I think I speak for my fellow committee members when I say these problems must be viewed as national problems-and their resolutions must, therefore, be reflections of a national policy. It is our hope that each witness will, without the restraints of tradition, speak on both the specific issues and policies that will best serve the long-range national interest.

The record of these hearings will remain open for supplementary statements and material for a period of 6 weeks following the last day upon which testimony is received.

I am going to ask unanimous consent, which will be promptly granted, to follow the statement which I have just made with an associated statement bearing more specifically upon the general subject, but I will not consume time now by reading it.

(The statement follows:)

PROGRAM FOR STUDY OF SHIPPING PROBLEMS OF THE DOMESTIC NON CONTIGUOUS

AREAS

I. NEED FOR THE STUDY

Recent rate increases requested by American-flag ocean carriers for service to U.S. noncontiguous areas and States-principally Alaska, Hawaii, Puerto Rico, and Guam-point up a critical conflict: that between the need, by the carriers on one hand, for higher freight revenue to meet mounting operating and vessel replacement costs; and on the other hand, the requirement that these noncontiguous areas have low transportation rates in order to survive and develop their economies. At the present time the following facts are component parts of a statement of the problem; the noncontiguous areas are mainly dependent on ocean transportation for export and import movements; most of this traffic is between the U.S. mainland and these offshore areas; under the terms of the cabotage laws trade with the mainland is restricted to American vessels; and, rate regulation in such trade is under the jurisdiction of the Federal Maritime Board.

Assuming that the primary national interest is best served by fostering and expanding trade between the mainland and U.S. territories and noncontiguous States, the problem becomes how to provide reasonable freight costs that will not penalize or undermine the local economies. Experience with case by case regulatory disposition of these rate matters amply justified the conclusion that no long-range resolution is to be gained on a piecemeal basis. In each proceeding, the agency has been confronted with the choice of penalizing the carrier and its future ability to serve or penalizing the industry and consumers in the area served. This adversary atmosphere, heightened by the frequency of rate controversies, has not lent itself to judgments that go beyond the narrow confines of the record.

What is needed, and what the Merchant Marine Subcommittee must concern itself with, is a policy on this matter that best serves the national interest.

II. PURPOSE AND SCOPE OF THE STUDY

To determine (or redetermine) such a policy will require initially a definition of what the national interest is-what commercial and defense goals are sought and what prestige and foreign policy objectives must be fulfilled by this trade. Conversely, a delineation must be made of the values not to be protected.

Next, an examination in depth must be made of the problems facing both the areas served and the ocean carriers serving these areas. Such examination cannot be limited solely to the present high cost-low rate conflict, but beyond to anticipate, for example, the popular industrial ambitions of each noncontiguous area and the rates and service frequency needed to fulfill the goals.

Finally, alternative policy solutions would be proposed and their effects considered. In each case the alternatives will be tested for their consistency or inconsistency with the definition of national policy.

Failure to deal affirmatively with this problem, not at a very critical point, invites a policy of drift.

III. SUGGESTED FORM OF HEARINGS

A. Statement by representatives of the local government of Hawaii, Alaska, Guam, and Puerto Rico: These statements should encompass all aspects of the problem as seen by the offshore areas. At this session technical data should be submitted by witnesses backing up the main speaker.

B. Testimony from the carriers involved in the trades between the mainland United States and the noncontiguous areas. This general material also to be accompanied by technical data.

C. After this statement and joining of the problem, the various Government agencies and Departments would be invited to give their views of how the national interest is involved, and how best it is to be served.

D. Presentation and consideration of alternative methods for resolving the transportation problem: Several of the previous witnesses may want to return to express their views on the soundness of these alternatives.

It is to be noted that the committee does not anticipate that the differing factual problems of each offshore area will necessarily be susceptible to the same solutions.

Senator BARTLETT. Now the witness list before me reveals that the able and distinguished Senator from Hawaii, Senator Hiram Fong, will testify first.

STATEMENT OF HON. HIRAM L. FONG, U.S. SENATOR FROM THE STATE OF HAWAII

Senator BARTLETT. We are glad to have you.

Senator FONG. Senator, I am very happy to be here this morning. I deeply appreciate the opportunity to appear before you and express my views on a matter of vital importance to the State of Hawaii.

Hawaii is the only island State and is completely dependent upon shipping for her sustenance. The attainment of statehood and the increased commercial activity resulting therefrom has served to emphasize this dependence.

