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Remarks of Steven R. Blust, Chairman, International Maritime Forum 2003, Shanghai, China, October 31, 2003

October 31, 2003

Remarks of Steven R. Blust,

Chairman, United States Federal Maritime Commission

International Maritime Forum 2003

Shanghai, China

October 31, 2003



Introduction

Ladies and gentlemen, it is a distinct honor and privilege to be here with you today in this beautiful and vibrant city. It is fitting to hold this maritime industry conference in Shanghai given the prominent position this progressive port city holds today in the international maritime community, as well as its bright prospects for becoming an even greater international shipping center in the near future. It my understanding that Shanghai has reached the number three worldwide position in container port volumes, which is an outstanding achievement. Congratulations to all of you who have made this possible.

More than 500 years ago, during the Ming Dynasty, explorers traveled to distant lands, looking for new trade opportunities. One of these explorers was Christopher Columbus, who was looking for better, faster and cheaper route to move cargo between Europe and Asia. Unfortunately for him, but fortunate for us, he discovered what is now North and South America.

Two hundred years ago, during the Qing Dynasty, our President Thomas Jefferson, sent the Lewis and Clark expedition to seek out a northwest passage from the U.S. East coast to Asia via the lands obtained in the Louisiana Purchase. Unfortunately, they found a mountain range in the way.

Less than 25 years ago, the new era of trade between the U.S. and China commenced with the call, in Shanghai, of the SS Letitia Lykes. The ship arrived full with cargo destined to China, but only a handful of pallets of export cargo were loaded.

This year, it is estimated that the U.S.-China market will exceed 5 million teus of cargo, or approximately 25% of U.S. international oceanborne container trade. I believe that our forefathers would be pleased with the business today.

What is the Federal Maritime Commission?

If I may, before I begin my talk about the impact The Ocean Shipping Reform Act has had on the international maritime industry, I would like to give you some background on the Federal Maritime Commission, which may be helpful in better understanding the impact of OSRA. Also, I would like to recognize the Honorable Ming Hsu, a former FMC Commissioner who is with us at today's forum. The Commission is responsible for the regulation of oceanborne transportation in the foreign commerce of the United States. The Commission has actually existed as an agency, in one form or another, since 1916 when Congress created the United States Shipping Board, that was responsible for both the regulation of ocean commerce and the promotion of the United States Merchant Marine. The FMC was established as an independent regulatory agency in 1961. The promotion of an adequate and efficient U.S. Merchant Marine was then assigned to the U.S. Maritime Administration, which is now part of the U.S. Department of Transportation.

As an independent regulatory agency, the Commission does not propose or make policy but rather, carries out the laws assigned to us by Congress. Unlike executive branch agencies, we do not act at the direction of the President, but upon the vote of a majority of the five Commissioners.

The FMC's mission is generally to ensure that fair competition exists in the ocean transportation industry and that the players and end users of the system are treated fairly. We do so by ensuring that there are no undue controls, influences, or non-market barriers imposed by any nation, carrier, cargo owner, intermediary, port or terminal operator, which can adversely affect U.S. oceanborne trade. Our mandate is to help remove impediments to fair competition and thereby allow the shipping public to conduct business as effectively as possible. Let me offer you a few specific examples of how the Commission carries out its mandate:

The Shipping Act of 1984, as amended by the Ocean Shipping Reform Act of 1998 (OSRA), requires that any person in the United States who operates as an ocean transportation intermediary ("OTI") in the United States obtain a license from the Commission. OTIs include both ocean freight forwarders for U.S. exports, which have historically been licensed by the Commission, as well as non-vessel-operating common carriers (NVOCCs) for U.S. exports and imports. Moreover, all OTIs, whether in the U.S. or foreign-based, but engaged in the U.S. foreign commerce, must furnish evidence of financial responsibility in the form of a surety bond, guarantee or insurance. This is available to pay for damages arising from the OTIs' transportation related activities.

The Commission also issues certificates of financial performance and casualty to cruise lines which have demonstrated that they have sufficient financial resources to pay judgments for personal injury and death or for nonperformance of a voyage.

