovative longterm investments in liner trades. To dismiss all of these is misapplication of economic theory with adverse consequences to shippers and governments concerned, is a position that begs the question. There are clearly benefits perceived or tangibly realized that permits these joint endeavours to operate and prosper. This kind of rationalization permits the development of services which do not merely serve the main arteries of commerce but all of the marginal areas as well. They own and operate a large variety of equipment and have service capabilities to meet all of the requirements of diverse trades. It is as inconceivable that these billions of dollars of investment could or would have been made without the ability to share the ri~s and shelter the result as it is to think that the American Merchant Marine can survive without similar opportunities to participate or reorganize. PAGENO="0425" 419 2. Questj~p - At. the bottom of page 7 you state that `neither shippers nor ourselves would want or intend that specific rate levels be dealt with." What shippers did you talk to in regard to that point? Answer - I have personally talked with dozens of shippers about this specific point and have never found one here or abroad who thought that shippers counsels should be authorized to deal with specific rate levels. Among the shippers who come immediately to mind in this regard are: Edward J. Derenthal, Director Transportation Whsg. & Physical Dist. RCA Corp Route 38, Bldg. 204-2 Cherry Hill, New Jersey 08101 Frank L. Merwin, Vice President ASARCO, Inc. 120 Broadway New York, New York 10005 George F. Avery, Director International Central Services Stauffer Chemical Company Donald G. Griffin Vice President, Distribution & Transportation PPG Industries, Inc. J. Robert Hoon Gereral Manager, Transportation Aluminum Company of America Roy W. Mayeske Director, Transportation Minnesota Mining and Manufacturing Co. John Norton Director, Transportation and Distribution .E.I. Dupont de Nemours & Co., Inc. G.B. Perry General Manager New Orleans Traffic and Transportation Bureau W.B. Rose Manager, Distribution & Traffic Witco Chemical Corporation Lee Soorikian Director, Physical Distribution ITT Corporation E.A. Vierengel, Director~ International Logistics Ingersoll-Rand Company P.J. Wahl General Manager, International Dist. Union Carbide Corp. PAGENO="0426" 420 3. Question - On pages 10 and 11 you state that the tariff filing requirement should be retained. You indicate that the "entire underpinning of U.S. common carriage philosophy, as it applies to ocean transportation, would go right out the window." Is that how you would describe the U.S. foreign commerce prior to 1961 (the year in which the requirement to file tariffs with the FMC became law)? Answer - With regard to the tariff filing issue, the effect of the 1961 amendments to the Shipping Act was to establish in law a more stringent and all-inclusive requirement than that which had existed under authority of the administrative and regulatory powers of the Federal Maritime Commission's predecessors. The reason for this statutory tightening had been the revelations of the House Judiciary (Cellar) Committee's investigation of industry practices in the late 1950's wherein it became evident the existing regulatory system was inadequate to perform the tasks mandated to itby the Shipping Act. The Commission's predecessors had required conferences to file their tariffs as an adjunct to its administrative oversight of Section 15 agreements; however, independent operators not being subject to this requirement had pre- cipitated a competitive situation by their rate cutting in the early 1930's which led to considerable rate instability in several important trades. In 1935 as the result of a Section 19 (of the Merchant Marine Act of 1920) investigation (1 U.S.S.B.B. 470 at 502-502), the Shipping Board Bureau promulgated a regulation that required all common carriers to file all export tariffs in U.S. trades within thirty days of their effective date. This decision was further broadened in 1943 to establish that being a carrier subject to this requirement did not depend solely on a regular sailing schedule or on the regularity of calls at ports but that the mere offering of service on a regular route was sufficient to require the filing (except on bulk commodities) of export rates (2 U.S.M.C. 681). In 1939 and again in 1943, the U.S. Maritime Commission (which had succeeded the Shipping Board Bureau) twice established that import rates h.~finstability in those areas (2 U.S.M.C. 14 and U.S.M.C. 675). f In 1957, the Federal Maritime Board (successor to the j. earlier agencies) promulgated General Order 83 which reasserted the earlier position requiring common carriers to file all export tariffs within thirty days of their effectiveness. Viewed in the light of what had gone before, the 1961 amendments were clearly the act of a Congress inpatient with half measures and insistent on a more effective, timely and all-inclusive control of tariff practices. to be filed for approval in particular trades for reasons of rate PAGENO="0427" 421 In summary, we would observe that there is a long history, far preceding 1961, of efforts by the United States to dampen down through the tariff filing procedure the excesses that frequently accompany competition in high volume trades. This *appears to us to justify the conclusion that the removal of these filing requirements would induce a competitive brouhaha deleterious to shippers, carriers in general, U.S.-flag carriers in particular and U.S. foreign commerce. 4. Question - Basically, your; concerns regarding the possibility of eliminating tariff filing, as expressed on pages 10 and 11 of your statement, center around its potential effect on shippers. What shippers did you consult in arriving at the conclusions on pages 10 and 11? Answer - We will seperately submitt as an appendix to our November 5 testimony a paper entitled Tariff Filing in the U.S. Trades. Since this makes the important points regarding this issue and clearly indicates there are many interests at stake, including those of shippers, we will not repeat those arguments here. During recent years of legislative study of shipping policy reform, we have discussed the question of tariff filing and other issues with shippers' (and consignees') representatives who have themselves been testifying on these matters before the Congress. Quickly coming to mind are groups such as the ~UTLeague, the New York Chamber of Commerce and Industry, the Transportation Association of America, the American Importers Association and the National Maritime Committee's Shipper Advisory Committee. We can further cite discussions with representatives of many individual companies. We would also reference the fact that in the aggregate our marketing and operating people are in touch with literally hundreds of customers on a daily basis over the many problems that they encounter in remaining competitive with respect to each other and with respect to competition from foreign sources of supply. PAGENO="0428" 422 Clearly, there is not an absolute consensus among all these parties on the question of tariff filing. In general, the bigger and more selfsufficient the shipper, the more likely it is to believe that it will not be hurt if the tariff filing requirement is eliminated. However, what is typically testified to by the more broad-based associations and told to us endlessly in individual discussion, is that what the shipper in general requires is stable rates, offered for certain future periods, that he can count on in computing his transportation costs in order to bid on future sales. 5. Question - What is CASO's position in regard to independent action? Answer - We b~elieve that independent action should not be mandated by. law but rather should be left to the decision of each individual conference depending on the economic and political nature of the trade. CASO members belong to numerous conferences some of which voluntarily have adopted a right of independent action and others which have not. When conference members do not adopt a right of independent action as part of their rules, it is usually for a very good reason, i.e., in some trades a mandatory right of independent action would violate the laws or regulations of some 0f the soverign nations being served by the conference; in other trades, a mandatory right of independent action could be utilized as a legalized form of rebating and could result i.n the destruction of the conference. PAGENO="0429" 423 Mr. BIAGGI. Our next witnesses are Mr. Stanley 0. Sher, accom- panied by John DeVierno, representing a whole host of confer- ences; and Donovan D. Day, Jr., chairman, Pacific Westbound Con- ference; and Gerald J. Flynn, chairman, Far East Conference. STATEMENTS OF LINER CONFERENCE PANEL CONSISTING OF STANLEY 0. SHER, ESQ., BILLIG, SHER & JONES, P.C., AND JOHN DeVIERNO, ESQ., BILLIG, SliER & JONES, P.C., ON BEHALF OF 15 STEAMSHIP CONFERENCES; DONOVAN D. DAY, JR., CHAIRMAN, PACIFIC WESTBOUND CONFERENCE; AND GERALD J. FLYNN, CHAIRMAN, FAR EAST CONFERENCE Mr. SHER. Good morning, Mr. Chairman. Mr. Chairman, I am an attorney with the Washington law firm of Billig, Sher & Jones. Sitting on my right is John DeVierno, who is also with our firm. We are appearing here today on behalf of 15 steamship conferences listed in our full statement. I will not bother to read the names here now. But what I would like to do is to sum- marize our full statement and seek to put into perspective some of the more important points. [The following was received for the record:] PAGENO="0430" and Rate Agreements (herein- New Zealand/U. S. Atlantic & Gulf Shipping Lines Rate Agreement North Atlantic/Israel Freight Conference North Atlantic Mediterranean Freight Conference U.S. Atlantic & Gulf! Australia-New Zealand Conference U * S. North Atlantic Spain Rate Agreement U.S. South Atlantic/Spanish, Portuguese, Moroccan And Mediterranean Rate Agreement The West Coast of Italy, Sicilian & Adriatic Ports! North Atlantic Range Conference 424 STATEMENT OF STANLEY SHER ON BEHALF OF AUSTRALIA/EASTERN U.S.A. SHIPPING CONFERENCE, ET AL. Mr. Chairman and Members of the Subcommittee: My name is Stanley Sher. I am an attorney with the Washington law firm of Billig, Sher & Jones, and I appear today on behalf of the following ocean steamship Conferences after referred to as "Conferences"): Australia/Eastern U.S. A. Shipping Conference The "8900" Lines Agreement Greece/United States Atlantic Rate Agreement Iberian/U.S. North Atlantic Westbound Freight Conference Israel/U.S. North Atlantic Ports Westbound Freight Conference Italy, South France, South Spain, Portugal/U.S. Gulf And The Island Of Puerto Rico Conference Marseilles North Atlantic U.S.A. Freight Conference Mediterranean-North Pacific Coast Freight Conference PAGENO="0431" 425 As is apparent from their names, these Conferences serve U. S. commerce in numerous trades, including the Mediterranean Sea, Ara- bian Gulf, Australia, and New Zealand. The ocean carrier members of these Conferences are as diverse as the areas they serve: some are large public companies, some are relatively small; some operate under the U. S. flag, some under the Italian, Australian, Israeli, Norwegian, and other flags; some are privately owned, while others have government affiliations or support. Despite this great variety of backgrounds, the Conferences and their members are unanimous on one, point: United States regulation of liner shipping is in need of immediate and radical revision. We, the Conferences which serve U. S. foreign commerce under this system, find it imposing ever-increasing costs and obligations and unaccept- able legal risks. To put it bluntly, we find the system intolerable. Thus, Mr. Chairman, we believe that these hearings have been scheduled not a moment too soon, and we commend you and Chairman Jones for introducing H.R. 4374. Mr. Chairman, our message today can be summarized briefly, for it consists of a few basic points. We strongly believe that new maritime legislation must provide a complete grant of antitrust immunity for ocean common carriage and related intermodal activities, and must also provide for a significant streamlining of FMC proceedings and processes. We think that H.R. 4374 moves in the right direction, towards the accomplishment of these goals. PAGENO="0432" 426 Enactment of the proposed repeal of the public interest standard would be extremely desirable, as would enactment of the bill's provisions to expedite FMC proceedings and place the burden of proof on opponents of agreements. However, we feel that additional reforms in the antitrust and intermodal areas are required if the system is to allow ocean carriers to respond quickly to changing trade conditions. In the balance of the statement, we would like to explain in some detail why we find the present regulatory system so objectionable, and then proceed to suggest how the bill might address these problems. BACKGROUND While we were able to summarize our concerns very briefly in the preceding paragraphs, these positions stem from years of experience, and we would like to describe now for the Subcommittee some of the tremendous difficulties which the present regulatory system has caused for conferences. Since 1916, the fundamental principle of the Shipping Act has been that cooperation between carriers should be encouraged and that such cooperative efforts will serve the public interest in the maritime transportation of goods in U. S. foreign commerce. Based on this principle, individual ocean common carriers have entered into a comprehensive system of cooperative arrangements with other ocean PAGENO="0433" 427 common carriers. Under this system, the companies which provide ocean common carrier service, and the individuals who work in that system, have developed business habits and practices that are geared to extensive cooperation. This cooperative principle has been endorsed by the other major maritime nations; in fact, practices far more cooperative than those employed by lines in the U . S. trades are fully permitted in non-U. S. commerce. It was onto this stage that a series of judicial and ad- ministrative developments made a grand entrance, thrusting antitrust principles, with their emphasis on competition, into the midst of a cooperative international system. As we will describe in greater detail, these decisions have turned the Shipping Act from a cooper- ative system into a schizophrenic non-system, under which carriers are told "you may cooperate but", and then are not told about a good many of the "buts". Thus, the present system still pays lip service to the general principle of cooperation, but has, with increasing fre- quency, punished the players for various cooperative efforts. Let us turn now to a more specific description of the factors which have converged to make the existing regulatory system so un- fair and unworkable, for it is only with an understanding of the specific problems that specific and enduring legislative solutions can be drafted and enacted. The present regulatory confusion began 15 years ago when the Supreme Court decided in the Carnation litiga- tion that the antitrust laws apply to activities of conferences and 9'~-856 0 - 82 - 28 PAGENO="0434" 428 ocean carriers if they step outside the antitrust immunity accorded to *1 them by the FMC pursuant to section 15 of the Shipping Act. - This decision was immediately expanded by a District Court decision which held that even if ocean carriers act under an approved im- munity, if the conduct is later found to run afoul of the Shipping ** / Act, the antitrust immunity is forfeited retroactively. - Since 1966, therefore, liner shipping has been subject to regulation under both the Shipping Act and the antitrust laws. This dual system has had a significant impact on all conferences. For each activity undertaken, it must be determined whether the activ- ity falls within or without the conference's antitrust immunity. As we have learned, however, drawing that line is not always easy and some- times requires nothing short of a gift of prophecy. And this problem has been exacerbated, because while the courts have been expanding the reach of the antitrust laws over the shipping industry, the FMC has, over the same period, decided a series of cases adopting more restrictive readings of the scope of agreements it has approved under section 15. Carnation Co. v. Pacific Westbound Conference, 383 U.S. 213 (1966). Sabre Shipping Corp. v. American President Lines, 285 F.Supp. 949 (S.D.N.Y. 1968), aff'd, 407 F.2d 173 (2d Cir.), cert. denied, 395 U.S. 922 (1969). PAGENO="0435" 429 If a conference activity is interpreted to fall outside its ap- proved antitrust immunity, the exposure is enormous. Since the anti- trust laws were amended in 1974, violations are now felonies carrying three year jail terms, and fines of $100 ,000 for individuals and $1,000,000 for corporations. There is also the added spectre of pri- vate treble damage actions, which have no counterpart in any other country of the world. It is against this background of fear that conferences now func- tion. As a result, meritorious activities about which there is the slightest question are not undertaken. As FMC Chairman Green noted in his appearance before this Subcommittee on October 6, the "confu- sion throughout the maritime industry because of the dual application of the antitrust laws and the Shipping Act has reached the point where steamship liner operators are at times beset by a commercial paralysis and cannot be expected to react quickly to changing trade conditions." Mr. Chairman, another court decision has made it even more difficult for the cooperative system to adjust to changed circum- stances. In the Svenska decision, the Court held that the public interest standard in section 15 of the Shipping Act requires ocean carriers seeking approval of an agreement (and hence antitrust im- *1 munity) to carry a heavy burden in order to prevail. - That Con- *1 - F.M.C. v. Aktiebolaget Svenska Amerika Linien, 390 U.S. 238 (1968). PAGENO="0436" 430 gress had found such agreements beneficial was no longer adequate. Each agreement and amendment had to be justified. Further, under another line of judicial precedents, those opposing approval of agree- ments were given the upper hand through the right to protracted evidentiary hearings prior to approval. Hence real barriers to ob- taining antitrust immunity have been erected. At the same time the law was changing, so, too, were the econ- omics of the industry and the nature of services offered. Beginning in the 1960's and accelerating in the 1970's, container and other in- novative vessels began to dominate. Because carriers invested in costly equipment such as containers and chassis that moved inland beyond the water's edge, and because this equipment and the cargo in it was easily transferable to motor and rail, ocean carriers (and hence conferences) became intimately involved in inland transporta- tion. The confluence of these legal and economic changes had a profound effect on the regulatory system, on the agency administer- ing it (the FMC), and, of course, on conferences. The result was that conferences and ocean carriers began to file an ever-increasing number of agreements and amendments with the FMC -- many out of an abundance of caution -- in an attempt to avoid the legal exposure created by Carnation and Sabre. A number of these conference agreements, such as agreements governing where meetings are held, whether voting may be by proxy, etc., are truly of no significance to PAGENO="0437" 431 anyone except the members. These filings are again a result of the atmosphere of legal uncertainty in which the industry finds itself. In addition, an avalanche of filings with the FMC was triggered by in- termodalism, as carriers and conferences sought to bring their legal arrangements into conformity with the new realties and and necessities of intermodalism. While the number of filed agreements was increasing, so too were the complexities and delays in processing. This was due not only to the volume of agreements, but to the heavy Svenska burden which the Commission embraced and expanded in a series of decisions to the point that an economic study is necessary to support approval of the more meaningful agreements. Because of these barriers, most confer- ences frequently forego necessary amendments because of the antici- pated costs and delays which are now uniformly experienced with most amendments of any significance. Then, in the early to mid 1970's conferences' difficulties with the system were increased as the Antitrust Division of the Department of Justice began to devote more attention to ocean shipping. The Depart- ment intervened in FMC proceedings, filing an increasing number of protests to approval of agreements, uniformly seeking evidentiary hearings, and taking the FMC to court when it disagreed with the results. Frequently, the Department was the sole opposition to ap- proval of conference agreements or amendments. This has not gone unnoticed. As one federal judge recently commented in a case in PAGENO="0438" 432 which the Department of Justice challenged an FMC approval, there are "incongruities" when federal agencies bring interagency disputes to court, and it is a "tragicomic spectacle presented to international *1 shippers who must wait while the U.S. government sues itself ... ." Two of our recent experiences illustrate how the system func- tions or, more accurately, shows how it has, quite literally, broken down. In 1976, the major liner carriers serving the trade from Italy to the U . S. North Atlantic agreed to form a cargo revenue pool agree- ment to ameliorate the destructively competitive situation in the trade. The agreement was filed with the FMC for approval in February 1977. The Department of Justice filed a protest and a formal hearing was held in which the Department was the only protesting party to ap- pear. After extensive evidentiary hearings, the FMC staff (Bureau of Hearing Counsel) recommended approval of the pool and the FMC Administrative Law Judge, in his Initial Decision, recommended ap- proval. However, the Department of Justice filed exceptions to the Initial Decision and the matter was next considered by the FMC. It unani- mously approved the Agreement in January of 1979 for a three year period. The Department of Justice then challenged that approval in *1 - United States v. F.M.C., - F.2d , No. 79-1325 (D.C. Cir., Dec. 29, 1980)(Opinion of Judge Markey, slip op. at 1 n. 1). PAGENO="0439" 433 the Court of Appeals (D.C. Circuit). The Court unanimously affirii~ ed the FMC's decision on December 29, 1980. Final approval of an agreement ultimately determined to be necessary to meet a "serious transportation need" thus required nearly four full years of litigation. The pool first agreed upon in 1976 began operations in 1981. A second recent experience also illustrates how difficult it is for conferences to function under the system. The U. S. Atlantic and Gulf/Australia-New Zealand Conference filed with the FMC an amend- ment to its agreement to provide authority over intermodal movements. It was filed on December 4, 1978. The Department of Justice pro- tested approval. Two and one half years later, in mid 1981, the Com- mission, in a split decision, refused to approve the amendment, but gave the Conference the opportunity to show it had a right to go to a formal hearing at which it could seek to carry its heavy burden for approval. Such a hearing would take an additional two to three years. In describing these two examples, our purpose is not to place blame or to discuss the merits of the proposals or decisions, but to illustrate how truly unworkable the system has become and the effects of this regulatory quagmire on businesses which are trying to react to changing conditions in the already complex world of international trade. In the Italian situation, the FMC staff, Administrative Law Judge, the five FMC Commissioners, and three federal judges thought the agreement justified, yet it took four years to obtain an approval PAGENO="0440" 434 which, as a practical matter, was good for a fifteen month period. In the Australian case, a conference was denied intermodal authority similar to that which had previously been approved by the Commission for a number of other conferences. That decision, reached without a hearing, took two and one-half years and, if the Conference should pursue the matter through a formal hearing, it would most likely take an additional two or three years (for a total of four or five years) to obtain a decision on whether the Conference should have intermodal authority. Mr. Chairman, this kind of regulatory waste simply must not be allowed to continue. Congress must act strongly, clearly, and promptly. Whether carriers should be able to form pools, whether conferences should have authority over intermodal activities, and other such fundamental policy questions are not appropriate matters for case by case litigation. Such an approach effectively precludes these arrangements. Whether these arrangements should be permitted is a policy issue which Congress must decide. Under the present system conferences are, quite literally, required to rejustify section 15 of the Shipping Act with each agreement they file. This has proved costly, wasteful and, in the end, impossible. THE ESSENTIAL ELEMENTS OF NEW LEGISLATION With this background in mind, we would like to turn now to a discussion of how the Congress can act most effectively to end this PAGENO="0441" 435 regulatory confusion and establish a cooperative system of intermodal liner shipping in U .S. foreign commerce to the mutual benefit of ocean carriers and the shipping public. As we noted at the outset, Mr. Chairman, we believe that H.R. 4374 moves in the right direction, and we appreciate your recognition of the need for such reforms. However, we think further, related changes are necessary. In brief, we believe legislation must be developed which will unambiguously ensure that: (1) Ocean carriers and conferences are not exposed to the anti-, trust laws; (2) Ocean carriers and conferences have (and should have) authority to engage in intermodal services; and (3) Processing of section 15 agreements by the FMC is simpli- fied and expedited under procedures which ensure that decisions will adhere to the Congressional policy judgment that cooperative agreements among ocean carriers are to be encouraged. (1) Elimination Of Application Of The Antitrust Laws The Conferences believe this reform is essential. The fear of the antitrust laws has grown to a point where it is widely perceived as threatening the ability of conferences to function as intended by Congress and respond to changing conditions. Indeed, as noted above, this was expressly acknowledged by the Chairman of the regulatory agency concerned in his testimony before this Subcommittee. The antitrust laws are incompatible with the cooperative principles of the PAGENO="0442" 436 Shipping Act, the conference concept, and the international character of ocean shipping. To seek to harmonize two diametrically contrary concepts -- cooperation under the Shipping Act versus competition under the antitrust laws -- is simply not feasible. It has resulted in waste, uncertainty, unfairness and, in the final analysis, has failed to achieve the benefits of either cooperation or competition. Due to the expansive reading the courts have given to the anti- trust laws, any antitrust exemption must be clear, all-encompassing and unequivocal. If not, we fear a repetition of the past, where courts have strained to reintroduce the application of the antitrust laws to liner shipping. While there are a variety of drafting approaches to this issue, several concepts must be kept in mind if the objective is to be ac- complished. First, it must be made crystal clear that the antitrust laws could not apply to conduct even if found to be outside the scope of activities approved by the FMC. Short of this, the central dilemma and fears of the Conferences remain. Serious and unacceptable anti- trust exposure would depend on the interpretation of the scope of an approved agreement -- a determination which often cannot be made before the conduct occurs Second it must be made unambiguous that even when conduct appears to be within the scope of an ap- proved agreement the antitrust exemption is not lost because the conduct may violate another provision of the Shipping Act. PAGENO="0443" 437 Repealing the public interest test, to reverse the Svenska decision, while highly desirable in and of itself, will not solve these problems. Requiring agreements to be acted upon quickly and placing the burden of proof on opponents of these agreements will not end the dilemma of exposure to antitrust liability raised by the increasingly narrow interpretation of the scope of approved agreements. The commercial paralysis facing the conferences can only be eased by directly reversing the Carnation and Sabre decisions. We want to emphasize that we do not seek relief from the antitrust laws as a means of escaping administrative sanction for unauthorized actions. Actions unauthorized by approved agreements and other violations of the Shipping Act should be punishable, but only under the Shipping Act. Under such a system, penalties and reparations would be assessed by the agency with expertise in shipping in light of the gravity of an offense. (2) Conferences Must Have Intermodal Authority Legislation should make absolutely clear that the FMC has jurisdiction over intermodal services and that it can therefore approve conference authority over intermodal matters. This clarification is vital, for it ensures that the law keeps pace with industry innovation. Not only will it eliminate a continuing source of litigation, it will confirm what, from our experience, is obvious: PAGENO="0444" 438 Without intermodal authority, the conference system may not survive and most certainly cannot achieve the objectives contemplated by the Shipping Act. Since many ocean carrier services now extend to inland matters, a conference system authorized to regulate only the ocean portion of the transportation is forced to play a very competitive game with a very weak hand, or, in many situations, can't even ante up. It makes little sense for a conference to establish and police ocean transportation rates when member lines may establish their own rates for an intermodal service which are different than those offered under the conference tariff and are not even policed under the conference system. It is no exageration to say that without intermodal authority, there can be no meaningful conference system. (3) Simplification And Expedition Of FMC Process H.R. 4374 recognizes the need to greatly simplify and expedite FMC processing of section 15 agreements. Substantively, section 2(3) ~f the bill would eliminate the public interest/antitrust standard and section 2(5) would properly place the burden of proof on parties opposing agreements. We strongly endorse the direction of these provisions, which would help restore the original intent of the Shipping Act. PAGENO="0445" 439 To ensure that these reforms would be fully effective, however, we suggest a number of related changes. First, we believe that report language regarding the repeal of the public interest standard should make it impossible for subsequent decisions to seize on other general standards in the law, such as the "detrimental" to the "commerce of the United States" standard, as a basis for eroding the intent of Congress and reinjecting antitrust concerns into the agreement process. In particular, we note that when the public interest standard was enacted, there was no contemplation that it would be used to inject antitrust considerations into FMC deliberations. Thus, we believe that the legislation should not only repeal the public interest test, but specifically preclude other means of reinjecting antitrust concerns into the agreement approval process. We also suggest that section 2(5) of the bill be amended to address the possibility that, despite the proposed statutory mandate, the FMC might not always reach a final decision regarding an agreement within 180 days. We believe the statute should explicitly provide that any agreement not disapproved or modified within 180 days is to be considered approved. SUMMARY Mr. Chairman, in closing, we can only reemphasize the key points that we have already made. Administrative and judicial decisions have undermined the conference system and made it difficult, if not impos- PAGENO="0446" 440 sible, for conferences to function. To allow the conference system to function effectively, the Congress must unambiguously remove confer- ences from exposure to antitrust laws for ocean and intermodal activ- ities and require expedited regulatory processes at the FMC. We believe that while H.R. 4374 demonstrates a recognition of the need to change the present system, it must include additional provisions if the problems facing conferences are to be resolved. We thank the Subcommittee for the opportunity to submit this statement, and would be pleased to provide further information and assistance. * * * * PAGENO="0447" 441 Joint Statement of Donovan D. Day, Jr. Chairman, Pacific Westbound Conference and Gerald J. Flynn Chairman, Far East Conference Mr. Chairman, Members of the Committee, and Staff: We are grateful for this opportunity to present the views and suggestions of our Conferences to this Commit- tee. We believe that House Bill 4374 embodies regulatory reforms that have been sorely needed by the international ocean shipping industry for many years, and it is our fervent hope that these reforms will be enacted during this session of Congress. Our Conferences, the Pacific Westbound Conference and the Far East Conference, account for the majority of the outbound liner cargo movements from the United States to the Far East; both Conferences enthusiastically support H.R. 4374 and the goals which the bill seeks to achieve. The Pacific Westbound Conference ("PWC") is comprised of sixteen regular steamship line members and two associate members, representing the flags of nine nations: the United States, Japan, Norway, Denmark, the Republic of China, Hong Kong, the~ Republic of the Philippines, Israel and the Republic of Korea. Through these members, the Conference provides ocean liner service from ports on the West Coast of 1/ The views expressed herein are the collective views of the Conferences. Individual carrier members have in some instances commented separately or through organ- izations such as CENSA or CASO. We are aware of no conflicts in positions filed, but point out that the particularized views expressed by individual members of the Conferences elsewhere should not be considered as being in any respect modified by these comments. PAGENO="0448" 442 the United States and Canada to the full range of Far i~ast countries from Siberia and Japan in the north to Thailand and the Republic of the Philippines in the south. The Con- ference also provides through export service to these destinations for hundreds of inland shippers whose cargoes move through West Coast ports. This through service is pro- vided under the Conference's intermodal ("minilandbridge" and "interior point intermodal") tariffs, under which the Pacific Westbound Conference has been able to develop an integrated land-water transportation system that has pro- vided reliable and efficient transportation services for shippers with markets in the Far East. The Far East Conference ("FEC") is one of the oldest conferences serving the U.S. trades, and is comprised of eleven members, representing the flags of five nations: the United States, Japan, Norway, Denmark and the Republic of the Philippines. The Far East Conference provides all-water service via the Panama Canal from U.S. Atlantic and Gulf Coast ports to many of the Far East destinations served by PWC. The Far East Conference has, to date, not been permitted to offer the integrated, through export service to inland shippers which the PWC has developed so successfully, having been denied this opportunity by the Federal Maritime Commission ("FMC"). Notwithstanding this handicap, the FEC remains a significant factor in the trades from the United States to the Far East. PAGENO="0449" 443 Over the past two decades, the PWC and the FEC, together with the other conferences that represent the backbone of the ocean liner transportation system through which the foreign commerce of the United States is con- ducted, have been increasingly beset with regulatory and antitrust constraints. These constraints have inhibited the ability of the conferences and their members to improve and expand their service to shippers and have become a source of unnecessary and undesirable strain between the United States and its trading partners. Congress' purpose in enacting the Shipping Act of 1916 was to remove these unnecessary con- straints, yet the developments of the past two decades have substantially frustrated that purpose. H.R. 4374 would do much to reverse this erosion of the Shipping Act and there- fore has our wholehearted support. H.R. 4374 would shore up the provisions of the Shipping Act in a number of respects, as well as introducing several changes to the regulatory scheme. We will address the policy areas which we believe the bill affects in the order in which they are presented by the bill. In so doing, we will respectfully offer our comments and suggestions as to how the bill might be clarified so as to reflect more per- fectly what we believe to be the underlying purposes of the bill. gL~~856 0 - 82 - 29 PAGENO="0450" 444 The principal subjects which our comments will address are the following: 1. The need to clarify the FMC's authority to allow conferences to continue to develop and provide integrated through intermodal services to shippers; 2. The reestablishment of the burden of proof in FMC proceedings to approve conference activities as being upon the parties seeking to block approval; 3. The establishment of shippers' councils, subject to appropriate controls; 4. The reestablishment of the vitally needed anti- trust immunity for persons participating in the congression- ally sanctioned conference system, which includes the clarification that the international ocean liner industry is to be subject to U.S. regulation only by the FMC under the Shipping Act and not subject to dual (and often inconsis- tent) regulation under domestic u.s. antitrust laws; 5. The appropriate degree of regulatory control over the ocean freight forwarder industry; and 6. The need to retain existing tariff filing require- ments. * * * * * * PAGENO="0451" 445 I. CONFERENCE INTERMODAL SERVICE Section 1 of the bill would add the following defini- tion to section 1 of the Shipping Act: The term "agreement" includes understandings and arrangements, written or oral, and any amendment, modification, or cancellation thereof, but does not include maritime labor agreements. This definition is an appropriately inclusive one and wisely does not attempt to enumerate all of the dozens of types of agreements that are entered into by ocean carriers under the aegis of section 15. Under this definition, it should be clear that ~ agreement (other than a maritime labor agree- ment) which falls under one of the broad, generic categories set out in the first paragraph of section 15 is subject to the filing and approval jurisdiction of the FMC. The FMC, the industry and the public have for many years acted in the belief that intermodal conference rate- making agreements through which transportation is provided to and from interior points (and port cities) located beyond the ports at which the conferences' vessels actually call are an integral (and often essential) part of the conference system regulated by the FMC. The PWC and other conferences that have been given authority to do so by the FMC have entered into agreements and committed huge investments of capital and effort in developing, promoting and expanding nationwide transportation systems that reap (for the shipper PAGENO="0452" 446 and carrier alike) the benefits of the "container revolution". Under this system, a shipper can move cargo from an inland point in the United States directly to an overseas market in a single container and get the same service that a coastal shipper enjoys; the shipper can plan his transportation needs around a single, through rate quoted in the conference tariff and can depend upon the con- ference carrier to take care of the rest. This system has been a huge success and has attracted increasing volumes of cargo, enabling conference carriers to recognize substantial economies of scale. Coordination between conference ocean carriers and the connecting inland carriers has been greatly enhanced. Finally, because a significant portion of the cargo handled by many conferences originates at points beyond the port cities at which their vessels call, the extension of conference ratemaking authority to inland points has prevented the deterioration of the conference system due to "rate wars" among conference members for inland cargo. The FMC has repeatedly recognized that the same factors that justify the conference system for port-to-port cargoes (rate stability and reliability of service) also can necessitate approval of conference rate- making to and from inland points or more distant port cities. PAGENO="0453" 447 Against this background, it is surprising that anyone could argue that the FMC has no authority to approve agree- ments between ocean carriers concerning through transporta- tion. Yet such an argument has been made vociferously within the past three years by the Department of Justice, which has challenged the FMC's authority to approve ~ con- ference service which reaches shippers beyond the water's edge. This challenge has reached the U.S. Court of Appeals for the District of Columbia Circuit in United States v. Federal Maritime Commission, which is pending oral argument on rehearing en banc in December of this year. If the Justice Department has its way, the entire integrated con- ference intermodal system of transportation which has developed and burgeoned during the past two decades would be wiped out and declared to be a per se violation of U.S. antitrust laws. We believe that, unless the matter is conclusively settled (which it may not be by the courts), the Justice Department will continue to cast a shadow over the full development of conference intermodal transportation. The effect of the Justice Department's position would be to read an additional exception into the definition of "agreement" contained in section 1 of H.R. 4374, 50 that it would effectively read, "but does not include maritime labor agreements or agreements for the through movement of cargo beyond the water's edge". PAGENO="0454" 448 We believe that the Justice Department's position poses a real threat to the survival of the conference system and that it is not Congress' intent to truncate the conference system in the manner advocated by the Justice Department. Because of the severity of the threat, however, we believe that it would be desirable for Congress explicitly to authorize the Commission to continue in its established course of authorizing conference intermodal authority where it is considered appropriate under Shipping Act standards. This could be done either by inserting the words "including without limitation agreements concerning transportation to or from inland points or ports not served directly" before the words "but does not include maritime labor agreements". Alternatively, this could be accomplished by inserting the same words at the end of the first sentence of section 15 of the Shipping Act after the words "or cooperative working arrangement". Insertion of this language would remove the spectre of dismemberment of conferences with intermodal service and would clear the air for both the conferences and the FMC. II. THE REESTABLISHMENT OF THE BURDEN OF PROOF IN FMC PROCEEDINGS Section 2 of the bill would amend section 15 by striking the words "or to be contrary to the public interest". The apparent, and laudable, purpose of this PAGENO="0455" 449 amendment is twofold: (1) to overrule the holding of the Supreme Court in the Svenska case, which reassigned the burden of proof in FMC proceedings wherein conference agree- ments are considered to the conference rather than to those seeking to block the agreement; and (2) to eliminate tradi- tional antitrust analysis as an element of approvability of conference agreements, leaving only Shipping Act considera- tions applicable to such agreements. Past experience under the Shipping Act has taught us that, if the role of the antitrust laws in the regulation of the international shipping industry is to be reduced or eliminated, a clear and explicit expression of congressional intent is necessary. Opponents of the conference system (such as the Department of Justice) will continue to argue that "exceptions to the antitrust laws are to be narrowly construed" and will then seek ways to evade all but the most explicit statutory language favoring the conference system. Our concern here is that elimination of the "public interest" standard, even though intended to remove antitrust considerations from FMC proceedings, may not have that effect. As the FMC has pointed out in its comments on similar legislation in the Senate (5. 