SPEAKERS CONTENTS INSERTS
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ANTITRUST ASPECTS OF THE OCEAN SHIPPING REFORM ACT OF 1998
COMMITTEE ON THE JUDICIARY
HOUSE OF REPRESENTATIVES
ONE HUNDRED SIXTH CONGRESS
MAY 5, 1999
Serial No. 30
Printed for the use of the Committee on the Judiciary
For sale by the U.S. Government Printing Office
Superintendent of Documents, Congressional Sales Office, Washington, DC 20402
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HENRY J. HYDE, Illinois, Chairman
F. JAMES SENSENBRENNER, Jr., Wisconsin
BILL McCOLLUM, Florida
GEORGE W. GEKAS, Pennsylvania
HOWARD COBLE, North Carolina
LAMAR S. SMITH, Texas
ELTON GALLEGLY, California
CHARLES T. CANADY, Florida
BOB GOODLATTE, Virginia
ED BRYANT, Tennessee
STEVE CHABOT, Ohio
BOB BARR, Georgia
WILLIAM L. JENKINS, Tennessee
ASA HUTCHINSON, Arkansas
EDWARD A. PEASE, Indiana
CHRIS CANNON, Utah
JAMES E. ROGAN, California
LINDSEY O. GRAHAM, South Carolina
MARY BONO, California
SPENCER BACHUS, Alabama
JOE SCARBOROUGH, Florida
JOHN CONYERS, Jr., Michigan
BARNEY FRANK, Massachusetts
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RICK BOUCHER, Virginia
JERROLD NADLER, New York
ROBERT C. SCOTT, Virginia
MELVIN L. WATT, North Carolina
ZOE LOFGREN, California
SHEILA JACKSON LEE, Texas
MAXINE WATERS, California
MARTIN T. MEEHAN, Massachusetts
WILLIAM D. DELAHUNT, Massachusetts
ROBERT WEXLER, Florida
STEVEN R. ROTHMAN, New Jersey
TAMMY BALDWIN, Wisconsin
ANTHONY D. WEINER, New York
THOMAS E. MOONEY, SR., General Counsel-Chief of Staff
JULIAN EPSTEIN, Minority Chief Counsel and Staff Director
C O N T E N T S
May 5, 1999
Page 4 PREV PAGE TOP OF DOC Hyde, Hon. Henry J., a Representative in Congress from the State of Illinois, and chairman, Committee on the Judiciary
Clancey, John, president and CEO, Sea-Land Service, Inc.
Creel, Harold, chairman, Federal Maritime Commission
Danas, Andrew, assistant general counsel, American Institute for Shippers' Associations, Inc.
Jacobsen, Ronald, vice president, Northstar Drawback Consultants, Ltd. on behalf of the Customs Brokers and Foreign Freight Forwarders Association of Chicago
Kadar, Mark, vice president, Mercer Management Consulting, Inc.
Kamler, Arnold, president and CEO, Kent International, Inc.
Nannes, John, deputy assistant attorney general, Antitrust Division, United States Department of Justice
Rhein, Timothy, president and CEO, APL, Limited
Welsh, Hugh, deputy general counsel, The Port Authority of New York and New Jersey on behalf of the American Association of Port Authorities
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Winstead, Gary, president, American Heritage International Forwarding, Inc.
Won, Delmond, commissioner, Federal Maritime Commission
LETTERS, STATEMENTS, ETC., SUBMITTED FOR THE HEARING
Clancey, John, president and CEO, Sea-Land Service, Inc. and Timothy Rhein, president and CEO, APL, Limited: Prepared statement
Coble, Hon. Howard, a Representative in Congress from the State of North Carolina: Prepared statement
Creel, Harold, chairman, Federal Maritime Commission: Prepared statement
Danas, Andrew, assistant general counsel, American Institute for Shippers' Associations, Inc.: Prepared statement
Hyde, Hon. Henry J., a Representative in Congress from the State of Illinois, and chairman, Committee on the Judiciary: Prepared statement
Questions posed in writing by Mr. Hyde and the responses
Jacobsen, Ronald, vice president, Northstar Drawback Consultants, Ltd. on behalf of the Customs Brokers and Foreign Freight Forwarders Association of Chicago: Prepared statement
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Kadar, Mark, vice president, Mercer Management Consulting, Inc.: Prepared statement
Kamler, Arnold, president and CEO, Kent International, Inc.: Prepared statement
Nannes, John, deputy assistant attorney general, Antitrust Division, United States Department of Justice: Prepared statement
Welsh, Hugh, deputy general counsel, The Port Authority of New York and New Jersey on behalf of the American Association of Port Authorities: Prepared statement
Winstead, Gary, president, American Heritage International Forwarding, Inc.: Prepared statement
Won, Delmond, commissioner, Federal Maritime Commission: Prepared statement
Material submitted for the record
ANTITRUST ASPECTS OF THE OCEAN SHIPPING REFORM ACT OF 1998
WEDNESDAY, MAY 5, 1999
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House of Representatives,
Committee on the Judiciary,
The committee met, pursuant to notice, at 10 a.m., in Room 2141, Rayburn House Office Building, Hon. Henry Hyde (chairman of the committee) presiding.
Present: Representatives Henry J. Hyde, Howard Coble, Bob Goodlatte, Ed Bryant, Bob Barr, William L. Jenkins, Asa Hutchinson, Edward A. Pease, Mary Bono, John Conyers, Jr., Robert C. Scott, and William D. Delahunt.
Staff Present: Thomas E. Mooney, Sr., general counsel-chief of staff; Jon Dudas, deputy general counsel-staff director; Daniel M. Freeman, parliamentarian/counsel; Joseph Gibson, chief antitrust counsel; Samuel F. Stratman, press secretary; James B. Farr, financial clerk; Shawn Friesen, staff assistant/clerk; Jim Harper, counsel; Sampak P. Garg, minority counsel, and Julian Epstein, minority chief counsel and staff director.
OPENING STATEMENT OF CHAIRMAN HYDE
Mr. HYDE [presiding]. The committee will come to order.
Today the committee conducts an oversight hearing on antitrust aspects of the Ocean Shipping Reform Act of 1998, which took effect on May 1, just 4 days ago. As those who follow this issue well know, I've long questioned the justification for the antitrust immunity provided in the Shipping Act.
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At the most visceral level, the industry has evolved to the point that the immunity largely benefits foreign-owned carriers, at the expense of American shippers, and non-vessel owning common carriers or NVOs. Apart from that, the allegations raised in Commissioner Won's recent report on practices in the transpacific trade further heighten my concerns. The committee has received a copy of the entire confidential report, and it is alarming.
Some have questioned why we're having these hearings now, just 4 days into the new era for the shipping industry. Frankly, I cannot think of a better time.
It is no secret that the NVOs do not feel that they got a fair shake in last year's bill, and I share their concerns. I promised publicly last year that this committee would conduct vigorous oversight of the implementation of the act, and today represents a down payment on that promise.
Some have argued that these issues were thoroughly aired and resolved in last year's debate. Respectfully, I disagree. In fact, there was absolutely no House committee consideration of the 1998 act, and only the briefest floor consideration. I understand the political realities behind the leadership's decision in that regard, and I do not criticize it. However, no one should use last year's procedure as an excuse to truncate further airing of these issues now.
Having said all that, let me also say to those on the other side of the issue, that I certainly want to hear your side of the story. That is another reason why I scheduled this hearing. It is also the reason that we have witnesses from both sides. There ought to be a debate, and every party ought to do their best to persuade us of their point of view. A full and vigorous debate will help us consider whether we need further revision of the antitrust provisions of the Shipping Act.
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Before I turn to my colleague, Mr. Conyers, let me raise just one issue further. At least two witnesses whom the committee had invited to testify at this hearing later withdrew because of the fear of business retaliation. I certainly am not accusing anyone, because I don't know what the facts were in these situations. But, I do want to state unequivocally, that this committee takes very seriously allegations of retaliation against its witnesses. That we have had this disturbing experience only strengthens our resolve to watch closely what happens in this industry as we go forward.
With that, I now am pleased to recognize the distinguished ranking member, Mr. Conyers, for any statement he cares to make.
[The prepared statement of Mr. Hyde follows:
PREPARED STATEMENT OF HON. HENRY J. HYDE, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF ILLINOIS, AND CHAIRMAN, COMMITTEE ON THE JUDICIARY
Today the Committee conducts an oversight hearing on antitrust aspects of the Ocean Shipping Reform Act of 1998, which took effect on May 1, just four days ago.
As those who follow this issue well know, I have long questioned the justification for the antitrust immunity provided in the Shipping Act. At the most visceral level, the industry has evolved to the point that the immunity now largely benefits foreign-owned carriers at the expense of American shippers and non-vessel-owning common carriers or NVOs. Apart from that, the allegations raised in Commissioner Won's recent report on practices in the transpacific trade further heighten my concerns. The Committee has received a copy of the entire confidential report, and it is alarming.
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Some have questioned why we are having these hearings now, just four days into the new era for the shipping industry. I cannot think of a better time.
It is no secret that the NVOs do not feel that they got a fair shake in last year's bill, and I share their concerns. I promised publicly last year that this Committee would conduct vigorous oversight of the implementation of the Act. Today represents a down payment on that commitment.
Some have argued that these issues were thoroughly aired and resolved in last year's debate. I must respectfully disagree. In fact, there was absolutely no House Committee consideration of the 1998 Act, and only the briefest floor consideration. I understand the political realities behind the leadership's decision in that regard, and I do not criticize it. However, no one should use last year's procedure as an excuse to truncate further airing of these issues now.
Having said all that, let me also say to those on the other side of the issue that I want to hear your side of the story. That is another reason why I scheduled this hearing. It is also the reason that we have witnesses from both sides. There ought to be a debate, and every party ought to do their best to persuade us of their point of view. A full and vigorous debate will help us as we consider whether we need further revision of the antitrust provisions of the Shipping Act.
Before I turn to Mr. Conyers, let me raise just one further issue. At least two witnesses whom the Committee had invited to testify at this hearing later withdrew because of the fear of business retaliation. I am not accusing anyone because I do not know what the facts were in these situations. However, I do want to state unequivocally that this Committee takes very seriously allegations of retaliation against its witnesses. That we have had this disturbing experience only strengthens our resolve to watch closely what happens in this industry as we go forward.
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With that, I now recognize the distinguished Ranking Member, Mr. Conyers, for his statement.
Mr. CONYERS. Thank you, Mr. Chairman, and members, good morning. I'm glad that these hearings are scheduled on the Ocean Shipping Reform Act, which continues the ocean-going cargo carriers' exemption from antitrust laws to set shipping rates.
Now, important questions are raised in the act about how we should apply our antitrust laws. I recognize that industries on both sides of this issue have concerns, legitimate concerns. Shippers are concerned about rates they pay to carriers, and don't want those rates fixed. Carriers, on the other hand, want to set rates because they need a certain amount of return on extremely high investments that they make for purchasing and operating ships.
My concern is about how the antitrust laws are being applied against only some industries. Congress continues to allow the insurance industry to keep its exemption under McCarran-Ferguson, but decided only last year that the baseball industry should no longer be exempt from them, at least with respect to labor relations. There is a clear lack of uniformity as to how these laws are applied, and I'm looking for a way that we can examine industries that continue to be exempt to see if these exemptions are no longer in the public interest.
I thank all of our witnesses for coming today and look forward to their testimony. Thank you, Mr. Chairman.
Mr. HYDE. Thank you, Mr. Conyers. Mr. Coble would like to make an opening statement. He has a long and abiding interest in this subject matter. Mr. Coble, the gentleman from North Carolina.
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Mr. COBLE. Thank you, Mr. Chairman. I will not exhaust 5 minutes. You and the ranking member have both indicated that this presents an issue today about which reasonable men and women can differ. I thank you for conducting or staging the hearing today, and I think you put together a balanced panel.
As you know, Mr. Chairman, I served as chairman of the Subcommittee on Coast Guard and Maritime Transportation when we first began to discuss ocean shipping deregulation almost 5 years ago. As chairman of that subcommittee, we conducted extensive hearings on the issue, and recognized that the compromise reached last year represented a delicate balance that had the support of a majority of the major stockholders in the ocean shipping industry. This is certainly not to say that the law is perfect, in fact, there probably is no such thing as a perfect piece of legislation.
As you know, the Ocean Shipping Reform Act of 1998 will dramatically change the regulatory and competitive environment of the ocean shipping industry. It is also important to recognize, it seems to me that the changes brought about by this legislation just took effect on May 1, 1999, and it is my belief that it may be too early to predict how these reforms will ultimately effect the shipping industry.
In respect to this hearing, and its focus on the antitrust aspects of the Ocean Shipping Reform Act, there are several key points that I think merit attention. While I would not consider myself, Mr. Chairman, a supporter of antitrust immunity, it is important to recognize, I believe, that the exemption from antitrust laws for ocean carriers has existed since 1916, and is the policy of our international trading partners.
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Additionally, both the railroad industry and the motor carrier industry, both of which currently operate in a deregulated environment, enjoy similar immunity. I believe that unilateral action by the United States to revoke antitrust immunity would likely disrupt international trade conditions and unfairly disadvantage U.S. carriers.
If given time, I also believe that these reforms will provide a unique opportunity for non-vessel operating common carriers, shippers' associations, and freight forwarders, to thrive. Shippers will now have numerous choices in deciding how their goods are transported, and according to a recent article in the Journal of Commerce, these intermediaries are expected to become a significant player with which carriers will have to negotiate.
Mr. Chairman, in an ideal world, we would have a completely deregulated global shipping market with full competition. We all know that this notion is not realistic. Therefore, I maintain that antitrust immunity is, if not essential, certainly desirable to the protection of U.S. carriers, and is in the national security interest of our country. I thank the chairman for recognizing me.
[The prepared statement of Mr. Coble follows:]
PREPARED STATEMENT OF HON. HOWARD COBLE, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF NORTH CAROLINA
Mr. Chairman, thank you for conducting this hearing today. I am glad to have the opportunity to participate in this hearing because as you know I was Chairman of the Subcommittee on Coast Guard and Maritime Transportation when we first began to discuss ocean shipping deregulation almost five years ago.
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As Chairman of the Subcommittee, I held extensive hearings on this issue and recognize that the compromise reached last year represented a delicate balance that had the support of a majority of the major stockholders in the ocean shipping industry. That is certainly not to say that this law is perfect. In fact, I would venture to say that the Congress rarely passes a perfect piece of legislation.
As you know, the Ocean Shipping Reform Act of 1998 (OSRA) will dramatically change the regulatory and competitive environment of the ocean shipping industry. It is also important to recognize that the changes brought about by this legislation just took effect on May 1, 1999, and it is way too early to predict how these reforms will ultimately affect the shipping industry.
In respect to this hearing and its focus on the antitrust aspects of the Ocean Shipping Reform Act, there are several key points which I think merit attention. While I would not generally consider myself a supporter of antitrust immunity, it is important to recognize that the exemption from antitrust laws for ocean carriers has existed since 1916 and is the policy of our international trading partners. Additionally, both the railroad industry and the motor carrier industry, both of which currently operate in a deregulated environment, enjoy similar immunity. I do believe that unilateral action by the United States to revoke antitrust immunity would disrupt international trading conditions and unfairly disadvantage U.S. carriers.
If given time, I also believe that these reforms will provide a unique opportunity for non-vessel-operating common carriers (NVOCCs), shippers' associations and freight forwarders to thrive. Shippers will now have numerous choices in deciding how their goods are transported and according to a recent article in the Journal of Commerce, these intermediaries are expected to become a significant player with which carriers and conferences will have to negotiate.
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Mr. Chairman, in an ideal world we would have a completely deregulated global shipping market with full competition. We all know that this notion is probably not realistic, and therefore, I maintain that antitrust immunity is desirable in order to protect U.S. carriers and is in the national security interest of our country.
Mr. HYDE. I thank the gentleman. Mr. Scott, do you have an opening statement?
Mr. SCOTT. No.
Mr. HYDE. Mr. Delahunt, I understand you have very limited remarks you wish to share with us.
Mr. DELAHUNT. I do. I simply want to associate myself with your remarks, Mr. Chairman. I think it is important that we do conduct an oversight, in terms of the implications of what is occurring in the industry, and I applaud you for having this hearing.
As you are aware, we do have a significant piece of legislation on the floor, so many of us will be, unfortunately, not here in attendance, but, I look forward to reviewing the testimony of all of the witnesses. Again, thank you.
Mr. HYDE. I thank the gentleman. Unfortunately, when one has to forward-schedule hearings, it is hard to tell what is going to be on the floor, and that is an occupational hazard, but I thank the gentleman.
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Does Mr. Bryant have an opening statement?