The Commission has primary responsibility for oversight of the competitive environment for carriers serving the U.S.: U.S. law permits ocean carriers to engage in discussions and agreements involving rates, services, capacity, and practices among ocean common carriers in the U.S. trades, which might otherwise run afoul of U.S. antitrust laws. We oversee such agreements between marine terminal operators as well. In many nations, a broader competition authority oversees such arrangements. I believe we are unique as a maritime regulatory agency playing this role. We are fortunate to have the expertise and resources to specifically devote to this undertaking.

The Commission receives all service contracts entered into by ocean common carriers and shippers, and maintains a database of those service contracts. We make sure that electronic tariffs of carriers, including vessel operating & NVOs, are published in an accessible manner. Marine terminal operators may choose to publish tariffs, and those that do are registered with the Commission.

Further, as part of our mandate to protect against discriminatory, unfair, or unreasonable rates, charges, classifications, and practices of ocean common carriers, terminal operators, and OTIs, the Commission has jurisdiction to hear complaints brought against any party subject to the Shipping Act of 1984. Private parties can bring complaints before an administrative law judge, or, the Commission may initiate investigations or other enforcement proceedings on its own initiative. We also provide an alternative dispute resolution service and we have an Office of Informal Complaints to assist any party in resolving disputes quickly and informally, including among shippers, ocean transportation intermediaries or carriers. Through this program, we provide assistance to cruise passengers as well.

The Commission is authorized to address restrictive foreign shipping trade practices pursuant to Section 19 of the Merchant Marine Act of 1920 and the Foreign Shipping Practices Act of 1988. These statutes empower the Commission to make rules and regulations governing shipping in the foreign trade to adjust or address unfavorable conditions that affect carriers, OTIs and shippers in the foreign trade - conditions which are not otherwise applied to foreign entities operating in the U.S. Simply stated - reciprocity.

What is OSRA?

After years of discussion and effort on the part of various maritime interests interested in efficient regulation, in 1998, the United States Congress passed the Ocean Shipping Reform Act (OSRA). The intent was to foster a market-driven liner shipping industry. The Act was a compromise that accommodated both those who sought total deregulation and those looking only for minimal reform. Since it became effective in May of 1999, OSRA has prompted significant changes for the industry. Among the most significant changes arising from that legislation have been:

the expansion of voluntary rate discussion agreements and vessel sharing agreements

• the establishment of confidential service contracts between shippers and individual ocean common carriers as the main approach for conducting business, and

•the licensing of NVOCCs.

How did OSRA impact VOCCs?

In the area of service contracting, OSRA was a significant change for both ocean common carriers and shippers. Under OSRA, service contracts are filed confidentially with the FMC, and may, at their option, be kept confidential only to the shipper and the carrier. Carriers are required only to make public certain essential terms of that contract. Also, OSRA eliminated the so called "me-too" provision that mandated conferences and carriers to make the same essential terms available to similarly situated shippers.

These changes have resulted in more flexible and individualized service contracting practices for carriers and shippers. In turn, the use of service contracts has increased dramatically since 1999. Twenty-five years ago, in 1987, the Commission received less than 5,000 service contracts. The volumes had doubled to approximately 10,000 in 1998. The Commission in 2002 received 48,154 new service contract filings over one quarter of a million filings when amendments are included. Most shippers are now inclined to negotiate one-on-one with individual carriers, instead of negotiating with rate-setting conferences or groups of carriers, which is estimated to include 95% of the trade.

OSRA eliminated the requirement that tariffs be filed with the FMC. Instead common carriers are required to maintain their own tariffs in an automated system, often on their website, and there are few substantive requirements as to format and content. OSRA does mandate that tariffs be published accurately and in a way that makes them easily accessible. To this end, the Commission monitors websites to ensure equitable, uniform compliance.

Changes made by OSRA have also contributed to the restructuring of the industry away from traditional conferences to voluntary discussion agreements, and an increase in operational type agreements. These include vessel sharing arrangements in individual trades, as well as global carrier alliances.