1593), antitrust-type considerations were weighed in approving agreements before the addition of the "public interest" language in 1961. Therefore, parties such as the Department of Justice would PAGENO="0456" 450 feel free to continue to argue that, even though protestants have the burden of proof under H.R. 4374, this burden can be met simply by showing that the proposed conference agreement would violate the antitrust laws, and that it therefore is presumptively contrary to some other statutory standard, such as "detrimental to the commerce of the United States". This would, of course, put us right back where we are today, before the passage of fl.R. 4374. For these reasons, we believe that the bill ought to be very explicit with regard to the burden of proof and with regard to the role of antitrust considerations in proceed- ings under section 15 of the Shipping Act. We are fearful that simple elimination of the "public interest" standard as a shorthand for this result will not suffice. Therefore, we respectfully recommend that, in eliminating the "public interest" standard, Congress should make it very clear, either in the legislative history or in the statute itself, that it intends (1) to place the burden of proof (including the production of evidence) upon protestants to conference agreements, and that the burden is not to pass to the proponents upon the mere demonstration that the proposed agreement would offend the standards of the antitrust laws; and (2) to eliminate antitrust considerations from sec- tion 15 approval proceedings. PAGENO="0457" 451 III. SHIPPERS' COUNCILS We have no objection in principle to the establishment of shippers' councils, subject to the appropriate controls presently embodied in H.R. 4374. There are only two points we would like to make regarding shippers' councils. First, H.R. 4374 as presently worded would authorize shippers' councils to: consult and agree with any ocean common carrier or conference concerning general rate levels, prac- tices, and terms and conditions of service affect- ing ocean transportation. [Emphasis supplied.] This language may be difficult to reconcile with new sec- tion 15a.(c)(7) (to be added by section 3 of the bill), which would prohibit "discussion, agreement or concerted action by members of a council with regard to their specific commodity rates, output or marketing". The bill attempts a potentially difficult distinction between agreement on "general" rate levels, which could be allowed under sec- tion l5a.(a)(l), and discussion or agreement on "specific commodity rates", which would be prohibited under sec- tion l5a.(c)(7). This distinction could be a dangerous one for ocean carriers and conferences, who would risk penalties if they reach agreement concerning rate levels that are determined to be too specific. Our conferences believe that the authority to agree with shippers' councils on "general rate levels" presents unwarranted problems and risks, and PAGENO="0458" 452 that it would be preferable to delete the words "and agree" from proposed section 15a.(a)(l). Our only other concern with the shippers' council pro- visions contained in section 3 of the bill arises out of paragraphs (c)(6) and (c)(8), which might be read as prohibiting nembers of shippers' councils, on an individual basis, from becoming signatories to conference dual rate contracts. Thus, for example, paragraph (c)(6), if read literally, might preclude individual shippers' council members from signing any dual rate contracts, because if more than one member signs this might be construed as a "collective refusal to deal" with carriers other than the dual rate contract signatories. Similarly, under para- graph (c)(8), if all (or a majority) of the members of a shippers' council decide (independently) to sign conference dual rate contracts, it might be argued that "the council" has, in effect, entered into the dual rate contract. We do not believe that the drafters of the bill intend these limi- tations on the right of shippers' council members to enter into dual rate contracts, and we believe that the legisla- tive history of the bill should so state. IV. ANTITRUST IMMUNITY Section 4 of the bill empowers the FMC to assess increased civil penalties for various violations of the Shipping Act. We believe that it would be appropriate, PAGENO="0459" 453 particularly in light of these increased penalty powers, to specify that the Shipping Act remedies and penalties are the exclusive remedies and penalties available to private parties and the FMC with regard to the activities of persons regulated under the Shipping Act. No subject has caused more apprehension, frustration and unnecessary litigation in the regulated shipping industry than the steady erosion -- accelerating in the past fifteen years -- of the original congressional mandate that this industry should be regulated according to the standards and sanctions of the Shipping Act and not the U.S. domestic antitrust laws. The courts and the Department of Justice have not shared Congress' original perception that the international ocean shipping industry requires a regulatory scheme that is different from, and exclusive of, this country's domestic antitrust model. Over the years judicial decisions and Department of Justice attacks have demolished the boundaries which Congress originally established between the two regulatory schemes, with the result that the inter- national shipping industry now must face on a daily basis the ominous prospect that any particular activity may someday be determined, after the fact, to have violated both regulatory schemes. Carriers and conferences are, in short, afraid to act in precisely the ways that they were expected to act when the Shipping Act, 1916, was enacted -- to PAGENO="0460" 454 provide adequate and flexible carrier services at stable and predictable rates which the importers and exporters of this country require, to innovate and adapt to the needs of the trades they serve and to deal efficiently with other modes of transportation as the developing technology of inter- modalism provides new demands and new opportunities. The industry labors at present under legal uncertainties stemming directly from the Carnation and Sabre cases, from a plethora of less celebrated antitrust challenges in the lower courts and from incessant Department of Justice attempts to displace the Shipping Act with the antitrust laws. Conferences are virtually unable to take many actions which were clearly contemplated in their original agreements or amendments thereto simply because it never has been and never will be possible to spell out in such documents every conceivable operational step which is necessary to operate a conference system in today's international ocean commerce. Herein lies the specific problem that we wish to bring to this Committee's attention. The experience we have briefly outlined above has taught us that it is not enough simply to enumerate a list of activities to which the anti- trust laws shall not be applied. The Carnation and Sabre cases -- and any number of more current antitrust cases and threats of antitrust cases -- teach that it is also neces- sary to define those additional areas that are intended to PAGENO="0461" 455 be regulated and sanctioned exclusively under the Shipping Act and not the antitrust laws. Specifically, we are concerned that any carrier activities which may be found to have been prohibited under the Shipping Act may, if the carrier or carriers had been acting pursuant to a conference agreement, give rise to antitrust penalties. This is the real spectre of the Carnation and Sabre cases and their progeny. It should be noted that the Shipping Act contains some rather broad, normative standards such as "so unreasonably high or low as to be detrimental to the commerce of the United States" in section 18(b)(5), or "discriminatory", "unfair", "undue prejudice", or "unjustly discriminatory", etc., in other sections. Such terms do not have concrete meaning until they are applied to particular fact situations. A carrier in most cases cannot know whether a particular activity is prohibited under these standards until the issue has been adjudicated. We doubt that this Committee intends that, in addition to the remedies provided to shippers under sec- tion 22 of the Act and the increased civil penalties that the Commission could impose under this bill, the antitrust laws -- with their treble damages and other penalties -- should also apply. Yet this argument could be made, as it was successfully in the Sabre case, in the case of a carrier or carriers who acted under a conference agreement. We PAGENO="0462" 456 therefore propose that this Committee consider an amendment which would make clear that the persons and activities that are regulated by the Shipping Act are subject solely to the criteria and sanctions of that Act and not the antitrust laws or any other law. To accomplish this clear statement, we suggest that proposed section 32 be revised by adding the following: (d) the requirements, standards, penalties and civil liabilities provided in this Act shall, as to the activities regulated herein of all common carriers by water, conferences, shippers' councils and other persons subject to this Act, be exclu- sive of all other laws, including specifically the antitrust laws; neither shall the antitrust laws apply (i) to any agreement that concerns or involves joint or through intermodal transporta- tion or other transportation or related services between or within any foreign country or place, or (ii) to consultations with or activities of ship- pers' councils situated outside the United States. V. FREIGHT FORWARDERS AND NONVESSEL OPERATING COMMON CARRIERS Section 5 of the bill contains increased bonding requirements for both freight forwarders and nonvessel operating common carriers ("NVOCC's"). We believe that these increased requirements are particularly appropriate for NVOCC's because they are not subject to the extensive regulation and licensing requirements that must be met by freight forwarders. Section 5 of the bill would significantly change the status quo with regard to freight forwarders. We believe PAGENO="0463" 457 that these changes are undesirable, and that the existing regulatory scheme should be retained. The new provision elininates the licensing of forwarders, which is essential to avoid rebating by payment of compensation to forwarders that may secretly be affiliated with shippers or which may serve as conduits for the transfer of rebates. The antire- bating and antidiscrimination provisions of the Shipping Act would become virtually unenforceable without the licensing of forwarders, since there is no workable way for a carrier or the FMC to ascertain shipper-forwarder affiliation on an ad hoc basis. The licensing requirement also protects the public by requiring the freight forwarder to meet reasonable standards of competence and fitness. The increased bonding require- ment is not an adequate substitute for this protection in an industry that, unfortunately, has been plagued by more than a few "fly by night" operators whose unlicensed activities have been harmful, particularly to small, unsophisticated shippers. Section 44 as amended also would not prevent a for- warder from acting as an NVOCC on the same shipment and collecting compensation thereon even though as an NVOCC it is acting in the role of a shipper, albeit one without a beneficial interest in the cargo. This would permit for- warders to compete unfairly with ocean carriers by offering PAGENO="0464" 458 competing rates as NVOCC's while at the same time demanding brokerage fees from carriers. For the foregoing reasons, we believe that the regula- tory scheme embodied in section 44 of the Shipping Act should be left intact. VI. ELIMINATION OF TARIFF FILING Finally, it is our understanding that proposals may be made to eliminate the requirement that carriers file and adhere to published tariffs. Public tariff filing is the core of any effective regulation of carrier rates and prac- tices. A proposal to end the tariff filing requirement would effectively destroy the protections provided to ship- pers and carriers alike in many other sections of the Ship- ping Act. For instance, if tariffs need not be filed and followed, carriers would be free to charge each shipper different rates fluctuating from day to day. The prohibi- tions against rebating to shippers, or discriminating between shippers, contained in sections 16, 17 and 18 of the Shipping Act would become dead letters, since it would be virtually impossible to determine whether the charge imposed by the carrier was equally available to all shippers. Similarly, the provision in section 14b authorizing dual rate loyalty contracts would become very difficult to administer. If the shipper is unaware of what the tariff PAGENO="0465" 459 rates are, he is in no position to evaluate whether he would benefit from a commitment to ship exclusively with one conference (or carrier) in exchange for a stated discount. From the carriers' standpoint, the removal of the tariff filing requirement is extremely undesirable because it becomes extremely difficult to identify and meet competi- tion. Attempts to verify rates competitors are charging by direct inquiries to competitors might lead to violations of section 15. Secret pricing would have an extremely destabilizing influence on rates, resulting in volatility that is harmful both to carriers and to shippers who need to plan their transportation costs. For these reasons, it is our strong position that the tariff filing requirement should be retained. 0 CONCLUS ION We thank you for allowing us to present the views and concerns of our Conferences and their membership, and believe that this statement will prove useful to the Commit- tee in finalizing the language of H.R. 4374. None of the suggestions and comments in this statement are lightly made, and our Conference memberships consider each of them to be essential in making a good bill even better. Respectfully submitted, PACIFIC WESTBOUND CONFERENCE FAR EAST CONFERENCE Donovan D. Day, Jr. Gerald J. Flynn Chairman Chairman 94-856 0 - 82 - 30 PAGENO="0466" 460 Mr. SHER. The 15 conferences that we represent have not previ- ously participated in efforts concerning maritime legislative reform. We are doing so now for the first time. We are doing so for one simple reason: The existing regulatory system under which the conferences operate has, to put it bluntly, become intolerable. It is no longer a sensible regulatory system. It was enacted in 1916 and revised in 1961. Since then, there have been radical changes in the economics of liner shipping; the law governing it has turned full cycle, and the international political setting in which it operates has changed markedly. I think it is fair to say, Mr. Chairman, that no one, be it the De- partment of Justice, Federal Maritime Commission, carriers or shippers, are satisfied with the present system. All are in complete agreement that something must be done. Of course, there is less than complete agreement on what that should be. We believe that the major question facing the subcommittee is a policy judgment. It is a policy judgment between two not complete- ly consistent policies, cooperation and competition. Today we have a complex, convoluted compromise which produces the benefits of neither competition nor cooperation. If, as we believe, and as is practiced by all other maritime nations, the underlying principle of the system should be cooperation, then we urge that legislation be enacted which truly encourages cooperative efforts. I think that merits some emphasis. That is, if the subcommittee moves in the direction that the bill appears to be going, in the di- rection of cooperation, I think it is important, very important, that a bill come out that gives it a chance to work. The problem that we have had as a result of some amendments to the Shipping Act and court decisions is that the system now is done on a case-by-case basis, and a case-by-case basis does not permit anything to happen. We have a constant tension between cooperation and the competi- tion, and the courts have come down on the side of competition. We must have a clear-cut policy decision from the committee. H.R. 4374 moves in the right direction. It would encourage coop- eration by repealing the public interest standard. This, in our opin- ion, is vital. If the subcommittee does nothing else, it will have taken a major step forward if it enacts this provision. However, since the bill reflects a clear intent to address and resolve these problems of FMC process, I do not want to dwell on them today. Instead, I would like to look at two reforms which the bill does not include. The first is a broader grant of antitrust immunity, and the second is a clear statement that the FMC has authority over inland and intermodal activities by ocean common carriers. Both, in our opinion, are necessary. Presently, the antitrust laws apply to activities of ocean carriers if they step outside the antitrust immunity accorded to them by the FMC. The courts have also held that even when ocean carriers act under an approved immunity, if the conduct is later found to run afoul of the Shipping Act, the antitrust immunity is forfeited retroactively. This has resulted in a dual system of regulation, the Shipping Act and the antitrust laws. For each activity a conference under- takes, it must determine whether the activity falls within or with- out its antitrust immunity. This problem has become particularly PAGENO="0467" 461 difficult in recent years, as the FMC has adopted increasingly re- strictive interpretations of the scope of agreements it has approved. As a result, determining the scope of the immunity is not always easy, and sometimes requires nothing short of a gift of prophecy. It is against this background of confusion, as well as fear of anti- trust penalties, which are truly enormous, that the conferences now function or, I think more accurately I should say, fail to func- tion. Meritorious activities about which there is the slightest question are often not undertaken. As Chairman Green noted in his appear- ance before this subcommittee, "the confusion has reached the point where steamship liner operators are at times beset by a com- mercial paralysis and cannot be expected to react quickly to chang- ing trade conditions." Mr. Chairman, I think that also merits emphasis. I can scarcely think of a stronger indictment of a regulatory system than ac- knowledgment by the head of the concerned regulatory agency that the system results in commercial paralysis. To end this paralysis, legislation must make crystal clear that the antitrust laws do not apply to conduct even if found to be out- side the scope of activities approved by the FMC. I want to empha- size that we do not seek relief from the antitrust laws as a means of escaping sanctions for unauthorized activities. That would hardly be a sensible or ethical position. What we are saying is that actions that are unlawful should be penalized and, for serious vio- lations the penalties should be substantial. And under your bill, they will be even more substantial for violations of the Shipping Act. What we plead for is to be regulated under one system and one set of penalties. Under the Shipping Act, penalties can be assessed and so can private reparations. No one is deprived of a remedy, either Government interests or private interests. When a violation is found, a penalty will be imposed and repara- tions may be sought. And when a technical violation occurs, we would assume a rather technical or appropriate penalty would be assessed. What we cannot continue to live with is the present situation, under which a technical violation leads to enormous antitrust pen- alties. Last, I would like to turn to the question of intermodal authori- ty, and I would like to depart from my statement for 1 minute, with your indulgence, to comment on a question that was asked to the earlier panel. I have not had the time now to go back over the testimony, but in response to the question of whether shippers are opposed to in- termodal authority, frankly, I have been struck by the lack of ship- per opposition to intermodal authority. I cannot think-I have to be careful because I have not reviewed all of the testimony with this in mind, but I would say that the shippers have been almost uniformly supportive of intermodal authority. They have some questions over, I think, the dual rate contracts and how they apply to intermodal authority, but I think insofar as the conferences are concerned, the shippers want conferences to have that authority and I think they support it uniformly. PAGENO="0468" 462 I believe that on this one, the Justice Department stands alone; I do not think anyone opposes this, except perhaps the Department of Justice. As Mr. Breed indicated, ocean carriers, with their heavy invest- ment in container equipment, are inextricably involved in the inland portion of the movement. The change in the operations and the economics are such that ocean carriers really have no choice. Their equipment moves inland; they are dealing with shippers who are requesting inland routings on a daily basis. Whether they do or do not want to become involved in the inland portion is really aca- demic; they are involved in it. The problem, then, is that since the land portion is part and parcel of the service, a conference which seeks to regulate its mem- bers with only authority over the ocean portion literally tries to regulate its members with one hand tied behind its back. I think it is no exaggeration to say that without intermodal au- thority, there is a fair chance that the conference system is doomed. I do not believe that the conference system can continue to survive if they do not have intermodal authority, because what has happened is their members are operating these services. If the conferences cannot cover these services, then the conferences will essentially be regulating only 50, 60, or 70 percent of the members' services, and that is simply an unacceptable situation. If, as we request, the bill is expanded to make intermodal author- ity clear, then the litigation that is presently pending on inter- modal authority would be resolved. Due to the importance of this question, I think it is important that the committee and Congress clarify it, hopefully in advance of the decision. It would be illusory, Mr. Chairman, to insure that the FMC proc- esses agreements expeditiously, and then deny the FMC the sub- stantive authority needed to approve those agreements. In summary, to allow the conference system to function effective- ly, Congress must unambiguously remove ocean carriers from anti- trust exposure, insure that the FMC has the necessary authority over intermodal activities, and, as you have already recognized in your bill, streamline the regulatory process so that the agreements may be implemented promptly. I would like to thank the subcommittee for the opportunity to appear today, and we would be pleased to respond to any questions you may have. Mr. BIAGGI. Mr. Day? Mr. DAY. Mr. Chairman, ladies and gentlemen, my name is Donovan D. Day, Jr. I am the chairman of the Pacific Westbound Conference. I am accompanied by Mr. Gerald J. Flynn, chairman of the Far East Conference. We appreciate the opportunity to present the views of our confer- ences to you. We have previously submitted a joint statement to the subcommittee, which I shall not read. I should, however, like to summarize our views for you now. In doing so, I would like to draw attention to a footnote that was contained in our submitted state- ment, just to kind of set the stage. It reads as follows: The views expressed herein are the collective views of the conferences. Individual carrier members have, in some instances, commented separately or through organi- PAGENO="0469" 463 zations such as CENSA or CASO. We are aware of no conflicts in positions filed, but point out that the particularized views expressed by individual members of the con- ferences elsewhere should not be considered as being in any respect modified by these comments. That would stand not oniy for our statement, but for the brief summary and answers to any questions at this time. The Far East Conference and the Pacific Westbound Conference represent a very~ significant portion of the ocean liner industry serving the United States. Together, our steamship line members carry the majority of the outbound ocean liner cargo from the United States to the Far East. The basic position of our conferences and their member lines on H.R 4374 is one of enthusiastic support. We are here to express this support and to point out several important areas where we be- lieve H.R. 4374 should be clarified or amplified in order to achieve its goal of providing regulatory relief to the ocean shipping indus- try and clarity to this country's maritime policy. These areas, and the conferences' suggestions, are essentially as follows. The first involves FMC authority over intermodal services to shippers provided by conferences. Over the past two or three decades, conferences have committed enormous amounts of capital and resources to the development of a through, intermodal system of transportation, under which conferences can offer to move cargo for inland shippers under a single, all-inclusive transportation rate from the shipper's place of business directly to foreign markets. This system has been a huge success and has burgeoned in recent years due to the enthusiastic support from inland shippers. Quite recently, the Department of Justice has attacked this system by challenging the authority of the FMC to continue to allow conferences to develop it. The Justice Department's argu- ment is presently being considered by the District of Columbia Cir- cuit Court of Appeals. We believe the Commission's authority to approve intermodal conference ratemaking is essential to the survival of the conference system and the efficient development of this Nation's international transportation system. It therefore is our position that H.R. 4374 should remove the cloud from the long standing and successful de- velopment of conference intermodal service by specifically author- izing the FMC to continue to exercise jurisdiction over these con- ference services. Our second area of concern involves the reestablishment of the burden of proof in FMC proceedings. Section 2 of H.R. 4374 would amend section 15 of the Shipping Act by striking the words, "or to be contrary to the public interest." The laudable purpose of this is to overrule legislatively the Svenska case, which changed the statu- tory burden of proof by shifting it to the conferences seeking ap- proval of their agreements under section 15. An additional goal of this amendment is to remove antitrust con- siderations from FMC approval proceedings under section 15. We are concerned, however, that these goals may not be met simply by the deletion of the public interest language because, as the FMC has pointed out in its testimony on this measure, antitrust-type considerations in FMC proceedings were a factor before the public interest standard was added to section 15 in 1961. PAGENO="0470" 464 Therefore, we suggest that the intent to place the burden of proof on protestants to section 15 agreements and the intent to eliminate antitrust considerations from section 15 proceedings should be made more explicit. Our third area of interest relates to shippers' councils. Here, we are concerned that the authority contained in H.R. 4374 for confer- ences to agree with shippers' councils on general rate levels is a dangerous one, since agreement on specific rates is prohibited. The distinction between "general rate levels" and "specific" rates would remain unclear and presents hazards to all concerned. We therefore suggest that the words "and agree" be deleted from the proposed new section 15(A)(a)(1) of the act. We also suggest that proposed new section 15(A)(c) (6) and (c)(8) be clarified so that indi- vidual shippers are not prevented from entering into dual rate loy- alty contracts simply because they are members of a shippers' council. Our fourth area of concern relates to antitrust immunity. The Justice Department and certain court decisions have steadily whit- tled away at the original antitrust immunity for ocean conferences envisioned by Congress when it enacted the Shipping Act. The result has been a debilitating and confusing atmosphere in which ocean carriers, many of which are foreign flag, are constantly under the threat of antitrust attack when they engage in U.S. for- eign trades. There is the possibility of dual, or inconsistent, regulation under both the shipping and antitrust laws. The result is that the oper- ations of conferences and carriers in our trades is stifled, and desir- able innovations and expansions of service can be frustrated, de- layed or even prevented by the spectre of antitrust penalities. We therefore have suggested language to be added to H.R. 4374 which would restore the antitrust immunity which the Shipping Act was designed to provide. Another area of concern involves freight forwarders. We are con- cerned that the elimination of licensing requirements for freight forwarders will create a chaotic situation for shippers and carriers alike. Many important protections for shippers and carriers con- tained elsewhere in the Shipping Act will become virtually unen- forceable if freight forwarders are not subject to regulation, since the information necessary to enforce these protections, such as an- tirebating rules, simply will not be available in the absence of freight forwarder regulation. Increased bonding requirements are not an adequate substitute for the protection provided by licensing. Finally, there is the matter of tariff filing requirements. We un- derstand that proposals may be made to eliminate tariff publishing requirements. If this were to happen, the antirebating and antidis- crimination provisions which are at the heart of the Shipping Act and transportation law as we know it would become virtual dead letters. H.R. 4374 does not contain a provision that would remove tariff filing requirements, but we have been extremely concerned that such an idea might even be suggested. For that reason, we must note our strong position that the tariff filing requirements must be retained. PAGENO="0471" 465 In conclusion, the Pacific Westbound Conference and the Far East Conference strongly support H.R. 4374, and believe that our proposed modifications would make a good bill even better. Thank you. Mr. BIAGGI. Mr. Flynn? Mr. FLYNN. I have no comments at this time. Mr. BIAGGI. I note you were present while the previous panel tes- tified. Would you care to comment upon some of the statements made by those witnesses? Mr. DAY. I think there are a number of them that I could com- ment on. Mr. BIAGGI. Well, let us go. Mr. DAY. OK. On the intermodal jurisdiction, as far as going counter to the ICC deregulatory measures that have taken place, I see no conflict; I see no problem. The inland charges that would be made under a deregulated program are charges which become ocean carrier costs, in effect, for performing a through service, point-to-point. To that extent, these costs are borne by the shippers and they must account for them in the overall through rate. So, from that standpoint, I see no conflict. I also have to agree with Mr. Sher that as far as I know, and I am in constant contact with shippers in our trades, I know of none who have expressed any particular problem with that. I would endorse the statement that the only people who seem to have a problem with this is the Department of Justice. I would refer to some of my associates here to present some other views. Mr. FLYNN. On that same line, Mr. Chairman, my contact with shippers both verbally and in writing has given an impression of strong support for the antitrust immunity to be granted by FMC control over intermodal ratemaking. I have heard from no shippers at all, directly or indirectly, opposing that idea being espoused. With regard to the tariff filing question which seems to keep pop- ping up, it is our view that the filing of tariffs tends to allow for a degree of stability of pricing by the carriers, and allows the mer- chant the opportunity to forward-price his product in his export or import sales. Absent the assurance of forward prices on transporta- tion cost, which is a big factor in merchandising, both export and import, the merchant is in a very difficult position in being able to conduct sales both abroad and to buy here. My experience over the years has shown, as one of the previous witnesses has testified, that the importers and exporters both are seriously interested and concerned with stability of rates. The level of rates obviously is a factor with which they are concerned, but the stability of the rate structure is of serious concern to them, so that they will be in a position to sensibly and, hopefully, successful- ly market their products abroad and buy in this country as well. Thank you, Mr. Chairman. Mr. SHER. Mr. Chairman, I would like to comment on two points that came up previously. The first one is on this intermodal ques- tion, as to whether it interferes with or would impact on the ICC. I think that to some extent, there are various, different aspects of this intermodalism, and sometimes I think we speak about it too PAGENO="0472" 466 generally. And I think it confuses the issue and makes it very, very difficult to understand what we are talking about. There are three aspects of this. The first one is the most impor- tant to the ocean carriers, and that is the issue that the ocean car- riers and the conferences are most interested in, when you talk about intermodalism, is reaching agreements among themselves, solely among the ocean carriers, on the inland portion of the voyage-on the inland portion, just among the ocean carriers. This is going on now in Europe; it has nothing whatsoever to do with the inland carriers. This is the most important aspect; this is what is at issue in the court of appeals en banc case which is to be argued on December 10. It does not impact on the ICC; as a matter of fact, it does not even affect the ICC carriers directly. The ICC carriers are not in- volved in this at all. That is the most important distinction, I think, to keep in mind. We are talking about a rate that the ocean carriers want to offer to the shipping public-a uniform rate-and it covers an inland portion. It has nothing to do with the ICC and it has nothing to do with inland carriers. If you take intermodalism one step further and you say that we want the ocean conferences to get together and meet with the inland carriers-either a single inland carrier or a group of inland carriers-then you do get into a more difficult area, and particular- ly on the third level because at that point, you have inland carriers sitting in the same room with the ocean carriers and agreeing on a unified rate. But that is not the essence of what we are asking, and I think the different aspects of intermodalism get confused and I think it is important to keep them distinct. We are mainly requesting that the ocean carriers themselves be permitted to agree on the inland portion. We are not necessarily concerned with the second and third level, which is more the ICC's business. That is not I think what is generally being requested. I think it is important to keep that in mind. It is very technical, and in doing the drafting I think it is important to keep it in mind. The second point I would like to make, to go back to a favorite subject-the antitrust laws-I think that it is very important for the committee to consider the expansion of the bill to exclude the antitrust laws from the shipping business completely, and I say that for two reasons. The antitrust laws, as they exist now in the backdrop of the shipping industry, are really unwise and they are also unfair. They are unwise because in our experience, we have never seen, I think, in international affairs on a matter of this nature-legal matter-the animosity and the hostility that has developed. Last year, the United Kingdom passed a specific law aimed at U.S. anti- trust laws. Last year, New Zealand passed a law aimed specifically at U.S. antitrust. Australia is considering a law. It has created so much unnecessary friction, and these are specifically trading cases with our trading partners. Not only is it unwise, but it is really unfair. I would like to take a minute to explain that if you have a conference that inadvertent- ly oversteps its antitrust immunity and agrees on something that is PAGENO="0473" 467 not authorized, these are the following results, and this is for any kind of overstepping of your antitrust authority. The Maritime Commission can penalize the conference up to $1,000 a day for each carrier. The Maritime Commission can then disapprove the agreement. The Department of Justice can seek a criminal indictment, which would possibly carry with it penalties of up to $1 million for a company, $100,000 for an individual, and jail sentences of up to 3 years. After that, the Department of Jus- tice is still permitted to seek an injunction against the conduct. When all of that is finished, you are then faced with a treble damage suit, plus attorneys' fees and costs-all of this for the same conduct. That is simply unfair, and a bill that would eliminate the antitrust exposure would eliminate that unfairness. I want to again emphasize that we are not saying that we want to be exempted from any kind of remedy or any kind of legal stric- tures. We are not saying that. What we are saying is one system is enough. Thank you. Mr. BIAGGI. Are you in favor of the proposed amendment to sec- tion 15 that would require conference agreements to provide an op- portunity for membership in those conferences for at least one U.S.