Mr. BRYANT. I thank the chairman, and I don't have an opening statement at this point, but again, I thank the chairman and the distinguished panel members who will be testifying today.
Mr. HYDE. Mr. Barr?
Mr. BARR. No. Thank you, Mr. Chairman.
Mr. HYDE. Ms. Bono?
Mrs. BONO. No, Mr. Chairman.
Mr. HYDE. Very well. Our first panel consists of three Government witnesses who are charged with overseeing the shipping industry. The first witness is the Honorable Harold Creel, chairman of the Federal Maritime Commission. He is a graduate of Wofford College and the University of South Carolina Law School. He has practiced admiralty law in the private sector, served with the National Oceanic and Atmospheric Administration, and served as counsel to the Merchant Marine Subcommittee of the Senate Commerce Committee. He became a commissioner in 1994, and became chairman in 1996.
Our next witness is the Honorable Delmond Won, another Commissioner on the Federal Maritime Commission. Commissioner Won graduated from the University of Hawaii and its business school. He has had extensive experience in business, serving with the Hawaiian Tug and Barge Company, Hawaiian Pacific Industries, and as a private consultant. He has also served on the Hawaii State Land Use Commission. He became a commissioner in 1994. Today, Commissioner Won will speak specifically to the recent report he prepared as an investigative officer on behalf of the Commission. That report represents his views and not necessarily the views of the whole Commission. Chairman Creel will represent the views of the Commission as a whole.
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Finally, we have the Honorable John Nannes, a deputy assistant attorney general in the Department of Justice's Antitrust Division. Mr. Nannes is a graduate of the University of Michigan Law School, after which he clerked for Judge Roger Robb of the D.C. Circuit, and Justice William Rehnquist of the Supreme Court of the United States. He spent 3 years at the Antitrust Division in the mid-1970's. After that, he spent many years in private practice in Washington, and assumed his current position last year. Chairman Creel.
STATEMENT OF HAROLD CREEL, CHAIRMAN, FEDERAL MARITIME COMMISSION
Mr. CREEL. Thank you, Mr. Chairman. Mr. Chairman, and members of the committee, thank you for the opportunity to appear before you to discuss antitrust immunity in ocean shipping today.
As you know, Congress has recognized the unique nature of the ocean transportation industry since 1916, and has deemed it beneficial to permit cooperative arrangements among ocean carriers since that time. From the outset, Congress has found that antitrust immunity in the liner industry increases carrier efficiency, affords shippers stable and predictable prices, and maintains harmony with our trading partners.
Congress has determined that removal of antitrust immunity for this industry would not automatically result in all of the benefits of a textbook free market. Accordingly, the approach taken thus far has been to obtain the advantages of conferences and other arrangements, while checking their abuses through Government regulation designed to both ensure appropriate competition, and curb potential abuses.
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The Ocean Shipping Reform Act of 1998, or OSRA, which became effective just last Saturday, continues the antitrust immunity for certain agreements first adopted in 1916, and reaffirmed in 1961, and 1984.
While providing carriers with antitrust immunity for their agreements, Congress has insisted on several safeguards to prevent carriers from taking unfair advantage of their immunity, for example, conference agreements must allow open admission and withdrawal without penalty, and the 1984 act sets forth an extensive list of prohibited acts, prohibiting many anti-competitive practices. Individual carriers are barred from engaging in a variety of unfair practices, such as retaliating against a shipper who has patronized another carrier, refusing to deal or negotiate with a shipper, and offering deferred rebates, which are essentially kickbacks to selected customers. When acting as a group, carriers cannot, among other things, unjustly discriminate against a person because of his or her status as a shippers' association, or as an ocean transportation intermediary.
Also, section 6(g) of the 1984 act authorizes the Commission to seek an injunction in the U.S. District Court against substantially anti-competitive agreements that have produced unreasonable price increases or service decreases. During its 45 day review process, the FMC routinely utilizes the threat of action under Section 6(g) to persuade carriers to modify or remove agreement provisions which could lead to unduly anti-competitive results.
OSRA, the result of 4 years of study, and a compromise achieved by industry groups, has made several pro-competitive changes to the 1984 act. Independent action, or IA, is the ability of a carrier to deviate from a group rate. IA has been extended to service contracts. Now IA can be effectuated on 5 days' notice, as opposed to 10 days under the previous law. Conferences now cannot prohibit or restrict their members from entering into service contracts, nor can they require members to disclose a negotiation on a service contract, or the terms of a service contract and the Senate committee report calls for a more expansive approach to the Commission's 6(g) analysis, directing the agency to take a less restrictive reading of its authority to address anti-competitive behavior. Congress' basic premise in drafting OSRA was that a continuation of antitrust immunity must be offset by confidential contracting and Government oversight of industry operations.
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I would point out that virtually all of our major trading partners afford shipping some special treatment in competition rules, allowing competitors to cooperate on pricing. Given this global consensus, maintaining antitrust immunity avoids potentially disruptive and unpredictable consequences, and maintains the comity and international harmony Congress has deemed important.
It is logical to consider whether the current system has worked, and if it can be expected to work in the future. I believe that if you look at liner shipping today, especially the improvements in service and rate reductions benefiting shippers and consumers in the last decade, and the wide range of transportation options now available to shippers, one must conclude that the system has worked. It allows carriers to adopt joint strategies for dealing with market instability, but it does not wholly insulate carriers from competition and market forces. And the various checks and balances provided for in the Shipping Act, combined with effective oversight of the Federal Maritime Commission, serve to maintain equitable trading conditions in our ocean commerce. Clearly, rates and services are being dictated more by market forces than the impact of antitrust immunity. This, I believe, will be even more true under OSRA.
The committee has also expressed an interest in the Commission's Fact Finding Investigation No. 23. The Commission initiated this investigation in response to complaints from many shippers and NVOCCs about the practices of ocean carriers in the east-bound transpacific trade during the 1998 peak holiday shipping season, when, as rarely occurs, cargo exceeded capacity. These practices were described as refusals to carry low rated cargo at rates in existing service contracts, the singling out of NVOCCs for the refusal of space, and significant sudden rate increases in service contracts through what were known as ''voluntary'' amendments. The Commission appointed Commissioner Delmond Won to conduct the investigation, and he presented a confidential report to the Commission.
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Mr. HYDE. Mr. Chairman, we normallyand I omitted suggesting thistry to confine the opening statements to 5 minutes, and then take questions. However, I really don't want to shut you off. Is another 5 minutes adequate?
Mr. CREEL. I don't need 5 minutes, sir. Probably a minute or two.
Mr. HYDE. Very good. Thank you very much. I suggest to the other two gentleman, if you could hold it to five, we won't be too punctilious about that, but it would help. Thank you.
Mr. CREEL. Thank you, Mr. Chairman. A number of troubling issues with respect to carrier practices in the transpacific trades were raised by the fact finding investigation. The report alleged that certain carriers apparently took an unfair advantage of the eastbound market conditions to increase revenues. Commissioner Won will advise the committee of his findings.
In response to the report, the Commission determined to pursue a number of practices by individual carriers through specific enforcement actions. Individual Commission proceedings will commence as necessary preparations are completed.
While I am satisfied that the FMC has taken significant steps to address alleged violations by individual carriers revealed by the fact finding investigation, the Commission as a whole did not take additional steps to inquire into the extent to which controversial activities stem from the concerted activities of the carriers. I, however, will continue to urge the Commission to take an aggressive approach on such matters, and to be vigilant in ensuring that carriers do not abuse their antitrust immunity,
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In conclusion, I think that is it very useful for Congress and the Commission to review the reasons for antitrust immunity. As I've testified, I believe the rationales underpinning the Shipping Act continue to be sound, and the system in general has performed well. I'm concerned that radical changes could lead to global discord, legal uncertainty, and unnecessary business risk.
A better course may be to allow the industry to gain experience under the changes brought about by OSRA, then evaluate that experience after a certain period. I can assure you that the Commission stands ready to take any action necessary to ensure that the pro-competitive aspects of OSRA work as intended. Thank you very much, Mr. Chairman.
[The prepared statement of Mr. Creel follows:]
PREPARED STATEMENT OF HAROLD CREEL, CHAIRMAN, FEDERAL MARITIME COMMISSION
Mr. Chairman and Members of the Committee, it is a pleasure to appear before you to discuss the antitrust aspects of the Ocean Shipping Reform Act of 1998 (''OSRA''), which amended the Shipping Act of 1984 (''1984 Act''), the primary statute administered by the Federal Maritime Commission (''FMC'' or ''Commission''). I thank you for the opportunity to address these important issues.
In order to put these issues into proper perspective, I will first discuss the history of antitrust immunity in the maritime industry and describe the scope of antitrust immunity under the 1984 Act. I will then discuss the various limitations on antitrust immunity under the 1984 Act and some additional changes occasioned by OSRA which will further limit the impact of collective activity by ocean common carriers. I shall then address how other governments deal with similar issues and describe how collective carrier activity is evolving in our trades. Lastly, I shall discuss Fact Finding No. 23, a recent Commission initiative that looked into carrier conduct in the Trans-Pacific trades.
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International ocean transportation is the vital link between the United States and the world's markets. Unlike our domestic transportation industries, international ocean transportation involves the interests of our trading partners, as well as our own, and includes many foreign carriers that are subject to the laws of their home countries. International ocean transportation is crucial to the efficient movement of U.S. exports and imports. In 1997 alone, this industry transported over 14.5 million containerloads of U.S. imports and exports, with a value of greater than $414 billion.
The ocean transportation market is truly unique. There are no barriers to entry other than the fact that the costs of entry are significant, yet the principal assets are extremely mobile and can be moved from trade to trade. Cargo volumes can be cyclical and many trades are unbalanced between inbound and outbound legs. Many trades suffer from chronic overcapacity resulting from worldwide subsidization of shipbuilding and shipping carriers. Moreover, demands on capacity can fluctuate wildly by season and, as is currently the case in the Pacific trades, due to changing economic conditions. Many foreign governments subsidize their national flag carriers or take other actions to aid their development. In addition, carriers can be subject to a range of foreign laws or regulations.
Since 1916, Congress has recognized the unique nature of the ocean transportation industry and has deemed it beneficial and advantageous to permit cooperative arrangements among carriers. From the outset, Congress found that if the liner industry were left to its own devices, it would create monopolies in U.S. trades with all of their attendant abuses. On the other hand, Congress noted that if carrier agreements and combinations were not allowed in U.S. trades, and unfettered competition reigned, rate wars would result to eliminate the financially weak carriers or force them to consolidate ownership. In either event, Congress concluded that unbridled competition could subject the U.S. trades to monopolies as effective as any that would be created by agreements. Congress therefore chose to obtain the advantages of conferences and other arrangements while checking their abuses through government regulation designed to ensure a degree of competition and curb potential abuses.
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The Shipping Act, 1916 (''1916 Act'') required common carriers to file their agreements with the U.S. Shipping Board, and, if approved, those arrangements were protected from application of the U.S. antitrust laws. The 1916 Act also allowed conferences to fix rates and other practices, but prohibited discriminatory rates and services, in addition to deferred rebates and the use of ''fighting ships'' (vessels put in a trade to drive out competitors by using predatory rates). In 1961, the 1916 Act was amended to authorize the use of dual-rate contracts (lower rates for a shipper who exclusively used a conference), and to address certain abuses that had arisen over the years in the conference system. The antitrust exemption for carrier agreements continued, but they were subject to a new review standardthey could not be contrary to the public interest. The amendments also required conferences to remain open to all qualified members, who were free to exit without penalty. All common carriers and conferences were further required to file with the Commission tariffs showing all their rates and charges and keep them open for public inspection.
The 1984 Act is the currently operative shipping statute. It continues the legislative scheme first adopted in 1916 and reaffirmed in 1961, by providing that certain types of carrier arrangements are not subject to otherwise applicable antitrust laws. The Conference Report noted that the Act permits a greater degree of cooperative conduct among carriers. It further stressed that certain carrier arrangements may enhance the quality, frequency, or efficiency of transportation services and should generally be permitted. Most recently, the basic antitrust immunity afforded carrier agreements was maintained when Congress enacted OSRA in October of last year. I view OSRA as establishing a 3-legged stool: there is greater confidentiality in contracting, with individual conference carriers having greater guaranteed rights to enter one or more contracts; antitrust immunity for joint carrier operations is continued; and government oversight is maintained, and, in my view, is even more important, in light of the greater confidentiality and continued antitrust immunity.
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The types of ocean common carrier agreements subject to the 1984 Act, as amended by OSRA, include agreements to discuss or fix rates, cargo space accommodations, and other conditions of service; pool or apportion traffic, revenues, earnings or losses; allot ports or regulate the sailings; limit or regulate the volume or character of cargo to be carried; engage in exclusive, preferential, or cooperative working arrangements; control, regulate, or prevent competition in international ocean transportation; and discuss and agree upon any matter related to service contracts. Any agreement covering the above activities must be filed with the Commission, which reviews it to ensure that it complies with the Act and the Commission's regulations. If not rejected by the Commission, agreements become effective 45 days after filing. However, during that period, the Commission can request additional information or materials, and thereby stay the effectiveness of an agreement.
The antitrust laws do not apply to any agreement that has been filed and become effective. In addition, the antitrust laws do not apply to any activity or agreement undertaken or entered into with a reasonable basis to conclude that it is pursuant to a filed and effective agreement or that it is exempt from any filing or publication requirement.
The 1984 Act contains several provisions to prevent carriers from taking unfair advantage of their antitrust immunity; these provisions are the checks designed to prevent antitrust immunity from resulting in excessively anticompetitive activity. For example, conference agreements which maintain ratemaking authority must allow open admission and withdrawal without penalty. In addition, section 10 of the Act sets forth an extensive list of prohibited acts, barring many anticompetitive practices such as boycotts, predatory practices, unreasonable refusals to deal, and allocation of shippers among carriers. This section also bars carriers from engaging in a variety of unfair practices, such as retaliating against a shipper who has patronized another carrier, refusing to deal or negotiate with a shipper, and offering deferred rebates, which are essentially kickbacks to selected customers. If the Commission determines that an agreement has operated in violation of the Act, it may disapprove, cancel, or modify the agreement; it also may impose penalties on the agreement carriers.
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Section 6(g) of the 1984 Act also authorizes the Commission to seek an injunction in U.S. district court for D.C. against substantially anticompetitive agreements that have produced unreasonable price increases or service cutbacks. During its 45-day review process, the FMC routinely utilizes the threat of action under section 6(g) to persuade carriers to modify or remove agreement provisions which could lead to unduly anticompetitive results, thereby deleting onerous agreement provisions without the costly and protracted litigation that prevailed under the 1916 Act.
One of the most pro-competitive elements of the 1984 Act is the requirement that all members of conferences have a right to take independent action (''IA''). This provision allows any conference member to establish its own competitive rates on ten calendar days' notice to the conference. Mandatory IA introduces a strong element of internal price competition within conferences that complements the external price competition from non-conference, independent carriers. Mandatory IA has been used extensively in the U.S. trades since it was introduced in 1984. For example, in 1998 the members of the Transpacific Westbound Rate Agreement took 1,208 independent actions on rates and in the North Atlantic trades 671 IAs were taken by conference members.
OSRA has made several changes to the 1984 Act that will provide further competitive elements to conference agreements. The time frame for taking IA on rate actions has been shortened from 10 calendar days to 5 calendar days. But more importantly, independent action has been extended to service contractsoff-tariff, written arrangements between shippers and carriers in which agreed upon rates are provided in exchange for cargo volume commitments. Conferences cannot under OSRA prohibit or restrict their members from entering into service contracts, nor can they require members to disclose a negotiation on a service contract or the terms of a service contract. The introduction of confidential service contracting also should have a significant pro-competitive impact on the U.S. trades. Lastly, the Senate Committee Report repudiates the 1984 Act legislative history concerning the Commission's analysis under section 6(g) and replaces it with a more expansive approach directing the agency to take a less restrictive reading of its authority to address anticompetitive behavior. In particular, the Committee directed the Commission to use forward-looking analyses, and to act prospectively to block substantially anti-competitive carrier plans before they result in adverse effects on shippers and trade. It made clear that direct evidence of actual commercial harm to shippers is not necessary for a 6(g) case, and the Commission should not wait for the disruption of oceanborne commerce before taking corrective action.
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During the process that led up to OSRA, the Commission advocated several procedural changes to section 6(g) to enhance its effectiveness. The Commission suggested that it, and not the district court, be the forum for resolving 6(g) actions and that shippers be given the right to petition for such action. Congress declined to adopt these proposals. Despite the pro-competitive aspects of OSRA, Congress left antitrust immunity in place because it found that the same basic reasons justifying it continue to exist. But Congress clearly intended its pro-competitive additions to provide a further check on potential negative effects.