Perhaps most importantly, the move away from the conference structure in U.S. trades has been a result of OSRA's changes to service contract provisions of the Shipping Act. Individual carriers have the right to negotiate and enter into contracts with shippers or groups of shippers, regardless of whether the carrier belongs to an agreement. Conferences and agreements can no longer dictate service contract terms or prohibit their members from offering service contracts. Carriers who are members of a discussion or conference agreement may establish "voluntary guidelines" on service contract matters. Pre-OSRA conference rules on service contracting were enforceable against carriers. Now, "Voluntary guidelines" allow a carrier to choose whether, or not, it wants to follow the guidelines.

In 2001, the Commission did a study of OSRA two years into its implementation. That study found that "[b]road-based discussion agreements with non-binding rate authority have become the primary forum for carriers to exercise their antitrust immunity with regard to rate levels." That study reported and more recent observation indicates that carrier success in gaining adherence to voluntary guidelines on rates depends to a great extent on overall market conditions. This may be read as an indication that the goal of making the marketplace the arbiter of rate levels, embodied in OSRA, has been met.

TSA SETTLEMENT

Along with the service contract and tariff-related changes in the Shipping Act made by OSRA, Congress encouraged the Commission to more actively engage the industry with respect to monitoring the use of carrier antitrust immunity. As it happens, the Commission recently had occasion to examine the legal boundaries of collective activity under OSRA. The Commission initiated a Fact Finding proceeding late last year, in response to a petition filed by the National Customs Brokers and Forwarders Association of America, Inc. (NCBFAA) and the International Association of NVOCCs (IANVOCC). The petition alleged that the Transpacific Stabilization Agreement (TSA) and its members had discriminated against NVOCCs through practices involving discriminatory timing of negotiations and unequal application of general rate increases and surcharges.

In the course of that proceeding, additional and broader issues with respect to collective carrier practices and activities in this trade were brought to light. Our objective was to address the issues, get them resolved quickly and let the parties get back to doing business. These additional issues as well as the concerns of the NVOCCs were resolved in a recent settlement agreement between the Commission and major ocean carrier agreements and their members serving the inbound waterborne U.S. trades with Asia. The settlement was found satisfactory to all parties involved, which is an accomplishment which we will try to repeat often in the future.

How did OSRA impact OTIs?

OSRA now requires that any person in the United States who operates as an OTI must first obtain a license from the Commission. As I mentioned, OSRA created the term "ocean transportation intermediary" to include both ocean freight forwarders for U.S. exports and NVOCCs for both U.S. exports and imports. As a result, all NVOCCs in the United States must now obtain a license, whereas prior to OSRA, only freight forwarders were licensed. In addition, in response to requests from the NVO community during the rulemaking proceeding to implement OSRA, the Commission provided the opportunity for foreign-based NVOCCs to obtain a license. We review applications to ensure that the applicants possess the requisite character and experience to render OTI services.

All OTIs must furnish to the Commission evidence of their financial responsibility, which is usually provided in the form of a surety bond. The amount of the bond varies according to the type of activities the OTI is engaged in, and it is available to cover damages arising from the OTI's transportation-related activities. Currently, the Commission licenses approximately 3500 OTIs, plus another 700 foreign based with financial guarantees.

In addition, OSRA set up an alternative claims procedure whereby persons making a claim against a bond no longer are required to obtain a judgment from the FMC or a court, but can seek to resolve the claim informally with the surety and/or NVO as provided for in Commission rules. Under these provisions, we have had success working informally with claimants and sureties to ensure timely response to claims.

An NVOCC may enter into a service contract with an ocean common carrier as a shipper, or customer of the ocean common carrier. However, the Act does not allow NVOCCs to offer service contracts as carriers to their shipper customers. Instead, NVOCCs must provide service pursuant to their tariffs, which are open for public inspection. The distinction drawn between VOCCs and NVOCCs in the area of service contracting was and continues to be a disappointment to the NVO community.

