Remarks of Chairman Creel before the Containerisation International's 4th Annual Conference, March 27, 2001
March 27, 2001
THE HONORABLE HAROLD J. CREEL, JR.
FEDERAL MARITIME COMMISSION
4TH ANNUAL CONFERENCE
March 27, 2001
It is a pleasure to be here today to participate in the discussion on whether ocean carriers or shippers would be the main beneficiaries of a totally deregulated market. I particularly look forward to hearing how my fellow panelists wrestle with this question. But before directly addressing this crucial and timely issue, I would like to comment on some related matters raised by the phrasing of this question.
I am assuming that by a "totally deregulated market" we are talking about one without antitrust immunity for conferences or agreements among ocean common carriers, where such groups would be subject to applicable competition laws. Clearly, removal of antitrust immunity is an issue unto itself, and it continues to be cause for serious debate. "Total deregulation," however, rarely is discussed - it is difficult to see the benefits in having the ocean transportation industry free from any oversight to protect the interests of all the parties involved.
The Federal Maritime Commission definitely has more than an academic interest in these issues. Indeed, if antitrust immunity for carriers were discarded, carrier agreements would not be filed with and reviewed by the Commission. We would, however, still need to monitor joint carrier actions to protect against abusive behavior. This would be in addition to the major role we would continue to play in enforcing our other responsibilities under the Shipping Act of 1984, including our authority to take action against unfair foreign maritime practices.
The program note correctly points out that liner shipping was not totally deregulated on many respects by the Ocean Shipping Reform Act of 1998 ("OSRA"). The ocean transportation industry was in fact re-regulated in many respects by OSRA. Nonetheless, antitrust immunity for ocean carriers was considerably limited and circumscribed by OSRA. Essentially, conference control over service contracts has been eliminated. As a result, there has been a proliferation of service contracts between individual shippers and individual carriers. OSRA also retained the Commission's authority to review carrier agreements to assess their anticompetitive effects and to require changes in agreements where appropriate.
I believe that any attempt to limit or eliminate ocean carriers' ability to act concertedly must be done on a somewhat uniform basis. As you know, there are at least twenty industrialized nations - including the European Union members - that provide some form of antitrust immunity or exemption from restrictive practices legislation for liner conferences. Under these circumstances, it would be economic suicide for one country to unilaterally abandon a system that has worked well and is still permitted elsewhere. In this regard, I note that the Canadian government appears to have recognized the need to maintain the ability of carriers serving its trade to act concertedly. It recently introduced the Canada Shipping Act, 2001, which would amend the Shipping Conferences Exemption Act to move it much closer to OSRA's re-regulated (not deregulated) approach.
I think it's also important to keep the traditional underpinnings of antitrust immunity in mind. Since 1916, liner shipping has been given limited antitrust immunity to allow it the flexibility to address the serious price and service volatility that is endemic to the industry. The industry has had to contend with chronic overcapacity given the introduction of progressively larger ships, imbalances in trade flows, seasonal fluctuations in trade flows, and the influence of various non-commercial interests, such as national pride and national security.
When faced with overcapacity, carriers tend to compete aggressively in order to fill their ships, as empty slots produce no revenue. Carriers are thus prone to bidding rates down to levels close to or below their costs. A degree of antitrust immunity allows carriers to engage in limited "self-regulation" - through conferences or discussion agreements - to keep rates from sinking below compensatory levels or to attempt to stabilize rates when overcapacity ceases. I would note, however, that the purpose of antitrust immunity is primarily to ensure an adequate and efficient supply of ocean transportation services in a manner that best fosters the flow of ocean commerce. This allows U.S. exports and U.S. trade to compete in the global marketplace and thus benefits U.S. businesses and consumers, too.
Antitrust immunity also allows for a broad range of efficiency - enhancing arrangements as well. Carriers can easily band together into operational alliances which permit them to share larger, more efficient vessels, terminals and other assets, while preserving separate, competing commercial and marketing entities. These create operational efficiencies which lead to lower costs and improved service for customers. Such cooperation can also facilitate entry into new trades. Without the ability to engage in such arrangements, carriers perhaps would consider mergers, leading to a reduction in the number of carriers and the possibility that U.S. international trade would be controlled by a small oligopoly of powerful lines. Moreover, antitrust immunity in U.S. trades is not unfettered or absolute. There are sufficient checks and controls built into the system to ensure that cooperative conduct does not result in serious anticompetitive effects.
Turning now to the million pound question - will carriers or shippers be the main beneficiaries of a totally deregulated market? I believe that the only logical answer is - it depends. As is true of many of life's cosmic questions, there is no easy answer. I note, however, that the question presupposes that both carriers and shippers will benefit under a totally deregulated market, but that one sector may gain more than the other. I would contend, however, that total deregulation may not necessarily benefit one sector over the other, and may in fact end up benefitting neither.
Large shippers will always have their ocean transportation needs met at prices with which they are generally satisfied. I am very concerned, however, about how a totally deregulated transportation market will affect the small to medium-sized shipper. These shippers are the backbone of our economy. According to recent statistics compiled by the U.S. Department of Commerce, ninety-seven percent of all U.S. export companies in 1998 were small and medium sized companies, and eighty-eight percent were small companies. These small and medium companies were responsible for slightly less than thirty percent of all U.S. exports. It is extremely important that the interests of these shippers be kept in mind in any deregulatory debate, for they are the ones who will feel the effects of any decreases in service or increases in prices.
I believe that the real question before us today is whether there are any benefits from complete deregulation, especially in light of the movement toward deregulation that has already taken place under OSRA. Stated another way - if there are no overall efficiency gains from deregulation, then where are the benefits? I would like to discuss, therefore, whether deregulation will increase or decrease the overall efficiency of ocean transportation, without harming service.