The details and the effects of the U.S. maritime antitrust exemption cannot be analyzed in isolation, i.e., without addressing the competition laws and practices of our trading partners as well. Unlike domestic transportation, international ocean carriage is not governed exclusively by U.S. law; rather, we share jurisdiction for this transportationboth inbound and outboundwith the countries at the other end of the voyage. Virtually all of our major trading partners afford shipping some special treatment under competition rules, allowing competitors to cooperate on pricing. In a 1992 OECD survey of seventeen industrialized nationsincluding the European Union members, Australia, Canada, Japan, Turkey, New Zealand, and Norwayall the respondents indicated that their nations maintained some form of antitrust immunity or exemption from restrictive practices legislation for liner conferences.
Of course, these countries' laws do not look just like the 1984 Act. Some countries, especially the European Union, place complex restrictions on carriers' rate-fixing activities. Newly announced rules in Europe move in the same direction as OSRA, but go even further to foster competition; while EU rules permit carriers to fix tariff rates in conferences, they bar carriers from discussing individual service contract rates, and establish a presumption of confidentiality for shipper-carrier contract deals. Japan is also reported to be stepping up its oversight of agreements, considering rules to give its regulators oversight powers similar to the 1984 Act's 6(g) standard. On the other hand, many countries provide no oversight or check on concerted activities at all. But while these systems may differ in detail, they all maintain some degree of antitrust exemption for shipping. Given this global consensus, retention of antitrust immunity under United States law avoids potentially disruptive and unpredictable consequences. Absent immunity for maritime agreements, our antitrust authorities would face the daunting task of investigating and challenging price setting agreements that take place overseas, in countries that may specifically permit such activities. Because of these conflicts, foreign governments could certainly resist attempts to enforce U.S. antitrust laws against their shipping companies. For example, foreign governments could use blocking statutes, already in place, or other limits on discovery, to frustrate aggressive U.S. antitrust enforcement. Of course, shipping lines based in the United States would receive no foreign intervention or protection from prosecution, and could find themselves at a competitive and legal disadvantage.
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I believe that the need to maintain comity and international harmony is a compelling reason for taking a cautious approach to antitrust immunity. If any one country makes a radical shift, leading to international conflicts of law or incompatible rules for shipping, the result could be trade disputes, costly international litigation, service disruptions and financial uncertainty for shipping lines. The costs and impacts of such actions ultimately would be borne by the users of the system. A more sound long-term course is the approach we have seen taken in recent years, in which major maritime countries periodically review shipping policies, and gradually introduce procompetitive reformslike those in OSRA, and those announced in Brusselswhile at the same time communicating with each other in multilateral fora and bilateral talks, to ensure that there will be compatibility and cooperation, not conflict.
The evolution in liner shipping regulation we have seen in the U.S. and abroad in recent years has been brought on, I believe, by changing market forces, especially the increasingly sophisticated demands of global shippers. In the years since the 1984 Act, and even during my tenure on the Commission, we have seen major changes in the way the industry arranges itself to best serve these customers. In particular, I have seen three major trends that illustrate how the carrier industry is changing, especially in the ways it views and uses its antitrust immunity.
The first trend has been a move toward consolidation and concentration, driven in large part by a desire to cut costs and boost efficiency. There have been several mergers among significant shipping lines in recent years. For example, P&O, Nedlloyd, and Blue Star are now one; two Japanese lines recently merged, as have two French carriers; Korea's Hanjin now controls Germany's DSR Senator; and Brazil's remaining lines are being acquired by foreign carriers. Canada's CP ships has pursued a compelling strategy of acquiring a stable of mid-sized and niche carriers, including the U.S.-flag Lykes Line, to assemble a global network. And Singapore's NOL purchased the U.S. carrier APL Ltd. These mergers are not exempt from the antitrust laws. When shipping lines operating in our markets merge, are acquired, or form joint venture companies, they are subject to Hart-Scott-Rodino requirements like any other company.
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The second trend, towards operational alliances, is driven by the same forces that spur mergers. Many major carriers have recognized a need to realize economies of scale and scope, cut costs, and improve service, but thus far have shied from the operational and legal difficulties of mergers and acquisitions. Instead, they have pursued vessel sharing partnerships with other lines, often on a global scale. For example, Sea-Land has paired with the Danish carrier Maersk Line, while APL has linked with Japan's Mitsui O.S.K. Lines and Korea's Hyundai Merchant Marine. In these arrangements, which are permitted under the 1984 Act, lines not only share vessel space, but also cooperate on terminal arrangements, information systems, and (given changes made in OSRA) possibly even inland transportation. In addition to cutting costs, individual carriers in these alliances are able to serve more ports and offer more frequent services, by coordinating sailings with their partners, and better serve shippers' global sourcing and time-sensitive logistics needs. At the same time, alliance members usually retain their separate corporate identities, marketing staffs, pricing, and contracts.
I think that allowing and facilitating these operational alliances has been a true success for the 1984 Act and antitrust immunity. It gives carriers an attractive option to cut costs and improve service worldwide without having to leap into a merger to stay competitive. This option likely has slowed down the consolidation of the industry, and thus has given users more choices and more competition.
In fact, despite the increasing concentration of the industry as a whole, in recent years U.S. shippers have been given several new options for carrier service in our major trades. Carriers that have previously focused just on the Atlantic or Pacific have recognized that this approach will not work in the dawning era of global shippers, and have used alliances, acquisitions, or aggressive growth to expand their reach. For example, APL, Mitsui O.S.K. Lines, K-Line, and Yang Ming entered the Atlantic, and at least six new carriers recently announced moves into the trans-Pacific trades, despite the fact that both routes were already well served by a dozen or more major carriers. Moreover, many major lines are establishing services in Latin America, providing new choices for shippers in the North-South trades.
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The system of antitrust immunity and oversight seems to have worked well in this regard; while the industry consolidates and becomes more efficient, we have avoided the sort of excessive concentration that has raised special competitive concerns in industries such as domestic rail transport. No major shipping line has achieved a dominant position, or even been able to hold onto market share over 15 percent, so the industry remains naturally competitive, and shippers enjoy a wide range of options.
The third trend we have seen is a shift away from liner conferences, with legally binding common rates for all members, towards discussion agreements, which provide a more flexible approach to cooperation on pricing policies. Most notably, carriers in the U.S.-Asia trades recently announced moves to shut down both eastbound and westbound trans-Pacific conferences. Carriers will continue to cooperate in these trades, however, through the Transpacific Stabilization Agreement and the Westbound Transpacific Stabilization Agreement. The shift to such ''discussion agreements'' has been driven, in large part, by market pressures. Because discussion agreements do not set fixed common prices or interpose themselves between carriers and customers, carriers seem to have more leeway to tailor prices, and especially individual service contracts, to suit the needs of individual customers. At the same time, discussion agreements provide carriers a forum to talk about pricing policies, a mechanism for initiating trade-wide rate actions, and a system for providing members with up-to-the-minute feedback on individual pricing decisions. Discussion agreements appear to be supplanting conferences in U.S.-Latin American trades as well, but have not taken hold in the Atlantic trades, as the European competition exemption extends only to the traditional conference structure and not to discussion agreements.
Page 30 PREV PAGE TOP OF DOC So as we view these trends in ocean shipping and the laws applicable to the industry, it is logical to consider whether the current systemantitrust immunity with economic oversight by the Federal Maritime Commissionhas worked, and if it can be expected to work in the future. I strongly believe that, if you look at liner shipping today, especially the improvements in service and rate reductions benefitting shippers and consumers in the last decade, and the wide range of transportation options now available to shippers, you must conclude the system has worked. Real rates declined from 1984 to 1996 by an average of 36% (weighted by cargo volume and adjusted for inflation). During that period we have seen continuous improvements in service times and service frequency, with increased intermodal options, carrier-backed advances in double-stack rail transport, increasingly sophisticated container terminals, and an explosion in carrier provided logistics and other value-added services. I further believe that OSRA and its pro-competitive provisions will further enhance the marketplace. New shipper-carrier partnerships under individual service contracts, which are being negotiated even as we speak, should enhance competition, but also provide stability and efficiency-creating opportunities for industry participants.
The system works, I believe, because it allows carriers to adopt joint strategies for dealing with market instability, but it does not wholly insulate carriers from competition and market forces. Shipping faces a peculiar combination of circumstances not seen in other industries: chronic vessel overcapacity in many trades; chronic imbalances in trade flows, so ships have empty space and empty equipment on one leg of most round-trip voyages; and seasonal fluctuations in trade flows, so that vessel space adequate for strong summer months leads to overcapacity in a weaker winter season. When these market forces are at work, competition will be keenly felt, and rate levels will often decline. For example, the weakness of the Asian currencies and the resulting imbalances in trade flows in the Pacific has led to a tremendous decline in rates. Westbound rates in the transpacific trades declined more than 50% in the last 15 years, while rates in the eastbound transpacific, up until increases implemented last year, were down between 35 to 49% over the same period. Carriers certainly have tried to use their antitrust immunity to arrest this decline. However, they have been largely unsuccessful, as the pro-competitive checks in the 1984 Act ensure that the market, rather than any carrier agreement, ultimately determines the direction rates move.
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As long as there has been liner shipping, carriers have had a pressing need to fill ships. Carriers aggressively chase cargo to ensure their ships are full, recognizing that an empty slot generates no revenue for that voyage at all. In their efforts to pull marginal cargo from each other, carriers are prone to bidding overall rate levels down to levels that are close to or even below the carriers' long term average costs of operating their services. Antitrust immunity gives carriers a way out of this cycle, allowing them (especially when market conditions are less unfavorable) to use conferences or discussion agreements to incrementally restore rates to levels that are compensatory. Over the last several years, this approach seems to have worked, allowing many (but not all) carriers to earn sufficient returns to continue operating and to continually improve their services to meet the needs of international trade. Such returns, however, have been persistently lower than other transport sectors.
At the same time, competitive forces and Commission oversight have ensured that carrier groups have not put in place unreasonable rate increases. Only in rare market conditions have we seen signs that collective carrier rate actions may harm shippers or international trade; in those circumstances we have stepped in and secured pro-competitive corrections. For example, in 1996, the Commission, recognizing declining overcapacity in the eastbound Pacific, persuaded carriers to drop an agreement to artificially limit capacity in that trade.
Antitrust immunity has other positive aspects as well. As I noted before, it has provided carriers a valuable way to form alliances, cutting costs and improving service. Antitrust immunity seems to facilitate entry into new trades, as a carrier can begin serving a new route through a partnership or space charter arrangement with another line, instead of facing the economically daunting step of putting a whole new string of vessels in the trade. Also, under OSRA, carrier alliances and other groups will be permitted to offer multi-carrier service contracts, allowing shippers more options to craft deals to cover their entire global transportation needs.
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There are a number of myths or misperceptions about antitrust immunity that bear mentioning. First is the notion that ocean carriers are ''inefficient,'' and if there were no antitrust immunity, the industry would cut costs and thus become more efficient. Recent years have seen tremendous pressure on carrier rates and revenue, which has spurred carriers to pursue exceptional cost cutting measures. These have included, for example, pursuing partnerships, alliances, and mergers; selling off non-core assets; building bigger and more efficient ships; pressuring terminals and other suppliers into cutting costs; restructuring or abandoning underperforming vessel services; and embracing the Internet and improved information systems. Many of these lines are publicly traded companies, and a perusal of their annual reports reveals that they are under tremendous pressure from their shareholders to earn a reasonable return on capital. Meanwhile, many lines are currently facing declines in earnings, and some even posted losses last year, as a direct result of market forces, particularly from the weakened Asian economies.
Another misperception about antitrust immunity is that withdrawal of immunity would force weaker carriers out of the market, while allowing more efficient or innovative lines to survive. This idealized scenario ignores the important fact that international ocean shipping does not operate in an open, free market. It also ignores the strategic role that shipping plays in many nations' economic and military systems, including our own. Without immunity, the carriers that prevail very probably would be the ones with the highest levels of government assistance, or those carriers owned or controlled by foreign governments. The result could be a bidding war of subsidies, as governments around the world look to head off the loss of their commercial fleets. An analogous situation seems to have taken place in the commercial shipbuilding industry where, because of its strategic importance, competition has prompted governments to put in place various support measures to keep existing operations viable.
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Given all these factors, I believe that the 1984 Act, as improved by OSRA, represents a positive, workable approach for liner shipping's future. The provisions for independent service contracting will provide increased competition, keeping pressure on carriers to continually cut costs and improve service, while fostering more efficient long term partnerships between shippers and carriers. Increased use of long-term contracts, especially multi-trade service contracts (now available under OSRA), may well lessen some of the pricing volatility that has characterized this industry. Carriers will continue to use antitrust immunity to form operational alliances, providing an efficient alternative to outright mergers, and will use conferences and discussion agreements to offset exceptional downward rate pressures brought on by chronic overcapacity and trade imbalances. The FMC will continue to stand watch to ensure that, when market conditions swing in the lines' favor, carrier groups do not abuse their antitrust immunity or impose unreasonable rate hikes.
The Committee has expressed interest in the Commission's Fact Finding Investigation No. 23, and has requested and was supplied a copy of the confidential report of the Commission's Investigating Officer in that proceeding. I will leave most of the discussion of that report to Commissioner Won. My discussion is also limited by the fact that the fact finding is an ongoing investigation. Before discussing that report, I will address what a fact finding proceeding is.
A fact finding investigation is one of the range of tools available to the Commission to help it determine whether to take action pursuant to section 6(g) or any other provision of the statutes it administers. Fact finding proceedings are non-adjudicatory information-gathering proceedings which may combine investigatory activity with the authority to require the filing of ''special'' or other reports, or to subpoena documents or witnesses. The Commission has previously used such proceedings on 22 occasions to investigate matters ranging from general industry practices, such as terminal practices at North Atlantic and South Atlantic ports, to the specific activities of agreements affecting a broad geographical range or large number of shippers, such as the investigation of Trans-Atlantic agreements undertaken in 1994.
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These investigations are conducted by an investigating officer, not an administrative law judge, and do not charge specific respondents with specific violations of the Act, or result in the imposition of penalties. Instead, they are used to determine whether further Commission action is warranted against specific parties through adjudicatory proceedings or informal actions to collect penalties, or rulemaking addressed to the problems or practices found. In some instances ''respondents'' are named in order to identify at the outset those from whom information is to be sought or whose activities are to be examined. ''Hearings'' in such proceedings are more like Congressional hearings than adjudicatory or ''evidentiary'' hearings: they present an opportunity for persons with information or particular concerns to be heard, as well as an opportunity to adduce facts about specific events.
Fact finding investigations generally result in a report of the investigating officer to the Commission depicting the subject examined and making recommendations for Commission action. The Commission's rules provide that these non-adjudicatory investigative proceedings may be nonpublic. A report of a fact finding proceeding containing confidential business information or other information protected from public disclosure would not be released to the public. When, on the other hand, investigations are conducted to inform the public and the industry, as well as to ascertain the existence or status of conditions affecting shipping, those reports of fact finding investigations are made available to the public. In any event, because a fact finding report does not state the ''conclusions, decisions, findings of fact or orders'' of the Commission, it cannot be considered a ''Commission report'' within the meaning of section 11(f) of the 1984 Act. Unless specifically adopted by the Commission, the report remains just that: the report of the investigating officer, although it may well form the basis and provide evidence for further Commission action.
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The Commission initiated Fact Finding Investigation No. 23 in response to complaints from many shippers and NVOCCs about the practices of ocean common carriers in the eastbound Transpacific trade during the 1998 peak holiday shipping season when, as rarely occurs, cargo exceeded capacity. These practices were described as refusals to carry low rated cargo at rates in existing service contracts; the singling out of NVOCCs for the refusal of vessel space; and significant, sudden rate increases in service contracts through ''voluntary'' amendments. To signal its concern with the seriousness of these complaints, the Commission appointed a member of the agency, Commissioner Delmond J. H. Won, to conduct the investigation.
Commissioner Won invited participation from carriers, shippers, transportation intermediaries and the shipping public, with assurances that commercially sensitive information provided would be accorded confidentiality to the extent permitted by law. Although many shippers were reluctant to provide information or testimony, based on stated fear of retaliation by ocean carriers, hearings were held in San Francisco, Seattle, Long Beach, Chicago and Washington, D.C. In addition to interviews with numerous shippers, witnesses on behalf of 11 carriers or conferences and seven shippers testified, and a record of some 40,000 documents was compiled.
