Remarks of Acting Chairman Michael A. Khouri at London International Shipping Week
Good afternoon. I am pleased to be here in London for International Shipping Week. Our exchange this morning during the US-UK bilateral meeting was productive, informative, and a welcome opportunity to share views with an old and highly valued U.S. ally and trading partner. I offer my personal thanks to our host here today.
As head of the U.S. Federal Maritime Commission, allow me a moment to set out our niche within the U.S. federal government scheme. We are an “independent agency” – on one hand, a part of the Executive Branch, but we do not directly report to the President. On the other hand, we report to the Congress for oversight and for budget purposes. The agency is allotted five commissioners, each nominated by the President and then confirmed by the Senate, with each serving a staggered five year term. By virtue of our Congressional charter, we are bipartisan – meaning the political party in the White House may have three members and the loyal opposition has two members.
The President designates one of the Commissioners as Chairman and head of agency. The FMC staff of 123 employees is comprised of economists, attorneys, and experts in ocean transportation and government administration.
Because of the essential role the international ocean transportation industry plays in U. S. commerce, Congress has given it a rather unique legal status for over one hundred years. Our charter legislation recognizes the potentially conflicting international regulatory regimes of our trading partners and sovereign government entanglements with the industry and directs the Commission to facilitate “an efficient and economic transportation system in the ocean commerce of the United States that is, insofar as possible, in harmony with, and responsive to, international shipping practices.”
Congress has entrusted economic regulation of U.S. ocean commerce to a specialized agency with a developed expertise, familiarity with the ocean liner industry, and sensitivity to the interests of U.S. stakeholders and international trading partners. Congress has charged the FMC with a number of oversight responsibilities designed to ensure competitive and efficient ocean transportation services for the shipping public and to protect the public from unfair and deceptive practices.
The FMC is fundamentally a competition agency with a key role in antitrust enforcement with a secondary role in commercial practices regulation. Congress has determined to allow certain types of international ocean carrier collaborations that would not otherwise be permitted under broader U.S. antitrust statutes.
The Shipping Act’s competition standard and its “Prohibited Acts” regulatory section provide the Commission with strong tools to protect competition in the international ocean liner industry. As a process matter, under the Shipping Act, cooperative or collaborative agreements between or among competitor international ocean liner carriers are filed with the Commission and reviewed under the Shipping Act’s competition standard.
In this regard, section 6 of the Shipping Act provides that an agreement filed with the Commission goes into effect UNLESS the Commission determines that the agreement is likely, by a reduction in competition, to produce an unreasonable reduction in transportation service or an unreasonable increase in transportation cost. This standard is analogous to the law employed by the U.S. Department of Justice and Federal Trade Commission to review mergers, acquisitions, and competitor collaborations
Agreements filed with the Commission go into effect automatically in 45 days unless the Commission determines that the agreement is anticompetitive under the section 6 standard. To make this determination, each agreement or alliance is reviewed and evaluated by the Commission on a trade-by-trade basis and using the appropriate relevant markets. A large trade-lane with many participants and with many potential entrants may not be concentrated and thus not problematic. However, a small trade-lane with limited participants and few potential entrants may be concentrated. That is why it is important to have an agency with up-to-date knowledge and particular expertise in this industry.
The FMC reviews confidential data filed by carriers and NVOs at the agency together with public industry data to determine whether ocean liners are competing on both price and service parameters. If such market competition is evident, then we can have confidence that each dollar saved by the ocean carriers in these cooperative alliances will be passed along to the ultimate consumer.
Much of the FMC’s ongoing monitoring and oversight involves the conditions in each trade lane, so that the Commission can determine whether efficiencies can be gained, and whether they are substantially being passed along to downstream consumers.
Because these are ongoing cooperative agreements rather than mergers, the Commission is charged by Congress with ongoing and continuous monitoring following the initial review and effective date of the agreements. The Commission may challenge an agreement at any time after the effective date. Because of this ongoing monitoring role, consistent experience is important, and the Commission staff has developed a fair level of expertise in the ocean liner industry, dedicated to understanding the nuances of this important and unusual industry.
As everyone in this room is well aware, the last few years have seen tremendous fundamental and structural changes to the ocean transportation services marketplace. Just a few notables:
- Not long ago, minor alliance activity with minor market shares in trade lanes, then proposed 3P, then a succession of amended alliances to today’s global three alliance structure,
- The top twenty carriers will be down to twelve companies in early 2018 by virtue of corporate consolidations, as currently announced, and
- A bankruptcy of a top ten carrier that created several months of pandemonium for ports and shippers worldwide.
Given the significant amount of change that has taken place over the past few years, shippers are viewing the new commercial environment with many questions, and perhaps, some trepidation. Put succinctly, shippers are concerned that fewer carriers, operating in fewer, yet larger alliances, will not only equate to less service choices, but to a commercial environment where shipping lines enjoy an advantage of leverage in contract negotiations. These apprehensions are not limited exclusively to cargo owners. We have heard similar sentiments voiced by terminal operators, equipment lessors, and various service providers.
The industry is entering a new era and it is not surprising that there may be questions about whether carriers will be in a position to dictate rates. The Commission has strengthened the economic review process of new alliance agreements filed with us. More specifically, we have required tighter limits on the scope of each agreement’s authority, as well as expanded quarterly reporting requirements to be filed with the Commission. All of this is done to ensure the Commission’s ability to detect and respond to any signs of anticompetitive rate or service behavior or abusive business practices.
The FMC regularly meets with competition authority counterparts of our trading partners to discuss container shipping industry trends and developments such as the carrier consolidation trends, the related development of new carrier alliances, how to address carrier insolvencies, and policy issues specific to each of our governments. These meetings provide a forum to discuss our respective approaches to the common goal of ensuring continued free and fair market competition in ocean shipping. Meetings like the ones we are having this week are important to the Commission and its work, and I look forward to future consultations and discussions with competition officials here as the UK develops its competition policy for the international liner industry post-Brexit.
Thank you for the opportunity to be here with you today and share my thoughts. If we have time, I would be happy to entertain questions and hear your comments.