On Monday, the House of Representatives voted 369-42 to pass the Ocean Shipping Reform Act. The bicameral legislation – which unanimously passed the U.S. Senate in March 2022 – was signed into law by President Biden on Thursday.
His support is no surprise – in his State of the Union Address, President Biden called on Congress to address unreasonable ocean shipping prices and practices. Most recently, he visited the Port of Los Angeles where he warned, “the rip-off is over.”
Truckload Carriers Association President Jim Ward called the reform “the first major overhaul of U.S. ocean shipping regulations since the 1990s,” citing that “the current market has been hurting American motor carriers and consumers.”
The law would make it more difficult for shipping lines to refuse goods ready to export at ports, a practice that has grown in recent years as ocean carriers increasingly opt to turn around containers, even if they are empty, to return them more quickly to Asia and take advantage of higher profits from Asian exports.
The overall intent of the bill is to reduce export backlogs and improve industry oversight to lower prices, ease supply chain disruptions, and fight inflation – which recently hit a 40-year high.
According to the Federal Maritime Commission (FMC), the average worldwide spot market rate to ship a container increased 800% during the pandemic. The skyrocketing freight rates and tight capacity in the shipping market during the pandemic burdened American motor carriers, retailers, manufacturers, and farmers, while ocean shipping lines, mostly based in Europe and Asia, made billions in profits.
In fact, ocean carriers made $150 billion in 2021, a nine-fold annual jump compared to 2020.
Ocean carriers have argued that the high prices – and subsequent profits – are an abnormal spike caused by pandemic-fueled imbalances in supply and demand that will naturally resolve.
However, the Biden administration has blamed rising prices on the lack of competition in the shipping industry. Currently, 10 shipping lines control nearly 85% of the global market whereas 25 years ago, the top 20 companies only controlled half of the total market.
In 2013, top ocean carriers began building business alliances to cooperatively allocate cargo space and coordinate sailing schedules. But by 2018, the United Nations agency responsible for maritime trade described the industry as “a market structure that is more representative of a loose oligopoly.”
Economists have also warned that high freight costs are “stoking inflation and clouding the [pandemic] recovery.” An economist with the Kansas City Federal Reserve found that a 15% increase in shipping costs translated to a 0.1% rise in inflation within a year.
The Ocean Shipping Reform Act will authorize the FMC to self-initiate investigations of ocean carrier business practices and apply enforcement measures when necessary. Additionally, it will direct the FMC to register shipping exchanges to improve the negotiation of service contracts.
However, critics of the legislation have called it “a cure that is worse than the disease”, claiming it fails to address the nationally specific root causes of the challenges facing U.S. exporters and will ultimately hurt efficiency. The World Shipping Council, a shipping lobbying group, said that inadequate U.S. port infrastructure and a workforce overwhelmed by record volumes are the factors causing increased shipping costs.
Despite the debate, bipartisan support allowed Congress and President Biden to move forward with the reform. With his presidency increasingly defined by record-breaking inflation, it is clear his administration is focused on efforts to correct course.