At the Commission's direction, Commissioner Won's Report and Recommendations were presented confidentially to the Commission on January 13, 1999. The Report summarized the evidence compiled, illustrated by specific examples from some of the appended supporting documentation, and recited Commissioner Won's conclusion that the practices complained of had occurred and represented significant violations of the 1984 Act. A summary of that Report, which maintained the confidentiality promised individual witnesses and providers of information or documents, was made publicly available on March 12, 1999.
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A number of troubling issues with respect to carrier practices in the Transpacific trades were raised by the Fact Finding Investigation. With respect to the now-past activities of the carriers which triggered the investigation, the Report indicated that all of the carriers took advantage of the eastbound market conditions to increase revenues. However, the carriers' responses to these conditions were not merely market-driven responses to the law of supply and demand, but involved practices which did not conform with their obligations under the Shipping Act or existing service contracts. The carriers allegedly sought to increase their revenues by refusing space to those with service contracts covering less profitable cargo so that they could make that space available to shippers of cargo which produced a better financial return; demanded rate increases or premiums in return for space; targeted NVOCCs as a class for specific large rate increases; and refused to honor service contract commitments to shippers' associations, which required members to seek space on their own at higher rates. These alleged practices did not generally affect large contract shippers who received preferential space allocation, although their lower-valued cargo was also affected by the sale of space to higher bidders. In addition, carrier failures to report certain meetings and concerted activities in violation of the 1984 Act and the Commission's regulations were reported to have occurred.
The Commission determined at its March 9, 1999 meeting to further investigate a number of practices by individual carriers through specific enforcement actions. Individual Commission proceedings will commence as necessary preparations are completed. We have kept the Fact Finding Investigation open to ensure that the record in that proceeding may be used and augmented to aid in the other enforcement actions authorized by the Commission on March 9, 1999. It would be inappropriate for me to go into any detail about these ongoing enforcement actions.
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In addition, the Fact Finding Report focused on carrier practices which, to my mind, raised troubling issues about the role played by the comprehensive communications network under the Transpacific Stabilization Agreement (''TSA'') in the carriers' ability to achieve rate solidarity during the 1998 peak season. Members of TSA, a so-called ''discussion agreement,'' are permitted to discuss and voluntarily agree upon rates but not publish a common tariff. The Report explains that commencing in 1998, TSA members shared information on proposed rate changes, including information on members' service contracts with particular shippers and particular rates, by notifying other members of TSA through the secretariat. The fact finding record also suggests that TSA had replaced the conferences in the eastbound transpacific trades as the ratemaking policy group. This appears likely, since ANERA has filed an amendment suspending the conference agreement for six months and TWRA has announced that it will take similar action.
While I am satisfied that the FMC has taken significant steps to address alleged violations by individual carriers revealed by the fact finding investigation, I believe the agency might have taken additional steps to inquire into the extent to which controversial activities stemmed from the concerted activities of the carriers. Obviously, the Commission, as a whole, did not embrace this view. But I will continue to urge the Commission to take an aggressive approach toward ensuring that we fulfill Congress' expectations that we provide meaningful oversight over the concerted activities of ocean common carriers benefitting from protections from our antitrust laws.
We are all aware that the shipping industry as a whole is in flux as the OSRA reforms come into force. However, I am also mindful that the Commission has an ongoing obligation to assure that those changes occur in an environment in which all participants have a fair shot at the benefits anticipated from those reforms. One of the major issues as we proceed under OSRA will be the extent to which concerted activities of agreements enjoying antitrust immunity may affect the degree to which shippers are able to secure truly ''confidential'' negotiations and contracts with carriers. In the coming months, as these relationships mature under the 1984 Act as amended, the Commission will need to be vigilant in monitoring these aspects of the many newly-filed agreement authorities, voluntary guidelines, and service contracts under TSA and other agreements. The Commission may also have occasion to hear from shippers who may have similar concerns.
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I think that it is useful for the Congress and the Commission to review the reasons for antitrust immunity, how the system is serving the needs of our oceanborne trade, and whether improvements can be made. As I have testified, I believe the rationales underpinning the Shipping Act of 1984 continue to be sound, and the system in general has performed well. I am concerned that radical steps could lead to global discord, legal uncertainty, and unnecessary business risk. I can assure you that the Commission stands ready to take action to head off any abuses by ocean carriers of their antitrust immunity. We would be happy to provide the Committee with additional information or reports as to the effects on the industry of the new, more competitive Shipping Act of 1984.
Mr. HYDE. Thank you, Mr. Chairman.
The vote is an approval of the journal vote. I intend to stay here to proceed with the hearing and miss the vote. But, anybody is free, of course, to go and vote and return, hopefully.
Mr. SCOTT. Mr. Chairman, if you'd be kind enough to pair with me[Laughter.]
Mr. HYDE. I will engage in whatever procedural device is appropriate to avoid dashing over there and voting to approve a journal, which, I must say, I have not read. [Laughter.]
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STATEMENT OF DELMOND WON, COMMISSIONER, FEDERAL MARITIME COMMISSION
Mr. WON. Thank you, Mr. Chairman, and members of the committee. I have been invited here today to testify concerning my report and recommendations to the Federal Maritime Commission in Fact Finding Investigation Number 23, entitled Ocean Common Carrier Practices in the Transpacific Trades. In the interest of time, I will focus on the activities uncovered by that investigation which appear to raise the most significant issues.
The documents and testimony gathered during the investigation generally supported the allegations which caused this initiation and revealed that (1) ocean common carriers took advantage of an unusual supply-demand imbalance to turn away cargo which was less profitable and demand voluntary rate increases in return for vessel space, regardless of obligations in existing service contracts, (2) ocean common carriers engaged in various other practices to take advantage of the excess cargo demand, such as refusals to honor service contract commitments to shippers' associations, which created pressure upon members to seek space on their own at higher rates, (3) ocean common carriers participated in conference service contracts while opting out of negotiated contract rates, enabling the opting out carrier to charge tariff rates, and (4) conference lines may have failed to file minutes as required of certain meetings at which there were discussions relating to allocation of space.
Collectively, these activities resulted in an environment, best described by one carrier's statement, that ''the box goes to the highest bidder.''
Page 40 PREV PAGE TOP OF DOC Large champion accounts were generally unaffected, while middlemen that we call non-vessel operating common carriers, or NVOCCs, were the first to be told that their cargo would not move unless they agreed to increase the rates they had negotiated just a few months earlier in their annual service contracts. As a result, most NVOCCs capitulated to the carriers' demands.
In the way of background, I think it would be helpful to take a look at the economic conditions that led to the situation. In the second half of 1997, a series of economic crises overtook several important Asian economies, from Thailand to Korea, and had a dramatic and nearly immediate impact on foreign exchange rates, and ultimately America's balance of trade with Asia. U.S. exports declined drastically in 1998, but ocean borne imports from the Far East grew by almost 20 percent during a year that saw little new ocean carrier capacity enter the trade.
Also beginning in mid-1997, TSA, a so-called discussion agreement, whose members dominate America's inbound Pacific trades, began a rapid and radical restructuring. New professional management was hired, and ocean carrier CEO's took a far more active role in collective pricing activities. Most importantly, TSA established a new, highly effective, centralized, information sharing process that allowed the carrier's to exchange advance information on proposed price and service changes and feedback on any likely commercial consequences to TSA's members of those proposed changes.
As a result of that restructuring, by the final months of 1997, TSA, then commanding a combined market share of almost 85 percent, was able to effect a virtual halt to competitive discounting among its members. By mid-summer of 1998, it became clear to both U.S. importers and TSA carriers, that demand for equipment and vessel space was going to be stronger than had originally been expected. During this 1998 back-to-school and Christmas peak shipping season, vessel space and containers became increasingly, and in many instances, desperately scarce.
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This imbalance between the supply of, and the demand for shipping services during the critical peak season, gave the lines an opportunity to make certain classes of shippers, particularly the NVOCCs, offers they could not refuse. TSA's centralized information system allowed the lines to communicate to each other, and thereby coordinate the details of the voluntary rate increases that they were imposing during the period covered by the fact finding investigation.
To illustrate how competition is stifled under TSA, its comprehensive email communication system allowed the members to notify each other of all proposed rate changes and service contract discussions. During the 1998 peak season, this communication network served to eliminate any uncertainty among TSA members as to rate increases being extracted from particular shippers or classes of shippers by other members, and was largely responsible for the uniform approach to space shortages evidenced by the fact finding record.
In conclusion, the regulatory concern raised during the course of the investigation is not that the carriers' took advantage of a very tight market to increase rates, that was to be expected, rather, the problem is that the carriers' targeted their increases and allocated their space in a manner that appears to be discriminatory and otherwise inconsistent with their obligations under the 1984 act, and that TSA's centralized information exchange system provides a forum in which all of its members could take advantage of the unusual market conditions in a coordinated manner.
Armed with its information sharing system, TSA was, and is, able to effectively eliminate all competitive and business risks among and between its members. When an entity such as TSA, which now controls roughly 90 percent of the eastbound transpacific trades, is able to achieve lock-step uniformity among all its members, it has eliminated all competition on the carrier side of the transportation equation. For all practical purposes, a shipper dealing with TSA is not dealing with a collection of carriers which happen to be behaving similarly. The shipper is dealing with a single entity to which, in this situation, there were no real alternatives. This is the fundamental concern that the investigation raised for me and is, I believe, the fundamental issue that we are addressing today.
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I thank the committee for this opportunity, and I will be happy to answer any questions.
[The prepared statement of Mr. Won follows:]
PREPARED STATEMENT OF DELMOND WON, COMMISSIONER, FEDERAL MARITIME COMMISSION
Mr. Chairman and Members of the Committee, I have been invited here today to testify concerning my report and recommendations to the Federal Maritime Commission in Fact Finding Investigation No. 23, entitled Ocean Common Carrier Practices in the Transpacific Trades. That confidential report, with its numerous appendices, has been made available to the Committee, and a summary was released to the public. Since Chairman Creel has described the nature of Fact Finding proceedings, and, in general terms, the results of my investigation, I will focus on the activities uncovered by that investigation which appear to raise the most significant questions.
This Transpacific investigation was prompted by numerous complaints received by the Commission from shippers during the 1998 peak holiday shipping season, concerning refusals of ocean carriers to provide space and demands for rates higher than those agreed to in service contracts in the inbound trades from Asia. The documents and testimony gathered during the investigation generally supported the allegations which caused its initiation and revealed that:
1) Ocean common carriers took advantage of an unusual supply/demand imbalance to turn away cargo which was less profitable and to demand ''voluntary'' rate increases in return for vessel space, regardless of obligations in existing service contracts;
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2) Ocean common carriers engaged in various other practices to take advantage of the excess cargo demand, such as refusals to honor service contract commitments to shippers' associations, which created pressure upon members to seek space on their own at higher rates;
3) Ocean common carriers participated in conference service contracts while ''opting out'' of negotiated contract rates, enabling the ''opting out'' carrier to charge higher tariff rates; and
4) Conference lines may have failed to file minutes, as required, of certain meetings at which there were discussions related to allocation of space.
Many of these practices may be in violation of prohibitions contained in the Shipping Act of 1984 and are currently being pursued by the FMC's Bureau of Enforcement. Collectively, these activities resulted in an environment best described by one carrier's statement that: ''Box goes to the highest bidder.'' Large, ''champion'' accounts were generally unaffected, while middlemen that we call non-vessel-operating common carriers (NVOCCs) were the first to be told their cargo would not move unless they agreed to increase the rates they had negotiated a few months earlier in their annual service contracts. As a result, most NVOCCs capitulated to the carriers' demands.
To appreciate fully the situation that American importers, and especially mid-size and smaller shippers, faced in the Asia-to-U.S. trades from July through November of last year, it is helpful to understand the supply and demand conditions that existed then, and the competitive restraints which can be attributed to the Transpacific Stabilization Agreement (TSA), a so-called ''discussion'' agreement whose members dominate America's inbound Pacific trades.
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In the second half of 1997, a series of economic crises overtook several important Asian economiesfrom Thailand to Koreaand had a dramatic and nearly immediate impact on foreign exchange rates and, ultimately, on America's balance of trade with Asia. U.S. exports declined drastically in 1998, but ocean borne imports from the Far East grew by almost 20 percent during a year that saw little new ocean carrier capacity enter the trade.
Also, beginning in mid-1997, TSA began a rapid and radical restructuring. New professional management was hired and ocean carrier CEOs took a far more active role in collective pricing activities. Most importantly, TSA established a new, highly effective, centralized information sharing process that allowed the carriers to exchange advance information on proposed price and service changes, and feedback on any likely commercial consequences to TSA's members of those proposed changes.
As a result of that restructuring, by the final months of 1997, TSA (then commanding a combined market share of almost 85 percent) was able to effect a virtual halt to competitive discounting among its members. That gave TSA the necessary platform to undertake a series of substantial collective rate increases beginning in 1998, and continuing into a 1999 increase which, alone, is estimated to transfer almost $3 billion from shippers to ocean carriers. Also, in 1999, TSA has attracted two new members, bringing the membership to 15 lines with a collective market share of over 90 percent.
By mid-summer of 1998, it became clear, to both U.S. importers and TSA carriers, that demand for equipment and vessel space was going to be stronger than had originally been expected. During this 1998 back-to-school and Christmas peak shipping season, vessel space and containers became increasingly, and in many instances, desperately, scarce. This imbalance between the supply of, and the demand for shipping services during the critical peak season gave the lines an opportunity to make certain classes of shippersparticularly NVOCCsoffers they couldn't refuse. TSA's centralized information system allowed the lines to communicate to each other, and thereby ''coordinate,'' the details of the ''voluntary'' rate increases that they were imposing during the period covered by the fact finding investigation.
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The carriers' demands for rate increases were, for the most part, uniform$300 per container for service to the U.S. West Coastand NVOCCs were targeted before other shippers for denial of space and for these uniform increases. In one carrier's words, ''All existing NVOCC SC's [Service Contracts] starting this week will be fully implemented the US$300 PSS [Peak Season Surcharge] till 11/30/98, such that those unwilling to accept or a little hesitate will definately not able to get any space for the rest of the next two months. (sic)'' Documents reviewed as part of the investigation contain information on more than thirty (30) new or increased charges or adjustments agreed upon by TSA members during the last six (6) months of 1998. By comparison, in a truly competitive market, we would have expected that the reactions of individual carriers to the unusual space shortage would have varied greatly.
To illustrate how competition is stifled under TSA, its comprehensive e-mail communications system allowed the members to notify each other of all proposed rate changes and service contract discussions. During the 1998 peak season, this communications network served to eliminate any uncertainty among TSA members as to rate increases being extracted from particular shippers or classes of shippers by other members, and was largely responsible for the uniform approach to space shortages evidenced by the fact finding record. Typical of these communications was one in early September 1998, from a carrier, which notified all TSA members of rate increases being imposed on all NVOCCs; quoted the specific wording of the service contract amendments, including the level of the rate increase; and identified, by name and contract number, the particular NVOCCs to which this ''offer'' had been extended, noting those which have agreed and those still negotiating. Other communications contain suggestions for TSA members to adjust rates ''per formula'' or ''to follow suit,'' to coordinate tariff wording, or to provide cost data to the TSA secretariat to support a new charge. The investigation also found that some of the service contract information (e.g. the shipper's name) currently being shared among TSA members is information which was then required, and will continue to be required by law, to be filed confidentially with the FMC.
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In conclusion, the regulatory concern raised during the course of the investigation is not that the carriers took advantage of a very tight market to increase rates. That was to be expected. Rather, the problem is that the carriers targeted their increases and allocated their space in a manner which appears to be discriminatory and otherwise inconsistent with their obligations under the 1984 Act, and that TSA's centralized information exchange system provides a forum in which all of its members could take advantage of the unusual market conditions in a coordinated manner.
Armed with its information sharing system, TSA was, and is, able to effectively eliminate all competitive and business risks among and between its members. When an entity such as TSA, which controls roughly 90% of the eastbound transpacific trades, is able to achieve lock-step uniformity among all its members, it has eliminated all competition on the carrier side of the transportation equation. For all practical purposes, a shipper dealing with TSA is not dealing with a collection of carriers which happen to be behaving similarly; the shipper is dealing with a single entity to which, in this situation, there are no real alternatives.
This is the fundamental concern that the investigation raised for me and is, I believe, the fundamental issue that we are addressing today.
I thank the Committee for this opportunity to share my views. I would be happy to answer any questions.
Mr. HYDE. Thank you very much, Commissioner Won.
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STATEMENT OF JOHN NANNES, DEPUTY ASSISTANT ATTORNEY GENERAL, ANTITRUST DIVISION, UNITED STATES DEPARTMENT OF JUSTICE
Mr. NANNES. Good morning, Mr. Chairman, and members of the committee.