In this regard, we must consider what impact the removal of antitrust immunity would have on the efficient use of ocean transportation supply. There are three main sources of efficiency on the supply side: 1) improved vessel utilization; 2) advances in vessel design; and 3) improved terminal throughput. Focusing only on vessel utilization, we must ask ourselves whether total deregulation is necessary to noticeably reduce excess vessel capacity in our trades.
It is worth pointing out the relative explosion of vessel sharing agreements ("VSAs") over the past several years. The number of VSAs filed with the Commission grew from 87 in 1997 to 148 this past year. These agreements all involve two or more carriers sharing space on one or more vessels. They can range from a simple space charter arrangement to a complex carrier alliance, with considerable involvement by the parties. But they all provide for a more efficient use of vessels' space because two or more carriers use the same vessel. I submit to you that anyone arguing for total deregulation would have to demonstrate that such a system would result in better vessel utilization than that currently achieved by the industry by way of VSAs, which exists by virtue of antitrust immunity.
The current system in the U.S. makes it very easy for carriers to implement VSAs. They are generally viewed by the Commission as beneficial because of their efficiency-enhancing aspects. The Commission reviews these arrangements closely to ensure that there is always some excess capacity in a particular trade. Under a system of total deregulation, such arrangements would be assessed or policed by competition authorities like the U.S. Department of Justice, and there is no guarantee that they will look favorably on them.
Total deregulation would give carriers a greater incentive to consolidate through mergers, as they find it more difficult to work together to cut costs and maintain a diverse and frequent port call presence through VSAs. Mergers raise serious concerns about capacity declines as consolidation often leads to fewer players investing in less supply. In the face of greater uncertainty over the ability to earn normal profits, carriers would be pressured to decrease their investment in vessel capacity. Mergers would also reduce competition by reducing the number of players in the market. In essence, in the international transportation arena, those with the deepest pockets and significant government backing would most likely prevail. But of even greater concern to me, mergers would result in a greater dependence on state-owned carriers.
We must ask ourselves who would benefit most from the anticipated consolidations in the ocean transportation industry. Some might argue that the most efficient or well-run carriers would prevail in such an environment; but I beg to differ. I believe that the most likely winners will be those carriers with the highest level of government support and backing. In the U.S. trades, these would be the major controlled carriers, in particular, the Chinese state-owned carriers, COSCO, Sinotrans, and China Shipping Container Lines. While privately-owned carriers would be forced to cut back or sell off their shipping operations entirely, state-run carriers will be happy to step in and fill the void.
Without a doubt shippers must have sufficient vessel capacity to move our international trade. This has always been taken for granted under our current limited antitrust regime, and the deregulatory debate seems to center on the price side. While the maritime industry debates deregulation, it must never take adequacy of supply for granted.
The only way shippers as a class would benefit from total deregulation would be if carriers were currently reaping excessive profits that deregulation would force them to share with shippers. There is no evidence, however, to indicate that this is the case. Rates assessed by carriers appear to be compensatory, and the healthy competition in the industry ensures that carriers are not accruing excess profits. I might add that shippers are not generally complaining to the FMC about rate levels being unreasonably high as a result of antitrust immunity. The procompetitive forces unleashed by OSRA have ensured that rate levels today are about the same as ten years ago, despite carriers' ability to discuss and even agree upon rates.
One class of shippers that may be particularly affected by a totally deregulated environment is the non-vessel-operating common carrier ("NVOCC"). This is somewhat ironic because NVOCCs led the charge in the last Congress to eliminate antitrust immunity for ocean carrier agreements. If rates come down, NVOCCs will face stiff competition from the shipping lines themselves. Full-service carriers will probably compete in the NVOCCs' core areas of consolidation and logistics as they look to exploit new profit centers. When capacity is at a premium, NVOCCs may find it extremely difficult to buy space in bulk at discount rates, that they can profitably resell to their customers.
Although the focus of my comments has been on whether repeal of antitrust immunity for carrier agreements would benefit carriers or shippers, I would be remiss if I did not at least mention possible effects on other segments of the ocean transportation industry. Ports in particular may be adversely affected by such an outcome. As we all recognize, there has been a growing trend among ocean carriers to gravitate to larger and larger ships. Carriers routinely use 5,000 TEUs vessels, and vessels of up to 10,000 TEUs are currently on order. This trend, combined with more consolidation from deregulation, will result in fewer and fewer ports being serviced by direct vessel calls. The surviving carriers will shift to a small number of load-center ports, perhaps just one or two on each U.S. Coast. This will have a significant, deleterious impact on the economies of those ports left behind, and on the businesses that ship through them.
In conclusion, I would like to contrast our current regulatory regime with the world of total deregulation. The current regulatory regime is one of limited carrier cooperation with oversight by an expert regulatory agency. Under this scenario: 1) there is international consensus on the appropriate regulatory approach; 2) oversight and enforcement occur under internationally accepted procedures; 3) there are no regulatory barriers to entry; 4) there is a wide selection of carriers and services available; 5) market pricing is driven by supply and demand considerations; and 6) confidential contracts are permitted and encouraged. Complete deregulation would result in the application of domestic antitrust laws by domestic antitrust agencies. Under this approach: 1) there would be a patchwork of approaches to the deregulation of the maritime industry; 2) the possible use of blocking statutes could impede consistent enforcement and create foreign relations problems; 3) entry conditions may vary depending on national regulatory approaches; 4) industry consolidations and various national regulatory approaches would reduce available options; 5) pricing may be subject to national regulatory regimes (e.g., minimum rates); and 6) confidentiality of contracts may be subject to national regulatory restrictions. So while I strongly encourage debate and discussion, I believe it is very important to recognize exactly what we have with our current system, and then seriously weigh the benefits and costs attendant to any changes.