-flag carrier? Mr. SHER. Well, on the question of closed conferences, Mr. Chair- man, we have not taken a position. We have a mixed membership, and I suspect they may disagree on this point. My personal view, for what it is worth, is that I think it is something that really has to be given some very careful thought. There is an implication in the bill that there is a quota for one U.S.-flag carrier, and I frankly, as a lawyer representing confer- ences, would not want to be in a posture, if two American-flag car- riers applied to a conference, of giving a legal opinion as to wheth- er only one were required, and if so, which one. Mr. BIAGGI. All right. Let us just eliminate one of your concerns. Instead of saying "one," let us use the term "any U.S.-flag carrier," which could imply more than one? Do you have a problem with permitting a U.S.-flag into the conference? Mr. SHER. Well, I have a problem when you set up the U.S.-flag as a special situation where they must be given preference. On the other hand, I have an equal problem with saying you can exclude the U.S.-flag, and I do not have an answer for it. Mr. BIAGGI. I think it is worthy of some continued thought. Mr. SHER. Absolutely. It is a very difficult problem because, as I say, I do not think you can exclude U.S.-flag carriers from a U.S. conference. On the other hand, it does trouble me to give the U.S.- flag carriers a special preference or a special situation. Mr. BIAGGI. Right. Mr. SHER. I am not sure how to resolve that. Mr. BIAGGI. Mr. Day, would you care to comment on that? Mr. DAY. I would echo, to this extent, Mr. Sher's comments, that our conferences really have not developed a position on this. Again, a personal opinion; I would tend to go along with the comments made by Mr. Breed of United States Lines on the previous panel as far as open and closed conferences are concerned. PAGENO="0474" 468 Open conferences have operated with reasonable success in these trades. A closed conference, without the other tools with which to operate, is not going to be effective in the job that it is intended to do. Mr. BIAGGI. Yes. Can I extrapolate from what you have said that the optimum situation would be dealing with the antitrust con- cerns and retaining an open conference? Mr. DAY. I think those things are compatible, if I understand your question. Mr. BIAGGI. Right. Mr. DAY. Obviously, under the systems that are used elsewhere in the world where there are closed conferences, we see a situation where they also, as pointed out by Mr. Breed, have the other tools to operate with-for example, strong tying arrangements with the shipper; they have the ability to use what would otherwise be con- sidered highly questionable tools from an ethical standpoint. But, nevertheless, they are used, and I refer there to the concept of a fighting ship. These things make it a strong system. The interesting thing from an historical standpoint is that these people have been in operation for years and years and years, with a very strong system. Shippers still exist, they still move cargo, and it seems to be a very efficient system. As a matter of fact, oftentimes shippers' in their requests for rate adjustments to our conferences, will refer to competitive rates from Europe to the Far East as being a problem for them in selling their goods. And it seems to me that the use of rationalization plans, and so forth, that can be used by these people have been used to make the transportation system more efficient and less costly to the shippers. Mr. BIAGGI. Do you have any comment, Mr. Flynn? Mr. FLYNN. Yes, Mr. Chairman. I think the whole concept of closed conferences is one that requires a great deal of study and education on behalf of most of us. It is a European-type of oper- ation. We know some of the alleged benefits of it, as opposed to the open conference system that exists in this country. But the idea, at least it strikes me off the top of my head, of closed conferences in this country, under present statutes and with- out the strong tying devices with the merchants that obtain in the European trade, would be a fruitless exercise at this point in time. Mr. BIAGGI. Mr. Snyder? Mr. SNYDER. Mr. Chairman, I want to apologize for not being here for the previous panel and for this panel's testimony. I was at another committee where we were having a mark-up. We had to keep a quorum there to forge some legislation; you know how that goes. We do have questions, Mr. Chairman, both for the first panel and for this panel, which I would ask unanimous consent that we be permitted to submit to the panels for them to respond for the record. Mr. BIAGGI. Without objection, so ordered. Thank you very much, gentlemen, for your testimony and contri- bution. Mr. SHER. Thank you. [The following was received for the record:] PAGENO="0475" 469 BILLIG, SUER & JONES, P. C. WASHINGTON, D.C. 20006 CASLE BISJO DOEOTL.CAOLS December 18, 1981 Honorable Gene Snyder Ranking Minority Member Committee on Merchant Marine and Fisheries United States House of Representatives Washington, B. C. 20515 Dear Mr. Snyder: Enclosed for the consideration of the Committee are the re- sponses to the six questions forwarded to me by your letter of No- vember 12. As you are aware, the statement which I presented to the Committee on behalf of 15 conferences on November 5 focused on three priority issues - the need for : (1) broad antitrust immunity; (2) clear intermodal authority; and (3) streamlining of FMC pro- cesses. As your questions are beyond the scope of the statement and the conferences we represent have diverse memberships and views, I cannot state with certainty that the responses to the questions represent their positions; thus, these responses must be considered my personal views. In closing, I thank you for your interest in these matters, and I look forward to continuing to work with the Committee on maritime regulatory reform legislation. Please advise if I can be of further assistance. Sin,~4, ~ Stanley 0. Sher Enclosures cc: w/encl. Hon. Walter B. Jones Hon. Mario Biaggi Hon. Paul N. McCloskey, Jr. NOTE: Billig, Sher & Jones, P.C. has registered with the Depart- ment of Justice pursuant to the Foreign Agents Registration Act on Behalf of the Conferences and Rate Agreements listed on the state- ment submitted to the Committee on November 5, 1981. PAGENO="0476" 470 QUESTIONS OF MR. SNYDER AND ANSWERED BY MR. SHER Question 1. The membership in the ocean which you represent is comprised pri- marily of foreign-flag carriers. Is that correct? Response. In most (but not all) of the fifteen conferences listed on the statement presented to the Committee on November 5, a majority of the members are foreign- flag carriers. Question 2. Who are the usual high cost operators in your conference? Who are the lowest cost operators? Response. While the ocean liner shipping industry and the conference system is a cooperative one, that cooperation does not extend to the sharing of data among members with respect to costs. Thus, I am unable to indicate which members of the conferences we represent could be characterized as relatively "high" or "low" cost operators. Further, I believe that recent changes in the economics of liner shipping have drastically altered the importance of various components of any operator's costs, whether the operator is foreign-flag or American-flag, making it more difficult to speculate on relative carrier costs. Question 3. Given that cartels fix their rate at a level high enough to meet the needs of the highest cost member, then are the lower cost, foreign-flag operators the ones who would receive the greatest benefit from a cartel? Response. While I do not disagree with the proposition that a true "cartel" adopts pricing policies that meet the needs of all of its members, I want to emphasize that ocean liner shipping conferences are not cartels. Further, I do not believe that lower cost operators would necessarily receive the greatest benefit from participation in a cartel. First, competitive forces, not member costs, are frequently the dominant factor in ocean carrier pricing decisions. Conferences are not cartels. They compete with inde- pendent carriers and, due to the possibility of different land routings, they also com- pete with different conferences. In a few instances, they may even compete with other transportation modes. Second, I think it important to recognize that conference members are in competi- tion with each other. That conference members have agreed upon a rate does not eliminate other aspects of competition between those carriers. Therefore, I disagree strongly with any suggestion that lower cost carriers necessarily benefit the most from conference rate agreements. Carriers still compete on service-frequency of sailings, capacity, loading/unloading time, etc.-and aggressively market their indi- vidual competitive advantages. Thus, if one assumes that Carrier A has significantly higher costs than Carrier B, Carrier A could still provide better service and market its services more effectively than Carrier B, thereby obtaining the higher load fac- tors needed to achieve greater profitability. Finally, even assuming arguendo that lower cost operators (whether foreign or U.S. flag) earn the highest profits in a conference system, this does not, in my view, mean that they receive a greater benefit than the high cost operators. Indeed, if there were no conference system one might contend that many high cost operators would be forced out of business. In fact, this is one of the concerns which prompted Congress to enact the Shipping Act of 1916, thereby authorizing conferences which provide the shipping public with the benefits of a cooperative system. Question 4. Do you believe that the conference system in the U.S. should remain open or be closed? Why? Response. Collectively, the 15 conferences do not offer a view on the desirability of open versus closed conferences. However, I suggest that resolution of that issue may not be nearly as significant as is generally believed. In particular, it is important to recognize that a closed conference is not necessar- ily a rationalized or strong conference. On the other hand, an open conference is not necessarily a weak conference. What is important is that a conference be able to achieve its objectives by imple- menting measures to promote efficiency, such as pooling, rationalization, and inter- modal agreements. We noted in our statement that the main issue facing the Con- gress in maritime legislation is whether the regulatory system should promote coop- eration or competition. We believe strongly that the public interest will be served by a system that maximizes the freedom of commercial interests to choose cooperative business practices. Such a system requires antitrust immunity, intermodal authority for conferences, and prompt FMC procedures. I do not see that closed conferences are necessarily an essential part of a cooperative system, and believe that rationali- zation and cooperative agreements may be pursued under either an open or closed conference system if needed antitrust, intermodal, and FMC process reforms are en- acted. PAGENO="0477" 471 Question 5. How much cargo does your conference move westbound out of U.S. ports that originates in Canada? Response. The 15 conferences which submitted the statement to the subcommittee serve only Atlantic and Gulf ports. These include both inbound and outbound con- ferences. All but one of the outbound conferences moves traffic eastbound, across the Atlantic. While the U.S. Atlantic and Gulf/Australia-New Zealand Conference moves traffic from Atlantic and Gulf Ports to Australia and New Zealand, this is generally not referred to as "westbound" traffic. However, to the extent that this traffic is of concern to the Committee, I am unaware of the extent to which any of the cargo of this conference originates in Canada. Question 6. The concern has been expressed that by eliminating tariff filing, the Shipping Act of 1916 would become a virtual dead letter. Is that how you would de- scribe the U.S-foreign commerce prior to 1961 (the year in which tariff filing became a statutory requirement)? Response. I believe that tariff filing requirements do further many of the goals of the Shipping Act and, at this time, I am not convinced that any paperwork reduc- tion benefit which may result would offset other, detrimental, results of the elimina- tion of tariff filing. As has been noted by other witnesses, without tariff filing, it would become extremely difficult, if not impossible, to enforce the Shipping Act's prohibitions against rate discrimination and rebating. Moreover, even without a statutory tariff filing requirement, conferences would almost certainly publish rates. Quite simply, as agreements between parties are gen- erally reduced to writing, I would expect that conference rates would generally be published. On the other hand, while independent carriers may choose to publish their rates, they would not have the same incentive or necessity to do so as would conference carriers. Thus, the abolition of tariff-filing could place conference mem- bers at a competitive disadvantage to independent carriers, which would be incon- sistent with H.R. 4374's general intent to strengthen conferences and secure the benefits of a cooperative system of ocean liner shipping. QUESTIONS OF MR. SNYDER AND ANSWERS BY MR. DAY AND MR. FLYNN Question 1. The membership in the ocean conference which you represent is com- prised primarily of foreign-flag carriers. Is that correct? Answer. Yes, it is true that most of the members of the Pacific Westbound Confer- ence ("PWC") and the Far East Conference ("FEC") are not U.S-flag carriers. We hasten to add, however, that U.S-flag carriers play a very substantial role in both the PWC and the FEC. For instance, in the PWC roughly 39 percent of the total tonnage handled by the conference in the first eight months of 1981 was carried by the U.S-flag members. In addition, the U.S-flag lines often take the lead in shaping conference decisions because of their close ties to the ocean trades of the United States. For these reasons, it would be easy to underestimate the role of the U.S-flag car- riers in our conferences if one focused solely upon the number of U.S-flag members in each conference. Questions 2 and 3. Who are the usual high cost operators in your conference? Who are the lowest cost operators? Given that cartels fix their rates at a level high enough to meet the needs of the highest cost member, then are the lower cost, for- eign flag operators the ones who wpuld receive the greatest benefit from a cartel? Answer. It seems to us that Questions 2 and 3 are both part of the same inquiry, which is whether conferences represent an inefficient system in which rates are set at artificially high levels in order to meet the needs of high cost operators. The answer to this inquiry is an emphatic "no", for the reasons we will discuss below. Our conferences have no real way of knowing who the "high cost operators" are, because cost information simply is not exchanged or discussed at the conferences. Conferences meet principally to agree upon rates and related practices, and these determinations turn on market and competitive factors faced by the conference as a whole, and not upon the cost figures of individual conference members. There are several reasons why costs are not the most significant factor in confer- ence ratemaking. First, the conferences do not have nearly the share of the trade necessary to set rates at any level they choose. If reference to our conferences as "cartels" is intended to suggest that we can control competition and set rates at any level we choose, the reference is incorrect. Conferences such as the Pacific West- bound Conference and the Far East Conference are faced with substantial non-con- PAGENO="0478" 472 ference competition,1 and must constantly adjust their rates to meet that competi- tion. Second, as is apparent from a review of our tariffs, rates are set according to value of service pricing concepts. Even if we were to speculate as to who the "high cost operators" in the PWC and FEC are, there would be no clear answer. When you speak of a "high cost operator", we assume that you mean an operator with a high cost per ton of cargo. It is true that some carriers have higher crew costs, and that carriers (such as U.S., European and Japanese operators) with modern containerized vessels have high vessel and equipment costs. It also is true, however, that less modern foreign-flag operators (those with breakbulk service) generally are less efficient and handle a much lower volume of cargo with the same amount of labor. Furthermore, the larger carriers (which includes some U.S-flag carriers) can reduce their inland transportation costs on through movements because of the amount of traffic they control, and can real- ize other economies of scale. Another factor making it unclear who the "high cost" per ton operators are at any given time is currency exchange fluctuation. Foreign- flag operators whose costs might otherwise be lower are confronted with foreign cur- rency revenue needs to a greater degree than U.S-flag carriers. This means that if there is a depreciation in the foreign currency value of their U.S. dollar-based rev- enues, they will quickly become higher cost operators. For these reasons, we do not think that it is safe to assume that U.S-flag operators are inefficient or high cost operators. It certainly is incorrect to assume that conference rates are kept at an artificially high level for the benefit of "high cost operators", whoever they are. This assumes that increased conference rates will result in higher revenues, while in fact they may result in lowei cargo volumes and therefore lower revenues. If the PWC or the FEC raise the rate on a particular commodity, they are faced with the prospect that non-conference competitors will offer a lower rate, with the result that the confer- ence members lose the cargo entirely. Similarly, if the PWC or the FEC raise freight rates to Japan for a commodity that must compete in the Japanese market with a similar product moving from Europe to Japan, they must worry about the possibility that the increased transportation costs of the U.S. to Japan commodity will price it out of the Japanese market, with the result that they lose the cargo entirely. There are many other reasons why standard U.S. antitrust rubric applicable to "cartels" does not fit the economic reality of the international ocean liner industry. We do not pretend to address all those reasons in this letter. Instead, we commend to the Committee's attention a recent work published by the Columbia University Graduate School of Business, entitled "Liner Conferences in the Container Age", authored by Professors Gunnar Sletmo and Ernest Williams. This book explains in much greater detail than this letter could the economic realities of the ocean liner industry, and the desirability of a strong conference system. Perhaps the most compelling refutation of the assumption that some conference members are high cost per ton operators and that conference rates are kept artifi- cially high for their benefit lies in the recent history of the industry. If conferences were safe havens from the rigors of competition in which inefficient or high cost carriers could hide with the assurance that their revenue needs would be met through high rates, then the Pacific Far East Line and States Line bankruptcies never would have occurred. Nor would foreign-flag carriers such as Seatrain or Phoenix have suffered their financial woes. It is difficult to say who receives the greatest benefit from the conference system. All conference members (and the shipping public) benefit from rate stability and service regularity. To the extent that some operators have lower total costs per ton than others, they obviously will receive a higher contribution to profit (in terms of U.S. dollars per ton) than other operators. But they will be giving up a stronger temptation to undercut the conference rate in order to secure additional cargo. One thing is clear, and that is that if conference ratemaking were eliminated, a rate war and long-term destabilization would ensue which would be harmful to everyone, and would result in unproductive, destructive cutthroat competition. 1 Independent carriers (common, contract and proprietary) in the westbound transpacific trade include: Yang Ming Line, Neptune Orient Line, Hapag Lloyd, Korea Shipping Corp., Hanjin Container Line, Evergreen Line, Hong Kong Islands Line, Star Shipping, China Ocean Shipping Co., Fesco Lines, S.C.I. Line, Lykes Lines, Wallenius Line, Weyerhaeuser Co., Seaboard Ship- ping, Salen Line, Reefer Express, Gear Bulk, and NOSAC. Independent all-water liner carriers in the Far East Conference trade include: Yang Ming Line, OOCL/Seapac, Zim Container Serv- ice, Evergreen Line, Korea Shipping Corp., Lykes Lines, and Jing Yang. PAGENO="0479" 473 Question 4. Do you believe that the conference system in the U.S. should remain open or be closed? Why? Answer. It would appear that, under the legal and regulatory framework which presently exists in the U.S. trades, conferences should remain open. Under present circumstances, the conferences cannot secure effective shipper loyalty contracts be- cause of mandatory loopholes such as the "right of control" clause. This and other competitive constraints peculiar to the U.S. trades make it impossible for the confer- ences to protect themselves against the "skimming" of desirable (high value) car- goes by non-conference operators. We do not mean to suggest that the PWC and the FEC are unalterably opposed, under any circumstances, to a closed conference system. It is our strong belief that whether conferences are to be open or closed should be decided by the conferences themselves based on their independent judgment on the competitive situation of the trade concerned. Question 5. How much cargo does your conference move westbound out of U.S. ports that originates in Canada? Answer. The Far East Conference does not have any records reflecting the amount of cargo handled by its members that had a Canadian origin point because Canada is outside the scope of the Far East Conference. The Pacific Westbound Con- ference has figures indicating that, of the approximately 3,223,450 conference reve- nue tons moving via U.S. West Coast ports in the first eight months of 1981, only about 70,000 revenue tons had Canadian origin points. This figure is an estimate based upon the best statistics available. Question 6. The concern has been expressed that by eliminating tariff filing, the Shipping Act of 1916 would become a virtual dead letter. Is that how you would de- scribe the U.S.-foreign commerce prior to 1961 (the year in which tariff filing became a statutory requirement)? Answer. The concern expressed in our testimony about the impact of eliminating tariff filing requirements is justified. Tariff filing, in one form or another, has been in existence since the inception of the Shipping Act; it was not a novel requirement first introduced in 1961. In a 1927 report, the Commission noted that twenty of the forty-three conferences under investigation furnished tariffs to the Commission. Ex Parte 4, 1 U.S.S.B. 121, 123 (1927). Tariff filing did not become a requirement until 1935, when the Commission's predecessor found it necessary in order to prevent the very abuses about which we have expressed concern in our testimony. In 1935, the Commission's predecessor in- voked its powers under section 19 of the Merchant Marine Act of 1920 to require every carrier of export cargo (except bulk cargo) to file tariffs within thirty days after they became effective, and later made a similar requirement for all confer- ences in the import trade.Investigation-Section 111 of the Merchant Marine Act, 1920, 1 U.S.S.B.B. 470, 502 (1935). The Commission's practice between 1935 and 1961 was summarized by the 1959 testimony of former Chairman Clarence Morse before the Celler Committee: "[O]utbound conferences and nonconference berth services, and inbound confer- ences, [were] required to file their rates 30 days after their effective date. Independ- ent berth services in the trades inbound to the United States [were] not required to file their tariffs. This requirement [was] not statutory but administrative, and was imposed pursuant to section 19, Merchant Marine Act, 1920, Docket 128, Sec. 19 In- vestigation, (1 U.S.S.B. 470 (1935))." [Monopoly Problems in Regulated Industries: Hearings Before the Antitrust Subcommittee of the House Committee on the Judici- ary, 86th Cong., 1st Sess. 172 (Part 1, Vol. 1) (1959) (statement of Clarence G. Morse, Chairman, Federal Maritime Board and Maritime Administrator, hereinafter "Morse Statement").] The reason for implementing this requirement was that, in its absence, carriers (particularly non-conference carriers) could charge whatever they pleased to ship- pers, and do whatever they considered necessary on a case-by-case basis to secure cargo. This means both destabilization of trade and unfairness to shippers: "Both carriers and shippers testified that `cut rates' have not increased the total volume of our export commerce. Indeed, it was testified by several shippers that in some cases the cutting of rates has decreased the export movement because of the instability which resulted. Stability of rates and services is of vital importance to exporters in making quotations for our export markets, and both shippers and carri- ers pointed out that in most cases exporters from foreign countries competing in for- eign markets against our exporters enjoy this much needed stability because of the conferences functioning in those trades. The use of these cut-rate methods prevents stability. Furthermore, their effect is cumulative, and sooner or later they result in PAGENO="0480" 474 complete demoralization of shipping conditions in the trades in which they are used." [Investigation-Section 19 of the Merchant Marine Act, at 491.] The Commission's predecessor, in requiring tariff filing in export trades in order to protect American shippers, recognized the close connection between the antidis- crimination provisions of the Shipping Act (such as sections 16 and 17) and the tariff filing requirement: "These provisions of law place an obligation on every common carrier by water in foreign commerce to make its rates public and available on equal terms to all ship- pers * * "There is clearly much need for stability in rates and shipping conditions in our foreign trade and for more adequate machinery to aid in enforcing the various regu- latory provisions of the 1916 act * * ~. [T]he following [tariff filing] rules * * * should, to a large extent, adjust or meet conditions herein found to be unfavorable to shipping." [Id. at 502.] [Emphasis supplied.] In Isbrandtsen-Moller Co. v. United States, 300 U.S. 139, 144-45 (1937), the Su- preme Court upheld the determination of the Commission's predecessor that the tariff filing information was required to enable it to perform its functions, which included administering the Shipping Act's provisions forbidding allowance of re- bates, preventing undue or unreasonable preferences, and prohibiting unjust dis- crimination between shippers or ports. In addition to protecting shippers from unfair treatment, tariff filing require- ments are necessary to prevent trade instability. In the absence of a tariff filing re- quirement, conferences can find it impossible to detect and meet short-term induce- ments offered by non-conference carriers. If this occurs, the non-conference carriers can deprive the conferences of so much cargo that their member lines can no longer afford to offer regular service and stable rates, and the stability of the trade itself suffers. This was dramatically demonstrated in Rates, Charges and Practices of Ya- mashita and 0.5K., 2 U.S.M.C. 14 (1939), where the Commission found that unsta- ble conditions in the trade between the east coast of South America and U.S. Pacific Coast ports made it necessary to invoke its powers under section 19 of the Merchant Marine Act of 1920 and to order all carriers (not just conferences) to file their in- bound rates with the Commission in order to stabilize the trade. While the tariff filing requirements instituted in 1935 went a long way toward protecting shippers from unjust discrimination, and protecting carriers against unfair competition (in the form of "rate cutting," i.e., quoting rates at a given per- centage below whatever a competitor's rate is), they did not solve the whole prob- lem. In 1959, former Chairman Morse explained why advance filings, and manda- tory adherence to tariffs, are so necessary for the protection of shippers and the ef- fective enforcement of the Shipping Act's provisions: "A number of complaints have been made from time to time to the Board by ship- pers, many of them located at inland points, asserting that the conduct of their busi- ness would be facilitated by a greater familiarity with freight rates and tariff struc- tures and the opportunity to anticipate shipping costs with more certainty. Shippers are entitled to know that they are being correctly charged, and what their competi- tors are paying* * "At present, a shipper is entitled to recover damages only if he is able to prove (1) that he has been charged a rate higher than that charged a competitive shipper, and (2) the discrimination has resulted in actual loss to the complaining shipper. Thus, a shipper is without recourse even where a carrier charges him a rate much higher than the tariff rate, unless that shipper can show that a competitive shipper was charged a lower rate at the same time. This is always difficult, and often im- possible, for a shipper to prove * * "Even in cases where only one shipper is involved-i.e., where there is no element of discrimination as between competitive shippers-we suggest that all carriers should be required to charge no more and no less than the tariff rate. A shipper bargains and sells his merchandise in reliance upon what he understands to be the cost of delivering that merchandise to the buyer, and carriers ought not be free to depart from the currently effective rate without being liable for doing so." [Morse Statement at 173 (emphasis supplied).] The shortcomings of the after-the-fact, or "informational", filings that were re- quired prior to the 1961 amendments to the Shipping Act were chronicled in the highly critical report of the Celler Committee, Report of the Antitrust Subcommittee of the House Committee on the Judiciary Pursuant to H. Res. 56, 87th Cong., 2d Sess 328 (1962): "At the time of this subcommittee's hearings, however [i.e., before 1961], there ex- isted no advance rate filing requirements with respect to carriers engaged in the foreign trade of the United States. The absence of any such mandate for prior advice PAGENO="0481" 475 of rate changes along our foreign trade routes tended to defeat one of the most impor- tant justifications for the existence of steamship conferences, namely, the stabiliza- tion of rates. For as Chairman Morse pointed out to the subcommittee: `Such post facto filing makes it difficult for shippers and for the Board to know at any given time what rates are applicable, for the conference is free to change its rates from day to day, so long as it remembers within 30 days after each change to amend its tariff.' "Furthermore, the fact that conferences and their members were not required to adhere to the rates appearing in their tariffs under most circumstances frustrated the very purpose of all the elaborate machinery established for compulsory filing of tariff schedules with the Board." [Emphasis supplied, footnotes deleted.] In sum, the concerns that led to the development and refinement of the tariff filing requirement over the past fifty years are the following: 1. In the absence of advance tariff filing requirements, shippers will be unable to plan their marketing strategy in foreign countries. 2. Carriers will be in a position to discriminate in favor of preferred shippers at the expense of their competitors, since they can change rates back and forth with- out notice in the absence of advance tariff filing requirements. Moreover, shippers (and the FMC) will be hard-pressed to prove that discriminations or rebates have occurred, since no rates would be on file to which they could refer absent a tariff filing requirement. 3. Non-conference carriers will obtain an unfair competitive advantage. Confer- ences (by the terms of their agreements) are required to adhere to the rates estab- lished by the conference unless otherwise agreed. In the absence of tariff filing re- quirements, non-conference competitors can engage in selective rate-cutting without the knowledge of the conference. The conference will be powerless to meet this com- petition without disbanding, and the rate stability brought by the conference system will be lost. We strongly believe that these factors are very much alive today, and that they continue to necessitate the tariff filing requirements contained in the Shipping Act. In the absence of these requirements, we believe that the Shipping Act's anti-rebat- ing and antidiscrimination provisions would become a mockery, and that invisible rate-cutting would make a shambles of the conference system. For these reasons, the Pacific Westbound Conference and the Far East Conference oppose the elimina- tion of the tariff filing requirements of the Shipping Act. Mr. BIAGGI. Mr. Richard A. French, manager of Water and Air Transportation, Procter & Gamble Manufacturing Co. STATEMENT OF RICHARD A. FRENCH, MANAGER, WATER AND AIR TRANSPORTATION, PROCTER & GAMBLE CO., WASHING- TON, D. C. Mr. FRENCH. Mr. Chairman, members of the subcommittee, my name is Richard A. French. I am manager of the Water and Air Transportation Section of the Procter & Gamble Co. My organiza- tion is responsible for carrier service and rate development and all regulatory and legislative matters concerning these modes for all of our subsidiaries in their cargo movements to and from the United States. The Procter & Gamble Co. recognizes the need for a strong U.S. merchant marine. Of our 1980 ocean cargo freight expenditure, which exceeded $80 million, about 41 percent of it was paid to U.S.- flag cargo liner carriers. This figure includes our freight payments for movements to Hawaii and Puerto Rico. It is our hope that changes to our laws which are designed to aid our merchant marine will enable them to improve their competi- tive position and assist us in our continuing export growth. Howev- er, we do not believe that regulatory changes alone can provide adequate assistance. To simply legislate power to cartels, called conferences, in which U.S.-flag carriers continue to have economic disadvantages is most g~-856 0 - 82 - 31 PAGENO="0482" 476 likely to give the greatest assistance to foreign-flag conference car- riers, sustain a relatively weak economic situation for U.S.-flag car- riers, reduce the volume of U.S. exports, and ultimately lead to the end of a commercially viable U.S. merchant marine in cargo liner service. Most conference and independent foreign-flag carriers enjoy low- cost and frequently subsidized shipbuilding. They enjoy tax exemp- tion on earnings, accelerated depreciation on vessels, and other eco- nomic benefits. U.S. carriers enjoy very little of these types of bene- fits. Conferences, open or closed, must respond to lower-cost, inde- pendent carriers nurtured by our own open-port policy. These con- ditions, combined with the fact that U.S. carriers do not represent the majority in any conference, place the U.S-flag carriers in a sit- uation where they are unable to obtain their economic needs. If the conferences were to raise rates to meet the needs of the high cost of U.S.-flags, then the foreign flags would receive the greatest benefit. Long term, the higher cost would diminish the U.S. shipper's ability to be competitive in foreign markets, the volume would decrease, and the problem of financing our merchant marine would return. The assistance required to enable our merchant marine to com- pete in international commerce must come from all Americans. We encourage Congress to give greater attention to legislation such as H.R. 4236 which would provide our American-flag carriers with as- sistance through tax relief-for example, through further improved investment tax credits or through reduced earning taxes. The recent tax law which reduced depreciation allowances from 14.5 years to 5 years should help. Mr. Chairman, although it is not in my written testimony, I would like to expand on this point. In your October 6 opening statement, you said that 10 U.S.