Mr. HYDE. Good morning.
Mr. NANNES. I'm pleased to be here this morning to discuss competition in ocean shipping, both generally and specifically, in connection with the Ocean Shipping Reform Act of 1998.
Mr. SCOTT. Mr. Chairman, could the witness bring the mike a little closer to him?
Mr. HYDE. I'm sure he could. [Laughter.]
I want to mention parenthetically that, while you don't get to finish your statements because of the abbreviated time, and that is because our time is limited, every statement is thoroughly read and digested by the staff, which tell us, pretty much, what you've said and what is significant. So, we will get the full import of what you are saying. Thank you, Mr. Nannes.
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Mr. NANNES. Thank you, Mr. Chairman. I shall proceed with all deliberate speed and volume. As a general proposition, the Antitrust Division believes that competition is the way to provide consumers with the best products and services at the most affordable cost. We do not believe that the ocean shipping industry is an exception, or that the industry has characteristics that warrant departure from normal competition policy. We also believe that collective price fixing and other anti-competitive practices by conferences over the years have imposed substantial costs on our economy through higher prices on a wide variety of goods shipped by ocean transportation. Especially in an era of expanding globalization of trade that is dependent upon an efficient ocean transportation system, sound public policy should promote increased competition.
As we all know, ocean shipping's exemption from the antitrust laws dates back to 1916. As the Antitrust Division has explained on many occasions, we believe that the exemption rests upon a number of economic and legal assumptions that were dubious at the time of enactment, and have not improved with age. Whatever support there may have been for the exemption in 1916, we believe the best thing Congress could do for consumers, and probably in the long run, for the industry itself, would be to repeal the antitrust immunity for ocean carriers.
Of course, we recognize that common carrier principles embodied in the 1916 act are now deeply rooted in ocean shipping. Strictly speaking, there is no reason why common carrier principles cannot co-exist side-by-side with the antitrust laws, as they do in telecommunications, for example. But we understand also, that in enacting the Ocean Shipping Reform Act of 1998, Congress was trying to balance a number of competing concerns. Under the circumstances, we thought the act was a desirable step forward for competition, because, although it did not eliminate the immunity, it offered the prospect of greater competitive forces being brought to bear in the ocean shipping marketplace. Now, we would hope that Congress would continue to look for opportunities to take further steps to foster an even more competitive ocean shipping marketplace. Let me hit a couple of highlights.
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Certainly one of the most pro-competitive changes in the 1998 act was to guarantee that an ocean carrier that was a member of a shipping conference would have the right individually to negotiate a service contract with a shipper at rates of their own choosing. Under the old Shipping Act, a conference could prohibit its members from entering into such contracts. But, because service contracts generally involve a significant volume of cargo over a protracted period of time, carriers have strong incentives to compete for them by offering discounts from the published conference tariff rates.
Obviously, more goods shipped pursuant to independent action means less goods will be shipped under rates set by the price-fixing cartel. That can only be good for consumers.
The act also prohibits shipping conferences from requiring disclosure of service contracts of individual members. This is another important pro-competitive change, because we believe that requiring disclosure would strongly inhibit individual carriers from undercutting the conference tariff.
Unfortunately, the act does not go as far as it could to maximize incentives for carriers to compete as aggressively as possible. For one thing, it allows members to adopt so-called voluntary guidelines. But even voluntary guidelines can be a powerful anti-competitive weapon when used to signal members as to expected behavior. At a minimum, such guidelines can be used to discourage individual service contracts.
Second, the act includes uniform confidentiality provisions that require the publication of the same information for conference and individual service contracts alike. We believe that there ought to be complete confidentiality for individual service contracts to maximize the incentives that carriers have to pursue such ways of setting rates and dealing with shippers, but that conference determined rates, whether they be conference tariff rates or conference service contracts, should not enjoy the confidentiality protections and should be, instead, subject to full disclosure, not only to the regulatory agencies, but also to affected shippers.
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In fact, we think the same approach with respect to confidentiality should be applied to tariff rates, as well. If a carrier is going to avail itself of its immunity, that ought to be public. But, if a carrier is going to negotiate individually with particular shippers, we believe that that should be subject to the same form of confidentiality as individual service contracts.
Indeed, we think such an approach is especially important for small shippers, because while large shippers may be able to negotiate service contracts with carriers, and thereby qualify for confidential treatment, smaller shippers are less able to do so, because the volume of cargo they tender may not warrant a service contract. But, there may be circumstances in which carriers will be prepared to deviate from tariff rates on an individualized basis with small shippers, and they should be encouraged to do so by having the same right for confidential treatment that is enjoyed in virtually every other industry in America.
It is true that because of efficiencies or other volume, some shippers may be in a better position than others to obtain cost-related discounts. But, it seems to me, that small shippers no less than large shippers ought to be able to try to negotiate discounts from conference tariff rates. In the final analysis, it is that kind of negotiation that fosters competition that protects all shippers.
In summary, Mr. Chairman, it is clear that despite the incremental improvements made by the act, the ocean shipping marketplace is not as competitive as it could be. Shippers can benefit from further competitive reforms, and the Division believes that the ocean shipping marketplace has the hallmarks of being one that can benefit, no less than other industries, from healthy competitive forces.
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[The prepared statement of Mr. Nannes follows:]
PREPARED STATEMENT OF JOHN NANNES, DEPUTY ASSISTANT ATTORNEY GENERAL, ANTITRUST DIVISION, UNITED STATES DEPARTMENT OF JUSTICE
Good morning, Mr. Chairman and Members of the Committee. I am pleased to be here to discuss competition in ocean shipping, both generally and in the context of the Ocean Shipping Reform Act of 1998, which took effect May 1.
As a general proposition, the Antitrust Division believes that competition is the way to provide consumers with the best products and services at the most affordable cost. We do not believe that the ocean shipping industry is an exception or that the industry has characteristics that warrant departure from normal competition policy. We also believe that collective price fixing and other anticompetitive practices by conferences over the years have imposed substantial costs on our economy through higher prices on a wide variety of goods shipped by ocean transportation. Especially in an era of expanding globalization of trade that is dependent upon an efficient transportation system, sound public policy should promote increased competition.
As you know, ocean shipping's exemption from the antitrust laws dates back to 1916. As the Antitrust Division has explained on many occasions going back many years, that exemption rests upon a number of economic and legal assumptions that were dubious even at the time of enactment and have not improved with age. Whatever support there may have been for the exemption in 1916, we believe that the best thing Congress could do for consumers and, probably in the long run, for the industry itself, would be to repeal the statutory antitrust immunity for ocean carriers.
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Of course, we recognize that common carrier principles embodied in the 1916 Act are now deeply rooted in ocean shipping. Strictly speaking, there is no reason why common carrier principles cannot co-exist side-by-side with the antitrust laws, as they do in telecommunications, for example. But we understand that in enacting the Ocean Shipping Reform Act of 1998, Congress was trying to balance a number of competing concerns. Under the circumstances, we thought that the 1998 Act was a desirable step forward for competition because, while not eliminating the antitrust immunity, it offered the prospect of greater competitive forces being brought to bear in the ocean shipping marketplace. Now, we would hope that Congress would continue to look for opportunities to take further steps to foster an even more competitive ocean shipping marketplace.
The 1998 Act, while generally a positive development from a competitive standpoint, has both procompetitive provisions and provisions that are not as helpful to competition.
One of the most procompetitive changes in the 1998 Act was to guarantee that an ocean carrier that was a member of a shipping conference would have the right individually to negotiate a service contract with a shipper at rates of their own choosingto take what is referred to as ''independent action.'' Under the Shipping Act of 1984, a shipping conference could prohibit its members from entering into individual service contracts. Because service contracts generally involve a significant volume of business over a given period of time, carriers have strong incentives to compete for them by offering discounts from the published conference tariff rates. Obviously, more goods shipped pursuant to independent action means that less goods will be shipped under rates set by the price-fixing cartel. That can only be good for consumers.
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The 1998 Act also prohibits shipping conferences from requiring disclosure of service contract rates of individual members. This is another important pro-competitive change. We believe that requiring disclosure would strongly inhibit individual carriers from undercutting the conference tariff. Disclosure can expose a carrier deviating downward from the conference cartel rate to various forms of pressure from other members of the cartel. Confidentiality of rates reduces these risks.
Unfortunately, the bill as enacted did not go as far as it could have to maximize incentives for carriers to compete as aggressively as possible. For one thing, it allows conference members to adopt so-called ''voluntary'' guidelines regarding individual service contracts. Even ''voluntary'' guidelines can become a powerful anticompetitive weapon in the hands of a price-fixing cartel. A conference generally holds significant influence over its members, which enables it to use ''voluntary'' guidelines to signal members as to expected behavior and to punish members who are detected to be breaking ranks. At a minimum they can be used to discourage such contracts.
Second, in the course of considering the 1998 Act, an approach to confidentiality that had been contained in earlier versions of the legislation, which we believe would have more appropriately balanced regulatory and competitive principles, was dropped. The approach would have required conferences to publish the essential terms and conditions of their service contracts, including rates, thereby ensuring that their exercise of collective power would have been subject to scrutiny by regulatory agencies and interested parties. But, when conference members elected to forego their right to coordinate with fellow conference members and entered into one-on-one negotiations with individual shippers or shippers' associations, they would have been under no obligation to publish any information regarding resulting individual service contracts.
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In place of this approach, the 1998 Act includes uniform confidentiality provisions that require the publication of the same information for conference and individual service contracts alikeinformation such as origin and destination port ranges, commodities involved, minimum volume required, and duration of the contract, but not including the rate. In our view, this compromise fails to give conference members acting competitively in their individual capacity the freedom they deserve to maintain complete confidentiality of all facts relating to individual service contracts.
In our opinion, the earlier approach provided a more sensible and competitively sound approach to the confidentiality issue. If, despite our concerns, the antitrust immunity is going to be retained, we should at least use the confidentiality provisions in a way to maximize carrier incentives to enter into individual service contracts, rather than use the cartel machinery of the conference system. If carrier members collectively negotiate service contracts, the terms and conditions should be no less public than collectively-determined conference rates. If, on the other hand, a carrier elects to negotiate an individual service contract with a shipper, the law should not mandate that any of the terms and conditions be made public. The carrier should have the same right accorded almost every other seller to keep the terms of its contract entirely confidential.
In fact, we thought that such an approach should have been applied to tariffs as well as to service contracts. If conference members retain their antitrust immunity when they collectively set rates governing tariffs, it is appropriate to subject those rates to public disclosure. But if a conference carrier acting in its individual capacity is willing to offer discounts to shippers, it should be free to depart from a tariff with complete confidentiality. With this system, conference tariffs would, in effect, become maximum rate tariffs. Ocean carriers would be subject to their common carrier obligation to accept shipments at the published tariff rate, and shippers would be assured that they would pay no more than the tariff rate. But, if shippers can negotiate a lower rate on a single shipment with an individual conference member, they should be able obtain that lower rate without thereby requiring the carrier to publish that rate as a tariffwhich not only subjects the carrier to potential pressure from fellow conference members for undercutting their collective agreement, but also forces the carrier to offer the same rate to all shippers, even outside the context that made it economical for the carrier to offer that rate. Unfortunately, the 1998 Act maintains the requirement that all rates other than service contract rates be published as non-negotiable tariffs, again treating carriers the same whether they are acting individually or collectively.
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Applying the approach described above for both service contracts and tariffs would have gone a long way toward extending the same kind of procompetitive benefits of the Ocean Shipping Reform Act to small-volume shippers, who often pay tariff rates for shipments of a container or two at a time, as are enjoyed by large-volume shippers, who negotiate service contracts governing several hundred containers over the course of a year. Ocean carriers would not enjoy confidentiality if they entered into conference service contracts setting rates for a thousand containers, or published tariffs setting rates for a single container. But they would be encouraged to forego their antitrust immunity and to voluntarily subject themselves to market forces through one-on-one negotiations with shippers, by knowing that they could negotiate confidential agreements with shippers to discount from the conference tariff rate for a single container, or to enter into an individual service contract for a thousand containers.
It is true that some shippers, because of volume or other efficiencies, will be in a better position than others to obtain cost-related discounts. But a large shipper's success in obtaining a volume discount does not mean that a smaller shipper cannot obtain competitive discounts of its own. Each decision as to a discount from the tariff rate should be arrived at individually, subject to the pressures of competition. Some shippers will attempt to time or otherwise arrange their shipments to increase their negotiating leverage. Others with more urgent shipping needs may not have the luxury of waiting. Still others may not care enough to make the additional effort. All these variables can be addressed by a competitive marketplace. In the final analysis, it is competition that protects all shippers.
The solution to a situation in which the benefits of competition do not reach all participants in the marketplace is not to reduce the role of competition, but rather to look for ways to enable more participants to obtain those benefits.
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In summary, Mr. Chairman, it is clear that despite the incremental improvements made by the 1998 Act, the ocean shipping marketplace is not as competitive as it could be. Shippers can benefit from further competitive reforms in the future, and the competitive benefits of the 1998 Act can be spread more widely. We in the Antitrust Division believe that the ocean shipping marketplace has the hallmarks of being one that can benefit, no less than other industries, from healthy competitive market forces.
Mr. HYDE. I thank you very much, Mr. Nannes.
The gentleman from Virginia, do you have any questions?
Mr. SCOTT. Mr. Chairman, I have some questions, but I think they will probably be answered by the other witnesses. I don't have any at this time.
Mr. HYDE. Very well, thank you.
Commissioner Won, I believe you conclude in your report and your testimony that, during the time period you investigated, there was no effective competition in the eastbound Pacific trade. Do you believe that antitrust immunity for carriers helps make that situation possible? Or, to put it another way, what would the situation have looked like if there had been no immunity? Do you believe that the Commission has adequate legal authority to deal with the situation, and, if not, what further legal authority do you need?
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Mr. WON. To answer the first question, I do believe that antitrust immunity contributed significantly to the situation, in which I conclude that there was effectively no competition in the eastbound Pacific trades during the period of the investigation. Had antitrust immunity not been granted on the carriers at that time, I still would have expected that prices would have increased, however, I would have expected the actions on the part of the individual carriers to have varied much more significantly than they were, where we saw a very uniform response to market conditions during the peak season.
Given that, obviously, the shippers would not have been faced with such increases that they were faced with, and they would have been in a better position to bargain for better rates among carriers who were not informed and sharing the same information as to the implications of that kind of rate discounting.
In terms of whether or not the agency has appropriate authority to deal with such abuses, I believe, as far as the letter of the law, that the law does provide sufficient avenues for the Commission to take action against these kinds of unreasonable anti-competitive behaviors. I think, ultimately, it depends on the individual commissioner's voting and making a determination that, when a situation such as this is presented to it, that a determination is made as to whether or not the behavior is unreasonable or not. I think that is the primary hurdle that needs to be taken. Statutorily, I do believe that the agency does have sufficient authority to deal with it.
Mr. HYDE. Thank you.
Page 58 PREV PAGE TOP OF DOC Chairman Creel and Commissioner Won, the report suggests that potential witnesses in the investigation were very fearful of business retaliation. We've run into the same fear in preparing for this hearing. As I understand the Shipping Act, even in the new era, the Commission is supposed to ensure a non-discriminatory common carrier type of system. If that is really enforced, business retaliation should not be possible. Neither the Commission nor the Congress can function properly if we can't obtain truthful testimony about what is happening. I ask you, Chairman Creel, what can the Commission do about this?
Mr. CREEL. Mr. Chairman, there are provisions in the act, in the previous act in 1984, and also under the amendments to that act, that address retaliatory situations. For example, if a carrier were to retaliate against a shipper, there is a section 10 action available. I have been very disturbed about those sorts of reports. Commissioner Won has informed us all of those reports. One of the reasons that the fact finding was structured the way it was, was to encourage shippers especially to come in and give us truthful testimony, either on the record or off the record, so that we would get to the bottom of this and determine two issues, whether there were individual violations, and also whether there was an abuse of the antitrust immunity.
I will be very vigilant, continue to be vigilant, about ensuring that there are protections for those that want to come in and give us information on this or any of the other responsibilities that we continue to have under the act.
Mr. HYDE. Commissioner Won, do you have anything to add to what the chairman has said?
Page 59 PREV PAGE TOP OF DOC Mr. WON. Yes. The problem of fear of retaliation, I think, is a very serious one, and a very difficult one for the Commission to deal with. What we have is a problem whereby a shipper may, in cooperating with the Commission or with the Congress, may not be able to get any kind of cargo space, especially in an economic situation such as this. The fact that, in a forum like TSA, a discussion agreement, if all members are aware that a particular shipper is, in effect, making trouble for the lines, it would be very easy for the carrier to pass that information around and put the shipper in a position where he is not able to get space on any carrier within that discussion group.