The Commission recently received five petitions from NVOs seeking various forms of Commission action to address what they see as a burdensome regulatory structure. They believe that the inability to offer service contracts to their customers puts them at significant competitive disadvantage to ship owning and ship operating VOCC's. The Petitions ask for various forms of relief. Some ask the Commission to exercise its exemption authority to provide certain, specific entities or types of entities the right to offer service contracts. Another asks the Commission to exempt NVOCCs from the requirement to file tariffs. Each petition is aimed at leveling the playing field, on the rate side, between VOCCs and NVOCCs.

Comments on all of the petitions are being reviewed by staff, and options and recommendations on possible courses of action will be submitted to the Commission for consideration in due course.

Evolving Regulations

The TSA Settlement and the NVO Petitions illustrate the extent to which the industry and the Commission are still in the midst of absorbing the impacts of OSRA. We call OSRA an adolescent at this point - most of the way to maturity but experiencing growing pains and challenges. OSRA will continue to mature and I believe the industry, already quite mature in the historic sense, will continue to adapt itself to the law's requirements as well as the influence of the global marketplace. I've heard it said that human beings who adapt well to change live longer. The same must be true of any industry or legal regime.

Roscoe Pound, a prominent legal scholar and former dean of the Harvard Law School, said that "[l]aw must be stable and yet it cannot stand still." We've found this to be true in the evolution of our regulations following OSRA. We continue to review our regulations to ensure they are consistent with the law passed by our Congress, while accounting for the innovations in the industry.

Chinese regulations and relations with U.S.

The Government of China has recently gone through a similar process. Almost two years ago, new regulations were issued that initiated a new chapter in Chinese maritime law. I was very gratified to see that the Chinese acknowledged the importance of openness and their receipt of public comments in their process. We've been pleased to welcome several delegations from the Ministry of Communications over the last two years interested in learning and observing the U.S. maritime regulatory structure.

As many of you know, the Commission has a pending docketed proceeding involving restrictions on non-Chinese companies' ability to establish and operate branch offices, conduct vessel agency operations, and do business as NVOCCs in China. The Commission also has pending petitions for exemption from certain requirements of the Controlled Carrier Act filed by three Chinese-flag carriers: COSCO, China Shipping and Sinolines.

The Commission is hopeful that many of the issues addressed in our pending proceeding will be resolved, and positive movement on the pending Petitions for exemption will be possible, as a result of recent diplomatic efforts by the U.S. Maritime Administration, the U.S. Department of State, and the Ministry of Communications of the PRC (MOC). A Maritime Administration-led delegation held talks with a delegation led by the Chairman of this conference, Su Xingang, of the Ministry of Communications with the aim of reaching a new bilateral maritime agreement between the United States and China. Those talks began in Washington in April and were concluded in San Francisco in July. The Commission was briefed by Maritime Administrator Bill Schubert following those talks, and we have reason to believe that the outcome will be highly successful for both U.S. and Chinese maritime interests.

The importance of strong maritime relations between our two countries cannot be overstated. Over 26% of U.S. export of containerized cargo to the Far East goes to China. Forty-eight percent of imports to the U.S. from the Far East come from China. This trade will undoubtedly continue to grow.

Conclusion

Regardless of how the industry may change or the Commission's regulations may change, the mandate given to us by Congress will drive our policies. The Commission will continue to strive for fairness and equality among industry components while monitoring to ensure our industry remains competitive. At the same time, the Commission aims not to impose requirements that will impede the efficiency or growth of the industry.

I don't think many would argue, that the ocean shipping industry faces many challenges in today's world - from the need to increase security to trade imbalances and the effects of a general economic downturn. I would like to propose that these difficult times can be more easily weathered if the industry continues to seek balance - balance between shipper and carrier interests, balance between governmental and commercial interests, balance in the international trades, and so forth. Further, it is my hope that we are entering an era where the industry will come to value cooperation and collaboration over confrontation. Unilateral efforts on the part of any segment in the ocean shipping industry or any maritime nation will not work as effectively as what can be achieved through collaboration and cooperation among the parties involved.

We look forward to working with the industry to make our trades safe, secure, efficient and profitable for all. Thank you again for inviting me.