The combination of a sluggish economy and heightened competition in the trucking industry has left Smith's Transfer Corp. President Joe F. Gilbert worried.

Gilbert wonders both how the giant Virginia-based firm he leads can avoid losing business to small low-cost operators and how many more large trucking firms will go broke before the economy turns around. He questions the benefits of free market competition in an industry that was protected for many years before substantial deregulation two years ago enhanced competition.

"The free enterprise system has created chaos in the trucking industry," said Gilbert, who is president of the Staunton, Virginia-based trucking giant. "Before deregulation, we didn't have cut-throat rate making. We've had recessions before, but we never used to have to cut prices just to keep our customers."

Gilbert, who has worked for Smith's Transfer since 1947, said he has been forced to lay off about 1,200 of the company's 7,000 employes. He also has slashed rates nearly 20 percent, often below cost, in an effort to hold onto customers who will provide substantial revenues once the economy turns around.

Gilbert is acutely aware that new small truck lines with low overhead are able to undercut Smith's Transfer pricing. As American Trucking Association President Bennett C. Whitlock Jr. pointed out in recent Congressional hearings, the liberal granting of operating permits by the Interstate Commerce Commission has added many new truckers to the industry.

From July 3, 1980 to May 31, 1982, 7,886 new carriers have received permission to operate from the Interstate Commerce Commission, increasing to about 22,000 the number of carriers licensed to operate.

"The industry has changed so that when a trucker goes out of business now, there are two more waiting to take his place," Gilbert said. "Our tonnage is down 20 percent below last year and last year was 15 percent below the year before.

"We earned about $18 million in 1979 and this year we don't expect to make a profit," Gilbert continued. "As long as we are not losing a lot of money in this environment, we are doing better than the average. Most large firms aren't breaking even."

In the first quarter of 1982, general freight tonnage was 12.2 percent below the first quarter last year. The industry downturn was most severe in 1980 when tonnage was down almost 17 percent below 1979. In 1981, tonnage was 3.6 percent below 1980.

A General Accounting Office study of trucking released last month concluded that the likely cause of high industry unemployment was poor economic conditions, not deregulation. The study suggested that while deregulation has brought about an increase in the number of trucking firms and increased price competition, unemployment in the industry was no worse than unemployment in durable goods and construction industries.

In the six quarters preceding passage of the act in July of 1980, the trucking unemployment rate was 6.9 percent; for the six quarters after the act, the average was 9.3 percent.

American Trucking Association Vice Chairman Ross Gaussoin testified before a House Public Works subcommittee recently that 144 carriers have left the industry since mid-1980 and another 90 are on the verge of bankruptcy. These firms represent over $2 billion in annual revenues and more than 42,000 jobs, he said.

Despite a Fifth Circuit Court of Appeals ruling last year that the ICC was administering the deregulation act too liberally in granting new territories, Senate Commerce Committee Transportation counsel William Ris said the commission is now well within the bounds of the legislation passed by Congress in July of 1980.

The Teamsters Union has been hit very hard as increased competition has damaged the union's ability to keep its members, Ris said. In the last decade, the Teamsters Union has lost more than 63,000 truckers, a 21 percent decrease.

Before deregulation, collective rate setting by truckers made it possible for the Teamsters to negotiate large pay increases every three years. Since all carriers passed wage increases on to shippers through higher rates, no individual trucker got hurt by paying higher wages.

But now that rates are no longer set collectively, non-union carriers with substantially lower labor costs are undercutting union carriers. This has eroded the union's bargaining position.

Terminals in eight Virginia cities were among those shutdown permanently by the management of Hemingway Transport Co. of New Bedford, Mass., in the midst of a strike by the Teamsters Union that began June 11. The strike occurred after company officials refused to sign a new national union contract that it said would have a "crippling effect."

Hemingway President Richard E. Edwards said the majority of his drivers were willing to cross the picket lines because they were not given the opportunity to vote on a strike which many did not believe was in their best interest. However, the company was forced to close its U.S. operations after many shippers refused to tangle with the Teamsters by allowing Hemingway to continue moving their goods.

"The union has made a policy decision that there will be no deviation from its national contract and that decision will force most regional union carriers out of business in the next 10 years," Edwards said. He added that the new contract called for hourly wages and benefits of $21 for the truckers.

Non-union drivers earn about $9.75, Edwards said. Hemingway, which had been southern New England's largest trucking company, formerly employed 1,500 in the U.S. The company intends to maintain its Canadian operations.

Despite the financial hardship for many unionized truckers in the interim, Ris believes that deregulation will ultimately benefit the industry.

"For a long time, the regulatory system protected marginal operators who would not have survived competition," Ris said. "If you had started regulating the grocery store business back in 1935, you would have nothing but mom and pop stores all over. In the absence of regulation, large efficient chains have developed along with independents.

"There is diversity in the grocery business that we will have somewhere down the line in trucking, but there is going to be a period of consolidation first. A shifting of territories and services in the interim is going to bring about more individual bankruptcies that would not have taken place without deregulation."