-flag liner companies have gone bankrupt in as many years. Clearly, they are no longer paying taxes. We would like to be able to state just how much tax relief our carriers need. However, we have absolutely no access to steamship line costs. We do have knowledge of the conditions that make it im- possible for U.S. carriers to compete. The economic environment in the international trade lanes is heavily impacted by the precedents set by other nations in their assistance to their national flag mer- chant marine in the form of tax relief. Our merchant marine needs tax relief to offset that granted by other governments to their carriers competing with our merchant marine. They need tax relief to offset flag of convenience registries made by carriers to avoid taxes, and they need tax relief to offset low-paid crews of foreign flag competitors. Returning to my written testimony, as previously stated if our merchant marine is lost, so are the taxes. Therefore, we are giving up very little to assist our carriers through tax incentives. A strong merchant marine paying no taxes would be commercially sus- tained. If the merchant marine fails commercially, it will become a burden under our defense budget. If the only attempt to assist our merchant marine is through changes in regulation, particularly the creation of absolute cartels, PAGENO="0483" 477 the entire burden of cost will be placed on U.S. exporters, which consist of less than 10 percent of all U.S. manufacturers. Again, Mr. Chairman, I wish to make some comments beyond the written testimony. We do not agree with those who contend that shippers will not experience dramatic rate increases because of the improved utilization that closed conferences would manage. Our experience is that in periods of heavy demand, the confer- ences take uninhibited action to dramatically increase rates. They cease to respond to shippers' requests for moderation in rate in- creases. In periods of high demand, seasonal or business-cycle-relat- ed, the conferences do not respond where additional capacity is needed. They prefer to select high-rated cargo, which leaves lower rated cargoes to be unreasonably delayed or the shipper's sale lost. Cartels obtain maximum profits in their existing investment. They have no incentive for efficiency and growth within their market. Many of their cartel members, current and future, are na- tional lines whose motive to earn foreign currency encourages them to obtain rates above reasonable profit levels, particularly when they may control 40 to 50 percent of the cargo by a bilateral maritime agreement or through their government-controlled car- goes. Therefore, we need U.S.-flag carriers whose costs do not exceed their competitors' costs. We need several U.S.-flag carriers in each conference to influence rates which can enable U.S. shippers to expand their commerce and to improve capacity utilization in trades, not the reverse of reducing service and further limiting trade. Returning to my written testimony, our merchant marine's cost relative to other nations' must be improved so that they can take a leadership role on behalf of the American shippers. With a more cost-competitive merchant marine, we can feel confident in the benefit that would be provided by our merchant marine by some of the changes to the Shipping Act of 1916 proposed in H.R. 4374. We believe that the original concept of a limited conference system of liner carriers intended in the Shipping Act of 1916 should be enforced. We strongly support section 2, subparagraphs (5) and (6), which would establish the primacy of the Federal Mari- time Commission-that is, clearly establish carrier antitrust immu- nity-and also place the burden of proof that carrier agreements are in violation of the act upon the complainant. We believe that conferences should remain open. As we have al- ready pointed out, no conference has a majority of U.S.-flag carri- ers. Today we have a total of only nine U.S.-flag liner carriers. A guarantee of the entry of one U.S-flag carrier in each conference, as proposed in section 2, subpart (4), falls far short of the need for the opportunity for several U.S.-flag carriers to be developed. An open conference system would allow this development. Closed con- ferences are the tools of foreign governments who are currently ex- cluding U.S. carriers from cross-trading. Open conferences have, since 1916, had the authority to use an effective list of anticompetitive devices. The list is found in the first paragraph of section 15 of the Shipping Act. Conferences of carriers may discuss, fix, regulate and agree upon rates; pool or apportion earnings, losses or traffic; allot ports; regu- PAGENO="0484" 478 late the number and character of the sailings between ports; limit or regulate the volume of cargo to be carried; engage in exclusive preferential or cooperative agreements; enter into agreements to control or prevent competition among themselves. Given presumptive approval under the primacy of the Federal Maritime Commission, these devices already threaten the ability of competition to work to assure the efficiency needed to assure the low cost required for our commerce. A safety mechanism to enable carriers to take action in order to preserve our commerce must be provided. That mechanism is the individual carrier's right to take independent action within a con- ference. A strong conference functioning properly, in the best inter- est of U.S. commerce, gives carriers every reason not to exercise it. When conferences abuse their power that mechanism must exist. We believe that a provision for mandatory right of individual carri- ers to take independent action within a conference should be added to this legislation. Mr. Chairman, we have experienced the benefit of independent carrier action, and have attached an example as an appendix to this testimony. I would like to read it quickly, and I request that it be entered into the record with the rate development chart which is attached to it, which is self-explanatory. By mid-1978, Procter & Gamble GMBH in West Germany had de- veloped a market for about 175 40-foot containerloads of disposable diapers in several countries on the Arab Gulf, including Kuwait, Saudi Arabia, Dubai, and Bahrain. At that time, the European markets were expanding rapidly and their manufacturing capacity was becoming tight. We conducted a study in the United States which demonstrated that with improved freight costs, our U. S. company could obtain this business. At that time, the U.S. Atlantic and Gulf-Middle East Outward Conference-the 8900 Lines-had an applicable base rate of $5,550 per 40-foot containerload, plus fuel surcharges. An independent carrier indicated that they would offer a rate of $4,500, but they could not serve all ports. The conference indicated that we could expect a usual reduction of about 10 percent, to $5,000; we needed $4,200. One conference carrier which wanted this business from the U.S. subsequently took an independent action at $4,200. The other conference carriers joined that $4,200 rate. The business was transferred to our U.S. company. Subsequent market growth has occurred. By the end of 1980, we passed the 400, 40-foot containerload per month mark. During this growth period, the rates have expired every 6 months. A rate histo- ry is attached and includes the fuel and war risk surcharges that have fluctuated throughout this period. At each 6-month expiration, we appealed to the conferences to continue to reduce the base rates to preserve this movement from the United States. In each instance, this has been achieved through an independent rate action of a single conference member. In mid-1980, the German company's manufacturing capacity was expanded. In late 1980, the U.S. dollar gained strength against the deutschemark, increasing the relative cost of U.S. product by about 15 percent. PAGENO="0485" 479 Simultaneous to the change in relative U.S. product cost, freight rates from Europe to the Middle East have dropped dramatically due to the large number of carriers transiting the Suez Canal in the conference services between Europe and the Far East. Due to recessions in Europe and Japan, their excess capacity is utilized for a partial revenue haul at less than the desired revenue of the Continental Red Sea Conference, which is also a dual-rate, closed conference. In April of this year, confronted with the loss of our business, we approached the 8900 Conference with an application to exempt our business from an announced 5-percent general increase. We asked for further reductions, if at all possible. The leadership for this came from a U.S.-flag 8900 Conference member who took independ- ent action. The carrier providing the leadership operates as a conference carrier in both the North Atlantic Continental and the Continental Red Sea trade. In this instance, they were able to take independent action which preserved the U.S. commerce and provided revenue to both of their operations. Without their action, this piece of business is likely to have been lost to the United States. Section 15(A), subpart (a), of H.R. 4374 provides for the establish- ment of shippers' councils. We are not opposed to the establish- ment of shippers' councils, particularly for the benefit of small shippers who find it too expensive to maintain personnel to repre- sent themselves in negotiations with carriers and conferences. Our company may choose to participate in shippers' councils if they are formed. We believe, however, that competition between carriers is the most effective means of assuring that American shippers are pro- vided the best available values in ocean freight. We encourage our Congress to give the U.S.-flag carriers the economic support which will enable our carriers and our commerce to thrive. Mr. Chairman, I will be happy to attempt to answer any ques- tions that the committee may have. [The following was submitted for the record:] DISPOSABLE PAPER DIAPERS, U.S. ATLANTIC AND GULF TO THE ARAB GULF [Doll ars per 40 ft. containerload] March 1978 September 1978 March 1979 September 1979 March 1980 September 1980 March 1981 Base rate $5,550 $3,950 $3,650 $3,470 $3,750 $3,850 $3,710 Bunker fuel surcharge 250 250 278 1,135 1,135 1,135 1,390 War risk surcharge 105 105 190 230 230 5,800 4,200 4,033 4,710 5,075 5,215 5,330 Mr. BIAGGI. Thank you, Mr. French. What would your comment be to the fact that in Europe they have closed conferences and carriers survive and shippers survive? Mr. FRENCH. The structure of rates that exists between any two points is not necessarily dependent on the fact that the conferences are open or closed. There is a tremendous number of factors that will enable carriers to publish rates. PAGENO="0486" 480 An example as to why the closed conferences may have an ad- vantage-the closed conferences of Europe, dealing with another part of the world with which the United States competes-would be, for instances in the trades between the North Atlantic United States and West Africa, and specifically Nigeria, and between the North Continent and Nigeria, wherein the distances are approxi- mately the same. It is roughly 3,200 miles, comparing those sets of origin and destination. In that case, the closed conference rates between Europe and Ni- geria may be lower than those from the United States. However, we are contend that they are low for reasons other than the closed status. First of all, we believe that competition is always the best way to assure efficient and lowest cost services. Our experience with sever- al trades demonstrates that in an effectively closed U.S. confer- ence, the costs are higher, for instance, between the United States and some South American points. I brought along some notes relative to previous studies I have made. Between the United States east coast and Japan, we have approximately 9,700 miles. The freight rates we would pay on a shipment of disposable diapers-a full 40-foot containerload-would be about $2,750. Between the U.S. east coast and Venezuela-a dis- tance of only 1,850 miles-we would pay $4,575. Between the U.S. east coast and Jidda, Saudi Arabia-a distance of 5,875 miles-it would be $5,220. There are many things affecting those differences. It may be that there is no backhaul, such as in our trades with the Middle East. In the case of the trade to Japan, it is a highly competitive situation. In the case of Venezuela it has long been a nearly de facto closed conference system. That same comparison might apply to other destinations. In the comparison of trades with Africa that we started here, U.S. rates apply to ports all the way from Eastport, Maine to Brownsville, Tex.-2,633 miles-versus rates for the conference be- tween Hamburg and Le Havre, which would be only 790 miles. The question exists of how many ports of call are those ships making; how many hours or days will the ships be in ports or en route; and do these ships call the entire West African coast, or select ports. Ship sizes vary; construction, engines, whether they are cellular, break-bulk or ro/ro (roll-on/roll off). All of these things make a dif- ference. In the final analysis, we think that looking at a compari- son of rates with closed conferences to Africa comes down to the fact that Europe, through their colonialism and looking more seri- ously at Africa, has developed more trade and has better economies of scale. It is not our open conference system and comparing it to their closed conference system. We think it has more to do with those economies of scale and these other factors in steamship oper- ations. We do not believe that closed conferences themselves make for lower rates. The ability for those conferences to succeed in Europe has a lot to do with their circumstances relative to the markets they are serving. Mr. BIAGGI. We will take a 5-minute recess. [Whereupon, a brief recess was taken.] PAGENO="0487" 481 Mr. BIAGGI. Mr. French, statements were made that the open conference, with its attendant overtonnaging, has increased the rate shippers pay because the carriers are charging higher rates to cover losses, because they carry less than full cargo loads. How would you react to that statement? Mr. FRENCH. When there is overtonnaging, certainly the carriers would like to charge more. I think that many rates are unattended, and I think that many shippers may be uneducated on the opportu- nities that exist. Therefore, in some cases, those rates may be higher. But the competition in the trade, we have found, produces very low rates, and ultimately what that leads to is carriers dropping out of the trade-either withdrawing or experiencing a bankruptcy. I do not think that an overtonnage situation is particularly healthy, long term, and it is definitely not healthy for the U.S. merchant marine. Mr. BIAGGI. We have had two conflicting views this morning and in other hearings. You are opposed to closed conferences; other people say that open conferences are not working. What would you offer as a solution? Mr. FRENCH. Well, I believe that the open conferences are not working because of the failure of the antitrust trust immunity in- tended to actually be delivered. I believe that in a situation where we do provide the antitrust immunity intended, the open confer- ences can work as well as closed conferences work, plus provide the additional advantage of giving opportunity for carrier expansion, particularly U.S. flag carrier expansion, in all of our trades. Mr. BIAGGI. Well, there is no doubt that the one thing all the witnesses agree upon is relaxation of the antitrust immunity, or at least the restoration of it-whichever way you choose to phrase it. But that remains to be seen; that is the critical question and we recognize it. Assuming that we were successful in bringing about the changes in that portion of the law with relation to immunity, how would that impact on European carriers? Mr. FRENCH. The impact on the European carriers would be simi- lar to that impact that we have on the American flag carriers. Mr. BIAGGI. Well, they are not burdened with antitrust provi- sions, are they? Mr. FRENCH. No, they are not, but the effect would be to stop the discrimination against the American flag carriers. Today, the American flag carriers who want to enter into agreements to pool their capital and to operate with joint services-they are not able to do what foreign flag carriers already are participating in be- cause of that lack of antitrust concern. Mr. BIAGGI. Well, with the elimination of the discriminatory con- ditions that exist here and on an international basis because of our own laws, it would seem to me that the obvious response to that would be that the European carriers would not be too happy, would they? They should not be. Mr. FRENCH. They would probably realize some additional com- petitive effect. They would have a stronger American merchant marine to contend with. In the case of Germany, I believe that with their economic situation, they would still have an advantage PAGENO="0488" 482 because of some of the tax advantages that they receive from their government. Mr. BIAGGI. Well, that is another factor that most Europeans have. We have had some subsidy programs working here to help us compensate for the difference, but I think they are pretty much on the way out, as far as construction and even perhaps operational. Mr. FRENCH. I would hope that the German carriers who, for the most part, are conference carriers would actually be better off for the strength that the American flag carriers could lend to the con- ferences. I do not know that that is their position, but I think that possibility could exist. Mr. BIAGGI. You were present during the testimony this morning given by other witnesses. Do you have anything to add, or would you like to comment on some of that testimony? Mr. FRENCH. I am sorry? Which--. Mr. BIAGGI. Any of the witnesses that were present may have made some statements or taken positions that you may have dif- fered with. Would you care to comment on them? Mr. FRENCH. I understand your question now, sir. I would like to comment on the shipper position on intermodal authority for conferences. I believe that the carrier conferences should have intermodal authority under the open-conference system. I believe that the ocean carriers should be able to negotiate with land-based carriers and publish through rates. However, I believe there are some conditions to that that should not be allowed. I do not believe that intermodal rates should be ex- tended to apply to the loyalty contracts with shippers. Some of the reasoning for this would be that shippers must reserve the right to negotiate a combination of inland services from their plants with those inland carriers. In many cases, a shipper might be the only industry on a given rail line, and they combine their domestic and international. Therefore, the conferences should continue to be required to pro- vide an all-water portion so that the shipper can provide his own inland portion of the rates. Also, on the subject of not applying to the loyalty agreement, there are many cases where the shipper must have the opportunity to select the ports to which they want to ship their freight. For in- stance, if we have a plant in the St. Louis area, there is often the opportunity to ship to the same foreign destination by the west coast, by the gulf or the east coast. If we had to have a loyalty agreement that committed us to ship by any one of those coasts and the inland carriers had heavy domestic demand and were not interested in providing attractive rates, we must have the opportu- nity to ship by another port, possibly through another conference area. Also, one other factor to consider in that intermodal situation is that conferences usually have a geographical port region of the United States that they serve. If we look at all the potential points that they serve in the United States on a port basis, it is some- where between 30 to 40 ports. When we look at intermodal, potentially there are several thou- sand inland points from which they might publish rates. Once again you get into problems of overlapping geographical areas that PAGENO="0489" 483 would create difficulty for shippers in obtaining distribution costs and remaining competitive in their international markets. Mr. BIAGGI. Mr. Snyder? Mr. SNYDER. Thank you, Mr. Chairman. Mr. French, does Procter & Gamble have a policy to use U.S.-flag vessels? Mr. FRENCH. We do not have a corporate policy, per se, that says we would provide a certain percentage to American flag-ships. However, as a matter of practice, we do keep the lines of communi- cation open with all American-flag carriers and see that they are fully aware of our needs and that they have the opportunity to par- ticipate in our business. Mr. SNYDER. Well, you do that for the foreign-flag carriers too, do you not? When looking for the best price from all carriers, you keep the lines of communication open so they can participate in trying to get your business. Mr. FRENCH. That is true, but I think we take an extra step with our American-flag carriers. I can only stand on our record, which says that in 1980, 41 percent of our liner cargo did move with American flag carriers. Mr. SNYDER. Yes, I noted that in your testimony. How much of that was to Hawaii and Puerto Rico? Mr. FRENCH. I do not have a breakout on that, but I would say that roughly one-third of that was to Hawaii and Puerto Rico: Mr. SNYDER. You did not have any choice on that, did you? Mr. FRENCH. No, sir. Mr. SNYDER. The Jones Act took care of that. Mr. FRENCH. I think that is a fortunate situation. Mr. SNYDER. What? Mr. FRENCH. I think that is a fortunate situation. Mr. SNYDER. You think that is fortunate? Mr. FRENCH. Yes, sir. I think that is a good policy. Mr. SNYDER. Then you would not mind having a good policy like that for all American exports and imports, would you? Mr. FRENCH. I do not believe I would go that far. Mr. SNYDER. I see. Do you export anything besides disposable diapers and soap? Mr. FRENCH. Yes, sir. We attempt to export the full range of our products-soap, food, paper, industrial products. Whatever areas we are in, we are interested in exporting them. Mr. SNYDER. Where do you make those diapers, up in Michigan? Mr. FRENCH. I beg your pardon? Mr. SNYDER. Where do you make those diapers, up in Michigan? Do you make the diapers up in Cheboygan? Mr. FRENCH. We make diapers at several places-Modesto, Calif.; Cape Girardeau, Mo.; Albany, Ga.; Greenville, N.C.; Mehoopany, Pa.; Cheboygan, Mich. Mr. SNYDER. How do you send your merchandise out of Cheboy- gan to foreign markets? Mr. FRENCH. Everything we have shipped from Cheboygan is moved through New York-New Jersey. Mr. SNYDER. Not through Montreal? Mr. FRENCH. No, sir. PAGENO="0490" 484 Mr. SNYDER. You are not sending anything up through Canada, then? Mr. FRENCH. Not from Cheboygan. We have had very little move through Canada. We have a Canadian plant that uses, of course, a sizeable amount of Canadian port facilities. Mr. SNYDER. But I mean you are not moving any of your U.S. products through Canada? Mr. FRENCH. No, sir. Mr. SNYDER. How do you feel about tariff-filing requirements? Mr. FRENCH. We believe that if we would discontinue the re- quirement to file tariffs, it would enhance competition. We believe that a tariff-filing requirement basically serves only to establish a ceiling or a floor for ratemaking that does not allow carriers to base their freight rates on their costs. As a result of this, we find a lot of carriers suffering from rate publication. Mr. SNYDER. Well, I believe I got a good answer. I think I will quit, Mr. Chairman. Thank you. Mr. BIAGGI. Do not go away, Mr. French; I am going to play with you a little while on that tariff-filing business. Mr. SNYDER. I figured I got a good answer, so I quit. Mr. BIAGGI. Of course. Mr. SNYDER. You can understand, Mr. French, that the chairman and I take a little different attitude about tariff filings. I liked your answer, so I expect he is going to work on you a little bit. Mr. FRENCH. OK. Mr. BIAGGI. This is a joint statement made by Mr. Day and Mr. Flynn-the previous witnesses who testified earlier-with relation to elimination of tariff filing: Public tariff filing is the core of any effective regulation of carrier rates and prac- tices. A proposal to end the tariff filing requirement would effectively destroy the protection provided to shippers and carriers alike in many of the sections of the Shipping Act. For instance, if tariffs need not be filed and followed, carriers would be free to charge each shipper different rates fluctuating from day to day. A prohibition against rebating to shippers or discriminating between shippers con- tained in sections 16, 17 and 18 of the Shipping Act would become dead letters. Or, to put it a different way, if we did not have tariff filing, we would be subject to the evils of illegal rebating that plagued this industry for some time. Mr. SNYDER. Mr. Chairman? Mr. BIAGGI. Yes, Mr. Snyder? Mr. SNYDER. Mr. Chairman, rebating is illegal whether we have tariff filing or not; it is just as illegal without tariff filings as it would be with tariff filings. Mr. BIAGGI. That is true, except that it is less likely to occur with tariff filing. Mr. SNYDER. Well, that is like saying you are less likely to have crime if you do not manufacture knives. Mr. BIAGGI. Yes, but FMC has stated that they just simply would not be able to enforce it unless they had tariff filing, Mr. Snyder. I am sure that you would like to see the practice properly eliminat- ed, and do everything in your power to see that it was. Mr. SNYDER. Mr. Chairman, if we did not have tariff filings, we probably would not have to have FMC. Mr. FRENCH. Mr. Chairman, I fail to see the logic of why, if the tariff is not filed, anyone would go to the trouble of arranging a PAGENO="0491" 485 rebate. It would seem to me that the pricing would be established between the shipper and the carrier on the front end. The other parties do not know the rates. Why go through the ad- ministration and difficulty of a rebate? As to the matter of making the tariff filing public, as a competitor for the sale of our goods, we do not believe that it is our competition's business what we pay for our distribution cost, just as it is not their business what we pay for any component of the goods we are selling. Mr. BIAGGI. I understand that, Mr. French. I think there was some earlier testimony that stated that they were for tariff filing. You are the only witness today, as I recall, who has stated that they were against tariff filing. I raised the question with some; I think it was Mr. May and his panel. He said there may be some large shippers who are unique and who might have the advantage, but that would place many of the smaller shippers at a disadvantage. I asked further, if you recall, "How would you be disadvantaged if we continued the filing, or are you seeking a special advantage by elimination of this filing that would not be available to any other shipper?" Mr. FRENCH. The only disadvantage we would experience is the one we already have; that our competition does know what our costs are today. I do not believe that the advantage is necessarily one of being a big shipper or a small shipper. I think it is a matter of the shippers developing the ability and the knowledge to negoti- ate rates with the carriers and the conferences. Mr. BIAGGI. Well, you have been functioning with tariff filing quite well, it appears. How does it hurt you? Mr. FRENCH. I think that is a matter of-when you say how does it hurt us, I can only say, well, why have we not grown faster with more of our exports than we have? This is theoretical, I admit, but it may be that our competition having access to our rates-and this includes our foreign competi- tion as well as those companies with whom we compete in the United States-may be able to slow our growth with that knowl- edge. Mr. BIAGGI. Procter & Gamble's growth has been slowed? Mr. FRENCH. We can always use some more. Mr. BIAGGI. Thank you very much, Mr. French. The hearing is adjourned. [The following was received for the record.] PAGENO="0492" 486 GRAHAM & JAMES November 10, 1981 ~. CE V E L BY HAND NOV 1 2 Mel Hon. Walter B. Jones ~ ~ Chairman House Merchant Marine & Fisheries Committee Room 1334 - Longworth House Office Building Washington, D. C. 20515 Re: H.R. 4374 Dear Congressman Jones: Enclosed is the written testimony of Mr. Henri P. Blok, Chairman, Latin America/Pacific Coast Steamship Conference and Executive Administrator of Section `A', Pacific Coast River Plate Brazil Conference, Mr. Evan Pugh, Secretary, Pacific/Australia-New Zealand Conference, and Mr. Donald I. Thiess, Chairman, Pacific Coast Euro- pean Conference, in regard to H.R. 4374. Sincerely, J. Michael Cavanaugh Enc. JMC: ew cc. Gerald Seifert (w/50 end.) House Merchant Marine & Fisheries Committee 1339 Longworth House Office Bldg. Washington, D. C. 20515 PAGENO="0493" 487 PREPARED TESTIMONY OF CERTAIN U. S. WEST COAST CONFERENCES RE: H.R. 4374 Mr. Chairman and Members of the Committee: This written testimony is submitted by the undersigned Conference officials on behalf of the San Francisco-based Steamship Conferences and their member lines as listed at the conclusion hereof. We regret that due to time constraints and other factors we were unable to appear in person before the Committee to testify live on this important Bill, but do understand that you would still welcome our written Comments, just as your Committee has done on predecessor maritime regulatory reform efforts over the past few years. We further understand that these Comments will be made part of the record, for which we are appreciat~.ve. While we are gratified that your Committee, as with your counterpart Committee in the Senate, is seriously addressing many of the problems which today plague the international liner community serving the United States, we respectfully suggest that H.R. 4374 is too modest in many respects in actually solving some of these crippling deficiencies. In addition to addressing the other half of the "double-edged sword" of anti-trust exposure in the administration of the Shipping Act, namely, the retroactive application of antitrust sanctions, we suggest that any regulatory reform legislation must also include provisions for clear intermodal PAGENO="0494" 488 conference authority, the strengthening of shipper loyalty contracts and devices, and mandatory self-policing for independent lines, subjects not covered by H.R. 4374, but all of which we will now briefly discuss. Antitrust Concepts By far the most urgent need of the regulated shipping industry is a clear, across-the-board, immunity of its activities from both the reach and philosophies of the U.S. antitrust laws. Taking the latter problem first, that is, the presently almost total influence of domestic antitrust concepts into the Section 15 approval process, we are pleased to note that H.R. 4374 would reverse this trend both by eliminating the antitrust-based contrary to the public interest" standard, and by requiring more prompt Federal Maritime Commission action on filed agreements, with the burden of proof resting with the opponents of an agreement. Under present conditions, and largely as a result of the "contrary to the public interest" antitrust presumption of unapprovability, protracted, costly and aimless FMC hearings, or merely threats of such hearings, have often ultimately resulted in the abandonment of any attempts to institute worthy trade efficiencies and innovations. We believe your Bill as drafted would meet this problem head-on and would effectively correct it, and we accordingly are very much in favor of these improvements in rectification of the present dismal situation in this respect. PAGENO="0495" 489 The other half of the antitrust difficulties currently faced by liner companies electing to join conferences in the U.S. trades, to wit, the exposure to antitrust sanctions in addition to Shipping Act penalties, under the judicial interpretations of Carnation and Sabre Line, do not seem to be addressed by H.R. 4374, much to our dismay. The constant threat of Commission or court retroactive "second guessing' of whether an activity of, or even a rate decision by, a steamship conference is or is not covered by its Section 15 agreement is a pervasive, on-going problem, and the application of both Shipping Act penalties and antitrust law sanctions against carriers for having "guessed wrong" is manifestly unfair. It is also completely contrary to the original intent of the Shipping Act, to promote conferences and other trade-stabilizing and efficient cooperative agreements among liner companies. This critical problem can be solved by simply stating, in any new maritime reform legislation, that penalties for violating Section 15 (or any other substantive Shipping Act section) are those contained in the Shipping Act itself. Con- comitantly, a clear legislative statement that liner companies have a complete immunity from the application of the U.S. antitrust laws for their activities, whether approved by the Commission or not, is also necessary to any statutory scheme intending to reverse the chilling effect that antitrust laws have had on international liner shipping operations. We urge your Committee to take these further, necessary steps to solve this foremost problem currently affecting this PAGENO="0496" 490 rrost inportant industry. Intermodal Authority As your Committee knows, the Department of Justice is even now in court attacking the authority of the Commission to approve steamship carrier agreenents relating to the intermodal rrovement of cargo, and in our view the possibility of an adverse result there nust be forestalled by any regulatory reforn legis- lation. We believe it indisputable that internodalism is a bene- ficial and viable supplement to all-water carriage, and if it is recognized -- as it appears this Committee recognizes -- that the conference system itself is a beneficial, indeed necessary, instrument in rationalizing and stabilizing the water-borne commerce of the United States, such recognition leads inexorably to con- ference jurisdiction over its members' intermodal movements. A clarification and reaffirmation of the Commission's authority to approve such internodal rate-making agreements is in order, and we suggest your Committee take this up along with the other matters being addressed in your legislative reform efforts. ~~per Loyalty Contracts We note that H.R. 4374 would allow for a form of "closed," or at least "quasi-closed," conferences. While this nay be appro- priate and useful in some trades, we do not believe that closed conferences alone, without a strong shipper loyalty system (such as deferred rebates), will be particularly effective or desirable. PAGENO="0497" 491 Generally, in the U.S. trades, where the only shipper tying device is the largely unenforceable "Shipper's Rate Agreement" authorized by present Section 14b of the Shipping Act, and where in many instances the deck seems to be rather heavily stacked in favor of the independent line, the problem is characteristicly how to bring additional lines into the conference, not how to keep them out. Unless statutory permission is granted to allow effective, binding shipper loyalty contracts and devices -- necessary to ensure the long-term support of shippers and thereby induce shipowners to make continuing investments in the trade -- your Bill's provisions for limiting conference membership will seldom if ever be used. Your couterpart Senate Committee, in its 5. 