Those are the kinds of concerns that were communicated with us. From a very practical level, I empathize with them very deeply, and it is a very serious, serious problem. I don't know what the answer is to that situation.
Mr. HYDE. Well, I think you need swift remedy. You need some sanction to impose if you become convinced that this is true. I think you would have to investigate the charge, and I think you should have the resources to do that, and if not, we'd like to know about it so we can help provide you with those resources. Have a hearing and have some sanction. So, maybe you don't have adequate legislative resources to deal with this. I don't know. Think about it, anyway, because it is a problem. I know things are said and attitudes are conveyed that aren't necessarily evidentiary, but we all have to know what the score is and what the truth is, and this is an abuse.
Mr. CREEL. Mr. Chairman, if I could just add one thing there?
Mr. HYDE. Sure.
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Mr. CREEL. Clearly, if carriers were operating in a collusive manner to do this, we have authority under section 6(g) of the 1984 act to address the problem as being an unreasonable reduction in competition. As for individual actions, section 6(g) would not apply; we would have to go after them under section 10.
Mr. HYDE. Well, this committee is not a traffic cop, or anything like that. We're a legislative committee, but we're interested in this aspect of the problem, and we will cooperate with you and hope that you'll cooperate with us on any activity along this line.
Now, Chairman Creel, some have argued that the so-called discussion agreements have effectively replaced the conferences envisioned by the statute. Can you explain what discussion agreements are, and what their legal status is? Do they have the same antitrust immunity as the conferences?
Mr. CREEL. Mr. Chairman, a discussion agreement is different than a conference in that a conference can set a common rate, a common tariff rate, or a common rate outside the tariff. A discussion agreement cannot do that. However, discussion agreement members can discuss rates and voluntarily agree to charge the same rates, but they cannot be legally enforceable. There can't be any enforcement mechanism. The question then becomes, what is voluntary? These are some of the issues that we, and I personally, have been troubled by, and I think that the voluntary guidelines issue is something else that comes into play here when we raise these issues as to what is voluntary.
Page 61 PREV PAGE TOP OF DOC I would just say that the same authorities that we have under section 6(g) of the act would apply to addressing any anti-competitive behavior under those sorts of agreements as well. I think that we have to be a little more vigilant and determine that the actions are truly voluntary, and there is not any sort of enforcement mechanism.
Mr. HYDE. Very well. We have several more questions. We can submit them to you in writing, if that suits you, and ask you to respond in writing. There is more to be gone into with you three excellent witnesses. You've helped us a lot. We will be in touch and submit these questions in writing and assure you of our abiding interest in this topic and our willingness to be cooperative and helpful. Thank you very much. We really appreciate it.
[The information referred to follows:]
Hon. HAROLD J. CREEL, JR., Chairman,
|Congress of the United States,|
|House of Representatives,|
|Washington, DC, May 11, 1999.|
Federal Maritime Commission,
DEAR CHAIRMAN CREEL: Thank you for appearing before the Committee at last Wednesday's hearing on ''Antitrust Aspects of the Ocean Shipping Reform Act of 1998.'' Your testimony, as well as that of Commissioner Won and the other witnesses, was very helpful to the Committee.
Page 62 PREV PAGE TOP OF DOC As I mentioned at the hearing, there was not sufficient time to ask all of my questions. By this letter, I am transmitting some additional written questions for the record. Your prompt written response will further assist the Committee in its study of these issues.
In that regard, let me also take this opportunity to clarify a misimpression that I may have left at the hearing. Since the hearing, various press reports have suggested that I have resolved the question of the carriers' continued antitrust immunity in my mind and that I will therefore have no further interest in this topic. This suggestion apparently grows out of a brief comment I made at the end of the hearing.
All that I meant to convey by that remark was that I have no immediate plans to introduce legislation to repeal the antitrust immunity. As you have correctly surmised, I am willing to withhold judgment until we have sufficient time to see how the Ocean Shipping Reform Act of 1998 works in practice. After hearing the testimony of the carriers' representatives, I realize the problems that they face.
As I said at the hearing, we need a healthy shipping industry. I remain skeptical that the carriers' antitrust immunity contributes to the health of the industry. For that reason, I consider repeal of the immunity an open option that I will continue to evaluate as we move forward under OSRA. If immunity continues to undermine the health of the industry, as the allegations in Commissioner Won's report tend to show, then the Committee will have to take a hard look at the issue. At the end of the day, I want all of the interested parties, including the non-vessel owning common carriers and other freight intermediaries, to have the chance to compete fairly. Ultimately, my on any potential legislation will rest on the record as it develops under OSRA. Thus, despite the apparent misunderstanding of my remarks at the hearing, everyone involved in this industry should be aware that my interest in this matter is continuing and I will be monitoring developments closely.
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Again, I want to thank you for your appearance before the Committee. I look forward to working with you in the future.
cc: Hon. John Conyers, Jr.
QUESTIONS FROM CHAIRMAN HYDE
1. Has the Commission provided a copy of Commissioner Won's report to the Justice Department? If not, would you be willing to do so?
2. Can you tell us what enforcement steps the Commission has the authority to take in response to the abuses documented in Commissioner Won's report? And, without telling us anything that is not public information, can you also give us an update on what enforcement steps the Commission is taking in response to Commissioner Won's report? In particular, I believe that one petition has been filed asking for Section 15 relief. When will the Commission act on that petition?
3. Some have argued that so-called ''discussion agreements'' have effectively replaced the conferences envisioned by the statute. Can you explain what ''discussion agreements'' are, and what their legal status is? Do they have the same antitrust immunity as conferences?
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4. One of the traditional arguments in favor of the carriers' antitrust immunity is that all of our trading partners also have such immunity. I believe you made that argument in your testimony. If for some reason, the carriers' immunity suddenly disappeared, what do you think would happen internationally? What is your response to the claim that the existing antitrust immunity largely benefits foreigners at the expense of Americans? I understand that the European countries have not allowed discussion agreements. In light of that, doesn't this argument break down?
5. Apart from the international aspect, suppose the current antitrust immunity simply disappeared tomorrow. What do you think would happen in the market place?
Hon. HENRY J. HYDE, Chairman,
|Federal Maritime Commission,|
|Washington, DC, May 21, 1999.|
Committee on the Judiciary,
House of Representatives, Washington, DC.
DEAR CHAIRMAN HYDE: In response to your letter of May 11, 1999, enclosed please find answers to your additional written questions for the record.
If I can be of further assistance, please do not hesitate to contact me.
Page 65 PREV PAGE TOP OF DOCSincerely,
|Harold J. Creel, Jr., Chairman.|
1. Has the Commission provided a copy of Commissioner Won's report to the Justice Department? If not, would you be willing to do so?
No, the Commission has not provided a copy of Commissioner Won's report to the Department of Justice or any other person outside the Commission, except for the copies provided, at your request, to the Committee. Pursuant to commitments made in the course of the investigation, the Commission does not plan to distribute copies of the report to the Department of Justice or other persons outside the agency. The Fact Finding Investigation was conducted pursuant to the Commission's authority to investigate possible violations of the Shipping Act of 1984, which include non-adjudicatory investigative proceedings. In the course of that investigation, persons providing information and documents pursuant to subpoenas or other requests for information were specifically assured by the Investigating Officer that ''[a]ll of the documents received . . . will be treated as confidential and will be protected from disclosure to the extent permitted by law and Commission regulations, until such documents may be necessary to a public Commission, court or Congressional proceeding.'' Release of the report, the appendices of which contain a substantial number of supporting documents, would be inconsistent with Commissioner Won's commitment of confidential treatment.
2. Can you tell us what enforcement steps the Commission has the authority to take in response to the abuses documented in Commissioner Won's report? And, without telling us anything that is not public information, can you also give us an update on what enforcement steps the Commission is taking in response to Commissioner Won's report? In particular, I believe that one petition has been filed asking for Section 15 relief. When will the Commission act on that petition?
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The Commission has authority under sections 11 and 13 of the Shipping Act of 1984 to investigate violations of section 10 and other sections of the Act and Commission regulations, and to impose civil monetary penalties for any violations found. In addition, the Act authorizes the Commission to suspend carrier tariffs for up to one year for certain violations of section 10(b). And, if the Commission determines that an agreement, or activities conducted pursuant to an agreement, are substantially anti-competitive and are likely by a reduction in competition to result in an unreasonable increase in transportation cost or an unreasonable decrease in service, the Commission may seek injunctive relief in the U.S. District Court for the District of Columbia. Any or all of these powers ultimately may be used in connection with specific carrier activities initially investigated by Commissioner Won.
The Commission recently ordered that Fact Finding Investigation No. 23 be continued, as a means of securing additional evidence and information regarding specific instances of alleged abusive carrier behavior during the 1998 peak shipping season revealed in Commissioner Won's report. The continued investigation may be the basis for enforcement actions which prove warranted against individual: carriers for specific violations of section 10 of the 1984 Act. The Commission appointed the Director of the Bureau of Enforcement as Investigative Officer to continue the Fact Finding Investigation. We anticipate that further individual enforcement actions will be initiated as warranted based on the further investigation.
The Commission also initiated a show cause proceeding against the Asia-North America Eastbound Rate Agreement (''ANERA'') and its members involving their use in 1998 of service contract provisions under which some members participated in service contracts with shippers but ''opted out'' of the negotiated service contract rates, charging higher tariff rates for the transportation. Finally, the Commission will continue to actively monitor the impact of effective agreements, including the Transpacific Stabilization Agreement, on shippers and on carrier competition in the trade, even as the implementation of OSRA and other forces transform the landscape for ocean shipping in the Transpacific.
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A Petition filed by the Coalition for Fair Play in Ocean Shipping, on March 26, 1999, was published in the Federal Register with a Notice. inviting comments. The Petition, which requests the Commission to issue a section 15 Order to TSA and its members requiring them to file extensive information relating to service contracts and communications on service contracts, seeks no other specific relief. TSA filed both an Initial Reply and Reply, the latter filed on April 13, 1999. No other comments on the Petition have been received. The Petition is pending Commission action, and should be considered in the near future.
3. What are discussion agreements, and what is their legal status?
''Discussion agreements'' are agreements by carriers to discuss and possibly reach consensus on rates, charges, and other conditions of service on a nonenforceable basis. Such agreements may also provide for discussion of non-rate matters, such as sailings (e.g., frequency, routing, deployment).
Discussion agreements differ from traditional liner conferences in two respects: (1) they do not maintain a common freight tariff, so each member establishes its own prices in its own individual tariffs and service contracts; and (2) any agreement or consensus reached by the members is non-binding, so members have no legal recourse if other members fail to honor commitments. Conferences, in contrast, have common tariffs to which all members adhere (even independent action rates are published in the conference tariff, after a waiting period up to five days). Conferences often have policing bodies that can sanction members for non-compliance, while discussion agreements do not. In general, however, the two types of agreements can be very similar in structure and effects.
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Both conferences and discussion agreements are agreements to ''discuss, fix, or regulate transportation rates . . .'' under section 4 (a) of the Shipping Act of 1984, and are therefore immune from the antitrust laws, if filed with the Commission. They are both subject to FMC oversight, including the section 6(g-h) injunctive provisions. The two types are subject to the same monitoring and reporting requirements, and the Commission uses the same analytical tools for evaluating both types.
In practice, discussion agreements can differ from agreement to agreement. Some provide very little coordination of commodity rates, and seem to exist primarily as fora for standardizing surcharges, such as cost adjustments for fuel cost or currency shifts or terminal charges. Others are far more sophisticated, with information sharing networks to provide rapid feedback to individual lines (both from other agreement members and from discussion agreement analysts) on proposed pricing decisions.
I believe that the shift to discussion agreements has occurred in many of our trades because maintaining common tariffs is becoming less useful and more cumbersome for an industry that is moving more towards individually tailored service contract carriage. The need to process all rate actions through conference administrators, which maintain the central tariffs, presents an extra layer of administration to carriers' businesses. As more shippers demand individual service contracts, carriers seem to prefer the looser, more flexible structure of discussion agreements, which allows face to face negotiation, and rate structures that accommodate individual carriers different service strengths, business strategies and customer needs. Information technology has also moved common tariffs towards obsolescence. The advent of e-mail and other technologies allows carriers to use a process of ongoing dialogue and feedbackrather than setting common, static tariff pricesto moderate the industry's tendency to drive rates below costs.
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Despite their inherent flexibility, the move toward discussion agreements has not been entirely pro-competitive. Because discussion agreements are less rigid and disciplined than conference agreements, they have been able to attract a larger market share.
4a. What would happen internationally if carriers' immunity (from U.S. antitrust law) disappeared?
In my testimony, I pointed out that all of our major trading partners have some exemption or special treatment under their competition laws for liner shipping. In the days before the hearing, I was visited by a delegation representing thirteen major European maritime nations and Japan. They reiterated their ongoing interest in antitrust immunity, and the need for consultation and coordination if changes were to be made, to avoid legal conflicts. I cannot forecast every future conflict or problem that might arise, but I can point out a few potential scenarios.
First of all, I believe that, if we eliminated antitrust immunity, price cooperation would continue. There are already a number of international fora overseas that shipowners could use to perform discussion agreement-like functions. Most of these are private organizations; however, some, like China's Shanghai Shipping Exchange, actually have been established by foreign governments. Presumably, U.S. antitrust authorities would seek to investigate and prosecute this foreign-based cooperation, to the extent it affected U.S. commerce. However, such actions would seem to invite obstruction or retaliation from foreign authorities, as the U.S. regulators challenge foreign conduct that is not only legal, but actually encouraged in the countries where it takes place. This would disadvantage U.S. carriers in at least two ways. First, they would likely be excluded, or need to exclude themselves, from foreign-based discussion agreements, as they would be much more easily investigated and prosecuted by U.S. antitrust authorities. Second, U.S. carriers would be the natural targets for retaliation by foreign governments whose lines are being subjected to antitrust prosecution in the United States.
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The second potential international reaction is rate regulation. International shipping has thus far been refreshingly free of governmental interference in individual carriers' pricing decisions; neither the U.S. nor foreign regulators ''approve'' or '' disapprove'' the rates charged by commercial shipping companies. One long-standing argument in favor of antitrust immunity is that limited industry self-regulation is preferable to regulation by diverse national authorities. If the United States is eventually successful in imposing its antitrust regime in ocean shipping and eliminating any self-regulating structure the industry has adopted, we will likely see an increased call for laws in individual countries to prohibit shipping rates from dropping to noncompensatory levels during times of slack capacity, or moving too high when space is tight. If governments become involved in pricing, the potential for both legal conflicts and economic inefficiencies will increase markedly.
A third potential pitfall is subsidization and protectionism. Liner shipping already underperforms other modes of transport, in terms of financial returns. If the U.S. does eliminate industry cooperation, the number of loss-making lines will increase, prompting pressures for them to leave the market. Rather than an efficient market clearing, however, I believe the result will be intense pressure in capitals around the world for more support measures for ship operators, including increased tax preferences (like those recently put in place in the Netherlands and elsewhere in Europe), and protection from foreign activities for certain services or cargo types (like Brazil's cargo reservation arrangements). I believe that the carriers most successful in these political efforts (and those owned by foreign governments, like China's COSCO) will be the most likely to prevail in such a scenario.
The only way to prevent these international consequences is to continue working with our major maritime partners to build consensus for gradual pro-competitive improvements in shipping. For example, the Organisation for Economic Cooperation and Development (OECD) has been holding ongoing multilateral talks on competition policy in liner shipping, which has allowed the major industrialized nations to discuss and reach some understandings about, for example, the global development of carrier alliances and the emergence of individual contracting. I also know the Administration has worked very hard bilaterally with countries such as China and Thailand to ensure that their competition systems remain consistent with global norms. These sorts of efforts are necessary to head off conflicts and trade wars that could harm U.S. carriers, importers and exporters.
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4b. What is your response to the claim that the existing antitrust immunity largely benefits foreigners at the expense of Americans?
To the extent ocean carriers, most of which are foreign, receive antitrust immunity, and NVOCCs, many of which are U.S., do not, it could be said that some U.S. interests are disadvantaged by immunities afforded their foreign competitors and service providers, at least in the short term. However, by encouraging reinvestment in shipping and intermodal operations, antitrust immunity has ensured that U.S. importers and exporters have enjoyed consistently improving, readily available and efficient shipping services, at rates that have declined over the long term. The system seems to have benefitted, rather than operated at the expense of, U.S. importers and exporters. As I pointed out in my testimony, carriers are under constant pressure to cut costs. But even as carriers become more efficient, they continue to yield relatively low returns, and certainly not monopoly profits, for their shareholders. Therefore, I believe that it is not realistic to suggest that foreign shipping lines are being enriched ''at the expense'' of their U.S. customers.
