For months, U.S. shipping interests have been issuing anguished complaints about massive container imbalances, delays, jams, rising costs and the alleged refusal by some carriers of United States containerized exports. Now two U.S. senators and President Joe Biden have acted to address the issues. Whether their proposed actions have properly assessed the causes of the crisis, or can do anything to relieve it, remains to be seen.
Executive orders
Biden’s directives to the Federal Maritime Commission came on July 9 as part of a sweeping series of 72 executive orders titled “Executive Order on Promoting Competition in the American Economy.” Most of the individual executive orders are really requests to 12 separate federal agencies and commissions, like the Federal Trade Commission or the Federal Communications Commission, that are supposed to be independent of direct White House control. Some of them promote practices that are popular with both political parties and consumers generally, such as having airlines refund baggage fees when baggage is delayed. But they generally exhort agencies to “enhance” or “strengthen” existing efforts, rather than specifying specific desired outcomes.
One of these EOs urged the Federal Maritime Commission "to take all possible steps to protect American exporters from the high costs imposed by the ocean carriers” and to “crack down on unjust and unreasonable fees,” the White House said.
Biden also directed the Surface Transportation Board to strengthen competition. The STB is currently considering two separate bids by two Canadian railways, Canadian National and Canadian Pacific, to merge with the Kansas City Southern rail network to create a new Class 1 rail carrier. The STB has not approved a rail merger in more than two decades.
Bill in preparation
Meanwhile, two members of the powerful House Transportation and Infrastructure Committee are drafting bipartisan legislation that also addresses shipping issues.
The bill, sponsored by John Garamendi, D-CA, and Dusty Johnson, R-SD, is a response to complaints by U.S. agricultural shippers that allege that unscrupulous business practices by foreign container ship operators are causing them to lose money and market share overseas. Stepped-up demand for imports into the U.S. has caused the freight charges for those loads to surge as high as $10,000 or $12,000 per container, according to the Agriculture Transportation Coalition. By comparison, export container loads are earning carriers only $400 to $1,800 in freight charges. Adding insult to injury to ag exporters are detention and demurrage fees charged to containers that are not picked up within a certain time window, even when the container owner has no control over delays.
Lost opportunities
Jen Sorenson, president of the National Pork Producers Council, testified that an average of 22% of agriculture export sales are going unexecuted due to a lack of export container capacity. “This is about lost opportunities and erosion of relationships,” Sorenson said. “Japan wants chilled pork. When we have to deliver it frozen [to avoid spoilage due to the shortage of containers], we lose a tremendous amount of value to U.S. hog farmers. Not only value, we erode that relationship with Japan that we built over time.”
In hearings in Congress, Garamendi framed the issue as one of deliberate exploitation. “We’ve got a problem in which the shipping industry is able to discriminate against American exporters,” he said during a recent House T&I Committee hearing investigating the export container shortage. “It may be because [ocean carriers] can make more money sending those containers back empty to the Western Pacific rather than allowing them to be here long enough to be loaded with American exports. It’s a serious problem.”
Included in Garamendi and Johnson’s draft bill are several provisions to amend the U.S. Shipping Act, overseen by the Federal Maritime Commission, including prohibiting ocean carriers from declining all cargo bookings for exports; requiring ocean carriers to include a statement of compliance with Shipping Act regulations; requiring the FMC to post publicly on its website all findings of false certifications by ocean carriers, as well as penalties that the FMC might have under the current law; and establishing ongoing duty responsibilities for the FMC to ensure export opportunities for U.S. exporters.
No easy villains
Those who work in ag logistics say finding a villain to blame is difficult and imposing direct price regulation may bring unintended consequences. “Containers want to get back to China,” said Mike Steenhoek, executive director of the Soy Transportation Coalition. He used the analogy of an over-pressurized balloon to describe the unbalanced market and said when government tries to relieve pressure at one point, it is likely to increase it somewhere else.
On the issue of competition within the shipping industry, it is true that ocean carriers operate in some ways like cartels. About 85% of ocean container shipping is now controlled by about 10 major container lines, all foreign-owned, which currently operate in three vessel-sharing alliances. Members of alliances agree to allow customers to use each other’s cargo slots and assets in their bookings. The alliances allow cargo slots to be allocated efficiently and save time, fuel and emissions costs.
Ocean carriers lost money during a 10-year period of plunging rates, Steenhoek said, and have only recently returned to profitability as a result of the world economy’s rebound from COVID-19 and the resultant increase in consumer spending. “There’s a massive shift in consumer spending from services to goods,” he said, straining a global logistics network that contracted during the lockdowns for COVID-19. That network is facing many issues, from the difficulty of ports in handling a new generation of ultra-large container vessels, to shortages of truck drivers. Steenhoek said many suppliers are questioning the “just-in-time” logistics model of product delivery.
Role of NVOCCs
However, competition is not absent within the shipping space. So-called non-vessel-owning-common carriers, or NVOCCs, are described within the shipping business as “a shipper to carriers and a carrier to shippers.” Consumers can best understand NVOCCs as travel agents for freight loads; they provide a cargo booking service, but don’t own vessels themselves, although some own containers. Just as airlines found it expedient to disaggregate their booking functions to thousands of travel agents who compete with each other to give air passengers the best deals on individual airplane seats, NVOCCs compete with each other to book cargoes aboard ocean-going vessels, and to arrange the movement of containers to and from vessels. According to the website of the FMC, which regulates them, there are more than 6,400 NVOCCs, indicating robust competition within this service area, at least.
John Butler, president and CEO of the World Shipping Council, argues that the container imbalance is caused by supply and demand, namely “the massive increase in U.S. imports.” Butler said that in normal markets the container trade imbalance with Asia is 2-to-1 U.S. imports to U.S. exports, but that has now jumped to 3-to-1. The system requires that empty containers be sent back, he said.
Butler said the FMC already has the power to enforce contracts and initiate actions, but he was critical of changing the law to give the FMC power over carrier booking decisions.
FMC Chairman Daniel Maffei told Congress that the Shipping Act does not currently contain provisions to mandate reciprocal trade, but said he was open to working with Garamendi and Johnson on their proposal. He said that “it would be good to have more tools at the FMC.”
Ken Eriksen, senior vice president-agribusiness for IHS Markit, said, “Freight rates are rising everywhere,” and warns that the administration’s actions could be disruptive. Forbes magazine warned of “danger” in rewriting shipping laws and said overreaction to what it called an unprecedented global crisis could end up hurting the shippers the reforms are intended to help.
David Murray can be reached at [email protected].
