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Remarks of Chairman Creel at the 2nd International Gwangyang Port Forum April 25, 2002

April 25, 2002

Remarks of Harold J. Creel
Chairman, Federal Maritime Commission

The 2nd International Gwangyang Port Forum
Gwangyang, Korea

April 25, 2002


Thank you for the kind introduction and thank you for inviting me to participate in this forum here in the lively port city of Gwangyang this year. My topic today is the state of the U.S. shipping industry and the role of my agency, the Federal Martime Commission (which I will refer to as the FMC or the Commission). Needless to say, the past few months have brought grave concerns and great change to both industry and policy makers in the United States. However, to give you the complete picture of the U.S. industry, let me take you back a few years.

In 1998, the United States Congress passed legislation which drastically amended our shipping laws. The result was a market-driven liner shipping industry. (The Ocean Shipping Reform Act of 1998, or "OSRA".) After years of effort, Congress was able to reach a compromise between those who wanted minimal or no legislative reform, and those seeking more or even complete deregulation. The legislation went into effect in May of 1999.

OSRA brought about major changes and innovations to the U.S. regulatory scheme. The most significant changes were in the areas of service contracting, tariffs and group carrier activity. For example, service contracts between shippers and carriers may be kept completely confidential between the shipper and the carrier. Moreover, only a limited amount of the essential terms need be published. There was also the complete elimination of the "me-too" provision, the requirement that mandated conferences and carriers to make the same essential terms available to similarly situated shippers. While service contracts still must be filed with the FMC confidentially, important rate information remains private between the contracting parties. Note that confidentiality is not required: if the parties want to reveal rate information about their contracts, they are free to do so, subject to whatever limits and understandings they agree on together. This was clearly a deregulatory step, but not a total elimination of all contract filing and adherence requirements as some would have liked.

The elimination of the requirement that tariffs be filed with the FMC was another innovation created by OSRA. While common carrier tariffs are still required to be maintained, they can merely be published on a 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, and to this end, the Commission monitors websites to ensure equitable, uniform compliance. This too was a compromise, between those seeking continued transparency and oversight, and those seeking complete elimination of tariffs.

In the areas of group carrier activity, yet another compromise between two opposing views was reached. Antitrust immunity for collective activity, including pricing, remains but the scope of this immunity has become more limited. The most significant change is that conferences and agreements can no longer dictate service contract terms or prohibit their members from offering service contracts. 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. However, Congress also allowed carrier agreements to establish "voluntary guidelines" on service contract matters. Unlike pre-OSRA conference rules which were enforceable against carriers, now a carrier may choose whether it wants to follow the guidelines.

It has now been almost three years since the implementation of OSRA- enough time for the shipping public to adjust to the new regulatory environment and for our agency to assess the legislation's overall impact. In fact, last fall, the Commission released a report to Congress and the public that detailed just how OSRA is doing. In compiling the report, all segments of the industry participated- shippers, carriers, intermediaries, labor and all other interested parties- offering their views on how OSRA has affected their operations. I am pleased to report that the general response has been quite positive.

In service contracting, the number of service contracts and amendments filed with the FMC has increased by 200% since May 1999. Statistics from some of the major trade lanes show that shippers now are moving approximately 98% of their cargo under service contracts. According to members of the shipping industry surveyed, this increase was due mainly to the change from conference control of service contracting to more flexible individual service contracts. The industry also reports that increased confidentiality has enabled shippers and carriers to focus their attention on internal cost factors, individual service requirements and achieving business objectives in contracts rather than on matching the terms of competitors or meeting the market rate. The post-OSRA trade environment has resulted in a stronger focus on market evaluation. Carriers commented that contract accounts and rate bids from shippers constitute their main sources of market information. It appears that service contracting is now overwhelmingly the primary method of rate-setting.