1593, proposes some solutions to the current failing of the present dual-rate contract system, such as allowing a "series of spreads" and placing the burden of proof for contract violations on the shipper; these provisions may be of assistance, in some trades, and at least are small steps in the right direction. Your H.R. 4374 does not provide for even these modest reforms, and, accord- ingly, fairly well precludes industry comment on the subject matter in general, including any arguments for the legalization of a strengthened dual-rate contract, a fidelity commission system, a time/volume rate tying device, or even a deferred rebate system itself. It is our sincere belief that this problem of lack of a meaningful shipper loyalty device should at least be debated, as 9~4-856 0 - 82 - 32 PAGENO="0498" 492 it is one of the paramount reasons for the current weak conferences system in the U. S. trades, a situation which your Committee in other areas seems intended on curing. Self-Policing of Independent Lines While this is the only subject on which all member lines of all four conferences represented herein are not unanimous, it is the overwhelming consensus of all the memberships that non-conference carriers should be required to retain neutral body policing services. Because of the truly international nature of liner shipping, no single government agency can in reality effectively police tariff-adherence requirements. This can only be practically accomplished by using commercial, not government, policemen, and we urge the Committee to not continue the presemt distinction between steamship lines who operate under a conference agreement, and those who do not, vis-a-vis policed adherence to filed tariffs. As matters presently stand, outside lines benefit appreciably by the assurance that price decisions by the conference lines are, indeed, "solid; yet these independent carriers neither need to sell their services on the basis of tariff-filed prices, nor do they have to share in the not inconsiderable expense of hiring neutral-body enforcement agencies. Again, this sub- ject is not addressed in H.R. 4374, but it is one which needs to be discussed in any regulatory reform of the liner industry. PAGENO="0499" 493 Conclusion On behalf of the conferences we represent, we very much appreciate being given the opportunity to comment on the very laudable efforts your Committee is undertaking to rectify the deficiencies in our country's maritime regulatory laws per- taining to our vital liner shipping industry. If we can be of any further assistance to you in these efforts, please do not hesitate to make contact. Respectfully ~ Henri P. Blok, Chairman, Latin America/Pacif Steamship Conference, and Executive Administrator of Section "A', Pacific Coast River Plate Brazil Conference ç~2 Evan Pugh, S retary Pacific/Aus ralia-New Zealand Conference onald I. Thiess, Chairman Pacific Coast European Conference PAGENO="0500" 494 PARTICIPATING CONFERENCES/MEMBER LINES: 1. Latin America/Pacific Coast Steamship Conference Argentine Lines (E.L.M.A.) Barber Blue Sea. Line Canadian Transport Company, Ltd. Canadian Westfal Larsen Ltd. Delta Steamship Lines, Inc. Empremar Flota Mercante Grancolornbiana, S.A. French Line Hapag-Lloyd A.G.. Intercontinental Transport (ICT) B.V. Lauritzen-Peninsular Reefers, Ltd. Lloyd Brasileiro Scan-Pacific Line United States Lines, Inc. United Yugoslav Lines 2. Pacific Coast River Plate Brazil Conference Argentine Lines (E.L.M.A.) Canadian Westfal Larsen Ltd. Delta Steamship Lines, Inc. Lauritzen Lines Lloyd Brasileiro 3. Pacific/Australia-New Zealand Conference Blue Star Line Ltd. Columbus Line Farrell Lines, Ltd. Pacific Australia Direct Line 4. Pacific Coast European Conference Blue Star Line Ltd. Compagnie Generale Maritime (French Line) D'Amiôo Mediterranean Pacific Line East Asiatic Line }Iapag-Lloyd AG Hellenic Line Intercontinental Transport (ICT) B. V. Italian Line Johnson Line AB Scan-Pacific Line Sea-Land Service, Inc. United Yugoslav Line Zim Israel Navigation Co., Ltd. [Whereupon, at 11:57 a.m., the subcommittee was adjourned.] PAGENO="0501" REGULATORY REFORM THURSDAY, MARCH 18, 1982 HOUSE OF REPRESENTATIVES, SUBCOMMITTEE ON MERCHANT MARINE, OF THE COMMITTEE ON MERCHANT MARINE AND FISHERIES Washington, D.C. The subcommittee met, pursuant to recess, in room 1334, Long- worth House Office Building, Hon. Mario Biaggi (chairman of the subcommittee) presiding. Present: Representatives Biaggi, Jones, Anderson, Foglietta, Breaux, Snyder, Dougherty, Shumway, and Shaw. Staff present: Ric Ratti, Rudy Cassani, Cyndy Wilkinson, Gerry Seifert, Ed Welch, John Long, Greg Lambert, Jeff Oshins, Ann Mueller, Steve Little, Beverly Rowen, Mike Toohey, Dave Parker, Alise Peyton, and Gwen Lockhart. Mr. BIAGGI. The meeting is called to order. The Subcommittee on Merchant Marine is meeting today to con- clude hearings on H.R. 4374. This is the fourth day of hearings we have held on this bill and on the general subject of maritime regu- latory reform. In addition to the hearings, members of the subcommittee and the staff personnel have had numerous meetings and discussion on the subject. The subcommittee has also received a great many let- ters and statements concerning the issues the bill addresses. Fur- ther, maritime regulatory reform was the subject of detailed hear- ings and work in the 96th Congress, and it has been extensively de- bated and considered in numerous conferences, symposia, trade meetings, and in the press. I think it is safe to say, therefore, that the topic of maritime reg- ulatory reform has been thoroughly considered, both within and without the Government. As a result, the subcommittee and the full committee will, after today's hearing is completed, be ready to move quickly ahead on legislation addressing this important sub- ject. In reviewing the extensive testimony and other material the sub- committee has received, it is clear that there is general, almost unanimous agreement on several points: First, the United States, as a leader in world trade, should have a strong, healthy, and vital merchant marine to insure its econom- ic well-being and its national security. Second, we do not now have such a merchant marine, and its health is declining rather than improving. Third, the present tragic condition of our merchant marine is primarily self-inflicted. (495) PAGENO="0502" 496 Fourth, one of the chief ways by which we have hampered the health of our merchant marine is through the laws that govern it and their interpretation. Fifth, it is now time to change those laws. The major thrust of the legislation we are considering is to remove those constraints in the law that prevent or impede our ocean carriers from engaging in those cooperative activities that would improve their efficiency and enable them to compete on a more equal basis with foreign carriers. While it is fairly easy to state that objective, the complexity of the ocean shipping industry and the many diverse interests involved make its achievement a difficult task. Nevertheless, it can be done. I and the other members of the sub- committee and the full committee fully intend that this Congress will see the enactment of a comprehensive maritime regulatory reform bill. The subcommittee is well aware that the passage of this legisla- tion will only be one part of the cure for the ills of our merchant marine. In addition to freeing our carriers from the legislative shackles of the antitrust laws, we must develop promotional pro- grams to assist in the revitalization process. The President has pledged a new beginning for the American merchant marine. I am hopeful that he will soon follow through on that pledge. I retain this hope despite the fact that several of the actions the Reagan administration has taken to date seem to move in the oppo- site direction. I refer to the elimination of construction differential subsidies, the apparent intention to reduce operating differential subsidies, the incursions into the cargo preference laws by several executive branch agencies, and the opposition to the Canadian di- version legislation. Most difficult for me to understand is the cur- tailment of the title XI vessel financing program. I hope that these types of actions will shortly be followed by positive proposals to promote our merchant marine. It is a pleasure this afternoon to welcome as our witness the very able Secretary of Transportation. I might add, and I have said this time and time again, in my judgment you are the one hope, Mr. Secretary, for turning this whole merchant marine direction around and have it enhanced. I know that we have come this far with the present legislation only because of your initiative, your persistence, and your determination in seeing to getting various parties off dead center on some of the critical issues. We look forward to exploring with you the administration's policy on important issues facing the subcommittee. The subcom- mittee is aware of the intense and concentrated effort that has gone into the administration's review of maritime regulatory policy. It has, I am sure, been a difficult task to achieve a consen- sus among the many Government agencies that have an interest in this subject. I commend you, Mr. Secretary, and Admiral Shear for having brought all those characteristics to this task. Now that we have for the first time in years a definitive maritime policy statement from the executive branch, we should be able to work together to achieve our mutual objectives. For my part, I intend to do my utmost to move this legislation forward as quickly as possible. I am PAGENO="0503" 497 sure I will be joined in that effort by our distinguished chairman and by the ranking minority members of the committee and sub- committee. Before hearing from Secretary Lewis, I would like to recognize the presence of the distinguished chairman of the full committee and offer him an opportunity to make a statement. Mr. JONES. Thank you, Mr. Chairman. I do not have any pro- found statement at this time but I cannot resist this opportunity to thank Secretary Lewis for the fine spirit of cooperation that has existed between your department and this committee. I could not ask for better cooperation. For that, I want to thank you and your staff. You have been most helpful. I think together we can move forward and indeed complement and improve our merchant marine position. Thank you, Mr. Chairman. I yield back. Mr. BIAGGI. Thank you, Mr. Chairman. I would also like to recognize the ranking minority member of the full committee, Mr. Snyder. Mr. SNYDER. Thank you, Mr. Chairman. I am extremely happy to join you and Chairman Jones in wel- coming Secretary Lewis to our committee hearing today. I appreci- ate the fact, Mr. Secretary, that you have taken the time to come before the committee and present the administration's position on maritime regulatory reform. I think your appearance here today is evidence of the adminis- tration's commitment to bring some badly needed reform to the U.S. merchant marine industry. You are to be commended for your efforts within the administration to have such a meaningful mari- time regulatory reform position announced just 6 months after your department took over responsibility for the Maritime Admin- istration from the Department of Commerce. As one who waited and waited for an administration position on the omnibus bill through the 96th Congress, I especially appreciate the fact that this administration was able to come up with such a landmark proposal in a relatively short time. I join with Chairman Biaggi in saying the burden is now on us, on the committee and in the Congress, to expeditiously move legis- lation which embodies the concepts enunciated in your letter and which I assume will be laid out in your testimony today. If we on the committee hesitate, for whatever reason, then the opportunity to move this bill this year could well be lost. I thank you, Mr. Secretary, for appearing before the committee. I look forward to hearing your testimony and working with you during the next few months to insure the passage of a maritime regulatory reform bill. Let me say to you, Mr. Chairman, that I was particularly inter- ested in your comments that appear at the top of page 3 of your prepared text in which you indicate some of your disagreements with this administration and the direction that it is moving. Some of those items I share with you but I think it is only fair to say, in regard to some of those, such as to do something in an effort to offset the apparent move against ODS-which I am in agreement with, and to offset the efforts to avoid the cargo preference eva- sions that have been attempted by some agencies within the ad- PAGENO="0504" 498 ministration, this Secretary who is before us today testifying has been one of the stalwarts in the defense of the positions that you and I have taken on these issues. For that, he is to be commended and deserves much of the credit for reversing some of those decisions that were originally made on the part of the administration. For that, he is worthy of our com- mendation and the commendation of all who are interested in the furtherance of the maritime industry. I want to say a special thank you to him for that. Mr. BIAGGI. Mr. Foglietta, the gentleman from Pennsylvania? Mr. FOGLIETTA. I thank you for recognizing me, Mr. Chairman. I am happy to be here this afternoon, and I am enthused to know that my co-Pennsylvanian, Secretary Lewis, is here for this very important hearing on this legislation which will so directly affect port cities like my city of Philadelphia. Thank you. Mr. BIAGGI. Mr. Shumway? Mr. SHUMWAY. Thank you, Mr. Chairman. I would like to associate myself with the remarks of the ranking minority member, Mr. Snyder, and certainly join in those remarks, and join with the other members of the committee in welcoming Secretary Lewis. It is a pleasure and a privilege to have him here to share his testimony with us. Thank you, Mr. Chairman. Mr. BIAGGI. Mr. Shaw, do you have any opening statement? Mr. SHAW. No, Mr. Chairman. Mr. BIAGGI. At this time I would like to insert into the record the following: a letter from the Secretary of Transportation dated February 5, 1982; and a letter from the National Maritime Council dated March 1, 1982. [Material follows:] PAGENO="0505" 499 ThS S.crstary of TpansportatiOfl `4 Washi~gton. DC. 20590 FB 5~?W The Honorable Mario Biaggi Chairman, Subcommittee on the. Merchant Marine Committee on Merchant Marine and Fisheries United States House of Representatives Washlngt~,p, D.C. 20515 Dear On behalf of the Reagan Administration, I would like to outline our position on regulatory reform of the ocean shipping industry. First, however, I commend you, Mr. Jones, and Mr. Snyder for your initiatives in this area. Your bill, H.R. 4374, goes a long way toward removing the restrictive burdens currently imposed upon U.S.-flag and other carriers engaged In our trades. We look forward to working with you and the.other members of the Merchant Marine and F~sherles Committee to refine all our efforts Into an approach that will be in our overall national interest and that will meet the needs of our maritime industry. In the Shipping Act of 1916, Congress recognized that a balance had to be struck between the ocean carriers' need to engage In certain cooperative activities, such as the setting of rates, and the public's need to prevent abuses. Since the passage of the Act, however, both the enforcement and the judicial Interpretations of the law have undergone substantial change. As a consequence, carriers operating in our trades are unable to predict reliably the extent of the antitrust exemption under the Shipping Act. Because In some circumstances they are subject to the antitrust laws, they are unable to engage In many activities that are common on other trade routes. Ocean carriers throughout the rest of the world operate with substantially less government restriction on their activities. Only the United States has followed a philosophy which limits the activities of conferences through a combination of regulatory and antitrust oversight of rates and practices. The result has been Insecurity, delays in regulatory approvals for or rejection of practices standard elsewhere, excessive and- unpredictable.. government Intervention, and the anomalies and irritations that inevitably arise from the attempt to Impose our laws on foreign parties whom our laws can only imperfectly control. Our foreign counterparts feel Imposed upon in the name of a policy they do not embrace, and our own operators are the victims of an ever-changing regime that Is only partially effective when applied to their foreign competitors. It Is now time to reconsider and simplify our approach. In developing the Administration's approach to these problems, we have been guided by three major objectives: PAGENO="0506" 500 First, this Administration is committed to minimizing government intervention in business. The reduction of government involvement In the commercial practices of the maritime industry is consistent with this philosophy and underlies our position. It should not be the responsibility of the Federal Maritime Commission to determine what industry practices might best achieve the efficiencies required by the marketplace. Second, we want to put U.S. carriers on an equal footing with foreign carriers. In regulating, our maritime. Industry,, wef are out of step with the rest of the world. U.S. antitrust policy should. not be Imposed unilaterally on other nations that favor cooperation among ocean carriers. In' the interests of' both International comity and. fairness, we must recognize the realities of International commerce in which our industry operates and limit its commercial activities only where we can clearly identify other overriding national objectives.. Third, we want to maintain a strong U.S. merchant marine. The President has pledged to reestablish the economic health of our merchant marine, to support our commercial Interests abroad, and to meet the need for logistical support for national defense In time. of emergency. Restructuring the regulatory framework within which the ocean liner industry operates would be beneficial to the industry, and..it is the first step in the implementation of the President's commitThent. We have translated these objectives into specific proposals for reform in the ocean liner industry affecting several key areas: conference activities, filing and approval of agreements, tariff filing and enforcement, independent carriers, and! finally, the very significant question of antitrust Immunity. We also have recommendations In the areas of shippers' councils and controlled carriers. CONFERENCE ACTIVITIES Current law requires that conferences In U.S. trades be open to all carriers -regardless of flag. Outside of the U.S. trades, closed conferences which may s~t prices and allocate capacity, routes, and cargo are the rule. We believe that conferences in the U.S. trades should be free to organize along the lines of conferences in the rest of the world, or' in any other way they wish, with one caveat, which I will discuss be-low dealing with abuse of conference power. These changes will enable conferences to control capacity,. to offer stable and reliable services,and. to'~ set. rates. whlcfr reflect a. high utilization of their- capacity. Allowing conferences to' organize as they wish means that rational izatiorr, including pooling agreements to share revenues or cargoes, should not be prohibited. The industry should not be prevented, from choosing- to rationalize and pooi if it will enable the carriers to improve their financial situation through steadier revenues and greater capacity utilization. Conferences also should not be prohibited from setting intermodal through rates if they so choose. Conferences presently set rates from U.S. ports to internal points In other countries; they should be able to PAGENO="0507" 501 extend those intermodal through rates to internal points within the U.S. However, while we think conferences should be allowed to set intermodal through rates, we strongly believe that only individual carriers should negotiate the division of the rate between ocean and inland carriers. Granting ocean conferences the authority to use their conference power to negotiate divisions with individual inland carriers conflicts with domestic surface transportation objectives. Consistent with recent legislation to deregalate domestic transportation, inland carriers are now prohibited by the antitrust laws from acting collectively on the division of rates. We believe the same prohibition should apply to conferences. Inland and ocean carriers should be permitted to negotiate the division of intermodal through rates only on an individual basis. With regard to loyalty contracts, we believe that conferences and shippers should be allowed to negotiate whatever form of contracts they may find to be in their mutual interest, to cover whatever commodities and to provide whatever discount may be appropriate, without statutory restriction. Such contracts permit better planning and promote full equipment utilization. The parties to such loyalty contracts should not be hampered from achieving these or other objectives by arbitrary restrictions on their freedom to contract. Similarly, we believe that interconferen~e agreements and rate agreements should be allowed without any regulatory requirements or restrictions. Rate agreements allow independent carriers, on a selective basis, to achieve some of the benefits. associated with ocean carrier cooperation in our- trades. Finally., the- measures necessary to prevent conference abuses in U.S. trades require minima] governmental intervention. We recommend statutory prohibition of clearly predatory practices, such as: Fighting ships, which are vessels subsidized by the conference and used essentially to drive other ocean carriers out of a trade. * Deferred rebates. Shippers should not be tied to a conference mechanism that, In effect, allows conferences to fine shippers for dealing with independents. ~ Exit penalties. Conference members should be free to quit a conference on short notice without penalties If they wish. Each of these prohibitions is designed to prevent the conference from exercising~ Its power in a fashion, that would. Impede independent carriers from operating in U.S. trades~ FrLING. AND APPROVAL OF AGREEMENTS Present law requires filing all agreements with the Federal Maritime Commission, which determines whether the agreement is "in the public interest." Historically, filing and. approval of agreements has. been justified on the grounds that conference agreements are inherently anticompetitive and must undergo rigorous government scrutiny if they are to enjoy antitrust immunity. The primary problems have not been with the requirement for approval. They have arisen over the interpretation PAGENO="0508" 502 of the vague and arbitrary public interest standard, and with the FMC approval process, which has been uncertain, expensive and lengthy. We also believe that vague standards suchas "unjustly discriminatory" or "detrimental to U.S. commerce," are likewise subject to the same lack of definition which will create confusion, extended approval processes and inefficiency. Instead, our approach is to continue the requirement that all conference agreements be filed with, and approved by, the FMC, but only so that specific predatory practices can be effectively prohibited. The approval process should be routine, consisting of a simple examination of the agreement to ensure that it does not contemplate such practices. This review should be completed within 30 days. The approval would be automatic if the agreement did not contain any prohibited activities. The practices to be prohibited would be described precisely and are those set forth above. Regulatory review based upon the vague standards set out would be eliminated, and prohibited practices which are alleged would have to be proven in a hearing process within an additional 90 day period. TARIFF FILING AND ENFORCEMENT The United States is almost unique in the developed world in mandating tariff filings and overseeing their enforcement. In almost all other OECD countries, tariffs are commerclal1y~ published, but the government plays no role in either the publication or enforcement process. We favor eliminating the requirement. that tariffs, other than for controlled carriers, be filed with and enforced by the FMC. Current requirements represent unwarranted government intrusion into the industry. However, all ocean carriers In our foreign trades should be required to make their tariffs available through a commercial organization in order to continue to provide shippers with information on ocean shipping rates and services. Any specifically prohibited practice reflected in a tariff could be Investigated by the FMC upon the complai ft of an aggrieved party. Conferences would be allowed to police their members' adherence to the conference rate. INDEPENDENT CARRIERS The Administration continues to support the presence of independent non-conference operators in: the U.S. trades. Independents exert pressure on the- conferences In our- trades to maintain reasonable and competitive rates. Furthermore, their presence ensures that shippers will have opttorns~ other~than~confe~'enCa service available te them.. In order to guarantee irndependents~ the opportunity te operate in our trades, the Identified restrictions must exist so that conferences do not engage In retaliatory and predatory practices against independents. Such restrictions would Include the prohibition against the use of fighting ships and deferred rebates, mentioned above. PAGENO="0509" 503 InTITRUST IMMUNITY Under present law, carriers are encouraged to act collectively but sometimes are in danger of having violated the antitrust laws. Because of this uncertainty -- and administrative delay in obtaining exemptions -- carriers have been constrained from making otherwise sensible commercial decisions. Present Section 15 of the Shipping Act specifies those ocean carrier agreements that must be filed before the FMC. We believe that all such agreements and all ocean carrier activities contemplated by such agreements or necessary to attempt to reach such agreements should be clearly immune from the antitrust laws, without any danger of application of antitrust penalties. The exclusive remedy for engaging in prohibited predatory activities should be under the Shipping Act. SHIPPERS' COUNCILS Testimony at recent Congressional hearings has addressed the need to grant antitrust immunity to American shippers so that they could form shippers' councils to counterbalance the increased power which might be exercised by closed conferences in the U.S. trades. It is not clear that such a step is either necessary or.~ven desired by shippers. We would not support a grant of antitrust immunity to shippers' councils absent a persuasive demonstration that they are needed and economically justified. We do favor, however, legislative language that clearly authorizes carriers to deal freely -- individually or as conferences - with foreign shippers' councils. CONTROLLED CARRIERS Current law authorizes the FMC to regulate the rates offered by controlled carriers when operating as cross-traders in U.S. trades. We support the retention of these provisions in any regulatory reform legislation considered by your committee. We think it would be appropriate, however, to exclude the application of these provisions to the carriers of non-communist developing nations as we have done already for non-communist developed nations. * * * In summary, the Administration believes that -- to the greatest extent possible - the members of the ocean liner industry should be free to conduct their business as they see Nt, free of government intervention In the form of unnecessary regulations, vague standards, or threatened penalties under changing interpretations of antitrust laws. The ease of entry into shipping markets and specific prohibitions on certain predatory practices is the extent of intervention needed to prevent any group of carriers from accumulating or misusing excessive market power. These policies would reinstate the balance between the needs of the public and the needs of the carriers that the Congress envisioned when it passed the Shipping Act, 1916. In closing, let me reiterate the President's commitment t~ the U.S. maritime industry anti say again how much we look forward to working with you and your staff jr the months ahead. Sircerely, .A~~Zt'~ PAGENO="0510" 504 ~s. FLA~p NATI~NAL MARITIME C~U~C~L 1748 N STREET, NW., WASHINGTON, D.C. 20036 * Telephone 2027853754 ~4~lTlt~ March 1, 1982 The Honorable Mario Biaggi Chairman, Subcommittee on Merchant Marine United States House of Representatives Washington, D.C. 20515 Dear Mr. Chairman: On behalf of the National Maritime Council, I am writing to express our strong support for the authority of the Federal Maritime Commission to confer appropriate antitrust immunity on ocean liner shipping conferences to establish single factor through intermodal rates over transportation routes having both ocean and land segments. The Council is a nonprofit trade association which represents all segments of the American maritime industry, namely, U.S.-f lag liner and bulk carriers, seagoing and shoreside labor unions, and domestic shipbuilders and ship repair yards. Our objective is to foster the development of a strong, competitive, modern, American-built, privately- owned and operated U.S.-f lag fleet which will afford U.S. importers and exporters the finest ocean transportation service in the world. As you are aware, the Antitrust Division of the Department of Justice in litigation pending before the U.S. Court of Appeals for the District of Columbia Circuit (United States v. Federal Maritime Commission, D.C. Cir. No. 79-1299, rehearing en banc held on December 10, 1981) has challenged the jurisdiction of the FMC under section 15 of the Shipping Act, 1916 (46 U.S.C. 814) to review a conference agreement between ocean carriers regarding the rates to be charged shippers utilizing intermodal services. In other words, the Department of Justice contends that under the 1916 Act conference activity can extend only to port-to-port movements and therefore the Commission has no authority to approve conference agreements to regulate the intermodal services of their members. SHIP A FAIR SHARE ON AMERICAN FLAG SHIPS PAGENO="0511" 505 Regrettably, H.R. 4374 does not address the issue of intermodal ratemaking authority by ocean liner shipping conferences. The Reagan Administration, via its spokesman for Maritime Affairs, Secretary of Transportation Drew Lewis, has declared: "Conferences also should not be prohibited from setting intermodal through rates if they so choose. Conferences presently set rates from U.S. ports to internal points in other countries; they should be able to extend those internodal through rates to internal points within the U.S. However, while we think conferences should be allowed to set intermodal through rates, we strongly believe that only individual carriers should negotiate the division of the rate between ocean and inland carriers. Granting ocean conferences the authority to use their conference power to negotiate divisions with individual inland carriers conflicts with domestic surface transportation objectives. Consistent with recent legislation to deregulate domestic transportation, inland carriers are now prohibited by the antitrust laws from acting collectively on the division of rates. We believe the sane prohibition should apply to conferences. Inland and ocean carriers should be permitted to negotiate the division of internodal through rates only on an individual basis." (Letter from Secretary of Transportation Lewis to Congressman Walter B. Jones, Chairman, House Merchant Marine and Fisheries Committee, dated February 5, 1982.) The National Maritime Council is of the view that without through intermodal rate authority, ocean liner shipping conferences would be precluded from offering shippers generally the best possible service on equal terms at the lowest practicable cost. Accordingly, the Council strongly supports the inclusion of a provision in H.R. 4374 granting conferences through intermodal rate authority. We request that this letter be made a part of the record on this legislation. sincerely yours, H/General USA (Ret.) President PAGENO="0512" 506 Mr. BIAGGI. Mr. Secretary, we welcome you and we look forward to your testimony. STATEMENT OF HON. DREW LEWIS, SECRETARY OF TRANSPOR- TATION, ACCOMPANIED BY JOHN M. FOWLER, GENERAL COUN- SEL; AND ADM. HAROLD E. SHEAR, ADMINISTRATOR, MARI- TIME ADMINISTRATION Secretary LEwIs. Thank you very much, Mr. Chairman. With your permission, then, so I do not bore you with a 13-page statement, I would appreciate your permitting me to make that part of the record. Mr. BIAGGI. Without objection, so ordered. Secretary LEWIS. With that taken care of, I would like to just make a few preliminary remarks. Not to appear as a mutual admi- ration society or solicitous of the committee to interrogate us, I would like to say that I have enjoyed very much working with you and Chairman Jones and obviously the ranking minority member, Mr. Snyder. I think all of us have a genuine concern for the direction the maritime industry is going, and I would also have to say that, de- spite Mr. Snyder's comments, we have made considerable progress since we took this operation over-what was it, August 6-I have been disappointed that it took us so long to get back to you with an answer to your bill and also to the bill, which is somewhat similar, proposed in the Senate. I want to assure you that it did take a long while to get the var- ious departments within the administration to work together to come up with a reasonable position. If you look at your bill and the position we are taking today, we are really not very far apart. I also would like to say, and I think I might as well say it for the record, that I am concerned as to where we go with this industry. We are taking one step here. There are obviously some needs for some very strong promotional efforts. I do feel that we would like to get out of the business of construction and operational subsidies. We do not think they have been particularly successful. On the other hand, the manner in which we get out of those subsidies, par- ticularly the operating subsidy, has to be done in an evenhanded way so that it is not damaging to this industry as we hopefully cor- rect its problems and create a stronger merchant marine fleet for this country. I would just like to summarize very briefly a few of our views. First of all, with regard to the staff working draft, which we are considering today, essentially to improve the international ocean commerce transportation system of the United States, we are in agreement with almost everything within that draft. We are com- mitted to minimizing Government intervention in business. We want to put the U.S. carriers on an equal footing with foreign car- riers, and we want to maintain a strong U.S. merchant marine fleet. In very brief summary, we agree that conferences should be per- mitted to organize as they see fit. Second, in the antitrust area, we agree there should be blanket exemption for ocean shipping activi- ties. I can assure you that we went through great consternation PAGENO="0513" 507 within the administration, and I appreciate the fact that the Jus- tice Department finally was able to see our view and accept it, which was not an easy task internally in the Justice Department. I do not say this in a partisan sense because this has gone on for 20 or 25 years. Third, we agree that we must simplify and streamline the agree- ment approval process; impose strict time limits on the commission approval process; and delete the vague, troublesome preapproval standards of public interest and unjustly discriminatory and detri- mental to commerce. Fourth, we agree that any violations of the act should be specific, prohibited activities, such as engaging in predatory practices like fighting ships, deferred rebates, and exit penalties. We feel some remedy to that should be within the act. I think the only thing on which we differ is whether or not there should be tariff filings and the manner in which we should have enforcement. I think we should leave that to your interrogation. I will say this: When we first took a position on tariff filing we found almost universal opposition within the industry. I now find some moderation in that view. If you look around the world, others do not have the same kinds of filings and enforcement procedures we have, and carriers seem to be much more successful and operating more profitably in those areas than in the United States. With that, I would just like to thank you very much, Mr. Chair- man, for your cooperation. I think we in essence have a very sound bill here which will help the industry. We would like to move it as promptly as you see fit, and to the extent that our cooperation will make that possible, we are prepared to make that commitment. I turn it back to you, and we are ready to try to answer your questions. [Material follows:] PREPARED STATEMENT OF DREW LEWIS, SECRETARY OF TRANSPORTATION Mr. Chairman and Members of the Merchant Marine and Fisheries Committee. I am pleased to appear before you today to present the Administration's views on H.R. 4374, a bill introduced by Chairman Jones and Chairman Biaggi "To improve the international ocean commerce transportation system of the United States." If I may, Mr. Chairman, I would like to take this opportunity to publicly thank you and all the Members of the Merchant Marine and Fisheries Committee for de- veloping the landmark legislation that transferred the Maritime Administration to the Department of Transportation. As you know, upon the enactment of your legis- lation, President Reagan designated me as the Administration's spokesman on mari- time affairs. It is a privilege for me to appear this morning in that capacity. As the Administration's spokesman on maritime matters, I am gravely concerned with the current status of the U.S-flag merchant marine, and am acutely aware of my responsibilities in this area. Liner vessels are the core of the U.S-flag merchant marine, and I view your bill as a vehicle to overcome some of the severe regulatory handicaps currently confronting our liner operators. I was particularly pleased to note Chairman Biaggi's remarks in the Congression- al Record that one of the fundamental purposes of H.R. 4374 is to "provide for greater recognition of commercial maritime standards when approving agreements between common carriers by water." This approach is consistent with the Presi- dent's efforts to reduce government involvement as part of his economic recovery program. The Administration's position on regulatory reform of the maritime industry was outlined in my letter of Feb. 5 to this Committee. That position represents months of debate and compromise with all interested parties in order to arrive at a policy which best meets everyone's concerns. In developing this approach we have been guided by three major objectives: 9~4-856 0 - 82 - 33 PAGENO="0514" 508 First, this Administration is committed to minimizing government intervention in business. Second, we want to put U.S. carriers on an equal footing with foreign carriers, and Third, we want to maintain a strong U.S. merchant marine. The President has pledged to reestablish the economic health of our merchant marine, to support our commercial interests abroad, and to meet the need for logis- tical support for national defense in time of emergency. Restructuring the regula- tory framework within which the ocean liner industry operates would be beneficial to the industry, and it is the first step in the implementation of the President's com- mitment. These objectives have been translated into specific legislative proposals that I will now discuss with respect to H.R. 4374. CARRIER ACTIVITIES The first subject I will comment on this morning is carrier activities, including conference membership, through intermodal rates, loyalty contracts, interconfer- ence and rate agreements, and independent ocean carriers. Conference Membership. On the question of liner conference organization, the United States is the only major trading nation in the world to require by law that conferences hold their membership open to all applicants. The rule in most other trades in the world is that conferences determine their own requirements for mem- bership; in other words, conference membership may be closed. Section 2 of H.R. 4374 would amend section 15 of the Shipping Act to authorize the formation of closed conferences in our trades where any such conference "admits to membership at least one carrier operating United States-flag vessels will- ing to serve the particular trade or route involved." The Administration believes that conferences in U.S. trades should be free to or- ganize along the lines of conferences in the rest of the world, or in any other way they wish, so long as clearly predatory practices, such as fighting ships, deferred re- bates and exit penalties, are prohibited by statute. Allowing carriers to organize their activities as they wish also means that ration- alization, including pooling agreements to share revenues or cargoes, should not be prohibited. The industry should not be prevented from choosing to rationalize and pool if it will enable the carriers to provide regular, reliable service and to improve their financial situation through steadier revenues and greater capacity utilization. Intermodal Through Rates. Let me move on to intermodal through rates. As you know, intermodal transportation in the maritime industry refers to the utilization of two or more different modes of transportation from origin to destination, at least one of which is an ocean common carrier. At the present time the regulatory treat- ment of intermodal through rates is ambiguous. It is clear that any ocean confer- ence member may negotiate with a rail, motor, or air carrier on the division (split) between the inland and ocean portion of an intermodal through rate. It is also clear that an ocean conference can not negotiate for all its carrier members the division with an individual rail, motor or air carrier. What is unclear is whether the Federal Maritime Commission has the authority to grant an ocean conference the ability to agree upon the total through intermodal rate. The Administration believes that conferences should not be prohibited from set- ting intermodal through rates if they so choose. Conferences presently set rates from U.S. ports to internal points in other countries; they should be able to extend those intermodal rates to internal points within the United States. However, while we think conferences should be allowed to set intermodal through rates, we strongly believe that only individual carriers should negotiate the division of the rate be- tween ocean and inland carriers. This maintains consistency with recent legislation to deregulate domestic transportation. Loyalty Contracts. I'd like to turn now to loyalty contracts. These contracts are arrangements whereby a shipper receives a published, but lower, freight rate in ex- change for a contractual commitment to ship with a particular conference or carri- er. Loyalty contracts in our foreign trade are regulated by the Commission under the Shipping Act, but elsewhere they are provided for by contract between the par- ties. The Administration believes that conferences and shippers should be allowed to negotiate whatever form of contracts they may find to be in their mutual interest, to cover whatever commodities and to provide whatever discount may be appropri- ate, without statutory restriction. We believe that such contracts permit better plan- ning and promote full equipment utilization so that the parties to such contracts PAGENO="0515" 509 should not be hampered from achieving these objectives by arbitrary restrictions on their freedom to contract. Interconference and Rate Agreements. Another topic I want to cover briefly this afternoon concerns interconference and rate agreements. At the present time, the Shipping Act authorizes agreements between conferences, called interconference agreements, and agreements between conferences and non-conference carriers, called rate agreements. The Act requires a right of independent pricing action by the parties to such agreements. Such agreements are generally not regulated in other trades. Rate agreements allow independent carriers, on a selective basis, to achieve some of the benefits asso- ciated with ocean carrier cooperation in our trades. The Administration believes that interconference agreements and rate agreements should be allowed in our trades without regulatory requirement or restrictions consistent with our policy of minimizing government interference. Independent Carriers. Mr. Chairman, in formulating a position with respect to conference activities, the Administration has not disregarded the ocean carriers who operate as independents in U.S. trades. We continue to support the ability of non- conference operators to function in our trades. Independents exert pressure on the conferences in our trades to maintain reasonable and competitive rates. Further- more, their presence ensures that shippers will have options other than conference service available to them. In order to guarantee independents the opportunity to op- erate in our trades, we must have clearly specified restrictions on certain predatory practices, such as fighting ships, deferred rebates and conference exit penalties, so that conferences do not engage in retaliatory and predatory, practices against inde- pendents, FILING AND APPROVAL OF AGREEMENTS Current law requires filing all agreements with the Commission, which deter- mines whether the agreement is "in the public interest." Historically, filing and ap- proval of conference agreements has been justified on the grounds that they are in- herently anticompetitive and must undergo rigorous government scrutiny if they are to enjoy antitrust immunity. I think there is general agreement that the pri- mary problems have not been with the requirement for approval. Rather, such prob- lems have arisen over the interpretation of the vague and arbitrary public interest standard, and with the Commission approval process, which has