Ships and Subsidies
BASIL HARRIS
President, United States Lines
Mr. Lewis W. Douglas proposes that the United States limit its post-war merchant fleet to 10,000,000 operating dead-weight tons. He would dispose of a big share of the rest of our ships under terms that “should provide-at least in so far as the British are concerned —that in the event of war the tonnage so sold at nominal prices or so leased irrevocably at nominal rentals should be made available to us in the conduct of any war in which we might become engaged.” In other words, Mr. Douglas suggests that we practically give away our merchant fleet to foreign nations and then expect to get it back when and if this nation is ever again plunged into a war!
The policy of the United States as set forth in the Merchant Marine Act of 1936, which is still in effect, decrees that the nation shall have a merchant marine sufficient to carry all its water-borne domestic commerce and a “substantial portion of the water-borne export and import foreign commerce of the United States" and that it shall “provide shipping service on all routes essential for maintaining the flow of such domestic and foreign water-borne commerce at all times.”
“A substantial portion” of the American exports and imports to be carried in American ships after the war has been set at 50 per cent. That would make it even Stephen with the rest of the maritime nations. The United States carries 50 per cent of its own trade, and the other 50 per cent is carried by other countries. Certainly such a plan implies no grandiose effort to monopolize the seas after the war.
But it is argued by Mr. Douglas that countries like Britain, Norway, and Holland depend far more than the United States upon shipping revenues to build up credits which make possible the operation of their own economies and the purchase of goods in the United States. Therefore, the argument goes, the United States would be cutting off its nose to spite its economic face if this country should try to carry more of its commerce in its own ships than it did immediately before the war.
Examination of the past and projection into the foreseeable future demolish the validity of that argument. Almon E. Roth, President of the National Federation of American Shipping, Inc., recently set forth some figures in this regard: —
(a) Foreign countries earned an average of only forty million dollars per year in usable dollar exchange from the United States in the twenty years between World War I and World War II; (b) this amount was only 1% of the value of our annual exports during that period; (c) our exports were only 7% of our average national income during this time; (d) it follows that if foreign countries had earned no net balance at all from the United States shipping services and had reduced their American purchases by $40,000,000 per year, this could have reduced our national wealth by only seven ten-thousandths. As against this theoretical loss, we would have had increased employment for Americans as crew members, shipbuilders, etc., which would more than make up for the supposed loss.
There is no assurance that either England, Norway, Holland, or any other maritime country will use any extra income derived from ship operation to buy additional goods in this country. Besides, the withdrawal of all competition by the American merchant marine would undoubtedly result in a rise in freight and passenger rates that would prove expensive to us.
Contentions that these maritime countries must make their money by carrying more than 50 per cent of American foreign trade are all based upon the belief that post-war international commerce will be maintained at the low levels of the past. Yet even the advocates of the idea that foreign nations should carry the bulk of American international commerce, like Mr. Douglas himself, talk in glowing terms of the necessity of developing world markets on a far bigger scale than in the past.
If the markets of the world are to be restored and enlarged — and I agree that they must be to maintain peace — then more shipping will be required all around the world to carry the expanded amounts of goods being exchanged. Britain, Norway, Holland, and the other maritime countries will find plenty to fill enlarged merchant fleets without carrying more than 50 per cent of American commerce.
And it might be a good thing to give this reminder. Before the war, Germany had a merchant fleet of 4,000,000 tons. Japan’s merchant fleet was 5,000,000 tons. There seems to be unanimous agreement that neither Japan nor Germany must be allowed to operate merchant tonnage in international trade, since such operation constitutes a war potential for the future.
Thus, some millions of tons of shipping formerly operated by the enemy must be furnished by the maritime countries of the United Nations. Add that to the anticipated general increase in the demand for ships from enlarged post-war commerce, and fears for the welfare of the other maritime nations melt away.