With all of this talk of service contracting, one would think that the days of the tariff are over. The tariff is not completely dead, however. Tariffs are used not only to publish freight rate information, but also to link ocean carriers' service contracts to basic terms and conditions that are provided for in tariffs-- such as surcharges and accessorial charges. This new use of tariffs spares carriers the necessity of repeating common service contract provisions in each new contract. While carriers are satisfied with the tariff publication requirements, non-vessel operating-common carriers or "NVOCCs" are not so enthusiastic. Their general sentiment is that they are disadvantaged by the tariff publishing requirement and service contracting because while vessel operating common carriers ("VOCCs") are permitted to offer individual service contracts to shippers, NVOCCs are not. Also, because most of the active VOCC rates are contained in confidential service contracts rather than in tariffs, they are not able to review them. In addition, VOCCs, unlike NVOCCs, have access to specific commercial information through their discussion groups and other types of agreements. In order to be put on equal-footing with the VOCCs, they want the tariff requirement to be completely abolished and to have the right to offer service contracts.

In the area of carrier activity, the increase in individual service contracting has no doubt altered the industry's structure. It appears that the high demand for individual contracts has led to the termination of major conference agreements in the transpacific and South America trades. Carriers have reformed their collective associations under discussion agreements with the voluntary rate authority and service provisions that I mentioned earlier. The FMC received a mixed bag of reactions from the industry regarding this topic. In the area of discussion agreements, carriers stressed their importance because of the benefits they bring about a more stable environment for shippers, and for carriers, security to make additional financial investments. On the other hand, shippers expressed concerns that the anti-competitive effects of discussion agreements should be closely scrutinized by the Commission. They claim that the voluntary service contract guidelines are not so voluntary, and in reality, these guidelines are used by carriers to increase freight rates. Shippers also contend that discussion agreements run contrary to the market-driven objectives of OSRA. To balance industry concerns regarding antitrust immunity abuse, the FMC thoroughly reviews all agreements, particularly discussion agreements.

It is important to remember that OSRA is still in its infancy. OSRA's impact on liner shipping will continue to take shape over the next few years. And as it does, and as the US ocean shipping industry further acclimates to the new trade environment, OSRA's impact will be easier to ascertain. It is true that issues of concern remain that require ongoing FMC assessment, but we are confident that these issues will be ironed out with time. After three years of operating under this statute, the general consensus appears to be that OSRA is achieving its objectives.

I would like to turn, for a moment, to another important statutory authority of the Federal Maritime Commission. One of the Commission's unique authorities is contained in Section 19 of the Merchant Marine Act of 1920. If the laws or regulations of a foreign country create conditions unfavorable to shipping in the U.S. foreign trade for any carrier in that trade - not just U.S. carriers - then the FMC may take action against vessels of the offending country. I would like to emphasize that there can be no preference shown for U.S. carriers over non-U.S. carriers. So, for example, if Hanjin were to encounter problems in shipping between China and the U.S. because of restrictions placed on them by Chinese laws, then Hanjin may come to the Commission and seek help in addressing those restrictions that create unfavorable shipping conditions. The object of the law is to keep trade to and from the United States free and open.

The Commission's sanction authority is very broad and may include limiting sailings or types of cargo carried, suspension of tariffs or service contracts, the imposition of fees or any other measure necessary. This is a very powerful authority in that it is solely within the FMC's discretion whether such action should be taken - approval by the President is not necessary. However, the Commission may consult with other Government agencies. In carrying out these duties, the FMC has instituted two proceedings here in Asia in recent years with which I am sure you must be familiar.

In 1996, the Commission issued an order which required that reports be filed by Japanese and U.S. carriers on restrictive port practices in Japan. We were concerned at that time particularly with a system under which even the simplest carrier operation activities required negotiation and preapproval of the Japan Harbor Transportation Association. The Commission found that this system suppressed competition and resulted in unreasonably high costs and inefficiencies. In September of 1997, after attempts at diplomatic resolution, the Commission took retaliatory action and imposed sanctions on Japanese liner operators of $100,000 per voyage. When Japanese carriers refused to pay, the Commission announced its intent to bar or detain Japanese vessels at U.S. ports. Extensive bilateral negotiations followed, and Japan soon made a far-reaching commitment to reform Japanese port practices. The FMC continues to monitor port practices and regulations in Japan, and recently ordered carriers to report on the effects of changes to Japanese law and regulations which went into effect in November 2000.

