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The South Carolina International Trade Conference - May 18, 1999

May 18, 1999

REMARKS OF

THE HONORABLE HAROLD J. CREEL, JR.
CHAIRMAN
THE FEDERAL MARITIME COMMISSION

BEFORE THE

SOUTH CAROLINA INTERNATIONAL TRADE CONFERENCE

MAY 18, 1999


Thank you. I would like to extend my thanks to the international trade conference for inviting me to be a speaker again this year. This is the first speech I have given since our new shipping statute, the Ocean Shipping Reform Act of 1998, or OSRA, became effective on May 1st. In previous years, I have spoken at this event about what might happen should a bill be passed. Today, I look forward to sharing my views on the direction in which I believe this new law, which was finally enacted, will lead us.

Many of you I am sure are aware that Majority Leader Trent Lott has recommended one of our own South Carolinians, Tony Merck, to be a Commissioner at the FMC. I think that is great. I had dinner with Tony last night and I was extremely impressed. But I must tell you of a major concern I have that may force me to voice some reservations. Should Tony be nominated by the President and approved by the Senate, my fear is that you folks will never invite me back to Charleston! So I need to do some serious negotiating with Tony on that point.

But seriously, I am extremely pleased to see how Charleston has emerged as a port of choice in U.S. ocean shipping. As the Nation's fourth-largest container port, Charleston is a major player in international trade. So I congratulate the State of South Carolina, the Port Authority -- especially Bernie Groseclose -- and all those people who have expended so much effort to make Charleston the first class port that it is. You are an asset to this state and you have a tremendously positive impact on commerce and the economy.

I have been asked to speak today about the state of the maritime industry from the FMC's perspective. Naturally, such a discussion cannot take place without a major emphasis on our new statute, OSRA, and the impact it should have on operations in the liner shipping industry.

OSRA has been touted as a "deregulatory" measure. By "deregulatory" most people mean fewer restrictions on business, or reduced government involvement in such business. Lately, many have referred to this new law as a "re-regulatory" measure. "Re-regulation" seemed to equate to a change in regulatory approach to an issue, practice, or commercial operation. There can be no doubt that each of these depictions is accurate.

From a deregulatory standpoint, ocean carriers no longer face rigid form and manner requirements in posting the prices and practices that apply to their operations. And those publications, known as tariffs, no longer have to be filed with the government - carriers are merely required to publish them in their own automated systems. Groups of carriers are now free to negotiate with inland carriers on rates for inland services, shippers no longer are required to repay freight undercharges, and the criteria to obtain an exemption from statutory requirements have been relaxed.

How about "re-regulation?" Well, a whole new world has been opened to the service contracting process. Service contracts, which are special deals between carriers and shippers, now can be kept confidential, with only the FMC knowing their complete terms. Multiple carriers can deal with multiple shippers; ocean carriers no longer are "required" to offer the same deal to similarly situated shippers - that's what we used to refer to as "me-too" rights; carriers are free to offer individual contracts apart from any agreement or conference to which they may be a member; and, contracts affecting multiple trade lanes and even global commerce now may be filed with the FMC.

In addition to deregulation and re-regulation, it is true that certain existing requirements remain unchanged. Examples in this category include: the continuance of antitrust immunity for ocean carriers and ports/marine terminal operators; the prohibition against rate rebates; and the 30-day advance notice requirement for rate increases.

So, there is truth in the statement that OSRA deregulates, re-regulates, and continues to regulate. But I would prefer today to review OSRA from a different perspective. I believe it is worthwhile to focus on the broad effects this new law has, not only on regulatory requirements, but on the manner in which business will be conducted on a daily basis in U.S. ocean shipping. And I think that can be described in one word:  pro-competitive.

I believe that there can be little question that OSRA opens up a host of opportunities for those involved in U.S. ocean commerce. It creates flexibilities and freedoms for these entities. It facilitates innovation and creativity, and it encourages all sectors of the industry to improve service and performance for the benefit of all parties involved in the transportation chain. Essentially, it is the intent of OSRA to let the marketplace be the main determinant of business operations. That's clear from the new policy objective for the Shipping Act, added by OSRA, which calls for the Act to promote the development of U.S. exports via a competitive ocean transportation system and a greater reliance on the marketplace. Of course, the FMC has been retained to oversee industry operations.

The new ocean trading environment emanating from OSRA becomes effective at a dynamic and changing time in international ocean commerce. Just take a look at the U.S. liner shipping industry today.

Much like other industries, consolidation and concentration, often involving mergers, abounds. And if not by outright mergers, many have found it desirable to form alliances or other types of joint ventures. Major ocean carriers, transportation intermediaries, and even various exporters and importers are finding it beneficial to combine in one form or another to cut costs and increase chances for profitability.

Also, most of our major ocean trades face situations that require all in the industry to develop new approaches or adjust established plans in order to stay afloat. The financial crisis in the Asian community has created a tremendous trade imbalance that poses a host of issues affecting ocean commerce in the Transpacific. In the North Atlantic, rates continue to plummet, while more and more carriers enter the trade. And the north/south trades also are affected by economic woes and trade imbalances.

Then too, globalization is in full swing in the transportation industry. Those companies who continually seek to maintain an edge or are planning long-term growth and development must, out of necessity, establish effective global relationships and global operations. Those that do not will have to be satisfied with being niche players, or in the worst case, not being players at all.

And for the maritime industry, we are witnessing a shift of influence from the traditional cartel or conference system, which focused on setting rates and seeking members' adherence thereto, to tradeswide "discussion" agreements that involve broader operational matters and are based on non-binding, or voluntary actions. This shift brings with it a number of new competitive and regulatory issues.