been uncertain, ex- pensive and lengthy. H.R. 4374 recognizes this serious problem. The bill would amend section 15 of the Shipping Act as follows: First, the Public Interest test for approval would be deleted. Second, any Commission proceeding must be commenced within 30 days after filing and concluded within 180 days thereafter. Third, the Commission would be required to hold an "informal preliminary hear- ing" within 30 days after filing of a written complaint by any common carrier by water, shipper, port or other person subject to the Act, in order to ascertain the rea- sonable probability that a section 15 agreement is in violation of the Shipping Act, and Finally, the burden of proof would be shifted to the Commission or to a party op- posing any agreement in such proceedings. While the Administration concurs with your objectives in this area, our approach differs slightly from that taken in HR. 4374. We agree that the "public interest" test should be eliminated. The Administration believes however, that other vague standards such as "unjustly discriminatory" or "detrimental to U.S. commerce" are similarly vague and therefore will lead to con- fusion, extended approval processes and inefficiencies. Therefore, our approach is to continue the requirement that all agreements among carriers be filed with, and ap- proved by, the Commission, but only so that specific predatory practices can be ef- fectively prohibited. We believe that Commission approval should be routine, consisting of a simple ex- amination of the agreement to ensure that it does not contemplate such practices. This review should be completed within 30 days. The approval would be automatic if the agreement did not contain any prohibited activities, such as use of fighting ships, deferred rebates, and exit penalites. The practices to be prohibited would be described precisely. Regulatory review based upon the current vague standards would be eliminated. Allegations of prohibited practices would have to be proven in a hearing process within an additional 90 day period. PAGENO="0516" 510 TARIFF FILING AND ADHERENCE REQUIREMENTS As you know, the freight rates charged shippers for ocean transportation are set forth in tariffs. The Shipping Act requires that ocean common carriers and confer- ences of such carriers must file their tariffs with the Commission, and the Commis- sion enforces adherence to the tariff rates. The United States is almost unique in the developed world in mandating tariff filings and overseeing their enforcement. In almost all other OECD countries, tariffs are commercially published, but the gov- ernment plays no role in either the publication or enforcement process. The Administration favors eliminating the requirement that tariffs, other than for controlled carriers, be filed with and enforced by the Commission. We believe that current requirements represent unwarranted government intrusion into the in- dustry. We also think, however, that all ocean carriers in our foreign trades should be required to make their tariffs available through a commercial organization in order to continue to provide shippers with information on ocean shipping rates and services. Any specifically prohibited practice reflected in a tariff could be investigat- ed by the Commission upon the complaint of an aggrieved party. Conferences would be allowed to police their members' adherence to the conference rates, but would not be required to do so. ANTITRUST IMMUNITY On the subject of antitrust immunity, Mr. Chairman, it appears we are both at- tempting to resolve the present unsatisfactory state of affairs. In the U.S. trades ocean conferences require antitrust immunity in order to func- tion. Therefore, section 15 of the Shipping Act exempts from the antitrust laws Commission approved agreements concerning conference and other activities speci- fied in that section, and loyalty contracts provided by section 14b. Unfortunately, Court and Commission interpretation of the Shipping Act have left the scope of antitrust immunity for activities pursuant to approved agreements in a state of great uncertainty and have eroded the original intent of the Shipping Act. Under present law, carriers are encouraged to act collectively but sometimes are in danger of being found to have violated the antitrust laws. This uncertainty and administra- tive delay in obtaining exemptions have constrained carriers from making otherwise sensible commercial decisions. H.R. 4374 would make substantial improvements in the filing and approval of such agreements, but would still require Commission approval for immunity from U.S. antitrust laws. The Administration's approach is slightly different. In view of the current uncer- tainty surrounding such antitrust immunity, the Administration believes that all such agreements and all ocean carrier activities contemplated by such agreements or necessary to attempt to reach such agreements should be clearly immune from the antitrust laws, without any danger of the application of antitrust penalties. The exclusive remedy for engaging in prohibited predatory activities should be under the Shipping Act. SHIPPERS' COUNCILS Shippers' councils are generally an association of shippers formed to engage in activities of mutual interest with ocean common carriers. Although Shippers' coun- cils function in many parts of the world, they have not been formed in the United States because U.S. antitrust laws generally prohibit them. H.R. 4374 would add a new section to the Shipping Act, 1916. The section would allow shippers to organize into councils so that they can meet, confer, consult, agree, and generally exchange information if such activities are pursuant to an agreement approved by the Commission. These activities would be conducted with full antitrust immunity. Mr. Chairman, testimony before this and other Committees of the Congress has addressed the need to grant antitrust immunity to American shippers so that they could form shippers' councils to counterbalance the increased power which might be exercised by closed conferences in the U.S. trades. However, it is not clear that such a step is necessary at this time. Therefore, the Administration would not support a grant of antitrust immunity to shippers' councils absent a persuasive demonstration that they are both needed and economically justified. The Administration does favor, however, legislative language that clearly authorizes carriers to deal freely, individually or as conferences, with foreign shippers' councils. PAGENO="0517" 511 CONTROLLED CARRIERS With respect to controlled carriers, Mr. Chairman, the Administration supports the retention of provisions in the Shipping Act that authorize the Commission to regulate the freight rates offered by such carriers when operating as cross-traders in U.S. trades. We think it would be appropriate, however, to exclude the application of these provisions to the carriers of non-communist developing nations. We already have done this for non-communist developed nations. CONCLUSION In summary, Mr. Chairman, the Administration believes that, to the greatest extent possible, the members of the ocean liner industry should be free to conduct their business as they see fit, free of government intervention in the form of unnec- essary regulations, vague standards, or threatened penalties under changing inter- pretations of antitrust laws. Maintaining ease of entry into shipping markets and providing specific prohibitions on certain predatory practices is the extent of inter- vention needed to prevent any group of carriers from accumulating or misusing ex- cessive market power. These policies would reinstate the balance between the needs of the public and the needs of the carriers that the Congress envisioned when it passed the Shipping Act, 1916. Finally, Mr. Chairman and Members of the Committee, let me reiterate the Presi- dent's commitment to the U.S. maritime industry and say again how much we look forward to working with you and your staff in the months ahead. That concludes my prepared statement. My colleagues and I will be pleased to answer any questions that the Committee Members may have. Thank you. Mr. BIAGGI. Thank you very much, Mr. Secretary. I think your summary is pretty consistent with your whole method of operation: Right to the heart of the matter, get it out of the way, let's do it and move it. We appreciate the difference, I assure you. It is clear that we have similar objectives. One of the objectives is to insure that while we are helping the U.S. ocean carriers to com- pete with foreign carriers on a more equal basis, we do not at the same time put the customers of ocean carriers at a disadvantage. I refer to the shippers, of course. I understand that many U.S. manufacturers who ship overseas are fearful that the proposed legislation will give the carriers a great deal of power and that they will raise their prices so that our manufacturers will be unable to ship their products overseas at a competitive price. Do you believe that the enactment of this legisla- tion, implementing the administration's recommendation, would adequately protect the interests of both large and small shippers? Secretary LEwIS. We feel very strongly that it will adequately protect those interests. Obviously if you look at the total shipping in this country, the largest proportion of it is not made by U.S. car- riers, and somehow we have been able to deal with foreign carriers and be competitive. Therefore, we do not see this as a competitive disadvantage. I think what we are essentially doing is permitting our companies in the maritime industry to compete on an equal footing with their European and other foreign competitors. I also should say that there is a right of independents to operate outside of these conferences. If there is an indication this is disad- vantaged shippers, we still have the presence of independent carri- ers. Therefore, we think the shippers should be adequately protect- ed. Mr. BIAGGI. Do you believe that the staff working draft adequate- ly protects the interests of shippers? Secretary LEwIS. Yes, we do. 9~-856 0 - 82 - 3L~ PAGENO="0518" 512 Mr. BIAGGI. Several large shippers have told me that this legisla- tion must include a mandatory right of independent action. Do you believe such a provision is necessary or desirable? Secretary LEwIs. No, we do not. Mr. BIAGGI. They have also said that legislation must give them the right to negotiate service contracts with carriers. What are your views on this proposal? Secretary LEWIS. We think they should be permitted to operate in a free enterprise system in terms of making those decisions as they see fit, and not under regulation by this act. Mr. BIAGGI. Shippers are also requesting that the bill provide them clear antitrust immunity when they consult, either individ- ually or collectively, with carriers in conferences. How do you re- spond to that? Secretary LEWIS. We think they should have antitrust immunity, and therefore supported that as it is so stated in the proposed staff draft. Mr. BIAGGI. Have you had an opportunity to examine the staff working draft, and do you have any other-- Secretary LEWIS. Excuse me. You asked about shippers' councils? Mr. BIAGGI. Yes. Secretary LEWIS. I must have misunderstood your question. Excuse me. No, the reverse is true on that answer. I misinter- preted your question and I apologize. Mr. BIAGGI. Yes. I was a little concerned about that one. Secretary LEWIS. Yes. I did not realize until I was corrected here. Mr. BIAGGI. Do you have any further comments on the staff working draft of the legislation? Secretary LEWIS. No, other than the fact, I guess, that basically more than anything else we believe there is no real requirement for the filing and enforcement of tariffs. We feel that with that ex- ception in the enforcement procedures under the act, we really have very few differences. Mr. BIAGGI. Good. Mr. Snyder? Mr. SNYDER. Thank you, Mr. Chairman. Mr. Secretary, when the chairman asked you whether or not you favored mandatory independent action and your response was in the negative, was or was not that response conditioned upon the bill containing a provision for not filing tariffs? Secretary LEWIS. Well, on the issue of the enforcement of tariffs, yes. Mr. SNYDER. It is sort of my understanding that mandatory inde- pendent action is probably not a requirement if in fact they adopt your position in regard to not filing tariffs, but if in fact the com- mittee decided not to go that route, then independent action would become more of a concern. Is that a logical conclusion? Secretary LEWIS. That is correct but what I would like to do is have John Fowler, who is our general counsel and who has been involved with your staff in terms of drafting the bill, answer that in more detail. Mr. F0WLER. Mr. Snyder, we are not at this point committed to requiring a mandatory right of independent action if in fact there is tariff enforcement, although as you say that is a lesser degree of PAGENO="0519" 513 protecting shippers from the extreme power of the conference. However, we are not convinced at this point in time that there are not sufficient independent carriers in our trades to protect the shippers against the problem that might be created by the confer- ence power. Mr. SNYDER. Further along that same line, you indicate on page 10 of your prepared statement that tariffs be required to be filed through some commercial organization. You go on to say that any specifically prohibited practice reflected in a tariff could be investi- gated by the FMC if on the complaint of an aggrieved party. Would the FMC under this proposal be able to initiate an investigation without a complaint? Mr. FOWLER. We believe that we can work with the staff in order to come up with, essentially, a showing of some initial burden of proof that indeed there is something more there than just them fishing around to determine whether or not there might be some prohibited activity-some indication that the prohibited activity was either contemplated by the clause in the tariff or by a permis- sable activity thereunder. Mr. SNYDER. What specifically prohibited practice or practices are you referring to in that statement? Mr. FOWLER. Well, I know the FMC has submitted a list of pro- hibited activities which they contemplate, and the ones that we would focus on would be fighting ships. These would more likely show up in the agreements than in the tariffs, but essentially pred- atory practices, boycotts, deferred rebates. That is something which might be more in the tariff. Mr. SNYDER. Therefore, the lack of tariff filing does not presup- pose that you want to legalize rebating, then? Secretary LEwIs. That is for sure. Mr. SNYDER. Mr. Secretary, this is not exactly a question, but in your ad lib remarks you referred to the desirability, in your opin- ion, of doing away with CDS and ODS as not being an effective way to run a merchant marine. I would like to call to your attention the fact that in the mari- time authorization bill that has been before our committee on sev- eral occasions I have been successful, with the concurrence of the majority, in having an amendment adopted which is in the law at the present time. This provision allows a carrier to go off of ODS for a period of. at least 1 year, pay back a portion of the CDS-and thus have an opportunity to operate in the free market. As a result of that amendment, there has been some movement in that direc- tion by at least one or two carriers and several ships. What they have been doing is carrying Government-impelled cargo, which is, of course, cargo preference. I just would like to suggest to you-and I am aware of your per- sonal feeling on it-I would like to suggest to you that cargo prefer- ence, in my opinion, is the alternative to ODS and the one way that they can make it without subsidy. I would like to bring that to your attention. Secretary LEWIS. Well, as we discussed previously, Mr. Snyder, we certainly have not ruled that out but we have not reached that conclusion, either. We would prefer not to go that direction. On the PAGENO="0520" 514 other hand, we are very much concerned about the present condi- tion of this industry. Mr. SNYDER. I seek your assistance within the administration for positive position on that. Thank you, Mr. Chairman. Secretary LEWIS. I may have to seek your assistance on that one, too. Mr. BIAGGI. Chairman Jones? Mr. JONES. Mr. Secretary, since there is alleged to be a fairly fixed pool of cargo in the international ocean trade, would the en- hanced position of U.S. liner operators be at the expense of, (1) for- eign-flag carriers within the conference or, (2) independents, confer- ence outsiders? Secretary LEWIS. Well, we would like to see that not happen at the expense of others. Mr. JONES. Could you dwell on that minute, maybe? Secretary LEWIS. Do you want to answer that? Mr. FOWLER. We feel that if we do close the membership or permit the conferences to close their membership, that the general increased load factors that may come from the resulting rationali- zation of the activities of conferences would result in more efficient and economical use of ocean carriers which would ultimately con- tribute to the profits, hopefully, of American carriers. Since we are in a position where we have such a vast bulk of the world trade, we do not think that that will come at the expense of independents visiting our shores. Hopefully the rationalization will take place at such a pace that it will not come at the expense of conference carriers either. Mr. JONES. Thank you. Since U.S. operators, because of statutory restrictions, are always going to be the high-cost operators in any conference, will this leg- islative effort be forcing the price of ocean transportation up to a point where it will be difficult for U.S. shippers to compete over- seas, or will the improved utilization of vessel capacity drive unit prices down? Secretary LEWIS. We think the latter. We think the improved utilization of space available will actually drive the prices down. What it will do is, it will at least permit our carriers to be more competitive on an international basis. Mr. JONES. Foreign-flag carriers trading in non-U.S. trades enjoy the rationalization provided by strong conferences, and they also are not burdened by high operating cost. They can take advantage of these savings when they quote rates to foreign shippers who compete with the United States in the third markets. How will this bill assist U.S. exporters seeking to compete in the third markets? Secretary LEwIS. Again, we think the improved utilization of vessel capacity is going to make us more competitive. Mr. JONES. In the final analysis, don't we still need some kind of support program to place U.S. operators more closely in line with the operating cost of their foreign competition? Secretary LEWIS. We are looking at all of that right now. It is very clear that the system we have has not been successful and it is clear we are not competitive. You can blame part of this on the management; I think you can blame part of it on our high labor PAGENO="0521" 515 costs. We are in the process of reviewing all of that right now. I made a commitment that we would have a program by this time. We do not. Admiral Shear, as you know, is our Maritime Adminis- trator and we hope we can get some kind of internal reconciliation among the administration and have a more definitive answer for you on that within the next 60 days. Mr. JONES. What change in condition-- Secretary LEwIS. I might also add that there are a number of statutory regulations we are looking at that we think are inhibit- ing our carriers to be more competitive, one of which we are re- moving with your bill, which is the antitrust immunity. Mr. JONES. What changing condition calls for the expansion of exempt classes in the controlled carrier law to include developing nations who choose not to utilize existing exemption provisions? Secretary LEWIS. Do you want to answer that? Mr. FOWLER. We believe that the Controlled Carrier Act should require the Communist countries to continue to file their tariffs with the Commission, and we are not sure that there are changes we can deal with to accommodate that. I am not sure I am getting the gist of your question. Is that where you are going? Mr. JONES. I think I had in mind, Mr. Secretary, India and Sin- gapore. Secretary LEWIS. Excuse me? Mr. JONES. I had in mind India and Singapore. Secretary LEWIS. I Cannot answer that question. Can you answer that, John? Mr. FOWLER. If you are speaking to the changes we want that deal with developing countries which are non-Communist, we be- lieve that the changes we are requesting simply are to clarify what we think probably already is the intent of the Controlled Carrier Act. It was designed to deal with predatory practices of Communist countries. It does not now apply to our most favored-nation coun- tries or the European Community countries, and we feel that the exemptions that are extended to those organizations and the coun- tries therein should also be extended to the non-Communist devel- oping countries whose trade is generally between that country and ourselves. Mr. JONES. What changes from the position outlined in your letter of February 5, 1982, are likely to cause the Department of Justice the greatest difficulty, and are they locked in to the admin- istration's posture on antitrust immunity? Secretary LEWIS. I think when you ask, that the changes that are going to create greatest concern with the Justice Department are the ones that we have already addressed. First of all, the Justice Department did agree on the antitrust immunity. I think the great- est difference we had with them was in terms of intermodal rates and tying the entire package together from port to final customer. These are problems. However, the Justice Department submitted their recommenda- tions to the President, as did we. The President has made his posi- tion clear and it is also very clear that he is the one that is calling the shots, in terms of where we go in this administration, and that is the direction we are going. I do not anticipate internal problems in terms of this particular bill at the present time because we are PAGENO="0522" 516 speaking with one voice within the administration. I hope I am being responsive to your question. Mr. JONES. Thank you very much. Mr. Chairman, that is all the questions I have at this time but if given an opportunity at a later moment here in a few minutes, I would be delighted to propound three or four more. Mr. BIAGGI. We will go around again. Mr. Shaw? Mr. SHAW. I have no questions, Mr. Chairman. Mr. BIAGGI. Mr. Snyder? Mr. SNYDER. Mr. Chairman, Mr. McCloskey had submitted some questions. I would like to ask unanimous consent that we be per- mitted to submit those in writing to the Secretary and that he be permitted to respond for the record. Mr. BIAGGI. Without objection. Mr. Anderson? Mr. ANDERSON. Thank you, Mr. Chairman. Mr. Secretary, what are the likely effects on labor of the mari- time regulatory reforms encompassed in H.R. 4374? Secretary LEWIS. Well, we think it is going to make our ships more competitive and, therefore, be helpful in terms of labor. I also have to say that we are not going to be the ones to do the negotia- tions but I think, as there have to be some management changes in this industry, we are also going to have to see some concessions from labor to make us more competitive. What I would like to see are more American-flag ships and it is obvious that you are not going to see them under the present con- ditions. We see nothing negative in terms of this act as far as labor is concerned. As a matter of fact, if this act is not enacted, operat- ing and construction subsidies notwithstanding, we do not even see an American maritime fleet a few years down the road. Mr. ANDERSON. In your remarks on page 12, you say that the ad- ministration does not now recommend provisions for the creation of shipper's councils. My question is, Why not? What would the ad- ministration consider sufficient rationalization for the creation of shipper's councils? Secretary LEWIS. At the present time there is no indication that it will be necessary. If it is clear that the closed conferences are creating problems for us in terms of our international trade and that shippers are not being properly served at what could be deemed to be competitive prices, we are satisfied to address that problem at that time. However, at the present time we do not see the necessity of shipper's councils. Mr. ANDERSON. What would be wrong with them? It seems to me it might be a good way to relieve some pressure created by allow- ing closed liner conferences. Is this position strictly from the Jus- tice Department or does this position represent your own feelings on that? Secretary LEWIS. No; this is our recommendation. Furthermore, we have been meeting with a number of these groups and I am get- ting no pressure from the shipper's groups that we should do this. Now if you are, perhaps you should pass it on to us, but we do not see at the present time that they see this as something that is vital to their interest. PAGENO="0523" 517 Mr. ANDERSON. If the purpose of this legislation is to allow inter- nationally accepted commercial practices to replace Government intervention, could you expand on the reasoning for prohibiting de- ferred rebates, a device which truly makes the conference strong and effective? What makes a deferred rebate any more predatory than other rebates such as the immediate price discounts? Secretary LEWIS. Well, essentially rebates-I guess people could put it in other terms, I will put it in my own terms-from a busi- ness standpoint I think it is economic blackmail. Essentially what you do is, you lock somebody into something and take their money, and then take it away. To me it is some- thing that I do not think will ultimately serve the best interest of the shippers nor the carriers. Mr. ANDERSON. The last part of my question was, What makes a deferred rebate any more predatory, say, than other rebates such as the immediate price discount? Secretary LEWIS. The problem with it is to look back and see and determine where you are after the fact, where the other one you have to put-in very blunt terms-your money where your mouth is. You know what you are going into, you know what your price is when you are shipping, which you do not know under deferred re- bates. Mr. ANDERSON. What makes one more predatory than the other? Secretary LEWIS. Again, I am looking at it from a businessman's viewpoint. I like to know what I am doing going into a deal rather than figuring out, under certain conditions somebody is going to slip me a little bit back after the deal is over. Mr. SNYDER. Would the gentleman yield? Mr. ANDERSON. Sure. Mr. SNYDER. Do I understand correctly that in the discount situa- tion that would probably be a volume discount that would be pub- lished and would be on top of the table, whereas the deferred rebate is an under-the-table deal subsequently? Mr. ANDERSON. No, I understand that the deferred rebate is also provided for in the tariff. Mr. SNYDER. That was not my understanding, and maybe I mis- understood it. I thought that the discount would be in the nature of a volume discount or something of that nature and would be pub- lished, and that the deferred rebate in the context in which it is being used is an under-the-table payment. Maybe I am in error about that. Secretary LEWIS. We interpret it the same way. We essentially look at it as some kind of a punitive effect after you look back, and it requires loyalty which we do not think should be imposed. Mr. Anderson, I am not suggesting that the point you may be driving at is not well taken. We just feel from our standpoint that it is not going to be advantageous to either the carrier or the ship- per, and in many cases could make us less competitive in the inter- national market. Maybe I am missing your point. Mr. ANDERSON. Would the administration's position allow a con- ference to restructure itself by expelling any member? Should good cause be a requirement, or should expulsion require a vote requir- ing a majority or some greater number? PAGENO="0524" 518 Secretary LEWIS. I believe there is some additional staff work re- quired to make sure that both the intent of the bill and our posi- tion are consistent. That is a matter I think has to be worked out really between the staffs but essentially, we do not have a detailed position on that, nor I think do you. Mr. ANDERSON. No. Thank you, Mr. Chairman. Mr. BIAGGI. Mr. Breaux? Mr. BREAUX. Thank you, Mr. Chairman. Thank you, Mr. Secretary. I apologize for not being here for the presentation of your statement. We appreciate your being with the committee today. On page 4 of your testimony, dealing with conferences, you state the administration's position that conferences in the U.S. trade should be free to organize along the lines of conferences in the rest of the world or in any other way they wish, so long as clearly pred- atory practices-and you name a few-are prohibited by the stat- ute. The question I want to address is related to the provision in the staff draft, on page 9, which deals with conference agreements, that provision sets forth two things that each conference agree- ment must do. Are you familiar with the staff draft? I will read it to you. Secretary LEwIs. I am familiar with it but I do not have it in front of me. Mr. BREAUX. First, it provides for the admission to conference membership for any carrier operating vessels of the United States willing to serve the particular trade or route. Second, the confer- ence agreement must permit any member to withdraw from confer- ence membership upon reasonable notice without penalty. Do you view these provisions of the staff draft that I just out- lined as too cumbersome or too burdensome? Does that fit the ad- ministration's equation as something that would be acceptable? Secretary LEwIs. As it applies to the last point, we would be in general agreement with the staff draft. Mr. BREAUX. You talk in your statement on page 8 about-- Secretary LEwIS. You are looking at my statement now or your staff draft? Mr. BREAUX. Your statement, page 8. You are talking about, at the bottom of that paragraph, "The administration believes, howev- er, that other vague standards such as `unjustly discriminatory' or `detrimental to U.S. commerce' are similarly vague and therefore will lead to confusion," et cetera. We are talking about tariff filings right now. Elsewhere in the draft that we have, on page 12, when we are talking about conference agreements, we have a standard set out in the bill. My question is, the standard on page 12 of our bill says that "The commission shall, by order of disapproval, modify any agreement that it finds will operate in violation of this act." I also find that language in other parts of the staff draft. I am trying to equate these provisions with your concern for vagueness. Is that not a problem in our draft, or is that something that you would find acceptable? Could we leave the language like it is, or should it be tightened up? PAGENO="0525" 519 Secretary LEWIS. I will let our General Counsel, who has been working with the drafting with your staff, answer that question. Mr. BREAUX. Sure. Mr. FOWLER. We believe there should be provisions that there should be specific prohibited activities that are violations of the act. I know that your staff has made an effort, along with the staff of the Federal Maritime Commission, to enumerate what those spe- cific prohibited activities would be. We have been talking about some of them earlier. You had asked about a couple of them earli- er. Violative of the act, I think as I read it, is intended to refer to the prohibited activities under the act. Mr. BREAUX. Therefore, you are OK on that? Mr. FOWLER. I believe so, yes. Mr. BREAUX. OK. Thank you, Mr. Secretary. Thank you, Mr. Chairman. Secretary LEWIS. Thank you. Mr. BIAGGI. I would like to address one area in which we seem to differ, and that is tariff filing. You recommend the elimination of it and suggest that they be commercially published instead. We know that it is primarily a mechanism for enforcing prohibitions against price discrimination and rebating. Secretary LEWIS. And fighting ships, which is the same thing. Mr. BIAGGI. It also provides some protection for shippers, espe- cially the small shippers, and also provides some price stability in their transportation costs. Do I understand you are recommending repeal of those prohibitions, and thus the elimination of this pro- tection for the small shippers? Secretary LEWIS. We feel the act without tariff filings gives the small shipper adequate protection. Again, we do not sense any overwhelming concern by smaller shippers. Again, I have met, as have Admiral Shear and John, with a number of these shippers. If we find that condition exists under this act, I think we can make adjustments. We are more confident now than we were when origi- nally proposed that shippers will not get any more protection with tariff filings than they will with some other kind of published filing. Mr. BIAGGI. What puzzles me a little bit is what you state when you say that there has been a modification of our position. We had hearings in this committee with many witnesses testifying, and I do not know if there was a single witness that was for the abolition of tariff filing. As someone said, why fix it if it works? Secretary LEWIS. Mr. Chairman, you can well be right in your position. Our feeling is that it is like everything else we have in this Government, where there are either subsidies or regulations, people become secure with that blanket. The sense we had when we first proposed this was that this was some kind of a radical de- parture from the past, and as people began to think about it we found less opposition than we did before. Now in no way does that refute what people have testified before your committee. We just feel that the tariff filings are unnecessary. I realize this is a very large portion of the work of the FMC but we also feel that ultimately, hopefully, if we can also come up with a PAGENO="0526" 520 decent promotional plan to go with this act, that the less involve- ment of the FMC, the better off the industry will be and ultimately the shippers. Mr. SNYDER. Will the chairman yield? Mr. BIAGGI. Yes. Mr. SNYDER. If the chairman would like to have some witnesses that want to do away with tariff filings, I will be glad to provide them. There were 8 or 10 in my office yesterday that were not here to testify. I do not know whether they were invited or not but I will be glad to provide those if the chairman wants them. Mr. BIAGGI. Well, we appreciate the gentleman's generous offer but we had sufficient occasion for witnesses to be here who did not-- Mr. SNYDER. My generosity is exceeded only by my good looks, Mr. Chairman. [Laughter.] Secretary LEwIs. Mr. Chairman, if I may say so, since this is the ranking minority member, that shows Mr. Snyder's usual modesty. [Laughter.] Mr. BIAGGI. His modesty is justified. [Laughter.] Under your proposal, Mr. Secretary, wouldn't you find yourself in a position of, when you allow rebating, allowing different ship- pers to be charged different prices for the identical service? Wouldn't you have that possible development? Secretary LEWIS. Well, we are going to have published rates and under those rates, certainly people have the right to make a deter- mination as to which carriers they want to use. If those carriers are out of line, they also have the opportunity to use independents. I do not know whether I am being responsive to your question or not. Mr. BIAGGI. I think you are but I think that brings us to, where do you publish them, by what mechanism? Where do we publish them so that they are all aware? Secretary LEWIS. First of all, I do not believe we have established within the bill itself how it will be published. We assume it will be a public filing and if there is discrimination under that, they cer- tainly have the same rights as anybody else does in this business community to bring suit under whatever the discriminatory prac- tices are. Mr. BIAGGI. Does your proposal also include repealing the provi- sions of section 18-b-2 of the Shipping Act of 1916 that provide time limits on when increases in tariffs can take effect? Secretary LEWIS. Our feeling is, again, in terms of increases, that as long as they are properly published that they should have imme- diate right to adjust their rates. They gave me a list here of 3, 6, 9, 12, 13 commercial services which could quote these rates. With your permission we will file this for the record to indicate that there would be adequate coverage of these filings but we feel there is no need for notice. [The following was received for the record:] PAGENO="0527" 521 TARIFF SERVICES*1 Business Systems Research, Salem, New Hampshire. CSS (Computer Shipping Services Inc.), Beaverton, Oregon. Distribution Sciences Inc., Des Plaines, Illinois. International Tariff Services, Washington, D.C. Lusk Shipping Co., New Orleans, Louisiana. McDonnell Douglas Automation, St. Louis, Missouri. Numerax, Inglewood Cliffs, New Jersey. Ocean Freight Consultants, New York. D.T.S. mt. Data Marketing Systems, London. Rand McNally TDM, Skokie, Illinois. Shipco, Houston, Texas. Transportation Concepts & Services, Metuchen, New Jersey. Union Carbide Corporation (IRAMS), New York. TRG, Washington, D.C. World Transportation Services, Inc., Washington, D.C. Mr. BIAGGI. Well, that instant aspect of it I think is what devel- ops the potential for abuse. However, if the provisions on rebating and price discrimination are repealed, and if rates can be increased or decreased instantly, then what is the purpose of requiring that tariffs be published? Secretary LEwIs. Mr. Chairman, I would say this: If you were sat- isfied to not have tariff filings, I certainly would be flexible in terms of whether or not there were 5-day, 10-day, or 30-day notice, which I believe is what you recommend. Mr. BIAGGI. Yes. For the record, since your initial proposal in February, have there been any changes specifically or conceptually, and if so, what are they? Secretary LEWIS. None conceptually other than the modifications we have made working with your staff, which you are fully aware of, as are we. Mr. BIAGGI. I have recently seen several indications, Mr. Secre- tary, that complete deregulation of transportation industries may not be working out as well as originally expected. What the admin- istration is proposing for the maritime industry is a radical deregu- lation of that industry, somewhat comparable to what has been done for the rail and air modes. This contrasts with the legislation we have developed so far, which is a much less radical but nevertheless important step. It seems to me it might be wiser to adopt the more conservative ap- proach, take things one step at a time, and wait to see how air and rail deregulation work out before we take that same giant step for maritime industry. How would you assess that? Secretary LEWIS. Mr. Chairman, first of all, we are really re- sponding to your bill. If this is radical, it is a recommendation that has been made by you and your chairman, Mr. Jones. We are merely saying that we agree with you. If you look at the other industries, specifically rail, we think the deregulation has been very helpful. The other deregulation took place prior to my coming here. The only deregulation we are look- ing at now is bus deregulation, and one thing we have recommend- ed is that we move as promptly as we can to total deregulation but 1 This is not to be construed as an all inclusive listing. This is used for illustrative purposes only. This listing is not an endorsement by the U. S. Department of Transportation of the serv- ices of the listed concerns. PAGENO="0528" 522 do it in a manner that is not disruptive to the service to the com- munities nor the industry. We are working very closely with Mr. Anderson on that. We do not think that the bill proposed by you is radical. Mr. BIAGGI. Well, I agree with you. I do not think it is radical either. The one provision where you and this committee differ is the abolition of the requirement for tariff filing. Secretary LEwIs. Well, I think that is a very fine point here, and obviously you may well be right and we may be right. Again, if there are at least 13 publishing