In August of 1998, the Commission issued demands for information to vessel-operating carriers of the U.S. and China for information on Chinese policies and practices regarding port access, the licensing of multimodal transport operations, and the establishment of representative and branch offices there. Responses to the FMC inquiries indicated that Chinese laws and regulations discriminate against and disadvantage U.S. carriers and other non-Chinese shipping lines with regard to a variety of maritime-related services. For example, non-Chinese carriers are barred from opening wholly-owned companies or branch offices in the PRC in locations where carriers' vessels do not make monthly calls; thus, non-Chinese carriers must rely on Chinese agents (who are affiliates of the state-owned Chinese shipping lines) to solicit business, book space, accept goods, and perform other functions in many port cities and inland locales. Non-Chinese carriers also are subject to high minimum capital requirements, and are barred by Chinese law from performing a number of vessel agency services for themselves, such as arranging for entry, departure, customs clearance, consignment, transshipment and multimodal transport.

The Commission also expressed concerns at that time about: Chinese restrictions on non-Chinese carriers' freight forwarding operations; requirements that ocean carriers obtain governmental permission before beginning or changing international vessel services; and proposed rules that could require the disclosure of confidential service contract rates or terms, and further restrict non-Chinese carriers' ability to offer multimodal transport services in China.

To address these restrictions, the FMC directed its staff to prepare a formal proposal for action under section 19 of the Merchant Marine Act of 1920. As I discussed earlier, the Commission has the authority to take actions including: limitations on sailings; suspension of tariffs; suspension of regulated agreements; imposition of fees not to exceed $1,100,000 per voyage, or any other measure necessary and appropriate to address the unfavorable conditions.

The Commission continues to supplement the record in this proceeding as the Chinese market and Chinese laws continue to evolve. The Commission has recently learned that the PRC issued a new law effective 
January 1, 2002, and is expected very soon to promulgate implementing regulations for operators in international shipping generally. The new law and regulations may significantly affect the Commission's review of potentially restrictive practices. It appears that U.S. ocean transportation intermediaries, or OTIs, carriers and other providers of transportation services may face serious restrictions in obtaining the necessary licenses and permissions to do business in China. Indeed, it appears that wholly foreign-owned NVOCCs continue to be completely barred from engaging in a number of commercial activities, such as offering through transportation as an NVOCC. Other types of services may be permitted, but only if a foreign firm enters a joint venture with a Chinese entity.

A U.S. delegation met with the Chinese Authorities at the end of March and we now have indications that the new law may not be as troublesome as it seems upon its face. However, we will continue to monitor closely the Chinese implementation of this new law. We have sent requests for information to carriers and OTIs operating in the U.S./China trade asking them about the effect of the new regulation on their operations. And we are dedicated to ensuring that U.S. and other non-Chinese carriers are not subject to discrimination in China.

The slowdown in the U.S. economy and fluctuations in the global economy since the terrorist attacks of September 11th have had a significant impact on the shipping world, as well as the Federal Maritime Commission's fiscal year. As most of you already know, the weak conditions present in many trades before 9/11 were made worse by the events of that day. Reduced U.S. consumer spending on imports has had far-reaching consequences for carriers. Particularly, carriers in the transatlantic and transpacific trades are facing a situation in which there is excess vessel capacity combined with depressed and decreasing freight rates. Industry analysts predict further carrier consolidation resulting from another round of mergers, acquisitions and possible bankruptcies.

