House members question whether the Shipping Act should be revised, and also said there is a need to protect domestic tugboat and terminal companies.
Members of Congress expressed concern over the growing concentration in the container shipping industry and its regulation by the Federal Maritime Commission (FMC), as well as the contraction of the U.S. Merchant Marine on Tuesday during a hearing of the Coast Guard and Maritime Transportation Subcommittee of the House Transportation and Infrastructure Committee.
Rep. Duncan Hunter, R.-Calif., the chairman of the subcommittee, said, “The contraction of the ocean carrier industry over the years has many carriers operating within shipping alliances to reduce operating costs. The FMC oversees agreements that form these alliances to ensure they adhere to the limited antitrust exemption” available to container liner companies under the Shipping Act.
“Recent action by the FMC has U.S. industry concerned the limited exemption is being misused,” he said. “The industry was also rocked by the Hanjin bankruptcy, which created turmoil in the supply chain. The subcommittee is interested in how the FMC assesses agreements and works with industry to prevent other supply chain disruptions and maintain fair shipping practices.”
The committee’s discussion of the liner shipping industry with FMC Acting Chairman Michael Khouri was limited since the session focused on reauthorization of programs not only of the FMC, but also those of the Coast Guard and Maritime Administration.
Rep. John Garamendi, D-Calif., the ranking member of the subcommittee, said oversupply of ships, the bottoming out of shipping rates, bankruptcies and acquisitions have created turmoil in the container shipping business. “We need to know how this transformation will affect robust competition and fair pricing for maritime services in foreign trade,” he said.
In addition, he and others wanted to know what the collateral effects of the consolidation of major liner companies into three alliances – the 2M Alliance, the OCEAN Alliance and “THE” Alliance – would be on marine terminal operators, tugboat companies and other marine service providers.
Rep. Peter DeFazio, D-Ore., the ranking Democrat on the House Transportation and Infrastructure Committee, echoed those concerns, saying, “I think we should revisit the antitrust immunity that has been granted under law, limited as it is.”
DeFazio pointed to reports of carrier executives being served with subpoenas by the U.S. Department of Justice during last month’s meeting of the World International Council of Containership Operators, an 18-member group informally known as the “Box Club.”
“Now we are going to have these foreign alliances controlling 90 percent of the container market to the Pacific states,” DeFazio said, as he proceeded to ask Khouri, “Aren’t you concerned about the potential for anti-trust collusion here?
“I understand the limitations of your authority, but you could have disapproved and had legal action,” DeFazio added.
Khouri said in his testimony that mergers and acquisitions in the liner industry as well as the Hanjin bankruptcy have reduced the number of major international container carriers, and that “shippers are viewing the new commercial environment with many questions and perhaps even some trepidation.”
However, Khouri said, “Carrier and marine terminal alliances can be very beneficial for U.S. exporters, importers and consumers. Such alliances allow participants to obtain efficiencies and cost-savings that can be passed on to domestic consumers especially when healthy competition exists among vessel operators.”
Khouri testified that competition between container carriers “remains vibrant, and shippers continue to benefit from low rates.
“Overall, market share of even the largest oceangoing carriers remain diffused,” Khouri said. “In the U.S. export and import trades combined, CMA CGM holds a 12.42 percent market share followed closely by Mediterranean Shipping Company at 12.39 percent and Maersk in third position with 10.62 percent. These are far from dominant market positions as recognized by established economic standards.”
He promised the FMC would “monitor what impact the carriers operating in the new alliances have on market dynamics, rates and services.
“A preliminary analysis conducted by FMC staff, and hopefully available for publication later this year, finds that shippers may enjoy certain benefits from larger alliances, particularly in terms of what they pay for service,” he said.
Khouri also noted in his testimony that “some carriers receive government support, either directly or indirectly. The invisible hand is not the only force that guides the global shipping industry, and nations throughout the world go to great lengths to support national companies, including saving them from bankruptcy. At the moment, such close links between a government and its national carrier can also benefit American shippers and consumers by virtue of lower freight costs and greater service choices.
“One needs to understand the nature of these alliances,” he told DeFazio. “They are purely operational. They do not have any price setting agreement or discussion in any shape, form or fashion.”
But the Oregon congressman was skeptical, asking, “The Box Club, who were all just subpoenaed, what were they doing?”
“Congressman, with all due respect, you must know more about what the Department of Justice is doing than I do because I have no idea,” Khouri said.
But DeFazio said, “There is no one in the industry who thinks these people aren’t getting together in the room and colluding over pricing and who is going to control what harbors and what marine facilities, what they are going to do. It’s Pollyannish to think these alliances are just going to just help make the industry more efficient. Twenty years ago, that might have been true. It’s not true today and they are foreign controlled.”
Khouri noted there are only 578 alliance ships in U.S. trades, and thousands of ships that could enter U.S. liner trades if prices go up. As measured by the Herfindahl-Hirschman Index, a tool commonly used by the Justice Department, liner shipping in the transpacific was unconcentrated.
He noted if the FMC wants to block a vessel sharing agreement like one of the three major alliances now operating on the East-West trades, the FMC must seek an injunction and convince a federal judge that its position is correct. “I have to have a solid economic argument,” Khouri said.
DeFazio also noted how many ships on U.S. trade visit China and Japan, and wondered whether they would obtain access the harbors and terminals in China.
“At what point will we think we’re too concentrated – when we get to two or one alliance that controls everything?” he asked. “We need to revisit the Act, we need to revisit the assumptions that we are creating efficiencies and market forces here in these modern times where we know state-owned enterprises and governments that are acting in a mercantilist way are not really interested in competition and they are interested in driving down their costs and dominating our markets and putting our people at disadvantage.”
DeFazio said tug operators and terminal operators are concerned about joint contracting by carriers, and questioned whether the FMC had the authority to regulate contracting for those sorts of services.
In a letter to Khouri dated March 31, Thomas Allegretti, the president and chief executive officer of American Waterways Operators (AWO), said the tugboat, towboat and barge industry was “deeply concerned about provisions in agreements filed with the FMC that permit foreign ocean carrier alliances to jointly negotiate with domestic harbor service providers that have no counterbalancing ability to take collective action.
In January, by a four to one vote, the FMC said Wallenius Wilhelmsen Logistics (WWL), EUKOR Car Carriers, American Roll-on Roll-off Carrier (ARC) and Hyundai Glovis Co. would be permitted to engage in joint negotiations for the procurement of tug services.
Allegretti noted how the Tripartite Joint Service Agreement between NYK, MOL and “K” Line published in the Federal Register March 31 also authorizes the parties to discuss, agree upon, negotiate and implement decisions relating to “contractual arrangements with feeder, tugs, barge and inland carriers,” but is “unlimited in its geographic scope and expanded in its application to third-party service providers.
“This provision, if allowed to remain in the agreement, could adversely affect AWO member companies and other American businesses, seriously degrade competitive conditions in U.S. ports and harbors, and encourage other groups of foreign carriers to follow suit,” Allegretti wrote.
At the end of the discussion, Hunter suggested, “An idea would be to maybe strip out the limited antitrust exemption that FMC can grant these consortiums totally so they are not allowed to join together to put pressure on the ports, collude on price.”
Congress expresses concern over liner shipping concentration
