Ocean carriers insist that they need antitrust immunity to survive. But what's the actual malady against which they are seeking protection? Easy answer: themselves.
Carriers believe they can't maintain profitable rate levels without a mechanism that shields them from their own worst impulses. The problem is, they can't seem to do it with the law, either.
Just two years ago, carrier salespeople were pounding at shippers' doors with unsolicited offers of drastic discounts. A planned rate increase of $500 per container quickly became a $200 decrease without hardly any pressure from shippers at all. This despite efforts by the Transpacific Stabilization Agreement, operating under the cloak of immunity, to goad its members into some semblance of pricing discipline.
The TSA has no teeth, of course. Ever since enactment of the Ocean Shipping Reform Act of 1998 (OSRA), collective action by carriers in the U.S. trades has been limited to making recommendations that participants are free to ignore. So you might assume that the culprit in this latest round of rate cuts was the body's voluntary nature.
The problem is, carriers were even more anarchic in the pre-OSRA days, when they were part of real rate-making conferences.
Antitrust immunity for ocean carriers in the U.S. trades dates all the way back to the Shipping Act of 1916. Back then, the pressure valve was independent action, which allowed individual conference members to stray from the herd under certain circumstances. (Real-world translation: anytime they felt like it.) And if that provision didn't buy them enough freedom, they could quit the conference and undercut it from the outside. (Real-world outcome: the conference was forced to respond with its own deep cuts, ensuring a general free-for-all in the trade.)
Each occasion of rampant discounting was followed by a morning-after vow by carriers never again to submit to the lure of market share at the expense of rational economics. The panic of 2008-2009 was no exception. In its wake we saw a rash of rate increases, right in the midst of legally binding service contracts. Carriers insisted that the actions were necessary to their very survival. The alternative, they claimed, would be a wave of business failures, followed by a sharp drop in capacity levels. At the same time, they laid up hundreds of ships, resulting in a sharp drop in capacity levels.
Shippers were livid. They complained about getting it from both ends: skyrocketing rates coupled with a plunge in service. They went so far as to suggest that the move by carriers to slow down their ships wasn't just an attempt to cut back on fuel costs and save the environment - it was yet another means of jacking up rates by limiting capacity. Shippers charged that delivery commitments were being abrogated, critical shipments were being left on the docks and U.S. exporters were missing out on sales because they couldn't get product to market in time.
In the world of global container-shipping, angry customers don't complain about you on Yelp. They start mobilizing to take away your antitrust immunity.
Early this year, 29 trade groups wrote a letter to House and Senate lawmakers, urging an end to the privileged legal status of ocean carriers. Under the status quo, the letter said, "U.S. importers and exporters are denied the benefits of a competitive market for this essential service. We have already seen that the carriers can use their antitrust immunity to reduce service options and abrogate their contract terms." Signatories to the letter included the National Industrial Transportation League, National Customs Brokers and Forwarders Association of America, Agriculture Transportation Coalition and National Retail Federation.
NIT League executive vice president Peter Gatti says his group opposes the ability of carriers to collude on pricing and conditions in the trade. It's not against the formation of vessel-sharing agreements (VSAs), which involve multiple carriers co-marketing space on their ships, without jointly setting rates. Such arrangements lead to higher vessel utilization and more efficient operations. The same goes for deals where carriers share marine terminal space at ports.
Carriers argue that the voluntary nature of discussion agreements in the U.S. trades removes any anti-competitive concerns. Not so, replies Gatti. The mere "recommendation" of a rate increase by a group like TSA automatically establishes a floor for negotiating with shippers. With more than 95 percent of trans-Pacific freight moving under contract, any such action ends up dictating the terms of doing business in the trade. Until, of course, carriers start slashing rates willy-nilly and completely undermine their collective effort.
"There are few industries in this country that are allowed to do this," says Donald Pisano, vice president and secretary of American Coffee Corp. "There are a lot [of businesses] that are capital intensive but do not enjoy antitrust immunity."
Last year saw the introduction of the Shipping Act of 2010 by Rep. James Oberstar (D-Minn.). The bill would have outlawed joint pricing without actually jettisoning antitrust immunity. VSAs would have been subject to review by the Federal Maritime Commission to ensure that no single group of carriers had more than a set share of the market. The measure died in committee, and Oberstar was defeated last November in his bid for a 19th term in Congress.
Gatti believes the Oberstar bill would have imposed an excessive regulatory burden on industry, with carriers forced to wait up to 90 days for agreements to take effect. What shippers want now, he says, is the wholesale removal of antitrust immunity as it relates to pricing and service elements, with the exception of space-sharing pacts.
Will 2011 finally be the year when ocean carriers are stripped of their 95 years of antitrust protection? It's too early to say, but Gatti says the House and Senate judiciary committees have signaled that they might study the 2007 recommendations of the Antitrust Modernization Commission from the standpoint of liner shipping. The commission has said that the burden of proof rests with industry to show that continued immunity is essential to its well-being.
Carriers dismiss the whole issue by replying that they're not using their status to set rates collectively. Replies Gatti: "Why do you need the privilege if you're not using it?" To which I might add: Why do you need it if it never protected you from your reckless actions in the first place?
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