The events of September 11th also quickly catapulted the issue of maritime security to the forefront. President Bush acted quickly to establish the Office of Homeland Security to address the domestic security issues. That Office, the U.S. Coast Guard, and the U.S. Customs Service acted quickly as well to build a coalition of federal agencies responsible for maritime transportation to develop a new framework for security. The goal from the beginning has been to find a way to secure our country's ports and waterways without halting the flow of commerce. While much of the effort has, obviously, focused on the shipments entering the U.S., the United States is also working to ensure the safety of shipments initiated in our country.

Scenarios abound for how a shipping container might be used in a terrorist attack. In one instance, for example, a suspected Al Qaeda member actually used a container as a passenger vessel. We can assume that terrorists have used containers to transport arms and other supplies. We can only imagine what would happen if a container was used to transport weapons of mass destruction. But, what is clear, is that commerce by sea would be gravely impaired if such weapons entered the U.S. in a container.

The U.S. Commissioner of Customs has proposed a container security initiative which would pre-screen containers before shipment, identify high-risk containers, use technology to pre-screen high-risk containers, and require the use of "smart and secure" containers. He proposes concentrating first on the "mega-ports" of the world, including Hong Kong, Singapore, Rotterdam, Bremerhaven, Tokyo, Genoa, and yes, Pusan, to begin to build, in his words, "a new international security standard for sea containers." His concept is to push the border outward to ensure that cargo is secure from the point of origin, and to have complete information about incoming vessels long before they enter port.

Crucial to the United States effort to secure our ports, will be the accurate and timely flow of information. Instead of clamping shut our borders, the fast transfer of manifest information by carriers to the port of entry in advance of the arrival of a vessel will mean that risks can be quickly identified and targeted without delaying transit of containers which pose little or no risk. I firmly believe that increased transparency from the point of stuffing to the point of loading to the point of offloading is the best way to go about keeping our ports open, efficient, and secure.

Needless to say, if our efforts are to be successful, the United States will need to rely on the support and cooperation of foreign governments and ocean carriers.

The United States Congress is now taking steps to turn these initiatives into funded mandates. First, Congress has made available over $93 million in grant funding to ports for improving security. Second, the U.S. Senate passed port security legislation in December that would provide additional resources for the Coast Guard, Customs and the Maritime Administration. That legislation would also create a Port Security Task Force, and require that new regulations be developed to protect the public from maritime threats. It would also provide funding for maritime security training.

Similar legislation has been introduced in the House of Representatives, but not yet passed, that would require the Coast Guard to conduct port vulnerability assessments for U.S. ports and to approve vessel and facility antiterrorism plans. The House legislation would require the Coast Guard to establish antiterrorism teams to protect vessels, ports, facilities, and cargo. In addition, it calls for the Coast Guard to assess antiterrorism measures at foreign ports from which vessels depart to the United States. The Coast Guard would have the authority to deny entry or prescribe conditions of entry for vessels coming from any foreign port that does not maintain effective security measures. Cargo identification and screening systems would be developed. Carriers would be required to provide passenger and crew manifest information for incoming vessels. And all vessels would be required to provide 96 hours notice prior to entering the 12 mile territorial sea of the United States.

Again, this legislation has not yet become law. We shall see what the final product looks like as it makes its way through our legislative process.

What does the FMC have to contribute to the maritime security effort? We have been involved from the outset. It is the responsibility of the FMC to license ocean transportation intermediaries, otherwise known as ocean freight forwarders and non-vessel operating common carriers. As part of the licensing process we investigate the applicant's character. We intend to assist in the homeland defense effort by coordinating information we collect with information held by other agencies on suspect individuals and entities. Hopefully, the end product will be a database that is effective in screening any cargo that presents a threat to our security.

The FMC has been involved from the beginning, helping the agencies with primary responsibility for maritime security to develop this new security framework. We are prepared to use all of our existing authorities to address this serious threat and to take on any new responsibilities with which we may be tasked.

Thank you very much for the opportunity to address you today. I am particularly appreciative of Mayor Kim's personal invitation to participate in this important event in a country and a city that are so important to worldwide shipping and international trade.