As for American ocean carriers, I believe that the stabilizing effects of antitrust immunity benefit all shipping lines, both U.S. and foreign. As I noted earlier, eliminating it would certainly harm U.S. lines, possibly more than it would harm foreign carriers.
4c. I understand that the European countries have not allowed discussion agreements. In light of that, doesn't this argument break down?
As noted in my testimony, many countries have somewhat different technical requirements for cooperation. For example, U.S. law bars closed-membership conferences. In Europe, the competition exemption was based on the U.N. Convention on a Code of Conduct for Liner Conferences (which formalized international recognition of carrier self-regulation, but was not ratified by the U.S.), so it included a provision that exempt agreements have common tariffs. Thus, the agreements in our Atlantic trades still have common tariffs, and are therefore technically conferences, but allow independent negotiation and contracting, making them closely resemble the discussion agreements in our Pacific trades. I do not see that these technical differences undermine any broader arguments about international antitrust immunity.
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5. Apart from. the international aspect, suppose the current antitrust immunity simply disappeared tomorrow. What would happen in the market place?
As I noted above, the potential results will depend in large part on what foreign governments choose to do. Some points are worth noting, however.
Antitrust immunity facilitates two broad categories of carrier concerted action. The first is operational cooperation, i.e., the formation of vessel sharing alliances and consortia, and cooperative ventures involving inland transport, information systems, or equipment interchange. The second is price coordination, through conferences and discussion agreements.
If antitrust immunity were to disappear, the status of the operational agreements and alliances would be unclear. I am concerned that, if this issue were not resolved beforehand, the alliances would either be forced to disintegratethereby eliminating efficiencies, disrupting sailing schedules and shoreside operations, and raising costs and degrading service for usersor would evolve into full-scale mergers, leading to increased market concentration and the Possible shifting of more U.S. carriers to foreign ownership.
For the reasons identified by Congress when it passed the 1984 Act, I believe that if price coordination were no longer possible, we would see more carriers pricing below their costs in efforts to fill ships in times of excess capacity. Over the long term, carriers' returns would decline even below current standards, and carriers would be less likely to invest in vessels and terminals. Service could suffer, to the detriment of international trade and U.S. exports. Carriers would leave less profitable trades or cease operations altogether; the consolidation of the industry would quicken, and the decline of the U.S. merchant fleet could be accelerated, as foreign government owned or supported operators capture market share. Thus, the long term effects on shippers in such a scenario could be quite detrimental.
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Hon. DELMOND WON, Commissioner,
|Congress of the United States,|
|House of Representatives,|
|Washington, DC, May 19, 1999.|
Federal Maritime Commission,
DEAR COMMISSIONER WON: Thank you for appearing before the Committee at the May 5 hearing on ''Antitrust Aspects of the Ocean Shipping Reform Act of 1998.'' Your testimony, as well as that of the other witnesses, was very helpful to the Committee.
As I mentioned at the hearing, there was not sufficient time to ask all of my questions. By this letter, I am transmitting some additional written questions for the record. Your prompt written response will further assist the Committee in its study of these issues.
Again, I want to thank you for your appearance before the Committee. I look forward to working with you in the future.
cc: Hon. John Conyers, Jr.
Page 74 PREV PAGE TOP OF DOCQUESTIONS FROM CHAIRMAN HYDE
1. Can you tell us what enforcement steps the Commission has the authority to take in response to the abuses documented in your report? Does Section 6(g) of the Shipping Act provide an adequate remedy for those types of abuses? Can shippers obtain monetary relief if a section 6(g) violation is found? And, without telling us anything that is not public information, can you also give us an update on what enforcement steps the Commission is taking in response to your report? In particular, I believe that one petition has been filed asking for Section 15 relief. When will the Commission act on that petition?
2. Some have argued that so-called ''discussion agreements'' have effectively replaced the conferences envisioned by the statute. Can you explain what ''discussion agreements'' are, and what their legal status is? Do they have the same antitrust immunity as conferences?
3. One of the traditional arguments in favor of the carriers' antitrust immunity is that all of our trading partners also have such immunity. I believe you made that argument in your testimony. If for some reason, the carriers' immunity suddenly disappeared, what do you think would happen internationally? What is your response to the claim that the existing antitrust immunity largely benefits foreigners at the expense of Americans? I understand that the European countries have not allowed discussion agreements. In light of that, doesn't this argument break down?
4. Apart from the international aspect, suppose the current antitrust immunity simply disappeared tomorrow. What do you think would happen in the market place?
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Hon. HENRY J. HYDE, Chairman,
|Federal Maritime Commission,|
|Office of the Commissioner,|
|Washington, DC, June 4, 1999.|
Committee on the Judiciary,
House of Representatives, Washington, DC.
DEAR CHAIRMAN HYDE: Enclosed for your review and consideration are my answers to your additional written questions transmitted to me by letter dated May 19, 1999.
In order to avoid being redundant, I have referred to Chairman Creel's answers to the questions where appropriate. I have, however, supplemented those responses with my own views on the issues.
My comments are intended to be brief responses to complex questions and issues. Should you wish to further pursue any of the ideas presented, please do not hesitate to contact me. I would be most happy to assist you in any way I can.
|Delmond J. H. Won, Commissioner.|
Page 76 PREV PAGE TOP OF DOCEnclosures
1. Can you tell us what enforcement steps the Commission has the authority to take in response to the abuses documented in your report? Does Section 6(g) of the Shipping Act provide an adequate remedy for those types of abuses? Can shippers obtain monetary relief if a Section 6(g) violation is found? And, without telling us anything that is not public information, can you also give us an update on what enforcement steps the Commission is taking in response to your report? In particular, I believe that one petition has been filed asking for Section 15 relief. When will the Commission act on that petition?
Chairman Creel provides a detailed response to most of this question in his reply to his question No. 2 dated May 21, 1999. However, the question directed to me includes two additional parts not addressed to or by Chairman Creel. Specifically, these parts are:
(A) Does Section 6(g) of the Shipping Act provide an adequate remedy for those types of abuses (documented in my report); and
(B) Can shippers obtain monetary relief if a Section 6(g) violation is found?
Sections 6(g) and 6(h) of the Shipping Act simply provide for a process by which the Commission may seek injunctive relief from the courts against an agreement which has been determined by the Commission to be unreasonably anticompetitive. Whether or not this remedy is adequate is subject to argument.
In the event the Commission prevails in a Section 6(h) injunction proceeding, the outcome is only a cessation of the anticompetitive behavior. Sections 6(g) and 6(h) do not provide for the award of monetary relief to the shippers, either in the form of reparations in an action before the Commission or in an action for treble damages in court. Nor do sections 6(g) and 6(h) provide authority for the Commission to assess civil penalties should an agreement be determined to be unreasonably anticompetitive. Reparations can be awarded and civil penalties can be assessed by the Commission only when violations of the Act other than section 6(g) are proven.
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While there, may be many in the industry who believe that the cessation of ''abusive'' behavior is adequate, there are probably just as many who feel that the remedy for such cases should go farther and provide for substantial monetary penalties.
My own personal leanings are in favor of making the Commission the initial forum for determining whether or not certain behaviors are unreasonable or excessively anticompetitive. This change should then be accompanied by the authority to assess monetary penalties and/or to provide shippers the right to collect damages if violations of section 6(g) are found. Under existing law, there may be a tendency for the beneficiaries of antitrust immunity to take the attitude that there is little risk in engaging in potentially unreasonable behavior because: (1) the Section 6(g)/6(h) process can be lengthy; (2) significant gains can be had during the length of time the process requires; and (3) even if the Commission prevails and the behavior is declared unlawful and stops, the gains remain.
The possibility of monetary damages and/or civil penalties would, I believe, help discourage such behavior and attitudes.
2. Some have argued that so-called ''discussion agreements'' have effectively replaced the conferences envisioned by the statute. Can you explain what ''discussion agreements'' are, and what their legal status is? Do they have the same antitrust immunity as conferences?
Chairman Creel's response to his question No. 3 dated May 21, 1999, provides a detailed technical description of discussion agreements.
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The Shipping Act of 1984 refers in section 4 to agreements among ocean common carriers to ''discuss'' rates, space, and conditions of service. Discussion agreements, in their modem form, apparently came into existence in the late 1980's under the guise of ''cooperative working arrangements'' as provided for in section 4.
While Chairman Creel presents valid pro-competitive reasons as to why discussion agreements are displacing conferences, I believe that it is important for the Commission and your Committee to be aware of the possible anticompetitive aspects of discussion agreements in order to arrive at balanced judgements.
Until recently, some degree of competition between carriers was assured by the simple fact that independents operated outside the confines of a conference. While conferences served as price leaders, the independents were free to deviate without pressure from ''fellow members'' based on their own assessment of the marketplace. In theory, competition between conferences and independents was insured because each had its own individual collection of market information which would result in different assessments and courses of action with respect to prices and services.
If one accepts the premise that one of the key elements of competition is the fact that competitors have differing assessments of the marketplace and hence different reactions to a given market opportunity, it becomes clear that discussion agreements, because of the virtually unlimited range of issues which can be shared among members, and modem communication systems which make the sharing of that information almost instantaneous, have the potential to significantly curtail competitive forces among their members. When every member of a discussion agreement has identical information as to market conditions, market opportunities and consequences of a given course of action, there is no competition. Of course, the risk of this potential lack of competition increases in direct relationship with the market share of a given discussion agreement.
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It is my belief that this virtual elimination of marketplace uncertainty is the magnet for carriers to join discussion agreements and is also why the market share of discussion agreements can easily grow to the 85 to 90 percent range it is today in the Transpacific and South American trades.
3. One of the traditional arguments in favor of the carriers' antitrust immunity is that all of our trading partners also have such immunity. I believe you made that argument in your testimony. If for some reason, the carriers' immunity suddenly disappeared, what do you think would happen internationally? What is your response to the claim that the existing antitrust immunity largely benefits foreigners at the expense of American? I understand that the European countries have not allowed discussion agreements. In light of that, doesn't this argument break down?
4. Apart from the international aspect, suppose the current antitrust immunity simply disappeared tomorrow. What do you think would happen in the market place?
With respect to questions 3 and 4, 1 would initially refer you to the responses of Chairman Creel to his questions 4 and 5 dated May 21, 1999, for what I would agree are possible scenarios in the event antitrust immunity disappeared.
It is extremely difficult to predict with a high degree of certainty what the outcome of such a drastic measure would be because such a prediction would necessarily require making assumptions as to what the reactions of our trading partners would be. As a corollary, these assumptions would require that we make additional assumptions as to the level of priority each of our trading partners place on the strategic importance of their respective national fleets.
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Ultimately, I agree with Chairman Creel's conclusion that unilateral action on the issue of antitrust immunity is probably not a wise move and could carry significantly negative consequences.
However, the point that all other countries provide antitrust immunity to their respective ocean carriers needs some elaboration. The grant of immunity aside, I believe that it's also important to recognize that there are few, if any, other countries that have the same kinds of antitrust laws that exist in the U.S., in order to assess more comprehensively the consequences of the removal of antitrust immunity.
Whereas the U.S. has a body of law which provides the framework for acceptable commercial behavior and subsequently grants immunity from this body of law to ocean common carriers, most other countries have no similar set of guidelines regarding commercial behavior. In view of our antitrust laws, the U.S. knows that absent immunity, certain behavior would be illegal. With fewer behavioral guidelines, other countries simply accept more practices as commercially acceptable and fewer practices as illegal when compared to the U.S.
When viewed in this manner, the Chairman's point is still valid. Removal of antitrust immunity in U.S. ocean transportation may have a greater impact upon the few remaining U.S. carriers than upon their foreign competitors. While U.S. antitrust laws would then apply to both U.S. and foreign carriers (to the extent that their actions have a direct and substantial effect on U.S. commerce), enforcement of these laws would be far more difficult against foreign carriers which may retain their records abroad, and which may not be in violation of the laws of their own nations for the practices challenged by the U.S.
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Moreover, the absence of antitrust laws (as opposed to antitrust immunity), and the concomitant absence of an antitrust philosophy, in many countries with which we trade would exacerbate the difficulties of attempting to reach consensus with those trading partners on an international regime under which ocean shipping might be governed by U.S.-style antitrust laws.
That being said, I therefore believe that the more relevant question at this time would be what can be done to preserve the benefits of antitrust immunity while minimizing the potential for unreasonably anticompetitive or market distorting behavior?
On the benefit side, it has been said that antitrust immunity allows carriers to form alliances, and to share vessels and space, which allow carriers to expand the scope of service with little or no added investment. To the extent that antitrust immunity is necessary to form such alliances, I could wholeheartedly support this aspect of immunity. The downside of antitrust immunity of course is the potential for unreasonable increases in transportation costs or unreasonable decreases in transportation services resulting from a lack of competition.
While I concede that the task would be difficult, I believe that antitrust immunity should be limited somehow only to activities which clearly benefit the shipping public and the carriers by increasing services and efficiencies.
Various schemes limiting antitrust immunity have been known to the Commission for some time. The primary one affecting U.S. trades is the European Commission's body of competition rules. As I understand that system, it is founded on the 1986 Treaty of Rome which established competition rules and certain exceptions, including one for ocean shipping conferences which are defined narrowly to exclude any ratemaking or rate discussion agreements other than a traditional conference with a common tariff and uniform rates. It is because of this definition that discussion agreements are not permitted in European trades. The EC has also promulgated a set of rules under which consortia or alliances are permitted, but only with certain limitations, including a ceiling on market share.
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Another proposal which has received attention over the past several years is one favored by Dr. Dave Butz, currently of the University of Michigan. Dr. Butz's scheme limits the potential for market power abuse by limiting the market share of conferences. In doing so, there is no possibility that any conference/rate agreement would have sufficient market share to exercise monopolistic power.
One means of limiting the anticompetitive impact of concerted activity was considered by the Commission earlier this year, when we were in the process of establishing the implementing rules for OSRA. A set of rules was proposed which would have limited the scope of so-called ''voluntary guidelines'' for service contracts which could have been agreed upon by the members of a conference or discussion agreement. I supported the proposed rules because I believed that they would have gone a long way in preventing the kinds of behavior described in my report and therefore would have increased the level of competition among carriers. The proposed rules, however, were not adopted because the majority of the Commission concluded that OSRA did not authorize the proposed limitations on the scope of voluntary guidelines. Thus, Congressional clarification of the voluntary guidelines authority could be useful.
There may be other ways which could be developed to limit antitrust immunity that would help make the industry a more market driven one as provided for in OSRA's policy declaration. After all, a market driven environment implies that there is competition among both buyers and sellers. For example, ocean carriers could be prohibited from discussing or agreeing on prices, while being allowed to continue efficiency enhancing agreements, such as asset sharing. This action might avoid some of the conflicts that would be encountered with our trading partners by a complete removal of antitrust immunity.
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Another option for retaining the benefits of antitrust immunity while avoiding its problems would be to enhance the power of shippers and the FMC to counteract ocean carriers' ability to distort market forces to their advantage. The only authority currently available to address classic anticompetitive abuses (unreasonable increases in transportation costs or unreasonable reductions in service levels) is found in sections 6(g) and 6(h) of the Shipping Act. Not only is the Commission's authority limited under those sections, as described above, but third parties, including shippers who may be harmed by the anticompetitive practices, are precluded from bringing an action under those sections, and even from intervening in an action brought by the Commission. Thus, the balance under the Shipping Act is currently tilted in favor of ocean carriers, and could be leveled without doing any real violence to that system.
Greater legislative clarity with respect to the section 6(g) criteria for identifying unreasonably anticompetitive activity could also be beneficial. The current statutory standards of 6(g) are open to a variety of interpretations. Also, as noted above, the procedures and remedies could be enhanced, such as to make the FMC the forum for an initial determination of whether an agreement is excessively anticompetitive, rather than making the agency a plaintiff in an injunction action with the burden of persuading a district court to provide relief.
Finally, it should be noted that, while antitrust immunity was retained by OSRA amendments to the Shipping Act, OSRA also included some checks and balances meant to curtail the effects of that immunity. Independent action by conference members on tariff matters is now authorized after 5 days' notice to the conference, as opposed to the previous 10 days' maximum notice. Conferences may no longer dictate service terms and procedures.
Page 84 PREV PAGE TOP OF DOC However, while the OSRA provisions may check the power of conferences, they have little if any application to the methods used by discussion agreements to stifle competition. Therefore, the above suggestions for additional restrictions on concerted carrier activities, such as caps on market shares, or additional protections against unreasonable and discriminatory behavior stemming from such activities, should be considered.
