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Scanning the Horizon: Some Observations on the Changing Maritime Scene

October 27, 2006

Remarks of Steven R. Blust at the Plimsoll Club New Orleans, LA

Ladies and Gentlemen, it is an honor to be invited to address the members of the World Trade Center, and a great pleasure to be back in New Orleans.

In recognition of the fact that today is Teddy Roosevelt’s birthday, I thought it might be appropriate to preface my remarks with an observation about that great outdoorsman and former President. It would have seemed strange and highly unlikely if, at the turn of the century, someone had predicted that the Assistant Secretary of the Navy who had advocated war with Spain in 1898, and then organized and helped lead the First U.S. Volunteer Cavalry in that war, would in just a few years become the first American Nobel Peace Prize laureate.

But the dynamics of history are rarely linear and often unpredictable. And that famous “Roughrider,” and author of the classic advice to “Speak softly and carry a big stick,” was, in 1906, honored with the Peace Prize for helping negotiate a peace treaty between Russia and Japan that ended the Russo-Japanese War in Manchuria and Korea.

Because history so often presents such surprises, anyone who undertakes to offer predictions has good reason to do so with humility. So I will limit my comments today to a few subjects that I think I can address with some confidence. But, mindful of Teddy Roosevelt’s achievements, I shall predict softly and carry a few caveats.

My crow’s nest in Washington is a 10th floor office a few blocks North West of the Capitol Building, so whenever I scan the horizon, the legislative branch of our national government figures prominently in my view. And that, I believe, is a good thing - since Congress plays, has played, and will play a major role in the transportation topics I’ll be commenting on today.

And, as chairman of an independent federal agency, I am also much in contact with representatives of the U.S. executive departments involved with transportation, international trade, and maritime security.

Beyond the various government officials I’ve had the pleasure to work with, I also have frequent - and often intellectually valuable - contact with representatives of the various industries that offer, use, or provide services to international liner shipping.

Access to all these perspectives - legislative, executive, and private sector - play a part in helping me and my fellow FMC commissioners perform the job Congress assigned to us: Promoting fairness and efficiency in U.S. ocean commerce. Those diverse perspectives also play an important part in shaping my awareness of what may lie ahead on the metaphorical horizon.

Since today’s comments are to deal with “the changing maritime scene,” it would not be unreasonable if you came expecting to hear statistics on the exploding growth of America’s international trade, pronouncements on proposed expansion of the Panama Canal, opinions on the likely consequences of the ever expanding size of new liner vessels, insights on the long-term impact the Dubai Ports episode, or similar well-known and much discussed topics. But instead, I’d like to focus on a couple of less publicized, but nevertheless very important, items.

Two particular topics of growing importance seem to me to be worth highlighting. And a third one, concerning the international regulation of liner shipping - which has been getting press attention in Europe lately - may also merit a brief mention.

The first topic is maritime security - security plans, procedures, and actions pertaining to vessels, to the cargo that moves on those vessels, to the ports at which that cargo is loaded and unloaded, and to our national economy as a whole - which increasingly depends on the free and efficient flow of international trade.

The second topic - less well publicized, but well deserving of greater public attention - is the question of future funding for landside freight infrastructure. And although the phrase, “future funding for freight infrastructure” may be strongly alliterative, it’s neither poetic to the ear, nor much in the public eye. Nevertheless, it’s an issue that everyone involved with, or even interested in, ocean shipping and logistics understands is of critical and immediate importance.

Closely associated with ocean freight infrastructure issues - especially in our major port cities - is the growing concern with the various environmental impacts of shipping.

These topics overlap, of course. Rapid trade growth presents heightened security challenges and puts ever greater pressure on inland infrastructure - the expansion of which can have local and even regional environmental effects. So, even though I may discuss them separately, it’s useful to remember that these topics are linked in ways that are sometimes direct and obvious, sometimes indirect and obscure.

Maritime Security

In the months and years following the attacks of September 11, 2001, the U.S. government, the nation’s public ports, US importers and exporters, and the companies providing international shipping services have been working together to identify and address vulnerabilities related to America’s maritime trade. And that cooperative effort quickly expanded to include our major trading partners. In particular, America and its international partners have developed a container security initiative for ports - an initiative to establish pre-loading container inspection procedures and protocols. That initiative has been expanded to include some 44 foreign ports from which (collectively) more that 75% of our nation’s containerized imports (by volume) are loaded.