services, and if the people that are receiving the benefits of the carriers or shippers still have the right to protest and the right to suit, we do not feel that just having an- other Government body involved in it is that helpful. We do not see that it adds any great security to either the shipper or the carrier. I guess what I am saying is that if there is anything radical about this, it is really the verybasis of your bill: We are permitting these people to have antitrust immunity, and they get involved in closed conference, rationalization, and intermodal rates. That is the only thing radical about anything we are recommending here, and I think all of us in this room are in agreement that that makes sense Mr. BIAGGI. I am not so sure that that is true. I am delighted that we enjoy a similar view on the staff draft with the exception of tariff filing. My concern about it is-and I am sure you are familiar of the history of the whole reasoning for the tariff filing-what we envision is some degree of chaos, practices of rebating and discrimination developing. I would feel more comfort- able, given all of the testimony we have heard up to this point, with tariff filing in place. The bill per se is, I believe, a very significant step forward. I will be as public as I can about it: We would not have come to this stage without your leadership in this matter, and I know the diffi- culty you have had within the administration. It is your persua- siveness that dislodged some of the agencies from their heretofore intractable positions. However, I would feel more comfortable if we were to retain the requirement for tariff filing. Secretary LEWIS. I think, Mr. Chairman, we are not that far apart. Let's continue to work at the staff level and see if we cannot reach an accommodation that you are happier with and that we can live with. Mr. BIAGGI. Fine. That has been the whole spirit of cooperation that has prevailed in the development of this legislation. Any other members? Mr. Snyder? Mr. SNYDER. I cannot let that go unchallenged, Mr. Chairman. I do not know whether the Secretary is aware of it or not but before the administration took a position on tariff filing-and bear in mind we did not have tariff filing before 1961, although we did have post filing 30 days afterwards, but before the administration took a position, we had the issue here on the Canadian diversion bill with an amendment offered by Mr. Hertel. I would like the Secretary to know that we lost his position by a one-vote margin in subcommittee, 9 to 8. We lost it much more sub- stantially in full committee, after the chairman got all the proxies PAGENO="0529" 523 together and the attendance was not too good. However, the opposi- tion to your position in this committee is not unanimous. In that connection, could I proceed to ask a question or two? Secretary LEWIS. Mr. Snyder, may I say on that score that we are going to be working very closely with you, and hope that your views will prevail among your colleagues on this committee. Mr. SNYDER. Well, it will be difficult here because of the parochi- al interests but I can assure you that deregulation is not too unpop- ular on the House floor. If in fact you do prevail on the tariff filing issue, there would not be an awful lot left for the FMC to do. Might we look toward first some financial savings, since some rate bureau would have that ob- ligation, and second, might we look toward a recommendation that some of the remaining functions of the FMC be transferred else- where? Maybe we could eliminate that bureaucracy. Secretary LEWIS. We are not here today to recommend the elimi- nation of the FMC. However, their obligation would be primarily to enforce prohibited practices, if we agree that there is not the re- quirement for filing tariffs. As we look at the FMC with that capac- ity and those requirements, we might consider at some point con- solidating their efforts into another department where it would not be necessary to have a separate, independent agency. I think before we do this, we would have to be satisfied that the act itself that we are recommending here is working effectively, and in point of fact that the shippers are being properly protected and we do not have a lot of the kind of practices which potentially could exist, which we feel will not exist under the act proposed by Chairman Biaggi and Chairman Jones. However, I concur with you that I think if we take this action, there is certainly very little need for the FMC after we go through the throes of making certain that we are operating properly under this act. Mr. SNYDER. The first part of the question: Do you know-and I do not-how many people they have at FMC involved in the rate side of the matter that would then be no longer needed, and that private industry would be picking up through some rate bureau? Secretary LEWIS. It is my understanding that approximately 50 positions would be involved. Mr. SNYDER. Thank you. Thank you, Mr. Chairman. Mr. BIAGGI. Mr. Jones? Mr. JONES. Thank you, Mr. Chairman. Mr. Secretary, if rationalization is to be effective, isn't it essen- tial that tariffs be observed and adhered to? Secretary LEWIS. Your question is, if rationalization be accept- ed-- Mr. JONES. Is to be effective. Mr. FOWLER. We do not believe that it is required that we have tariffs being observed or enforced in order for rationalization to be effective. Mr. JONES. Why not? Mr. FOWLER. Essentially, there would be a self-policing mecha- nism permitted within conferences and recourse within the legal framework of the country for anybody who was essentially dis- criminated against or who did not get a rate that they were quoted PAGENO="0530" 524 for a given movement. They would have the right to go to court for damages like anyone else would. It would be enforced ultimately through the courts of the United States through the standard damage actions that everyone is permitted to file in the courts of this country. Mr. JONES. Therefore, then, we are still talking about enforce- ment. Mr. FOWLER. Well, we are talking about enforcement by parties who are wronged instead of by independent regulatory agencies who say that they think a party has been wronged and go out to file an action on somebody else's behalf. As a practical matter, in commerce the carriers will observe the quoted tariffs they have published because it is in their interest to do so. Mr. JONES. Thank you. Now, Mr. Secretary, if Congress in its wisdom or lack of wisdom chooses to retain tariff enforcement by the Federal Maritime Com- mission in this legislation, would that cause the administration to reevaluate its position? Secretary LEwIS. It will certainly cause a reevaluation by the ad- ministration. There is no question about that. As you know, we spent a considerably longer period of time than anticipated. We started on this, I guess, the latter part of August or September, and until we could reach a consensus it was some time in late Decem- ber. We reached that fundamentally on this issue, so there is very strong feeling that if we are going to go with the idea of antitrust immunity, at the same time we should be consistent within the ad- ministration in terms of deregulation and also not having the FMC involved in tariff filings. Mr. JONES. Well, Mr. Secretary, are you telling me then that if the tariff enforcement stays in, that we will lose the support of the administration? Secretary LEWIS. I am not trying to say that, and I am not trying to hang this out as a threat or saying the President would veto the bill. I can assure you that if the filing of tariffs remains in this leg- islation, that I am going to have some serious difficulties with others within the administration-Murray Weidenbaum, the Coun- cil of Economic Advisors-I am clearly going to have problems with the Justice Department, who somewhat reluctantly supported our views because the President had determined they would. [Laugh- ter.] Secretary LEWIS. Therefore, I will have some problems. There is no issue about that. Mr. JONES. To say the least, the administration would be less en- thused. Secretary LEWIS. There is no question about that. Mr. JONES. The elimination of tariff enforcement was intended to inject competitiveness into the conference system. Could you assess the competitive value of independent action as a substitute for elimination of tariff enforcement? How about open conferences as a substitute? Secretary LEWIS. Well, in certain circumstances independent action in the past has been effective in terms of competition, and we see no reason that it would not continue to be effective. All we PAGENO="0531" 525 are doing is permitting the carriers to organize as they wish, and not subject them to our antitrust regulations. Mr. JONES. Finally, Mr. Secretary-and again, thank you for your presence here this afternoon-is the Justice Department, to your knowledge, in support of the concepts contained in your letter of February 5, 1982, if you know? Secretary LEwIs. Yes, sir. Mr. JONES. The answer is yes. Thank you, Mr. Secretary. Secretary LEWIS. Thank you. Mr. BIAGGI. Mr. Foglietta? Mr. FOGLIETTA. No questions, Mr. Chairman. Mr. BIAGGI. Mr. Breaux? Mr. BREAUX. Thank you, Mr. Chairman. I just have two quick points. I know the administration's position on tariff filings. I think it is perfectly clear. With regard to the problem that this committee has discussed in the past, the so-called Canadian diversion problem where a foreign common carrier who operates in the United States and advertises in the United States, does not currently have to file tariff with the FMC what is the administration's position with regard to requiring those type of operations to publish their rates as opposed to filing? Secretary LEwIS. I am going to have our General Counsel answer. Basically, we seek to minimize, not expand, regulatory ju- risdiction over the industry. Obviously, those operating through the Canadian ports are free from FMC jurisdiction but let our General Counsel answer that in more detail for you. Mr. FOWLER. Essentially, if in fact you do not require tariff fil- ings at all, why there is certainly no reason to require tariff filings for the movements that would go up through Canadian ports. We do feel as an administration that it is better not to have additional required regulation, instead to have less and just have no tariff filing throughout. Accordingly, as I think this committee probably has been notified, the administration has taken a position within the context of the present scheme of requiring tariff filings, against-- Mr. BREAUX. I appreciate that answer but that really was not the question. There is no question that you are opposed to filings for the U.S. carriers, and I would take it that that would extent and, you would not want a foreign operator to have to go through a filing operation. The question is, if you support a publication type of arrangement for U.S. carriers, do you also support a publication type arrange- ment for a foreign carrier advertising in the United States, taking cargo in the United States, and running it through Canadian ports. There is a difference between publication, as you pointed out, and filings. I am talking about publication for the Canadian diversion problem. Mr. FOWLER. I believe we would support publication. Mr. BREAUX. You would support a publication for foreign carri- ers who operate-- Mr. FOWLER. We believe it should be treated the same as the bal- ance of the cargo carried through U.S. ports. PAGENO="0532" 526 Mr. BIAGGI. Will the gentleman yield on that point? Mr. BREAUX. Go right ahead. Mr. BIAGGI. That is exactly what this cargo diversion bill that this committee has been dealing with has been trying to establish, that the individuals who ship in foreign ports be put in the same position as Americans. We may be doing it in reverse by requiring that it be published if our ship is required to publish but at least we are on the same wavelength, that we are treating both parties alike. Mr. FOWLER. We understand the philosophic consistency in the concept, Mr. Chairman. However, we do feel that the Canadian Government has a legitimate position in terms of questioning whether our Government should be involved in traffic moving up across their border and out through their ports, and do not believe that we should be requiring additional regulatory filings of that traffic. Our resolution of it is to seek to eliminate that filing for the traffic in this country. Mr. BREAUX. In keeping with the theory of less regulation, which I do support, does the administration support a provision which would allow a shipper to do their own freight forwarding if it were accompanied with specific language to make any kind of a rebating practice illegal? Mr. FOWLER. If it is a commercially reasonable practice, we would not be adverse to them doing so. Mr. BREAUX. It is in the staff draft. I take it that you support the terminology in the staff draft. Mr. FOWLER. Yes. Mr. BREAUX. OK. Thank you, Mr. Chairman. Mr. BIAGGI. Mr. Dougherty? Mr. DOUGHERTY. No questions, Mr. Chairman. Mr. BIAGGI. Mr. Secretary, if there are no further questions I would like again, on behalf of the committee, thank you for your cooperation with this committee and for your positions today and your appearance. Thank you very much. Secretary LEwIs. Thank you very much for having us. Mr. BIAGGI. The meeting is adjourned. [The following materials have been received for the record:] PAGENO="0533" 527 (A~MI(~A[I. IMT[~HATIOMAL S[~VI([ CIS OCEANAIR SERVICES CABLE ADDRESS SALVOLOX CARMICHAEL FORWARDING SERVICE TWA (910)3214512 POST OFFICE BOX 54172 TERMINAL ANNEX LOS ANGELES CALIFORNIA 56054 PRONE (213) 6267105 REPLY TX!L9 ~ - INTRO DUCT ION My name is Enrico Salvo: I am the President and General Manager of Carmichael International Service, a licensed Independent Ocean Freight Forwarder operating at the Ports of Los Angeles/Long Beach and San Francisco/Oakland. I am also Area Director for the Pacific Coast of the National Customs Brokers and Freight Forwarders of America, and first Vice President of The Foreign Trade Association of Southern California, an Association of 450 member firms dedicated by its charter "to promote, foster, and encourage foreign commerce between the United States of America and countries throughout the world. To encourage and stimulate interest in for:ign trade and international relations." I entered the field of international tramsportation in 1946 upon my graduation Cr071 the Merchailt Marine Institute in Savona, Italy, (an institution similar to the Ti. S. Merchant Marine Academy at Kings Point), and served on merchant vessels until 1955: in 1956 I found employment with a freight (ruirder in Los Angeles and for the last twenty years I have managed Carmichael International Service. I am in full agreement with the comments filed by the National Customs Brokers and Freight Forwarders Association; nevertheless, I would like to submit the followinq additional personal comments on behalf of my Firm and my staff on seine of the provisions contained in the Bill. 94-856 0 - 82 - 35 PAGENO="0534" 528 LULUi,.~.~L~iON 5, AMENDMENT TO SECTION 44 ~ ~ ~;1i~sN~ ACT PROPOSED NEW SECTION 44A 1) This section repeals the licensing provision of the Shipping Act of 1916. The proposed amendment has the effect of delicensing freight forwarders but it has no deregulation features: the nile-making power of the Federal Maritime Commission on any person, including forwarders, subject to the Act is retained. I strongly recommend that the licensing provisions be retained. The Federal Maritime Commission, in the new General Order 4, which became effective October 1, 1981, provides for fair licensing requirements. Such requirements should be further strengthened in the area of professional training, qualifications, maybe through industry sponsored on the job or academic apprenticeship programs, or other means. Forwarders, like customhouse brokers, accountants, lawyers, etc., xmist be well trained professionals. If one of the objectives of this Bill is to establish better regulations, or less regulations, then the new General Order 4, or any other rules made by the Federal Maritime Commission should be carefully reviewed with industry's input in order to inject into them more equitable and realistic commercial standards. ) The amount of the bond required to qualify as a freight forwarder should not be specified in the Bill for the following reasons: a) The amount presently shown is unfair and unreasonable. The intention of a licensing bond is to show a reasonable financial standing and responsibility; it is not intended as a fidelity bond. Many professionally-able smell forwarders may not qualify if the present minimum limits shown on the Bill are enacted. b) If the intent of the Bill is to view the bond as a guarantee to shippers, the FMC should then determine the amount of the bond needed, taking into consideration the number of transactions and do]Iir volume of freight of such transactions. For instance, if a.forwarding company handles one million dollars in freight payments per year for the account of his clients and another Company handles fifty million a year, the shipper's exposure-is much different and the bond amount should then be different. The present requirements in GO 4 are much more equitable and stringent than the ones containel in the present Bill setting a minimum bond at $30,000 plus $10,000 for each branch office: for large forwarders the total amount of the bond is presently several times higher than the amount indicated in the Bill. PAGENO="0535" 529 COMMENTS 10 SECTION 5, AMENDMENT TO SECTION 44 OF THE SHIPPING ACT PROPOSED NEW SECTION 44A - Continued c) A fidelity bond such as the one described in sub paragraph "b' is not needed as shippers have always had the option to pay ocean freight and related charges directly to the carriers. Many shippers, in our present credit oriented society, choose to channel their funds through the forwarder for payment. The decision to do so rests entirely on the shipper: most of them desire this course of action for convenience, or to satisfy their needs for short term credit. The decision to use the forwarder to channel funds and pay all bills is strictly a commercial decision and should not be governed by law. The shipper has the option to request a guarantee or credit reference and a bond from the forwarder: the forwarder has the same option as he might not want to extend credit to some shippers. I conclude in stating that the bond limits are equitable and practical as set in General Order 4. PAGENO="0536" 530 SECTION 5 - SECTION 446 - COMPENSATION Compensation should not be paid to companies who have a beneficial interest in the cargo; furthermore, a license should not be granted to companies who are shipper connected. In the late 1950's Congress spent a lot of time and effort investigating the abuses in the area of compensation and in 1961 wisely passed a just law. It now appears to me that Congress is considering a law which will create the same problems which it previously found necessary to eliminate. Contrary to some statements made during the hearings and in the media, to date there are very few forwarding companies; probably a handful, who may argue in the name of progress, intermodalism and deregulation, that times have changed. The notion that international ocean transportation or forwarding should operate in a regulation free environment is not only unrealistic but extremely naive. Oeregulation is a fashionable word these days and a nice idea but moving goods in international trade by water is not like manufacturing a product or moving freight from Chicago, Illinois to Louisville, Kentucky. Twenty years have passed since Congress found it necessary to amend the Shipping Act: the fact that twenty years have passed is certainly not sufficient reason for a change as the basic. conditions for regulation of ocean transport have not changed. I also would like to refer to some statements made during the hearings and reiterate that the position of our industry has not changed - what has changed is the corporate status of certain firms also operating as freight forwarders. The majority of forwarders in this country are sn~all businessmen and remain only forwarders Or custombrokers: as NVO's or domestic consolidators (Part IV-forwarders) they can provide clients, if needed, with all the services in transportation and look after any intermodal moves. Forwarders do not have to be part of large conglomerates to be able to perform, neither do they have to become a trading company to survive. There have been many technological changes in ocean transportation: we have seen the domestic deregulations impact on intermodal moves but basically we are still operating in ocean transportation like we operated twenty years ago. The provision commonly known as "Breaux" or Transway Amendment which was recently passed by Congress and authorizes shipper connected forwarding companies to engage in ocean freight forwarding without compensation, is contrary to the interest of the majority of shippers. I am not referring to very large shippers as they do not need to worry about these matters; they have enough experience, economic strength, available information and clout to act almost independently. PAGENO="0537" 531 SECTION 44B - COMPENSATION - Continued I further believe that a shipper connected ocean freight forwarder should reveal his connection not only to the FMC but also to all his clients who may be using his services. Such connection may be disclosed in their advertising, invoices, statements or other communications to the trade: all shippers should be made aware that a forwarder is shipper connected as they may choose not to use his services. Frankly I do not consider the biggest problem to be the present traditional ocean frei~ht forwarders who are now or will be, in the future, shipper connected. As Congress found out prior to 1961, I believe that the biggest abuses which this type of legislation invites is on the part of unscrupulous U.S. and foreign shippers who create paper companies to collect compensation, negotiate in the U.S. or in foreign countries rates, direct or indirect rebates. The other very real reason shippers should not own forwarding companies is that a forwarder offers his services to the general public and therefore he acts in a fiduciary capacity. A shipper connected forwarder could not act in such capacity particularly if the shipper is directly or indirectly controlling him. In case of a large conglomerate it is possible that the conflict of interest will be less compelling, nevertheless, any law which liberalizes the old prohibition will definitely create a lot of problems. The independent forwarder has a great responsibility to all his clients and is a keeper of very important information regarding transactions such as prices, terms, source of supply, and other sensitive data which must be held strictly ccinfidential. In today's competitive business, substantial shippers are already looking at this rule,which permits them to be licensed forwarders, as a source of additional dollars and abuses will definitely occur: forwarding companies operated by relatives or associates will definitely flourish. Two very learned counsels stated that the proposed certification statement is self policing - I doubt it very much. Carriers certainly have neither the time nor the inclination to dig into the forwarder connection; they are very happy to get the freight no matter how it gets to them. The FMC has a tough enough time with their present limited resources: the Administration's budget calls for a further reduction in the budget and I frankly cannot see how they FMC could do a thorough job - the FMC should, however, answer this question directly as they have a better knowledge of all the facts. The forwarder has been defined, through the years, as an important and essential link in the movement of trade in the international market, his expertise is used daily by hundreds of small and medium sized shippers. He assists clients to under- stand terms and conditions of sales, how to get it there, lead his client through the red tape established by a multitude of regulations. PAGENO="0538" 532 SECTION 5 - SECTION 44B - COMPENSATION-Continued I, like many other forwarders, am a professional who renders a service to his clients and a great deal of my time is spent consulting with them on what to do or what not to do. I also spend time with prospective exporters to encourage them to market their goods abroad. I honestly question the need for a forwarder to be a trader or an interested party in the transaction. I agree with the statement made by the counsel for one of the large forwarders in the U.S. that the forwarder is in an excellent position to help many small firms who, without the help, would not be able to export. The forwarder has the expertise and is in the position to be of great help to potential exporters but has a tremendous conflict of interest. The forwarder should remain independent without a vested interest in the financial transaction or sale of goods if he wants to continue to be an asset to shippers. PAGENO="0539" 533 TARIFFS FILING In recent months I have heard comments from shippers, a few carriers, and members of Congress advocating the abolition of tariff filing requirements. If the present conference system is to be retained in total or part, tariff filing requirements should be retained: the absence of published tariffs would produce chaos although it may benefit certain shippers or a group of shippers: it invites discrimination, unfair competition and creates confusion. All tariffs should be filed with the Federal Maritime Commission or, as some people advocate, they could be filed with a neutral body or any other entity in the private sector if desired. From the forwarder's point of view, considering our experiences, I firmly believe that the knowledge of published rates permits exporters as well as importers to accurately compute their landed costs and determine if their products are competitive in a certain country, or in the case of imports, in the United States. Published tariffs also allow a shipper or consignee to make comparisons between the cost of ocean transportation or other modes, such as air, and determine the most advantageous method of shipping and routing, (for instance, all water, landbridge, or sea-air) an important consideration in these days of high interest rates. Good steady business is based on a reasonable stability of prices and for many commodities freight charges are a substantial part of the total landed cost. An exporter may allocate a certain amount of money for freight charges, therefore, he must determine these charges in advance to complete his sale: if freight costs are found to be too high then he has the option to apply to a conference or an independent carrier for a better rate which will be held for a spedified period of time. Another possible negative effect in an ocean transportation market without tariffs will be the establishment of practices which may be particularly injurious to U.S. flag carriers: terms of sale and contracts can be changed to allow a consignee in a foreign country to select any carrier with whom he has or he may negotiate an agreement for a lower rate or rebate. PAGENO="0540" 534 I welcome the efforts and comments of your Committee, and Mr. Gorton's Committee in the Senate, and I agree with the purpose of the Bills. I am sure one of the main goals of the two bills is to make American flag carriers more competitive with foreign flag carriers. I am personally very concerned about the U.S. merchant fleet's ability to compete profitably and at the same time provide efficient and responsiLie services. This task is an important and difficult one to achieve: neither Congress or the Administration have been able to agree so far on our maritime role and the Department of Justice may prove to be an unmovable roadblock. U.S. flag carriers do not agree among themselves and we see costs for running american flag vessels through american ports skyrocket out of proportion. The subject has spurred, until now, much rhetoric for many sides and very little action. Unless all parties, including labor, get together to identify their goals and try to work out a solution to the many problems affecting the maritime industry, our country will never be able to regain its once prominent place among the maritime nations of the world. CARMICHAEL INTERNATIONAL SERVICE 0 PAGENO="0541" The Honorable Mario Biaggi Chairman Subcommittee on Merchant Marine Room 2428, Rayburn House Office Building Washington, D.C. 20015 Dear Chairman Biaggi: As the Executive Vice president and General Counsel for the International Association of HVOCC5, i appreciate the opportunity to submit comments on behalf of the Association on H.R. 4374, a bill to improve the international ocean commerce transportation of the United States. Members of the Association are non- vessel operating common carriers (HVDCC5 or NVO5) recoonized by Congress, the Courts and the Federal Maritime Commission (FMC) and other federal agencies. The development and rapid growth of containerization in ocean transportation has produced a parallel growth of NVOCC5 or NVO5 who consolidate less-than containerload (LCL) cargo in full containerload shipments, delivering the full containers to vessel operating common carriers (VOs) for the physical transportation of the cargo. The NVOCC operates and provides transportation in the waterborne foreign and domestic commerce of the United States, and files tariffs covering its transportation rates with the Federal Maritime Commission the same as any other common carrier by water. The HVOCC, as a common carrier by water, perfomms an essential and valuable service to the public by assembling and consolidating less_than-containerload (L~L) shipments into container loads then transferring the loaded containers to the pier for shipment overseas. By thus consolidating LCL shipments for the small shipper, or the less_than-containerload shipper, by preparing all of the documentation including waybills, bills of ladino, manifests, by routing and tracinG shipments, performing transfer services, the NVO not only reduces loss and damage, pilferage, congestion at the piers and delay, but the NVO in effect becomes the export 535 INTERNATIONAL ASSOCIATION OF NVOCCS Suite 450 1747 Pennsylvania Avenue, N.W. Washington, D.C. 20006 December 1, 1981 Telephone (2021 466-2263 (7031 691-0900 Cable Address: INVOCC PRESIDENT Frank Hollnsee Trees-Medal. Inc. 2590E.DecoeAcenoe Des Plaiees, Illinois 60018 EXEC. VICE PRES.-GEN. COUNSEL Raymond P. deMember Suite 450 1747 Peensylcania AVenue. NW Washiegton. D.C. 20006 VICE PRESIDENT E.W. Johnsoe Caroliea-Puom'to Rico. Inc. Charlotte. North Caroliea SECRETARY-TREASURER Michael J. Sinclair Direct Coetaieer Linet. Inc. Wilmoiegtoe. Califoreia BOARD OF DIRECTORS ThomnatM.Beidleetee Guant Freight Forenardert aed Coetolidatort Lot Angeles. Califoeeie Robert Broonee Worldmside Traesporn.Ioc. Bayonne. Neon Jertey Rodolfo A. Catinchi Transoonee. Inc. San Juan, Puerto Rico Roher's T. Coynu Bottoe Contolidetion Sernice, Inc. Boston, Massachosettt Ken Kane International Parcel Sernice. Ltd. Neon York. Neon York Paul Lanoe SCACTrantportlUSAl.Inc. Neon York. Neon York Homnerd Leff StrasegicTrensporeanion Company. Inc. Houston, Tesas PaoIE.Roach Houston Consolidation Seemices, Inc. Houston, Tesat ErnestoSaniurio Tmcin Eopress. Inc. North Bergen. Noon Jersey PAGENO="0542" 536 marketing and traffic manaqement arm of the les~-than-containerload shipper. The NVO thereby truly makes it possible for many shippers, who, but for the NVO, would not be able, to participate in the export trade of the United States on a realistic cost and service competitive basis. Thus the Association heartily supports the statutory recoonition of the NVOCC as a "common carrier by water" in the proposed amendment to section 1 of the Shipping Act, 1916. With respect to the amendment to Section 44 of the Shippino Act, providing for bondino of NVOCCs, we believe that the requirements of no less than $50,000 or no greater than $100,000 may be too low a figure. We believe a fiqure of $150,000 would be more realistic and more effective to protect the shipping public. There is no level hiqh enough to protect absolutely the shipping public from unscrupulous operators. The sum of monies and the value of carooes handled by freioht forwarders and by NVOCCs is substantially more than the $150,000 bond figure we propose. However, the $150,000 level is high enough to ensure that fly-by-night-operators cannot enter the business - make a fast buck and evaporate leaving both shippers and carriers at a loss for monies due and services unperformed. Anti trust Exemptions We must point out the dangers inherent in the revision of t1~e present Section 15 of the 1916 Act in Section 2 of H.R. 4~74, which removes the present requirements that agreements be properly justified, or which might shift the burden of proof in the first instance to shippers or other protestino parties. The present Section 15 was intended to provide an exemption or immunity from the antitrust laws for common carriers by water when the circumstances were such that a problem in ocean transportation could be PAGENO="0543" 537 solved only by a collective action of such carriers that would otherwise be in violation of the antitrust laws. It was never intended that such common carriers would be immunized from the antitrust laws for any and all collective action taken solely for the benefit of such carriers without regard to the public interest, or without recard to the existence of a real problem the resolution of which is serious enouoh to reouire an exemption from the antitrust laws. The burden of proof should remain with such carriers seekino exemption from the antitrust laws since they have the primary knowledge concerning the ocean transportation problem which the carrier proponents of agreements contend requires resolution by such exemption. The Association questions also whether the time limits for Commission action on agreements in Section 2 of H.R. 4374 are realistic arid fully protective of shippers' interests. The full impact of concerted action by carriers can often not be determined until lengthy discovery procedures have been utilized during hearings to determine the true economic impact as well as the true aims of the parties to the agreements. Any authority granting antitrust immunity for agreements which effectively prevent competition from outsiders, should be circumscribed with definitive standards of approval and should require that any such agreement contain explicit safeguards. The burden of showing transportation needs and public interest justification for such effective prevention of competition from "outsiders" should be a heavy burden on the proponents of such aoreements. Such agreements are so contrary to the history of free and open competition in the United States, that they should be approved only after meeting stringent standards and after the most careful consideration of a showing of a very clear and significant justification. The Association is grateful for this opportunity to submit these views on H.R.4374. PAGENO="0544" 538 Yourconsjderation of the Associations recommendations is urgently requested. In accordance with information received from the Committee staff we respectfully ask that this submission be made a part of the record and Report of your Committee. If there is any additional information the Committee would like, we will be pleased to furnish it. Sincerely, T7~' ~ I / /~ ~j)/~~ Rayi~nd P. deMember~~ Exec~htive Vice President General Counsel RPdeM/ddeM enclosure - M/r: Enclosure not included in RECORD PAGENO="0545" 539 STATENENT OF E. I. DU PONT DE NEMOURS AND COMPANY Du Pont is a Delaware corporation engaged in the manufacture, sale, and distribution of paints, plastics, man-made fibers, chemicals, and related products. Du Pont has over 112 manufacturing plants located in 30 states and some 900 shipping locations in the United States. Many of these locationsare engaged in foreign trade. We are the nation's sixth ranked exporter with more than $2 billion in export sales. According to most estimates, Du Pont is the nation's leading industrial user of ocean containers as well as one of the world's largest. Over one hundred million dollars of our total $700 million 1980 transportation expenditures was for ocean transportation services for our U.S. exports and imports. Consequently, Du Pont has a major concern in the future of U.S. maritime policy, and we support Congressional reappraisal of our maritime laws. It is a timely and logical extension of recent successful reforms in our aviation, railroad, and trucking industries. Ocean transportation costs and services increasingly determine whetheror not companies like Du Pont can sell abroad, especially in high growth markets such as the Asia/Pacific and Latin American regions. U.S. foreign commerce is dependent on a vital ocean transportation system. Because ocean transportation is so central a link with world markets, a reappraisal of our maritime regulations cannot be undertaken without keeping in perspective the impact it will have on our foreign trade. The interdependency of one on the other is too PAGENO="0546" 540 critical. Du Pont believes, like other major exporters, that the future of U.S. trade depends on whether our nation can develop a realistic and balanced regulatory environment for carriers and shippers. Competition is essential in any effective industry. Regulatory reforms in our domestic transportation modes permitted the marketplace to function, resulting in benefits not only for the carriers, but also the shippers and industries they serve. We should never lose sight of the fact that carriers exist to serve the needs of shippers. The benefits resulting from reforming domestic transportation regulations can be experienced in ocean transportation as well. The market must be allowed to operate without needless regulatory constraints. Du Pont believes in competition. It is the necessity which makes inventors of us all. Our position is pragmatic as well as philosophical. Containerization, the premier system in liner trade today, was but a competitive concept when first originated. Yet this competitive concept grew and brought foreign markets within reach of Du Pont and other U.S. manufacturers, facilitating the tripling of U.S. foreign commerce over 25 years. Innovation then extended - containerization into an intermodal system called "mini-bridge" and opened the Asia/Pacific Basin to Du Pont and other exporters. In reforming our ocean transport laws, we should be careful not to decrease competition from which innovation and its benefits are derived. PAGENO="0547" 541 Du Pont believes effective maritime legislation must be based upon these principles: o The marketplace must be allowed to function within reasonable parameters, stimulating competition without sacrificing dependable, safe, and economic service. o Maritime policy reform should result in a new generation of innovation, more efficient shipping systems, and new services. o Legislation must balance both shipper and carrier interests. H.R.4374 is aimed at improving the international ocean commerce transportation system of the United States, but it presently lacks balance by not adequately protecting shipper interests. SHIPPERS' COUNCILS Section 3 of the bill authorizes a Shippers' Council which, we assume, is intended to provide shippers with the balance needed to counter the increased prerogatives of conferences. Yet the Shipp~rs' Council is only empowered to address general issues and not to handle specific shipper problems. Most shipper/conference dialogue is specific, dealing with a particular product, rate or service. Since a Shippers' Council cannot address these problems, Du Pont believes there is little, if any, balance provided shippers through their formation. PAGENO="0548" 542 Du Pont believes proper shipper balance can be achieved by: (1) a clear legislative mandate permitting individual shipper-carrier service contracts, and (2) a clear right of independent action for conference carriers in responding to a shipper proposal rejected by the conference majority. SERVICE CONTRACTS Service contracts are not a new concept in transportation. The practical experience of their use in domestic transportation as well as