Friday, December 7, 2018

Is Revised US Shipping Act a Common Sense Antitrust Measure - or a Licence to Steal?

Container Alliances Will Fear Retro Prosecutions Despite Multilateral Authority Acceptance
Shipping News Feature
US – Following the recent shipping industry trend of consolidation and ocean container carrier alliances, the US has signed into law amendments to the Shipping Act primarily designed to address issues related to antitrust matters. According to an analysis by law firm Holland & Knight Partners (H&K), the changes are intended to help protect marine terminal service providers as well as other US marine equipment and services providers, and to preserve investment in domestic shore-side maritime infrastructure.

Ocean freight carriers will eye the new resolutions with trepidation. Along with other cost and emission saving measures such as slow steaming, the rise of the container freight alliances has meant vessels travelling with viable quantities of cargo, as opposed to several lines fighting for the same trade and each company’s ships loading only a percentage of available cargo. It is telling that a US President who boasts of his prowess in business is putting his ‘America First’ policy before the potential of the international shipping industry and the cost of conducting trade.

Marking the first substantive revision to the US Shipping Act since 1998, including several of the most significant changes to the Act since 1984, US President Donald Trump, with bipartisan support, signed into law the Federal Maritime Commission Authorization Act of 2017 on December 4, as part of the Frank LoBiondo Coast Guard Authorization Act of 2018.

H&K says that the Act is an important development for the maritime industry in the US. It is aimed at preserving competition in US trades and assuring future capital investment in maritime and transportation infrastructure, the vital link in supply chains across the US and the world. The Act grants the FMC specific authority to investigate any ocean carrier alliances that engage in anticompetitive action during negotiations with other maritime industry players and contains a number of amendments to the Shipping Act addressing anticompetitive behaviour of carriers. The changes include:

  • The FMC must review the effects of alliances on an annual basis and include this information in its report to Congress.
  • Carrier alliances are prohibited from engaging in collective negotiation that would result in excessive anti-competitive impacts (i.e. unsustainable rates, reductions in capacity).
  • The FMC will consider the aggregate effect of carrier alliance agreements on competition when determining whether to seek injunctive relief against certain activities.
  • Carriers cannot participate in both a rate discussion and vessel sharing agreement operating in the same trade if such participation results in a reduction in service or increase in transportation cost.
  • The DOJ will continue to have authority to prosecute anti-competitive behaviour in violation of US antitrust laws.
According to H&K, these provisions are intended to protect US-based marine terminal operating infrastructure and other domestic stakeholders (i.e.harbour pilots, tug operators, equipment suppliers, etc.) from being forced to accept pricing from the ocean carriers in concerted action that will threaten their long-term sustainability and impede future investment in infrastructure and technology.

Another view might be that, as fewer vessels are now required to call at ports due to the fact containers from a range of lines are being loaded aboard and offloaded from a single, more economically efficient vessel in rotation, there is likely to be less income generated for the ports and terminals along with more competition to accomodate the handling needs of the services..

The revisions to the Act provide a clear mandate from Congress for the FMC to exercise substantial supervision over and review of ocean carrier alliance activity with respect to the use of US infrastructure. The addition of the term ‘certain covered services’ within the US terminal services industries focuses attention on important activities of US based service providers, which represent US strategic supply chain assets as well as major US employers. The Act protects these service providers by limiting ocean carriers from engaging in 'excessively anti-competitive strategies' when collectively negotiating with terminal service providers.

How of course anyone can judge what is anti-competitive is a subjective matter, but the new rules mean it will be whatever the FMC decides. To imagine the shipping lines can somehow operate as an alliance, approved by global regulatory authorities, without discussing rates, is of course pure fantasy. The rate agreed between carrying partners for example must of course be the result of mutual agreement, conversely the selling price to customers must, under the terms of such agreements, always be a confidential matter between the line and the shipper.

However, the client is free to negotiate and, despite allowing confidential freight rate agreements, tariffs are rarely a trade secret, witness the incoming Sulphur Surcharges in which every major line now mirrors its competitors, and the rise of platforms such as Freightos. The thought of post event prosecution, for any offence including terms with shoreside suppliers, will remind older industry professionals of  the demise of the container conferences. In the event of post operation prosecutions the FMC will do well to avoid industry accusations of using the Act as a cash cow.

Finally, the revised Act protects US maritime interests by requiring the Comptroller General to conduct a study of a ‘major ocean carrier bankruptcy’ for purposes of mitigating the effect of any future bankruptcy event on supply chains in the US. This provision has significant implications in light of the 2017 Hanjin Shipping bankruptcy and is meant to bolster maritime commerce response to future such bankruptcies potentially involving alliance member lines. H&K concluded that the overall effect of the Act will prove to be significant and should provide strong support to the long-term viability of US maritime commerce.

In fact the alliances are already moving toward a position whereby, should one of the parties fail financially, the others will undertake to resolve the matter and, in the case of THE Alliance, the members have taken out policies to ensure customers and suppliers are unaffected by a bankruptcy of one of the partners through the workings of an independent trust fund.

First enacted in 1916, the Shipping Act confers authority upon the Federal Maritime Commission (FMC) to regulate maritime commerce in the US. The Shipping Act regulates common carriers (both non-vessel and vessel operating) and marine terminal operators and affords limited antitrust protections to filed agreements among regulated parties. In the years since, amendments have been made to follow advancements in the sector and since 1998, allowed carrier and shippers to enter confidential rate agreements.

After the 1998 amendment, the maritime industry experienced significant and widespread consolidation. In addition to carrier mergers and acquisitions concentrating the bulk of containership capacity in US trades to fewer than a dozen large carriers, the formation of vessel carrier alliances has caused further substantial consolidation. Currently, there are three major carrier alliances representing 80% of all container trade. Within the alliances, there has been further consolidation like the creation of Ocean Network Express (ONE) by the merger of Japanese carriers.

It is easy to see why the US authorities fear this concentration of the industry’s services. However after suffering some serious blows in the past decade or so it was imperative that the lines addressed the problem, failing to do so would mean chaos in the supply chain and ever rising costs. Shipping companies have never been good at balancing sales initiatives against profits, it’s a cut throat business when trade is tight. Hopefully the rise in cargo levels which is predicted with ever growing populations will enable the industry to avoid another Hanjin.

The US already runs a severe protectionist policy with regard to its domestic shipping, using security as demanded by the Jones Act as a reason for this. One must hope that the FMC does precisely what this latest legislation outlines, and is not tempted to use it as an excuse to launch unfair prosecutions at some point in the future.