So as we move towards the implementation of OSRA, we must not ignore trends, each of which, in its own right, has a major impact on commercial operations. That's why I have maintained that it will be at least a year, if not longer, before we can reasonably assess the effects of this new statute.

But now that OSRA is in effect, how can we expect it to change the landscape of ocean shipping?

To begin with, no one should expect any dramatic changes overnight. From what I can tell, most in the industry, to date, are moving carefully through the transition phase. I think we must assume that while change will occur, it definitely will be gradual.

From a general standpoint, OSRA will dramatically change the thinking and planning of all participants in U.S. ocean commerce. It has to. I say that because OSRA puts the focus for international trade where it belongs, on effective partnerships, long-term relationships, reliability, flexibility, and accountability. Previously, for example, when a shipping line and an exporter sat down to negotiate a service contract for the movement of goods, they essentially talked about basic ocean service and bottom-line rates. Sure, certain parties went further than that, and some historical partnerships existed in all trades. But the preponderance of deals, from what I can tell, boiled down to what's the best rate I can get for the volume of cargo I am promising you. OSRA changes all that. Now shippers and carriers can tailor their deals to their specific needs and mutual benefit without disclosing all of the details of those deals to others.

OSRA encourages industry participants to act more as partners, as opposed to adversaries. Now, both carriers and shippers must be thinking more strategically and long term, and must consider a host of logistics questions that can create mutual efficiencies and benefits.

In addition to shippers and carriers becoming better attuned to each other's needs and advantages, I think OSRA will increase the efficiency of ocean transportation. OSRA has convinced all in the industry that achieving success in the next millennium is going to take a concerted corporate effort to identify means of maximizing efficiencies down the road, and not being so influenced by doing whatever it takes to increase short-term profit levels. Now that a new law is in effect, a good dose of uncertainty has been removed from the equation, and long term planning can be accomplished from a more informed and definite basis.

And in looking at the near term, I must agree with those who have warned importers and exporters not to expect a bonanza in the form of exceedingly low rates due to OSRA's confidential contracting authority. To be sure, shippers will have more options, and confidentiality will permit better deals to be negotiated. But that will not always translate into lower rates or rock bottom charges. In some instances it will. But rate levels will be determined more so by the market - supply and demand, carrier cost factors, efficiencies that can be brought to the table, etc. And clearly that is what OSRA intends.

Finally, I would like to address the FMC's role for the future. OSRA has changed our statutory responsibilities -- some have been added, others removed. So allow me to briefly give you my view on the FMC's new statutory mandate, and how we can best accomplish it.

For years the FMC has served as a repository of information, an overseer of regulatory compliance, an arbiter of complaints, an enforcer to curb malpractices, and a protector against unfair trade practices by foreign governments. But I believe that OSRA requires us to alter our emphasis and change our approach. Although we have maintained most of our prior authorities, and still must perform certain of those foregoing tasks, our responsibilities indeed have changed, as have the expectations of us. On the one hand there is to be a greater reliance on the marketplace and the new opportunities and freedoms given carriers and shippers under OSRA.

On the other hand, although OSRA envisions a greater reliance on the marketplace, the Shipping Act maintains an oversight role for the Commission. My view is that confidential contracting authority and the reduced transparency of pertinent information mandates an effective oversight performance by the FMC. I emphasized that point in testimony before Congressman Hyde's Judiciary Committee a couple of weeks ago at a hearing that questioned the continued role of antitrust immunity in the ocean shipping industry. I acknowledged that OSRA reduces the role of government in certain respects, but I stressed that the FMC will be vigilant in protecting against abuse of antitrust immunity, as well as other violations of the Shipping Act. How we accomplish that responsibility is the question.

I believe we must begin by focusing on our current monitoring efforts. As OSRA unfolds, we need to be fully cognizant of just what is going on in the industry. Armed with that knowledge, we will be better able to discern relevant trends and identify instances of noncompliance. This will enable us to work more closely with the industry to facilitate compliance and obtain the benefits for U.S. trade envisioned by OSRA. We also will be in a better position to curb malpractices and, at the same time, initiate enforcement action against serious offenses, clearly harmful practices, abuses of antitrust immunity, or willful actions that create inequitable trade conditions or otherwise disrupt fair trade. I acknowledge OSRA's desire for an increased reliance on the market to regulate industry practices; but this reliance was not intended to replace the Commission's oversight role completely. The key will be achieving the correct balance as we move forward.

Additionally, the Commission is prepared to effectively use our existing and strengthened authority to address the restrictive practices of foreign governments that adversely affect U. S. interests or our ocean commerce. We have been quite active in this area over the years, particularly in the late 90s, and we realize that we must continue to initiate the appropriate action at the right time in cases that have the potential to unfairly harm U. S. companies or U. S. trade. In enacting OSRA Congress has revalidated this as an important statutory mission of the agency.

I'd like to conclude today by repeating a message I have delivered often recently. OSRA has all the potential to benefit U. S. commerce and those who operate in it. Implementation of this new statutory scheme will raise uncertainties and questions. The key to a smooth transition, in addition to effective planning, will be the "reasonableness" of the industry and the FMC as we move forward in this new environment. I have pledged that the FMC will do just that, and I renew that pledge today. In return, I hope to receive the same assurance from those in the liner shipping industry.

Thanks for having me, and unless Tony Merck becomes a more "favorite son," I hope to see you again at a future conference.