It is asserted by some, including Mr. Douglas, that the United States is not essentially a maritime nation and that foreign nations operate their ships more cheaply than we operate ours. When Mr. Douglas says that foreign nations can operate more cheaply than we can, he is entirely correct. But why? Because they do not build or sail their ships under wage and working conditions which we have established as a fair standard of living. Wages on foreign ships are low, quarters are cramped, food is poor. Ask any seaman to compare American shipping conditions with those of other countries. He’ll tell you in no uncertain terms.
And this is where the “subsidy” comes in. Under the Merchant Marine Act of 1936, payments are made to certain American shipping companies in order to equalize competition between companies flying the American flag and operating under American wage and working conditions, and foreign ships with far lower wage and working standards. Every cent of the “ subsidy” goes to the men who sail the American ships. The shipowners and operators keep none of it. The same is essentially true in shipbuilding and ship repair, where the “subsidy” goes to make up the difference between American wages and working conditions and the lower wages and conditions in foreign shipyards.
Another criticism of an equalization subsidy for an American merchant fleet is that it constitutes a growing government intervention in affairs of private trade and thus threatens the free market. In the interests of historical accuracy, it should be pointed out that the British — for whom Mr. Douglas seems so solicitous — have themselves taken special action in violation of Mr. Douglas’s “law of the market place.” Almost at the very time that Mr. Douglas’s words were being printed, the British were forming what amounts to an overall export-import trust into which all sections of British economic life are gathered in order to bolster Britain’s post-war position in foreign trade and shipping. Is that the free exercise of the “law of the market place”?
It is obvious that around the world almost all nations other than the United States will operate in their international commerce in much the same way. The Soviet Union has long dealt abroad through a state monopoly. The French lean in that direction for postwar trade. The Chinese have laws of the same trend. Other nations may follow. In no sense do these facts argue that the United States should follow suit. But it is important to bring home to our people that the rest of the world pays little attention to maintaining a free market.
Obviously the United States cannot employ 60,000,000 tons of merchant shipping. Estimates on what should be the size of an operating American merchant marine after the war vary greatly. They range from 20,000,000 tons to 35,000,000 tons (with some laid up as a naval auxiliary to be used in emergencies). Nevertheless, the United States will have on its hands millions of tons of shipping which it will not be able to use. What shall this country do with those millions of tons of shipping? That is the big question.
Mr. Douglas would have this country dispose of all but an amount equal to our pre-war ocean tonnage to foreign countries. Our small merchant navy would then be required to engage in competition on the high seas with ships we have sold or leased to others at nominal prices. We must dispose of our ships, according to Mr. Douglas, because others can operate the ships more cheaply than we can and because they need the revenue which this plan would give them so that they can spend some of it to buy more of our goods. In effect he is proposing that we subsidize the maintenance of the lowest possible wage and living standards for the world’s maritime shipping.
This dictum would seem to run head on into contradiction with the ordinary American belief that this country should not help lower standards of living throughout the world, but should aid in raising the standards of other countries up to ours. Let the shipping of other countries lift itself to our wages and working conditions and the American shipping companies will be able to operate without subsidies of any kind.
Meanwhile, the United States must keep itself sufficiently strong on the seas to guard against any possible future aggressor and to contribute its full share towards maintaining a permanently peaceful world. Without an adequate operating merchant marine of its own — sufficient to complement our future navy — it will not be equipped to do either.
J. F. GEHAN
National President, The Propeller Club
As far as I am informed, the shipping industry of this country is not advocating a merchant marine large enough to drive other nations from the seven seas; and I think the record will disclose that the United States government has no such plan in mind. What is really feared by the industry is that agreements may be made which will lessen the effects of the Merchant Marine Act of 1936 and hinder the United States from assuming its rightful place among the maritime nations of the world.
Notwithstanding a so-called agreement that we would build merchant ships here and Britain would build naval ships in Great Britain, the fact remains that Britain has built fast freighters during this war, and it is estimated that she will have about the same amount of tonnage at the end of 1945 that she had in September, 1939, and a large number of her ships will be new units-not old units. She will also have available passenger vessel tonnage far in excess of any other country, including the United States, which will have practically none.