With considerable international cooperation and strong public-private support domestically, the basic framework for America’s maritime security efforts is, by now, well established. The Coast Guard, for example, oversees security planning and its implementation at U.S. ports and on vessels in the U.S. trade. Other elements of the Department of Homeland Security (“DHS”) are responsible for cargo security and personnel security - including the program to develop, test, and put in place a Transport Worker Identification Credential known as TWIC - and for cargo security.

Even to describe our existing maritime security programs, plans and procedures, to say nothing of discussing the details, is a speech in itself - and a long one. So I will limit my remarks to a few words about one aspect of cargo security that I think is likely to be of pressing importance in the next year or two: The need to obtain more accurate, more detailed, and (most important) more relevant cargo shipment data if DHS is to improve its risk assessment and targeting system for containerized cargo.

Currently, Customs and Border Protection (CBP), the arm of DHS that operates its risk assessment and targeting program, makes use of data provided by ocean carriers to help them determine which containers are most likely to pose a security risk - including the importation of chemical, biological, or nuclear devices C and thus require further investigation. Ideally that “further investigation” would be carried out at a foreign port before any high risk container was loaded on a vessel bound for America.

Obviously, the more relevant and accurate the data used in the initial security screening, the more likely that the high risk containers will be timely identified. Better data allows better analysis, and leads to superior risk assessment and targeting.

But cargo risk assessment is a complex and data intensive business. And it has become increasingly clear that, to improve the data used in the analysis, it will be necessary to go to the best available source. In most cases that means to the shippers - and, in particular, U.S. importers. These shippers own the cargo in question and are responsible, directly or indirectly, for the selection of the overseas suppliers that produce the cargo, the cargo consolidators that pack it and make transportation arrangements, and land and ocean transportation providers.

Realizing the importance of improving its cargo risk assessment system, DHS is reportedly engaged in an initiative - sometimes called the “10 plus 2” approach - to acquire better data. The initiative would, if fully adopted, require the U.S. importer of record to supply Customs and Border Protection with 10 key pieces of data about the import cargo 24 hours before that cargo is loaded on a U.S.-bound vessel. It would also require the ocean carrier to provide 2 additional pieces of necessary information.

But an initial, pre-loading cargo risk assessment is not the only value of better, more relevant shipment data. As citizens of New Orleans, where Hurricane Katrina so recently produced a particularly painful object lesson in how important it is to be able to recover quickly from a disaster, you can readily appreciate that the data provided for the pre-shipping cargo risk assessment could well have an important second use. In the event that one or more containers were used in a terrorist attack, a rapid review of the relevant shipment data could be critical for making a post-event evaluation of what happened, and for determining what other cargos to allow into U.S. ports in the aftermath.

In short, data collected for both pre-shipping risk assessment and post- event recovery planning is vital to protecting our nation, while, at the same time, assuring the free flow of America’s international ocean commerce. And so, two rather straightforward implications follow: First, that the collection of relevant shipment data, its appropriate use, and its secure maintenance is going to put an increasing - but necessary - burden on U.S. importers to timely collect and provide the key data.

Second, ocean transportation intermediaries, the firms that consolidate and take responsibility for a significant amount of America’s import cargo, are going to find themselves under increasing scrutiny as part of this data improvement initiative. It’s going to become a national security concern, not just a regulatory legal concern, that we can identify who these intermediaries are, what cargo they’re taking responsibility for, and what their legal status is.

So, in scanning this one small (but critical) section of the maritime security horizon, I feel confident in saying that in the not-very-distant future, ocean transportation intermediaries - and the shippers that use them, and the ocean carriers who contract to carry cargo with them - will find it essential to be certain that intermediary licensing and bonding requirements have been fully complied with.

Inland Freight Infrastructure

And beyond assuring that our nation’s imports and exports are safe and secure, there is still the issue of being able to get them to and from the vessels on which they cross the seas.

Just last month, President Bush appointed a new secretary of transportation, Mary E. Peters. Secretary Peters brings to her new job over 20 years of experience with difficult transportation challenges, including, in particular, those related to America’s highway system. She now commands nearly 60,000 employees, a budget of almost $62 million dollars, and a mission to help maintain and improve the safety, reliability and efficiency of America’s transportation system. That’s a very tall order.

In the next month or two, Secretary Peters will probably have the opportunity to review a transportation planning document entitled “A National Strategy for the United States Marine Transportation System,” which is currently in draft form undergoing final revisions and polishing at the staff level. That document will include a description of the major trends and challenges that our marine transportation system faces - aging infrastructure, productivity constraints, lack of coordinated planning, threats to safety, security and environmental quality, and - perhaps most important - a lack of public awareness of the importance of the maritime transportation system and of the impending crisis we face in maintaining and expanding the system to meet expected future trade growth.