In his recent testimony before the Federal Maritime Board, Dr. James H. Shoemaker, vice president, Bank of Hawaii, stated that more than two-thirds of the food consumed in Hawaii is shipped by surface transportation from the mainland, and more than 90 percent of consumer goods other than food, which include clothing, automobiles, and building materials, are similarly imported. By the same token, the chief agricultural products of Hawaii, sugar and pineapple, must reach mainland markets by ship. In 1958, 2,699,287 tons of consumer and industrial goods were shipped to Hawaii from the mainland, while 1,472,744 tons of Hawaiian products similarly moved to the mainland. Service is provided between the mainland and all deepwater ports located in the islands by freighter.

For many years, Matson Navigation Co. has been the chief carrier of freight between the west coast of the United States and Hawaii, and has likewise carried passengers to and from Hawaii. Matson has served Hawaii efficiently and well.

However, since 1946, because of rising costs, this company has placed nine general rate increases into effect. Two of these resulted in hearings and in each instance the Federal Maritime Board found that the increases were just and reasonable.

Pending now before the Board is a further application by Matson for a 1212-percent increase. This increase is being opposed by the State of Hawaii and by local industrial interests. It appears that a point may have been reached where the freight costs not only

have become a burden upon consumers and business interests in Hawaii and a hindrance to economic development of the new State, but that costs incurred by this shipping company are such that it may be uneconomic for it to continue to do business without further rate in

creases.

I do not take any position, Mr. Chairman, with respect to the reasonableness of these rate increases. The decision on what a fair rate of return should be to the owners of a shipping company is one which requires meticulous study by accountants and economists. I am tremendously concerned, however, by the increasingly heavy burden placed upon consumers in Hawaii and upon local industries which export their products to the mainland.

The pineapple industry offers a good example of the dependence of Hawaii's business interests on shipping as well as the burden of rising freight costs on a local industry. This is a $125 million industry which employes between 10,000 and 20,000 persons, depending on the season. Today, this industry finds itself in a highly competitive market, and its position as one of the basic income producers in Hawaii is jeopardized. A leader in the industry has stated that competitive conditions have prevented the industry from passing on the most recent freight increases to its customers and that the industry is in no position to absorb any further freight increases.

The Federal cabotage laws (46 U.S.C. 289, 46 U.S.C. 883) prevent the carriage of goods and passengers between Hawaii and the mainland on other than American-flag vessels. This legislation has been justified on the ground that it encourages the growth and development of an American merchant marine which can be made immediately available in time of war. I am in full accord with this principle. However, because of these laws, offshore areas such as Hawaii cannot take advantage of the lower rates provided by foreign vessels for shipment of freight. They are compelled to pay substantially more each year for their essential ocean freight services because of the national policy requiring them to use U.S.-flag vessels than they would be if they were free to use the most economical services regardless of nationality.

Furthermore, this inequitable burden may well increase in the near future. The vessels presently serving Hawaii were constructed for the most part during World War II for the United States and sold at favorable prices after the war to the private carriers. These vessels are now almost all approaching their 20th anniversary in service. They will have to be replaced eventually. If they are replaced at present U.S. ship construction costs, which are almost twice as much as foreign costs, these costs will have to be absorbed by the people of Hawaii through even higher freight rates.

I believe that maintenance of a segment of a strong U.S. merchant marine should not devolve chiefly upon these areas. The problem is national and should be solved on a national basis.

It is my hope that the committee will make a thorough study of these probems and that it will recommend solutions which will be in the best interest of the people and business interests of the offshore areas, recognizing at the same time that the ocean carriers serving these areas must make a reasonable profit if they are to continue in business. With particular respect to Hawaii, orderly development of its economy in the years to come will depend upon the regularity of

ocean transportation and the reasonableness of shipping rates. Finally, national policy with respect to maintenance of the U.S. merchant marine must be reexamined and new determinations made.

Thank you, Mr. Chairman.

Senator BARTLETT. Thank you, Senator Fong. I believe you mentioned that more than two-thirds of the food consumed in Hawaii reaches there by ocean shipping.

Senator FONG. Ninety percent, Mr. Chairman. Ninety percent of all consumer goods, other than food.

Senator BARTLETT. How about food?

Senator FONG. Two-thirds of the food consumed in Hawaii is imported.