We must take our rightful place in world affairs; we should help Great Britain to continue the role of world policeman. We cannot do it without shipping, and England has demonstrated that she cannot maintain such a role without our assistance. It will take a reasonable amount of tonnage for such a role. We are not trying to hog all the shipping of the world, but we are entitled to a fair share.
Under such conditions, I agree it is up to the private operators to make this tonnage work and to pay a profit, but if the operators do not succeed, the government will probably take over. The past has proved, however, that it costs more of the taxpayers’ money through government operation than under private operation. Is it better for the government to pay directly greater losses on its own fleet, or to assist private operators, where required, at a smaller indirect cost? That is the dilemma which faces many maritime nations.
If all foreign governments should agree to discontinue trade barriers, subsidies, and preferences, the United States could probably afford to do likewise. Let’s see the other fellow make such a proposal before we go off the deep end.
LEWIS W. DOUGLAS
Deputy Administrator of War Shipping May, 1942 — April, 1944
Several matters stated in my article “What Shall We Do with the Ships?” have been questioned as to their accuracy and implication. It is argued that the proposals do not give sufficient weight to the requirements of our peacetime navy. On this point the article contains the following language: —
Besides this tonnage [that which should be disposed of by the government on favorable terms to American operators] there is of course the amount necessary to serve as a fleet train for our peacetime navy. But this tonnage would not be operating in commercial trades and would be used purely on military duty.
Serious doubt has been cast on the estimated subsidies necessary to operate a fleet of cargo vessels of some 20,000,000 dead-weight tons. The article did not attempt to distinguish between the subsidy required on direct operational account and on construction account. The total of these two types of subsidies was the basis for the estimated burden a cargo fleet of this size would place on the country. For purposes of clarity, there follows a detailed calculation and analysis of each of the two types of subsidies and the total cost.
In December, 1941, there were approximately 7,500,000 dead-weight tons of dry cargo vessels under the American flag, of which 1,575,000 tons were operated over subsidized routes and 5,925,000 in the coastwise, intercoastal, and non-subsidized offshore trades. The domestic and non-subsidized owners’ fleets probably will not increase in dead-weight tonnage in the post-war period; therefore, if we are to have a fleet of some 20,000,000 tons, the increase in offshore subsidized tonnage would be approximately 12,500,000 tons, making the total dead-weight tonnage in subsidized operation 14,075,000 tons.
The average daily operating subsidy payment to operators in 1940 was approximately $152 a day, which is about half the total daily operating cost, excluding overhead and other items not included in the subsidy calculations.
The following is an estimate of the average daily cost of operating a cargo vessel in post-war foreign trade: —
| Wages | $200 |
| Overtime, vacation, and taxes | 20 |
| Food ($1 per man per day) | 40 |
| Stores and equipment | 40 |
| Repairs (10,000 d.w. tons @3 per ton per year— est. average d.W tons) | 82 |
| Miscellaneous | 6 |
| Marine insurance | 71* |
| $459 |
At a 50 per cent operating differential, this total of $459 would produce a subsidy per day per vessel of $229.
Based on a total of 14,075,000 dead-weight tons subsidized in foreign operations, at an average of 10,000 dead-weight tons per vessel, there would be 1407 vessels. At $229 per ship per day, this means a total daily cost of $322,203, or a total each year of $117,604,095. (If the average dead-weight should be less than 10,000 tons, there would of course be an increase in the number of vessels, which would offset any lesser cost of operation.)
The total cost of these 1407 vessels, at an estimated initial cost of $2,400,000 each, would be $3,376,800,000. On the basis of a 50 per cent construction differential, these 1407 vessels would be sold to subsidized operators for $1,688,400,000, thus costing the government $1,688,400,000. Assuming a twenty-year life for the vessels, the cost per year would be $84,420,000. If the government’s interest rate is 2½ per cent per year, there would be a further cost annually of $42,210,000, or a total of $126,630,000. This, added to the $117,604,095 operating differential mentioned in the previous paragraph, brings the grand total of annual subsidies on the 1407 vessels to $244,234,095.