Because political commitment to finding and funding solutions so often depends on a public awareness of the nature and extent of the problem to be addressed, I believe it’s important that transportation and international trade experts read the National Strategy for the US Maritime Transportation System when the final version is released. And I’d further urge you to bring it to the attention of your local, state and national political leaders.

In a similar vein, we at the Federal Maritime Commission have noticed new types of agreements - non-traditional in focus and innovative in approach - being filed with our agency. These new style agreements among terminal operators and between neighboring ports, are designed to allow and encourage cooperation on projects to reduce traffic congestion, advance environmental clean-up measures, and investigate ways to fund freight infrastructure improvements.

So far these new style agreements have tended to focus on Southern California - with some interesting innovative agreements covering a broader range of port areas that deal with organizing and running chassis pools. But as these new agreements - aimed, as I said, at increasing transportation efficiency, combating congestion, enhancing the local environment, and improving port-related infrastructure - take off, I expect them to offer a model to other regions facing similar problems.

So, when I see our national strategic planners looking at the maritime transportation system in terms of public-private partnerships, and in my own back yard see the innovative approaches being taken by public port authorities and private sector entities, I conclude that looking to the private sector, rather than just the legislative branch, for planning and investment in maritime transportation, is likely to prove an important new direction in the years ahead.

A major challenge lies ahead, I’m afraid, in translating the broad and somewhat abstract national maritime transportation strategy into specific, concrete projects with adequate funding. So, I’m hoping our new DOT Secretary will take a central role in helping assure that happens. And I hope Congress and the other executive departments will give Secretary Peters the support she needs and deserves.

The International Scene

Finally, let me offer a few, brief observations about my own regulatory realm, international liner shipping. As you may know, the European Union (“EU”) recently voted to radically revise the legal treatment of liner shipping in the European trades. Two years from now, in October 2008, the EU will end what they call the “bloc exemption” for liner shipping companies to collectively set and discuss rates. What the precise dimensions of carrier collective activity will be at that point is still under discussion C and open for public comment. The European Commission’s Directorate for Competition (their equivalent, roughly speaking, of our Department of Justice Antitrust Division) has promised to offer “guidelines” sometime in 2008.

Since the EU has always approached the regulation of liner shipping in its own distinct way - more legalistic and confrontational than our more pragmatic and consensus-based approach - the decision to remove the existing exemption from standard competition policy was not unexpected. And, as a result, the existence of two distinct regulatory regimes for international liner shipping can be expected after October 2008. So, for the moment, it appears that we may soon see - in the European trades - the beginning of an interesting experiment in the economics of liner shipping.

It appears likely that Europe and the US will both maintain a limited antitrust exemption for operational agreements among carriers; the US will continue to provide a similar exemption for public port authorities and marine terminal operators; but the Europeans will no longer allow immunity for collective trade-lane agreements with authority to discuss rates. It isn’t yet clear what such ocean carriers might yet be allowed to discuss - and, I suppose, it won’t be until the promised guidelines are issued.

In the U.S. and throughout the rest of the world - including, most notably, our major Asian trading partners - rate discussion agreements likely will remain. In 1998, Congress - following detailed negotiations among U.S. shippers, port authorities, maritime labor and ocean carriers - passed the Ocean Shipping Reform Act (“OSRA”) which further limited the immunity granted to ocean carriers, and introduced provisions that essentially eliminated conference contracts in favor of confidential contracts offered by individual lines. The previous problem of delay and bureaucracy associated with the conference contracting process disappeared as well.

So, by enacting OSRA, Congress, in effect, modernized the antitrust provisions of the Shipping Act - introducing efficiency-enhancing regulatory reforms, especially in the areas of contract negotiation and carrier pricing. It also introduced new elements of regulatory flexibility that allowed, and permits, the Commission to introduce further pro-competitive reforms as warranted. And, OSRA’s successful implementation reduced tensions between shippers and carriers and helped foster an environment supportive of their cooperation in the areas I mentioned earlier - maritime security and the promotion of a modern and efficient maritime transportation system.

It is going to be interesting to see what happens in the European liner trades in 2009 and 2010. But (and if this is a biased perspective - it’s a bias informed by long and diverse experience), it seems to me that OSRA is working well, Congress’s goals are being met, and our major Asian trade partners - including China, Japan and Singapore - support U.S. style expert agency regulation over the soon-to-be-tested European approach. So, I believe that, for the foreseeable future the likely course - and frankly the more prudent one -will be to keep OSRA and use its built-in reform process as needed.

Let me conclude these remarks by reiterating how pleased I am to have been invited back to New Orleans, and thanking you for your kind attention.