Senator BARTLETT. Do you foresee the possibility that at some time in the future a greater percentage of food will be produced in the islands for local consumption or do you believe the land will always be more valuable for sugar and pineapple?

Senator FONG. I believe the land is always more valuable in the type of agricultural pursuits we are now pursuing. We have a very difficult time in Hawaii in getting land for the truck farmer. For example, on the Island of Oahu, where almost 80 percent of our population is situated, on 10 percent of the land, of the State we almost have no land for agricultural pursuits for small farmers, and it is a very, very difficult thing to find land for these truck farmers to produce the things we need. More and more I think we will be dependent on surface transportation to take care of our requirements.

Senator BARTLETT. While your land is most productive, the aggregate acreage available is rather limited in terms of Nebraska or the Dakotas, for example.

Senator FONG. Yes, very much so. Much of our land is mountainous, and I believe we only have around 10 to 15 percent class A land that could be used for good agricultural purposes. Much of our land is class B land and mountainous terrain.

Senator BARTLETT. Now, pursuing that line of inquiry for a moment more, how does the island of Hawaii, for example, or any of the other islands receive its foodstuff? Does it all come to Honolulu and then transshipped, or is there direct service from the mainland?

Senator FONG. We have direct service to the various islands, and we also have transshipping from Oahu. I do not know what the percentages are, but there is quite a lot of transshipment.

Senator BARTLETT. Transshipment is by barge or how?

Senator FONG. By barge mostly.

Senator BARTLETT. My recollection is that Hawaii is the only one of the three offshore areas-Alaska, Hawaii, and Puerto Rico that now enjoys passenger steamship service. How many carriers serve Hawaii for passenger carriage?

Senator FONG. I believe there are two passenger carriers, Matson and American President Line.

Senator BARTLETT. Are the passenger ships of Matson new, medium aged, or becoming older?

Senator FONG. I think they are more than 20 years old and within a few years they will have to be replaced.

Senator BARTLETT. If they are replaced, if new ships are built for that trade, under existing circumstances, would it not require a very considerable elevation of passenger rates?

Senator FONG. From my understanding, a freight-carrying ship costs around $10 million. These ships were acquired by the Matson Navigation, I believe, for the sum of approximately a million dollars. Now, there is a difference of $9 million there not taken into account in computing costs. If you were to make a 6-percent return, there is $54,000 right there, to be considered in just interest alone on the $1 million without talking about the cost of amortization or depreciation, say for a period of 20 years. It must necessarily follow these ships are to be replaced by ships that would exceed in cost the sum now being shown on the books, and that the company expects a return of probably 6 or at least 4 percent on their costs. Under those circumstances the rates will materially rise. Passenger ships, I understand, cost at least $25 million each.

Senator BARTLETT. There is keen competition at this time, is there not, between the passenger steamships and the airlines?

Senator FONG. I am not in a position to answer that question, except that there are not too many trips that have been made by the Matson Navigation with the two ships they have. I think they have the Matsonia and the Lurline. There is a Matson man here who will be able to give that testimony.

There are only two ships that make the Hawaiian run, and there is some talk one of the ships will be taken off the run in June. I don't know whether that is definite or not.

The Matson Navigation people have representatives here to testify and I presume they will be able to answer that question. But most of our passengers come by airlines rather than by ships.

Senator BARTLETT. Is that on account, would you think of course, this is all speculative of a desire to save time, and be able to spend more time in the islands

Senator FONG. It is cheaper by airplane because it only takes 412 or 5 hours to get to Hawaii now-whereas by ship it takes around 412 days, and with all the food and services that must go with 42 days on a ship, the costs are much higher if you go by ship than if you go by airplane. Most of our passengers come to Hawaii by airplane.

Senator BARTLETT. From some later witness we will seek to elicit information about the comparative rate schedules, in part to point up the possibility that you have suggested that if the carrier serving Hawaii has to get new ships on run, with the high costs, the trade actually may no longer be competitive.

Senator FONG. Yes.

Senator BARTLETT. Thank you very much, Senator Fong, for a most useful statement.

Senator FONG. Thank you, Mr. Chairman.

Senator BARTLETT. Our next witness will be the former Governor of the then Territory of Hawaii, one-time superintendent of instruction of the territory, and now the Senator from the new State, Senator Oren Long.

We welcome you, Senator, because we know that you always are eminently qualified to speak on this subject.