international liquid and dry bulk ocean shipments offers ample evidence that they work. They are nothing more than agreements between shippers and carriers to provide a certain quantity of cargo on the one hand and a certain level of service and rate on the other hand. Congress needs to clearly state that a carrier can be both a contract and common carrier. Service contracts are substantially different than loyalty agreements with conferences. A loyalty agreement ties a shipper to a conference of carriers in exchange for a lower rate than a shipper who does not bind itself to a conference. There is no quantity commitment on the part of the shipper. The comference has no service commitment other than a discounted rate. The shipper merely promises that if it has cargo, it will ship with the conference. The conference promises ships, not necessarily carriers the shipper prefers, PAGENO="0549" 543 and there are no service specifications, i.e., transit tine, port rotation or special handling for specialty cargo. Rates also are subject to change. Under a service contract the rate is mutually agreed upon and could be higher or lower than the conference equivalent depending upon the service needed. However, the rate is either fixed for a period of time agreeable to both parties or escalated according to formulae. Fluctuations in currency exchange rates or fuel costs can be addressed separately and fairly. The shipper agrees to a certain cargo quantity which must be provided or the shipper must pay. The carrier promises space on its vessels, transit time between particular ports, and even a specified port rotation. These service features, or others depending on individual conditions, are important to a shipper, especially when interest rates dictate tight overseas inventory control. Du Pont can even conceive of service contracts between a shipper and a conference. Although they differ from the contracts discussed above, current time-volume rates already provide for reduced rates for the volume shipper. This is in keeping with the general business practice that the commitment of volume should be given price consideration. Service contracts can also be beneficial to the smaller shipper by guaranteeing acceptable service levels at stable prices over a given period. In fact, service contracts should provide more flexibility to the smaller shipper than 94-856 0 - 82 - 36 PAGENO="0550" 544 current loyalty agreements with conferences. Also, it should be remembered that large companies, such as Du Pont, are often a "small shipper" in certain trades. INDEPENDENT ACTION The right of independent action for carriers responding to a shipper proposal which has been rejected by the conference majority will also provide needed additional balance to H.R.4374. The right of independent action, which we are referring to, must be understood and not confused with the right of independent action commonly mentioned in the trade. It is quite conceivable that a shipper rate proposal to a conference can be attractive to one or a minority of carriers within a conference, but not to the majority. The single carrier could have.a better cost profile, a favorable equipment situation or an inbound/outbound product marriage that would be ideal. Such a carrier must be allowed to exercise independent business judgment within the conference system. The astute business person will reject a transaction that does not provide profit. Every conference member should have the right to disagree with its fellow carriers and take independent action without fearing economic reprisal or being forced to withdraw from the conference. The right of independent action will not destroy conferences because our proposal has an important qualifier. The right can only be exercised when a shipper proposal has PAGENO="0551" 545 been rejected by the conference majority. By providing carriers with the ability to exercise individual business acumen, H.R.4374 will give the bill adequate shipper balance. OPEN CONFERENCES It is not clear whether H.R.4374 contemplates open or closed conferences. Section 2(1) amends Section 15 of the Shipping Act, 1916 by adding the words "limiting or regulating the membership of conferences." Yet Section 2(4) amends Section 15 of the Shipping Act by adding the words "or admits to membership at least one carrier operating United States flag vessels willing to serve the particular trade or route involved." This amendment should read "fails to admit . . which would then make conferences open to U.S. flag but closed to all others. However, Du Pont does not support limiting entry to conferences of even foreign flag carriers. ANTITRUST IMMUNITY While we are in favor of the stimulation of competition which is generally promoted by the application of the antitrust laws, we recognize that ocean carriers operate in an international environment that is, in general, contrary to our national antitrust philosophy. Therefore, we support antitrust exemption, assuming such provision does not exempt activities which would restrict non-conference competition. We PAGENO="0552" 546 also suggest that antitrust immunity not be extended to situations where a carrier's conduct restricts competition or has a direct and substantial effect on trade or commerce within this country. We believe a mandate for shippers and carriers to enter into a contract carriage relationship, as explained above, and the right of conference carriers to act independently when responding to a shipper's proposal will ameliorate the anti-competitive effects of any antitrust immunity. Similarly, we believe that the deletion of the language "or to be contrary to the public interest," from 46 U.S.C. 814, as proposed in Section 2(3) of H.R.4374, will not promote a balanced appraisal of anticompetitive effects of any antitrust immunity. In conclusion, Du Pont extends its continuing support to reforming our nation's international maritime policy, and will work with the Committee to meet that goal. PAGENO="0553" 547 ~STo CD1'JFREIGHT ~_i ~ MARU\JE LJI~bJE, INC ________ 800 ESTES AVENUE * ELK GROVE VILLAGE, ILLINOIS 60007 * (312)364-7110 k~0~C Telex: 206818 December 9, 1981 The Honorable Mario Biaggi Chairman, Merchant Marine Sub Committee 2428 Rayburn House Office Bldg. Washington, D.C. Re: House bui HR4374 Shipping Act Reform Bill Dear Sir: Our firm has been discussing the above mentioned bill, now in committee in both the House and the Senate; with various colleagues in this area.\ We have decided there are a few rumored portions on which we should let ourselves be heard. Tariff Filings: We are definitely oppose' to the elimination of Tariff filings. The absence of tariffs by carriers would place the U.S. exporter in an untenable and noncompetitive position. The writer, speaking from personal experience, is positive that exporters would be unable to bid or submit quotations with any reasonable validity and hold such valid for a period of time. Most foreign requests are based on future business contact end/or purchasing requirements for which decisions will not be made for 60 days or 6 months. How may such provisions of tariff filing eliminations aid U.S. exports? Currently, In the deregulation of the air freight industry, standard tariffs are no longer valid. Rates fluctuate on a daily basis. What is one rate today may not be in effect In two days. In this kind of climate only large shippers will survive as they have sufficient volume to negotiate. Out of approximately 400,000 U.S. manufacturers about only 4% are involved in exporting and only about 15% to 20% of that number are large enough to negotiate rates. What of the other exporters who must rely on their foreign freight forwarders and NVOCC to assist them In marketing their products? PAGENO="0554" 548 CDNFREIGHT I'VlARINE LIPJE, INC. Also, we believe NVOCC's should be allowed to form sections 15 agreements and file Intermodal rates. NVO's serve the shipper's interest in serving their needs. The majority of shippers are not fortunate enough to ship full container loads and qualify for reduced rates. NVO's who have section 15 agreements serve this need, each other, and, more Important, move the shipper's freight on a timely basis. Otherwise, the traffic would be delayed for a full container load, or revert to breakbulk modes with VO's, defeating the timeliness and/or economies originally planned. We believe that their points will protect the interests of the shipper and serve their needs as equally as large shippers. All should receive fair and just service. We feel strongly on these points especially as stated. If our opinions on other portions of the bill are of interest, we would be happy to make our coninents known. Thank you for your time and consideration. Cordially yours, Alan Badour PAGENO="0555" 549 L.&w OFFIcEs WARREN & ASSOCIATES P. C. 1100 CONNEc~rICUT AVENUE N. W~ WASHINGTON, D. C. 20036 202) 20)3-2165 December 14, 1981 Na. Ann Niller Merchant Marine Subcommittee Committee on Merchant Marine & Fisheries U.S. House of Representatives 531 House Annex Two Washington, D.C. Re: H.R. 4374 Dear Ms. Miller: We refer to the "Statement of Various Trans-Pacific Conferences on H.R. 4374," filed with the Subcommittee on December 7, 1981. We are instructed to advise that while one of the conference members, United States Lines, Inc., supports this Statement which was filed on its behalf, it must disassociate from that part of the Statement relating to Section 2(4) of the bill, commencing in the final paragraph of page 13 and ending at the top of page 14. Yours very truly, WARREN & ASSOCIATES, P.C. Charles F. Warren Attorneys for the Various Trans-Pacific Conferences PAGENO="0556" 550 BEFORE THE MERCHANT MARINE SUBCOMMITTEE COMMITTEE ON MERCHANT MARINE AND FISHERIES HOUSE OF REPRESENTATIVES STATEMENT OF VARIOUS THANS-PACIFIC CONFERENCES This Statement is presented on behalf of Trans-Pacific Freight Conference of Japan/Korea, Japan/Korea-Atlantic and Gulf Freight Conference, Japan-Puerto Rico & Virgin Islands Freight Conference, New York Freight Bureau, Philippines North America Conference, Thailand/Pacific Freight Conference, Thailand/U.S. Atlantic & Gulf Conference, Trans Pacific Freight Conference (Hong Kong), Agreement No. 10107 and Agreement No. 10108, and their respective members (hereafter, the "Conferences') The members of the Conferences are identified in the Appendix hereto.* Each of the Conferences functions under a ratemaking agreement filed with, and approved by, the Federal Maritime *The views expressed herein are the collective views of the Conferences. Individual carrier members have, in some in- stances, commented separately or through organizations such as CENSA or CASO. We are aware of no conflicts in positions filed, but point out that the particularized views expressed by individual members of the Conferences elsewhere should not be considered as being in any respect modified by these comments. PAGENO="0557" 551 Commission or its predecessor, and each covers an ocean borne trade from the Far East and/or East Asia to ports in the United States. In addition, each conference either has in- termodal authority, has filed for such authority in the past, or is presently seeking the Commission's approval action. Representing a combined vessel and shoreside investment of billions of dollars, the conference memberships annually employ nearly 200 vessels (including the latest modern full- containerships, semi-containerships, breakbulk, and Ro-Ro vessels), provide some 800 trans-Pacific sailings, serve more than 15 origin ports in Japan, Korea, Hong Kong, Taiwan, Macao, Thailand, and the Philippines, more than 25 destina- tion ports in the United States, as well as hundreds of in- land intermodal. U.S.~..destinations. The Conferences are gratified over the concern which is being shown by the Subcommittee and which has recently been shown by Senator Gorton's Subcommittee in the Senate for preservation of the conference system. Last month, the Conferences demonstrated their firm support. of these efforts to restore the original intent of the Shipping Act, 1916, by commenting favorably on 5. 1593. Because of the erosion of the strength and vitality of the conference system by the courts and Commission decisions contrary to congressional intent, the Conferences believe the time has come for res- toration of the statute's intendment through legislative PAGENO="0558" 552 clarification. The importance of conferences to the preservation of essential stability in U.S. foreign commerce has been re- peatedly recognized by Congress and the Commission for nearly 70 years. As early as 1913, the Alexander Committee found that there is no "happy medium between war and peace" in international shipping. After an exhaustive examination, that Committee found, as had a similar British Committee studying "Shipping Rings" several years earlier: It is the view of the Committee that open competition cannot be assured for any length of time by ordering existing agree- ments terminated. The entire history of steamship agreements shows that in ocean commerce there is no happy medium between war and peace when several lines engage in the same trade. Most of the numerous agreements and conference arrangements discussed in the foregoing report were the outcome of rate wars, and represent a truce between the contending lines. To terminate existing agreements would neces- sarily bring about one of two results: The lines would either engage in rate wars which would mean the elimination of the weak and the survival of the strong or, to avoid a costly struggle, they would con- solidate through common ownership. Neither result can be prevented by legislation and either would mean a monopoly fully as effective, and it is believed more so, than exist by virtue of an agreement. ("Alexander Report," H. Doc. No. 805, 63d Cong., 2d Sess., pp. 416-417) Following enactment of the 1916 statute, nearly 100 con- ferences covering virtually every U.S. foreign trade, import PAGENO="0559" 553 and export, have been sanctioned by the Commission with the ostensible promise of antitrust immunity. In 1961 when major amendments to the Shipping Act were adopted, Congress again recognized the stabilizing characteristics of conferences and sought to strengthen the conference system by authorizing dual rate contracts with shippers and consignees. The Senate Commerce Committee observed: In order for the ocean common carriers and conferences serving our foreign com- merce to do so on a regular, dependable, and nondiscriminatory basis, they must be allowed, as they are throughout the rest of the maritime world, to enter into dual-rate contracts with shippers and consignees. Otherwise, the economies of ocean shipping will force the lines con- cerned into rate wars among, themselves that might result in the destruction of ocean common carriage. (Sen. Rept. No. 860, 87th Cong., 1st Sess., p. 10) That concern was again carried forward in the recent enactment of the Ocean Shipping Act of 1978 (Public Law 95-483) where the Congress was called upon to strengthen the hand of the traditional liner carriers in dealing with the intense, and unfair, competition from state-controlled car- riers. In reporting the bill which was finally adopted, the Senate Committee on Commerce, Science, and Transportation observed: As a general rule, major liner companies are members of shipping conferences be- cause conferences encourage the stabil- ity required by liners to finance the regular,, frequent services they offer shippers, and to warrant investment in PAGENO="0560" 554 new and improved services to the shipping public.... Often they (non-conference carriers) choose to operate as independents and can offer rates below those set by con- ferences because they are not committed to offering the variety and permanence of ser- vice necessary to promote stability in the trades.... (Sen. Rept. No. 95-1260, 95th Cong. 2d Sess., p. 3) The Conferences support those provisions of H.R. 4374 which are intended to restrict application of the antitrust laws, but urge that the bill be amended to remove other judicially-imposed obstacles which currently threaten exis- tence of the conference system. The Conferences support establishment of U.S. based shippers' councils provided they are limited solely to consultative functioning. The Confer- ences also support imposing time limitations on Commission actions. The Conferences, however, are seriously concerned over the bill's failure to deal with and reaffirm the Com- mission's authority to approve conferencewide intermodal arrangements. Section 2(3) of the bill eliminates the so-called "public interest" standard by which domestic antitrust prin- ciples found their way into the Shipping Act. This is a necessary step in returning to traditional, workable regu- lation of the shipping industry. Addition of the public interest standard subjected agreements filed for approval before the Commission to unnecessary scrutiny under domestic antitrust doctrines, often resulting in lengthy delays and PAGENO="0561" 555 subversion of the .fundamental congressional intent. Elimina- tion of the public interest standard will allow the Commis- sion to focus its inquiry on issues which are truly relevant to this international industry. However, in order to fulfill its objective, the bill should expressly clarify that the antitrust laws will not apply to the ocean shipping industry and that only Shipping Act penalties will be assessable. Without the additional clarification, the Conferences fear that the Justice Department will continue, in its usual man- ner, to apply traditional antitrust philosophy, relying upon pre-1961 Commission and court decisions which had already begun to inject principles alien to the Shipping Act. The Conferences also applaud the provisions of sections 2(5) and 2(6) of the bill which would return regulation to traditional Shipping Act standards by clarifying that the Commission or the agency or party opposing approval of con- ferences and other arrangements bears the burden of proving noncompliance with the standards of the Act. This would overrule the Commission's Svenska** rule whereby filing par- ties are called upon to justify their arrangements in extra- ordinary detail from an antitrust perspective. Although section 15 of the Shipping Act, by its express terms, re- quires the Commission to approve all agreements filed for **A]~tiebo1aget Svenska Amerika Linien v. FMC, 390 U.S. 238 (1968) PAGENO="0562" 556 approval absent findings of contrariety, the public interest standard has been effectively used under the Svenska ratio- nale to impede the approval of many agreements Congress obvi- ously had wished to sanction. Combined with elimination of the public interest standard, clarification of the original intent of the Shipping Act by placing the burden of proof on the party opposing conferences and other agreements will ease the unnecessary burden conferences and others have borne in securing Commission approval of their agreements. Although the Conferences strongly support these impor- tant changes in facilitating approval of their agreements, they do not consider the bill goes far enough in its treat- ment of the antitrust dilemma. The stability and reliabil- ity provided by conferences is particularly essential in this time of high cost technology in terms of vessels, term- inals and equipment, complicated by persistent inflation in our major trades. Notwithstanding, the ability of con- ferences to influence and nurture stable trading conditions in our foreign commerce has been seriously undermined by the judiciary, abetted by traditional anticonference factions in the Department of Justice, which, as Senator Gorton of the counterpart Subcommittee suggests, has turned the intended antitrust immunity policy "on its head." The courts have done the most violence to congressional intent in their treatment of activities which are found not PAGENO="0563" 557 to have been authorized by an agreement approved by the Com- mission. Under the Carnation and Sabre Line precedents,*** conference members who thought their actions were immunized found they had not only violated the Shipping Act but were susceptible to treble damage antitrust exposure as well. The Conferences strongly supported the provision in 5. 1593 which would overrule these troublesome decisions. As indicated earlier, H.R. 4374 does not currently address this problem of exposing conferences to two sets of inconsistent and even conflicting laws and to multiple penal- ties. The Conferences believe a provision which would exempt activities from the antitrust laws whether or not those acti- vities are found to have been authorized under an agreement approved by the Commission would eliminate this threat to conferences and would serve to reclarify the original intent of Congress. Accordingly, the Conferences urge the Subcom- mittee to incorporate in its bill a provision similar to section 8 of 5. 1593. The Conferences support the provisions of section 2(5) and 2(6) which would end the crippling delay in processing and acting upon section 15 arrangements by fixing the time within which Commission decisions must be forthcoming. For ***Carnation Co. v. Pacific Westbound Conference, 383 U.S. 213 (1966); Sabre Shipping Corporation v. American President Lines, Ltd., 285 F. Supp. 949 (S.D. N.Y. 1968) PAGENO="0564" 558 some years, the Svenska rule and the public interest standard have operated to clog the Commissionts docket with the result that agreement processing - entailing months and even years of soul-searching - has frustrated the efforts of conferences and others to keep pace with real world commercial develop- ments. Although the bill would remove those major obstacles, the Conferences believe that imposing reasonable time re- straints on Commission actions would also be beneficial. Such restraints will ensure prompt action which will allow better long term planning for conferences and shippers. The limits proposed in the bill, however, require fur- ther consideration and refinement. For example, it is not clear whether the 30 day requirement to commence a proceed- ing under section 2(5) is limited to self-initiated proceed- ings by the Commission. If not, it would appear to conflict with the provision for a preliminary hearing in section 2 (6). The requirement for Federal Register publication of agree- ments does not appear to have been considered in establish- ing the time limits, nor is there provision for proponents to reply to complaints filed under section 2(6). Also, it is uncertain what would happen if the 180 day period in sec- tion 2(5) expires without Commission action. The Confer- ences believe, therefore, that this provision should be clarified if the goal of expedition is to be reasonably accomplished. PAGENO="0565" 559 Section 5 of the bill would eliminate licensing require- ments for freight forwarders but require freight forwarders and non-vessel-operating-common-carriers (NVOCC' s) to post minimum bonds. As ocean freight forwarders operate only in the outbound trades, the Conferences, all of whom operate in- bound, do not here address this aspect of the bill. The Con- ferences do, however, support the provision for. bonding NVOCC's. At present, NVOCC operators appear and disappear overnight, only to appear again under another name at another port. Virtually no capital is necessary to initiate an NVOCC service as no assets are required. As a result, many are thinly capitalized and their operations are sporadic. The proposed bonding requirement should serve to inhibit unreli- able opportunists from commencing operations. Section 3 of the bill establishes a defined structure for shippers' councils. While, conceptually, the Conferences do not oppose shippers' councils, they believe any U.S. regu- lation must be limited to councils which are domiciled in the United States, which are concerned only with the U.S. outbound trades, and which are restricted to functioning only as bodies which may carry on consultative activities. Although section 3 of the bill is restricted to councils "organized or existing under the laws of the United States," the Conferences believe the bill should clearly be restricted to shippers' councils which function in the U.S. water-borne 94-856 0 - 82 - 37 PAGENO="0566" 560 export trades. As will be appreciated, shippers' councils have been organized and operating abroad and in the foreign countries which these Conferences serve over many years. The bill does not appear to require these bodies to file their organizational agreements for Commission approval, as this could understandably lead to a direct collision with the laws of our trading partners, which, in many cases, have mandated their formation and operation. In many U.S. inbound trades, conferences have been cus- tomarily required to consult with shippers' councils organized outside of the United States. Any legislation in this area should insure that the councils which are sanctioned will not compete with these pre-existing foreign-based councils which otherwise would place conferences in an impossible dilemma. Therefore, with respect to conferences located abroad, the practice of continuing consultations with foreign domiciled councils should be left undisturbed, including the practice of consulting the smaller segment of U.S. consignees concerned with shipping in these trades to United States ports and points. The Conferences also believe that these existing foreign- based shippers' councils provide an excellent framework for modeling councils in the U.S. outbound trades. The Confer- ences, however, are concerned over the powers given under section 3 of the bill whereby councils would be authorized to PAGENO="0567" 561 agree with conferences upon general rate levels, practices and terms and conditions of service. This would represent an entirely new concept which is presently unknown to the ocean shipping industry. While there would be considerable merit in sanctioning a consultative process between carriers and their customers, the ratemaking function must not be delegated to entities who are not engaged in the business of common carriage. Not only is this at odds with the prin- ciple of common carriage, ratemaking contingent upon the need for agreeing with non-carriers could well jeopardize a car- rier's economic viability. While the Conferences genuinely support the notion of increased communication with their customers, they believe *that careful lines of responsibility must be drawn. Sec- tion 3 of the bill, for example, speaks of `the resolution of disputes." The Conferences suggest that this language could be interpreted to require binding arbitration regard- ing disputes arising between the council and the conference. The policies of increased communication and cooperation in resolving common industry problems are best served by avoid- ing mandatory arbitration of differences between conferences and shippers' councils and by avoiding provisions which allow shippers' councils and carriers or conferences to establish rates, practices or terms of service. The Conferences' experience with foreign-based shippers' councils shows that PAGENO="0568" 562 discussion of common problems is most beneficial if it occurs without the threat of forced arbitration and outside the con- text of any specific, collective agreements. The Conferences are also concerned about an apparent in- consistency in section 3. Although a dividing line would eventually be drawn between the gray areas of general and specific rates, proposed sections l5a(a) (1) and l5a(c) (7) indicate the difficulty in establishing authority for ship- pers' councils to engage in agreement making. Given the obvious problems of a grant of unlimited authority and the promise of continued litigation regarding general and spe- cific rates, the Conferences suggest that all references to the authority to reach agreements with carriers or confer- ences be deleted. With these changes, the bill would sanc- tion the use of such councils as consultative organizations on a parallel with the practice abroad. Section 2(4) of the bill would appear to require con- ferences to admit at least one U.S.-f lag carrier who is willing to serve the trade covered by the agreement. It is unclear whether this applies to all conferences or only to those which would elect to limit their membership. Simi- larly, section 2(4) could be read to require conferences to admit all willing U.S.-f lag carriers, or to allow a confer- ence to deny subsequent U.S.-f lag carriers admission if the conference has filled its `quota" of one such carrier. The PAGENO="0569" 563 Conferences believe adoption of section 2(4) would, because of these inconsistencies, adversely affect carriers which are currently adequately protected by the present section 15 requirement that all conference agreements "provide reason- able and equal terms and conditions for admission." There- fore, the Conferences urge that section 2(4) be deleted from the bill. We note, in passing, according to the printed version of the bill, shippers' council agreements would be approved by the Federal Trade Commission. The Conferences assume this was an oversight, and that the bill had instead envisioned jurisdiction residing in the Federal Maritime Commission. Section 4 would revise the current penalties assessable under the Shipping Act by deleting the criminal penalties under sections 14 and 21, by increasing the civil penalty maximum, and by establishing a minimum penalty of U.S. $5,000 per offense (or per day). The new maximum penalty of U.S. $25,000 per offense or day could reach one million dollars in less than six weeks of a continuing violation and, therefore, borders on the confiscatory. And, for the first time, there is introduced the concep~ of a mandatory minimum penalty. Although the effect of the Commission's compromise authority under proposed section 32(b) is un- clear, it appears from section 32(a) that the minimum pen- alty must be assessed irrespective of the mediating PAGENO="0570" 564 circumstances. This could lead to inequitable treatment and should be eliminated. Also, it is believed that the new maximum of U.S. $25,000 per offense or day is inordinately high. In addition, and as pointed out earlier in this State- ment, the bill does not expressly clarify the Commission's authority to approve conferencewide intermodal arrangements among ocean common carriers or with other combinations of inland carriers establishing through routes and rates to and from inland points. The Conferences believe that this is one of the single most important concerns the industry pres- ently faces; without the ability to engage in intermodal transportation, the Conferences cannot hope to survive. The trans-Pacific conferences were the first confer- ences functioning in our foreign commerce to implement con- ferencewide intermodal authority to U.S. inland destinations pursuant to Commission approval action. Today, these con- ferences are nearly 100 percent containerized and a growing percent of the cargo carried by their members moves under single factor through bill transportation arrangements. In the Hong Kong/Taiwan trade, intermodal cargo has increased to the point where traditional, port-to-port cargo now makes up only a declining minority of the total cargo carried by the members. In other trans-Pacific trades, intermodal cargo varies from 25-50 percent of the total cargo carried. PAGENO="0571" 565 Without the ability to regulate and control this significant and rapidly growing segment of the trade, the Conferences would be unable to achieve their primary role of providing for trade stability. Without exaggeration, if conferences are to be deprived of the tools with which to deal with technological advances indigenous to the ocean shipping in- dustry, the system itself cannot survive. The need for clarification of the authority to approve intermodal arrangements is crucial. Although the Commission has assumed it had such authority, that authority is cur- rently being challenged in the courts. In United States of America v. Federal Maritime Commission, et al., No. 79-1299. Court of Appeals for the District of Columbia Circuit, pend- ing, the Justice Department persuaded the Court of Appeals to grant en banc reconsideration of the decision of a panel of three judges upholding the Commission's statutory author- ity to approve conference intermodal authority. Given the history of judicial interpretation of the intent of the Shipping Act and the increasing amount of cargo moving under intermodal arrangements, the bill should clearly affirm that the Commission has the authority to approve conferencewide intermodal arrangements among ocean carriers or with other combinations of inland carriers. The Conferences believe granting this authority would not interfere with present efforts of the Interstate Commerce PAGENO="0572" 566 Commission to deregulate inland carriers. Inland carriers would be free to negotiate with conferences, individual mem- ber carriers, independent carriers, or shippers in setting their rates. Shippers would not be forced to accept confer- ence intermodal rates, as tariffs would continue to include all water port-to-port rates. Therefore, the Conferences strongly support reaffirmation of the Comrnmission's intermodal authority along the lines as currently proposed in S. 1593. Such a reaffirmation should include language amending sec- tion 14b of the Shipping Act expressly to allow dual rate contracts for intermodal services. This authority to cover both port-to-port and intermodal cargoes is essential if dual rate contracts are to function effectively in the container age. And, it is equally essential that conferences have the right to employ a single unitary contract covering all of the services they offer if the contracts are at all to be effective. To further strengthen the effectiveness of dual rate con- tracts, the Conferences urge the Committee to delete the pro- viso of section 14(b) (3) and insert in place thereof: Provided, however, That the contract covers all shipments as to which the name of the contract shipper or consignee appears on the bill of lading or export declaration as shipper, consignee or notified party; The Conferences submit this change is necessary on the basis of some twenty years of experience with the existing "legal rights" language, which has served only to weaken, in a significant way, the enforceability of existing contracts. PAGENO="0573" 567 Another vexing area of concern to the Conferences in- volves newly-developed aspects of self-policing. Needless to say, the Conferences staunchly support the present pro- visions of law which enable them to engage in the self- policing of their agreement obligations. In September 1978, however, the Commission adopted some new self-policing regu- lations (General Order 7) which not only require conferences to engage outside policing entities, but also impose complex and complicated regulations controlling the procedures for policing conference obligations and recordkeeping. In addi- tion, the regulations require conferences to delete from their agreements provisions which have served in the past to protect the confidentiality of self-policing records which are maintained in the repositories of the various polic- ing authorities. For the first time, the regulations announce a Commis- sion intention to use these records to second-guess the policing authorities and, where merited, impose civil penal- ties in addition to those which may be assessed by a confer- ence's policing authority. These Conferences challenged the regulation's validity in the Court of Appeals in the District of Columbia Circuit, contending that the regulations had exceeded the congressional intent. In a split decision, a panel of the Court upheld the regulations despite persuasive legislative history to the contrary. PAGENO="0574" 568 The future of conference self-regulation thus stands at a crossroad. The threat that documents which have been voluntarily turned over to policing authorities in con- fidence may be subsequently seized by the Commission to mete out additional sanctions is now real and not imagi- nary. It is the opinion of the members of these Confer- ences (and of most knowledgeable shipping officials), how- ever, that any demand for self-policing records to carry out Commission prosecutorial investigations of Shipping Act violations will signal the end of effective self-regulation. A system of conference self-policing, like any system of self-regulation, depends on the cooperation and the good faith efforts of those who are being policed. Yet, conference mem- bers can scarcely be expected to make their records accessible, and freely cooperate with self-policing agencies without re- sort to legal processes, if the fruits of those investigations are to result in Commission-imposed penalties or suspension of member services. The Conferences urge, therefore, that the bill be amended to include a provision adding the following sentence at the end of the third paragraph of section 15: Self-policing records in the possession of an independent neutral body may not be used as a basis for imposing civil penalties. The possibility of interference with the self-policing neutral bodies and imposition of civil penalties threatens PAGENO="0575" 569 the conference system itself. Nonconference carriers and NVOCC's are not subject to the current self-policing provision of section 15. In these circumstances, confer- ence members may feel pressure to leave the conferences to avoid the threatened penalties. The Conferences submit it is neither logical nor fair to police conference carriers to the exclusion of nonconference carriers and NVOCC's. The Commission's investigations over the past several years have demonstrated that conference carriers have no monopoly on malpractices. This is particularly evidenced by the NVOCC's which have recently negotiated settlement agreements with the Commission in lieu of civil penalty action. The Confer- ences must, therefore, urge that the bill be amended to apply the self-policing provision of section 15 to not only carriers who support conferences but to those carriers who operate out- side of conferences and to NVOCC's, as well. There is, finally, the matter of the need for tariff filing. While it is appreciated that H.R. 4374 does not dis- turb the current provisions of the Act under which tariffs are required to be filed, as questions in the Subcommittee's hearings have been raised concerning the propriety of these filings, the Conferences wish here to submit their views and observations. The Conferences believe, and quite strongly, that all shippers should have access to the common carriage system PAGENO="0576" 570 on a reasonably equal basis. Elimination of tariffs would introduce discrimination and rate instability. Many ship- pers literally depend upon the tariffs which are publicly on file in order to compete in the marketplace. Carriers would be free to charge their customers differing and fluctuating rates, and it would be no longer possible to administer the anti-rebating provisions of sections 16, 17 and 18 of the Act. Furthermore, with removal of the tariff filing requirement, conferences and carriers would no longer be in a position to evaluate their competitive stance and, hence, would be unable to engage in meaningful (and lawful) competitive pursuits. For example, under the Controlled Carrier Act, there would be no way of knowing the rate levels of controlled carriers. The Conferences, therefore, must urge retention of this statutory requirement. The Conferences appreciate the concern the Subcommittee has shown for the problems currently facing the shipping in- dustry. They wish to thank the Subcommittee for this oppor- tunity to present their views, and will be anxiously awaiting its deliberations. PAGENO="0577" 571 APPENDIX AMERICAN PRESIDENT LINES, LTD. BARBER BLUE SEA LINE GALLEON SHIPPING CORPORATION HAPAG-LLOYD AG JAPAN LINE, LTD. KAWASAKI KISEN ~AISHA, LTD.. KOREA MA.RINE TRANSPORT CO., LTD. KORYAA SHIPPING CORPORATION 7 LYKES BROS. STEAMSHIP COMPANY, INC. MARITIME COMPANY OF THE PHILIPPINES MITSUI 0.5. K. LINES, LTD. A. P. MOLLER-MAERSK LINE NIPPON YUSEN KAISHA ORIENT OVERSEAS CONTAINER LINE, INC. SEA-LAND SERVICE, INC. SHOWA LINE, LTD. THE EAST ASIATIC CO., LTD. UNITED STATES LINES, INC. YAMASHITA-SHINNIHON STEAMSHIP CO., LTD. [Whereupon, at 3:10 p.m., the subcommittee recessed to reconvene at the call of the Chair.] 0 PAGENO="0578"