If, however, it is assumed that the ships are already built and have already cost the government the amount above mentioned, then there must be taken into consideration the replacement cost of these vessels over the next twenty years. Assuming a replacement cost of $2,000,000 each, with a 50 per cent building differential, the cost to the government would be $1,000,000 each on 1407 vessels, a total of $1,407,000,000, or an average of $70,350,000 per year based on a twenty-year life. Interest at 2½ per cent on the building cost absorbed by the government would be $35,175,000 per year, making a total of $105,525,000. This, added to the $117,604,095 operating differential above mentioned, makes the grand total of annual subsidies on this assumption $223,129,095.
These figures are estimates, of course. But it is not likely that the error, if any, will be substantial enough to alter the conclusion.
But the matter of subsidies is not the only reason for reaffirming my proposals. It is often difficult to distinguish between temporary and ephemeral gain, on the one hand, and future and permanent gain on the other. Temporary gain for the benefit of a small part of our economic life, at the cost of creating international frictions and endangering the peace, is no gain at all. It is a devastating loss.
The basic question is: Subject always to the qualification that we should take reasonable steps to protect ourselves against possible military contingencies, shall the United States organize itself, and assist in the organization of at least a part of the world, for peace? Or shall it turn intensely nationalistic, imperialistic, and organize for war? Either will exact a price. But I prefer paying the price for peace to paying the price for war.
ADMIRAL E. S. LAND
Chairman, U. S. Maritime Commission
Mr. Douglas, in his “explanation,” makes three basic assumptions, none of which has any justification whatever: —
1.His hypothetical post-war fleet of 20,000,000 deadweight tons consists entirely of dry cargo vessels, which means an increase, on the basis of his figures, of 12,500,000 tons.
2. All of this increase will be in foreign trade.
3. All of this increase in the foreign trade fleet will be subsidized.
I repeat that there is no justification, on or off the record, for any one of these assumptions. Taken collectively, they compound Mr. Douglas’s distortion of the truth.
Leaving Mr. Douglas’s figures for a moment, what are the facts? Our foreign trade fleet before the war consisted of slightly more than 3,318,000 dead-weight tons. Of this total about 1,575,000 tons, or 47½ per cent, received operating-differential subsidy payments. Of these subsidy payments, about two thirds went to combination cargo-passenger ships and not, as in Mr. Douglas’s fleet, exclusively to dry cargo vessels.
These facts should certainly arouse some suspicion as to the reliability of Mr. Douglas’s sources and “facts” and cast serious doubt upon any conclusions he may present to the readers of the Atlantic.
But, even more important, I particularly call attention to what seems to be a remarkable misstatement in Mr. Douglas’s “explanation” where he says:
The article did not attempt to distinguish between the subsidy required on direct operational account and on construction account.
Yet in his article Mr. Douglas said: —
If, for example, there is to be an American merchant fleet of 20,000,000 tons . . . the cost to the country in operating subsidies alone will range between $200,000,000 and $300,000,000 each year, depending on the way the subsidy is calculated and the form it takes. (Italics mine.)
If I read the English language correctly, Mr. Douglas again did not state the facts in his “explanation.” Consequently, I say I should prefer not to continue the discussion except to suggest the irresponsibility of his whole approach to this very important problem.
It is hoped that if this statement does not fully correct certain inevitable false impressions to be gained, both from Mr. Douglas’s article and from his interpretation of what he would have us think he said, it may at least serve to keep readers’ minds open on this matter until they have convinced themselves as to the facts from reliable sources.
- Marine insurance daily cost would be about $142, but the subsidy would apply to not more than 50 per cent of that figure.↩