Mr. HYDE. Our second panel consists of eight private sector witnesses who represent various segments of the shipping industry.
Our first witness will be Mr. Ronald Jacobsen, vice president of Northstar Drawback Consultants. Mr. Jacobsen is a licensed United States custom house broker, and he's been active in the international trade industry for more than 20 years. He is also an adjunct faculty member at William Rainey Harper College. He is currently serving his third term as president of the Customs Brokers and Foreign Freight Forwarders Association of Chicago, and he appears here today on behalf of that organization.
Our next witness is Mr. Gary Winstead, president of American Heritage International Forwarding. Mr. Winstead attended North Carolina State University before entering the transportation business. He has wide experience in the field working for CF Ocean Service, Air Express International, and Conway Southern Express. In 1993, he founded American Heritage, where he currently serves as president.
Our next witness is Mr. Andrew Danas, assistant general counsel of the American Institute for Shippers' Associations. Mr. Danas is a graduate of the University of Connecticut and the George Washington University School of Law. He's worked for the American Association of Railroads, has engaged in the private practice in law, and has published numerous articles in the transportation law field.
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Our next witness is Mr. Arnold Kamler, president and chief executive officer of Kent International, Inc. Mr. Kamler is a graduate of the American University, and after graduating, he joined Kent, his family's business, and he's been its president for more than 20 years. During that time, he's been active in a number of business and community organizations.
Our next witness is Mr. John Clancey, the president and chief executive officer of Sea-Land Service. Mr. Clancey is a graduate of Emporia State College and the Harvard University Advanced Management Program. After a tour in the Marine Corps, he joined Sea-Land in 1970, and he's been with the company ever since. He took his current position in 1991.
Our next witness is Mr. Timothy Rhein, president and chief executive officer of APL, Limited. Mr. Rhein is a graduate of the University of Santa Clara, and has done graduate work at the College of William and Mary. After a tour in the Army, he began a lengthy career in the shipping business, and has been with APL since 1983, and took his current job in 1995.
Our next witness is Mr. Hugh Welsh, deputy general counsel for the Port Authority of New York and New Jersey. Mr. Welsh is a graduate of St. Peter's College and the Rutgers University Law School. He is a decorated Army veteran, serving with distinction in Vietnam. During his time at the Port Authority, he's represented it in a variety of Congressional and international forums. He appears here today on behalf of the American Association of Port Authorities.
Finally, we have Mr. Mark Kadar, a vice president of Mercer Management Consulting. Mr. Kadar has three degrees from Yale University, as well as a law degree from Harvard. He has extensive business experience in the transportation industry, working at Hapag-Lloyd, the Rowan-Berger Group, and Behman Company, before taking his current position.
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This is a very distinguished line-up. You gentleman can understand our hope and expectation that you can confine your remarks to approximately 5 minutes. We're not going to cut anybody off in mid-sentence or mid-phrase, but we would like to leave some time for questions, and finish at a reasonable hour. I want to assure you that all of your testimony, all of your statements, will be digested and will be given significant consideration. Mr. Jacobsen.
STATEMENT OF RONALD JACOBSEN, VICE PRESIDENT, NORTHSTAR DRAWBACK CONSULTANTS, LTD. ON BEHALF OF THE CUSTOMS BROKERS AND FOREIGN FREIGHT FORWARDERS ASSOCIATION OF CHICAGO
Mr. JACOBSEN. Thank you, Mr. Chairman, Congressman Conyers, and members of the committee. On behalf of our membership
Mr. HYDE. Would you pull the mike closer to you?
Mr. JACOBSEN. Closer? Okay.
Mr. HYDE. Thanks.
Mr. JACOBSEN. Thanks. On behalf of our membership, let me first thank you for providing the Chicago Forwarders and Brokers Association this opportunity to testify before the House Judiciary Committee. It is, indeed, an honor and a pleasure to appear before the Judiciary Committee, as you consider various antitrust aspects of OSRA. Although I am here today in my capacity as president of the Chicago Association, our association is also a member of the National Customs Brokers Association of America, and Forwarders, which supports our testimony and appearance before the Judiciary Committee. I would also like to take this opportunity to acknowledge that the comments that I express here today not only represent the views of the Chicago Association, but also the National Association, as well as affiliated associations and sister organizations throughout the United States, including Detroit, Boston, New York, and others.
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Simply put, the words, experience, and concerns raised here today before your committee are truly reflective of a national view, from Chicago to Boston to South Florida to Northern and Southern California, and from Washington State to Texas.
I will share some of their experiences with you while you consider the issue of antitrust immunity in the context of the steamship industry in international commerce. We believe our commentary will raise questions with you, such as: Who are the real beneficiaries of this immunity? Has the conference system of price-setting, as it has developed, outlived its usefulness to the American shipping public? In fact, it is outright detrimental to the American shipping public? Does OSRA outright discriminate against ocean transportation intermediaries?
We will also ask you, has the new legislation, OSRA, only 5 days after its implementation, already proven itself to be devastating to the American shipping public by the workings of what appear to be super rate-making bodies, or conferences, which are discussed as talking agreements?
These are all serious questions which will lead to the ultimate question, why antitrust immunity to ocean carriers, the vast majority of which are not American, and where is the benefit to the United States?
I cannot stress the importance of these hearings at this time to an industry that is so vital to a strong, vibrant, and healthy national economy. Indeed, ocean shipping impacts the lives of all of us, especially your constituents, Mr. Chairman, and Congressman Conyers, and the constituents of others members of the committee that are located, not only near the great ports of this country, but also at key inland ports that handle cargo to and from our major manufacturing and distribution centers.
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Before proceeding to relate some of the steamship company abuses of antitrust immunity, let me briefly describe what roles ocean transportation intermediaries play in international trade. Although our industry is linked in so many vital ways to international trade, the average person knows little or nothing about the essential services that our membership provides. Our members include ocean freight forwarders who traditionally have provided much needed services to small and medium sized exporters and importers, such as preparing and processing export declarations, booking, arranging and confirming cargo space on vessels, preparing and processing ocean bills of lading, coordinating the movement of shipments from origin to vessels, and providing expert advice to exporters concerning letters of credit, and other documentation, licenses or inspections, applicable to various shipments.
It is well documented that forwarders are the very catalysts that bring small and medium sized domestic manufacturers to export for the very first time, providing the expertise that gets the goods in the international marketplace. Freight forwarders, in many cases, become the traffic department of many small and medium sized exporters and importers.
Another type of ocean transportation intermediary is the non-vessel operating common carrier. These are intermediaries that provide transportation services, but do not own the actual vessels by which the transportation is provided. In effect, the NVOCCs enter into shipping agreements, usually through service contracts with the vessel operators, and agree to provide a certain amount of volume to the carrier in exchange for reduced rates that are then offered to the general public. It is in this way that small and medium sized shippers are able to obtain shipping rates that they would not be able to do so otherwise, directly from the steamship companies. Again, NVOCCs have traditionally met the needs and interests of smaller importers and export companies that are engaged in international trade activities, serving as an essential component to the overall transportation industry.
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In your district alone, Mr. Chairman, there are over 350 NVOCCs and freight forwarders that provide these services. These companies employ as few as 10 employees and some, in fact, are in the hundreds. In short, thousands of employees handle tens of thousands of maritime containers in and out of these districts. The ocean transportation intermediary is a vital segment of the shipping industry.
Now, Mr. Chairman, and committee members, I would like you to hear from these intermediaries from your districts, through me. These are their experiences, which bring us here.
Mr. Chairman, consideration of the carriers' antitrust immunity is prudent and ripe due to the discriminatory and predatory collective actions which the lines have taken in various trade lanes, in particular, the Asia-to-U.S. routes on the Pacific, on the eve of, and in anticipation of May 1st, OSRA. All members of the committee are aware of the current Asian economic crisis, which has resulted in an exacerbated trade imbalance between the U.S. and our Pacific trading partners. The steamship lines, operating under the collective umbrella of their discussion agreements, the TSA, seized upon the unique economic conditions of the Pacific to discriminate against NVOCCs, small and medium shippers, and shippers' associations.
FMC Commissioner Won did an outstanding job earlier in the hearing by providing testimony about the findings of his investigation. To better understand the gravity of this situation, I would like to share with you some real-life experiences of our members, the importing clients of our members, and the membership of affiliated sister organizations. These are anecdotes which build upon what Commissioner Won already described happened last year in the Far East inbound trade lanes. This is what is happening as we speak. Services contracts were just completed in the trade lane on May 1, and the saga from last year, described by Commissioner Won, clearly continues.
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Keeping this context of the discussion agreements in mind, the following are examples related to me either directly or indirectly, but always with the identity of the ocean transportation intermediary, shippers, or shipper groups involved. I believe the following to be true conditions, as least in the Far East trade lanes. I would also provide an overview of the actions that were taken last year by carriers against NVOCCs in the Far East trades.
During last year's peak shipping season on the Pacific, NVO cargo was singled out for rejection, reduction, and/or increases by most of the carriers. This collective action was taken under the TSA issued directives and so-called voluntary guidelines. In the Won Report Summary, the commissioner states that NVOCCs, ''were also subjected to space discrimination, sample excerpts from carrier documents included currently only service contract accounts are getting space, and all tariff and NVO bookings are being rejected. All existing NVO contracts will be fully implemented at the peak season surcharge of $300, such that those unwilling to accept or hesitate a little will definitely not be able to get space for the next 2 months. And, because of the tight space, NVO shipments are the first to go.''
Voting of service contracts. NVOCCs, last year, in the Chicago area, as well as California and other locations, essentially the entire country, were told by TSA members that their contracts were no longer valid because the minimum amount of cargo, as agreed to be shipped, had been completed. Traditionally, carriers and shippers, including NVOs, have continued to utilize the service contract for their transportation needs throughout the entire duration of a contract
Mr. HYDE. Mr. Jacobsen, I hate to cut you off, but
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Mr. JACOBSEN. I knew you would,
Mr. HYDE. I know you accommodated us by going very fast[Laughter.]
Mr. JACOBSEN. Yes, I did.
Mr. HYDE. But, we will read carefully the balance of your statement and re-read what you've told us. I appreciate it, but we have other witnesses.
Mr. JACOBSEN. No problem. If you have any questions
Mr. HYDE. Thank you, sir.
Mr. JACOBSEN. Thank you.
[The prepared statement of Mr. Jacobsen follows:]
PREPARED STATEMENT OF RONALD JACOBSEN, VICE PRESIDENT, NORTHSTAR DRAWBACK CONSULTANTS, LTD. ON BEHALF OF THE CUSTOMS BROKERS AND FOREIGN FREIGHT FORWARDERS ASSOCIATION OF CHICAGO
Mr. Chairman, Congressman Conyers, and Members of the Committee, on behalf of our membership, let me first thank you for providing the Chicago Freight Forwarders and Brokers Association, Inc. (the ''Association'') this opportunity to testify before the House Judiciary Committee. It is indeed an honor and a pleasure to appear before the Judiciary Committee as you consider various antitrust aspects of the ''Ocean Shipping Reform Act of 1998'' (the ''Reform Act'' or ''OSRA''). Although I am here today in my capacity as President of the Chicago Association, our association is a member of the National Customs Brokers and Forwarders Association of America, Inc. (''National Association''), which supports our testimony and appearance before the Judiciary Committee. I would also like to take this opportunity to acknowledge that the comments that I express here today not only represent the views of the Chicago Association, but also the National Association, as well as other affiliated regional sister organizations throughout the United States, including those from Detroit, Boston, and New York. Simply put, the words, experiences, and concerns raised here today before your Committee are truly reflective of a national viewfrom Chicago to Boston to South Florida to Northern and Southern California, from Washington State to Texas.
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I will share some of their experiences with you while you consider the issue of antitrust immunity in the context of the steamship industry in international commerce. We believe our commentary will raise questions with you such as: Who are the real beneficiaries of this immunity? Has the conference system of price setting, as it has developed, outlived its usefulness to the American shipping public? In fact, is it outright detrimental to the American shipping public? Does OSRA outright discriminate against Ocean Transportation Intermediaries? We will ask you also: Has the new legislation, the Ocean Shipping Reform Act of 1998, only five days after its implementation, already proven itself to be devastating to the American shipping public by the workings of what appear to be ''super rate-making bodies, or conferences, disguised as ''talking agreements?'' These are all serious questions which will lead to the ultimate question: Why antitrust immunity to ocean carriers, the vast majority of which are not American? Where is the benefit to the United States?
I can not stress the importance of these hearings, at this time, to an industry that is so vital to a strong, vibrant, and healthy national economy. Indeed, ocean shipping impacts the lives of all of us, especially your constituents Mr. Chairman, and Congressman Conyers, and the constituents of other Members of the Committee, that are located not only near the great ports of this country, but also at key inland points which handle cargo to and from our major manufacturing and distribution centers.
Before proceeding to relate some of the steamship company abuses of antitrust immunity, let me briefly describe what roles Ocean Transportation Intermediaries play in international trade. Although our industry is linked in so many vital ways to international trade, the average person knows little or nothing about the essential services that our membership provides. Our members include ''ocean freight forwarders,'' who traditionally have provided much-needed services to small and medium-sized exporters and importers, such as preparing and processing export declarations; booking, arranging and confirming cargo space on vessels; preparing and processing ocean bills of lading; coordinating the movement of shipments from origin to vessels, and providing expert advice to exporters concerning letters of credit, other documents, and licenses or inspections, applicable to various shipments. It is well documented that forwarders sometimes are the very catalysts that bring small and medium sized domestic manufacturers to export for the very first time, providing the expertise that gets goods in the international marketplace. Freight forwarders, in many cases, become the ''traffic department'' of many small and medium-sized exporters and importers.
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Another type of ocean transportation intermediary is the ''non-vessel-operating common carrier'' (''NVOCC''). These are intermediaries that provide transportation services but do not own the actual vessels by which the ocean transportation is provided. In effect, NVOCCs enter into shipping arrangements, usually through service contracts with the vessel operators, and agree to provide a certain amount of volume to the carrier in exchange for reduced rates that are then offered to the general shipping public. It is in this way that small and medium sized shippers are able to obtain shipping rates that they would not be able to otherwise obtain directly from steamship companies. Again, NVOCCs have traditionally met the needs and interests of smaller import and export companies that are engaged in international trade activities, serving as an essential component of the overall ocean shipping industry. In your district alone, Mr. Chairman, there are over 350 NVOCCs and freight forwarders that provide these types of services. These companies employ as few as ten employees and some employ in the hundreds. In short, thousands of employees from your district handle tens of thousands of maritime containers in and out of your district each year. The ocean transportation intermediary is a vital segment of the shipping industry.
Now, Mr. Chairman, and Committee members, I would like you to hear from these intermediaries from your districts through me. These are their experiences, which bring us here.
CARRIERS ABUSES OF ANTITRUST IMMUNITY.
Mr. Chairman, consideration of the carrier's antitrust immunity is prudent and ripe due to the discriminatory and predatory collective actions which the lines have taken in various trade lanes, in particular the Asia-to-US routes on the Pacific on the eve of, and in anticipation of May 1, the first day of OSRA. All members of the Committee are aware of the current Asian economic crisis, which has resulted in an exacerbated trade imbalance between the United States and our Pacific trading partners. The steamship lines, operating under the collective umbrella of their ''discussion agreement'', the Trans Pacific Stabilization Agreement (''TSA''), seized upon the unique economic conditions of the Pacific to discriminate against NVOCCs, small and medium-size shippers, and shippers' associations. FMC Commissioner Won did an outstanding job earlier in the hearing by providing testimony about the findings of his investigation. To better understand the gravity of this situation, I would like to share with you some real life experiences of our members, the importing clients of our members, and the membership of affiliated sister organizations. These are anecdotes which build upon what Commissioner Won already described happened last year in the Far East inbound trade lanes. This is what is happening now as we speak. Service contracts were just completed in that trade lane on May 1, and the saga from last year described by Commissioner Won clearly continues.
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Keeping this context of the ''discussion agreements'' in mind, the following are examples related to me either directly or indirectly, but always with the identity of the ocean transportation intermediary, shippers or shipper groups involved. I believe the following to be true conditions, at least in the Far East trade lanes. I also will provide a brief overview of the actions that were taken by carriers last year against NVOCCs in the Far East trades, as were found in the Won Report Summary.
Blatant Discrimination against NVOCCs and Smaller Shippers: During last year's peak shipping season on the Pacific, NVOCC cargo was singled out for rejection, reduction, and/or increases by most carriers. This collective action was taken under TSA-issued directives and so-called ''Voluntary Guidelines.'' In the Won Report Summary, the Commissioner states that NVOCCs ''were also subjected to space discrimination . . . [s]ample excerpts from carrier documents included: 'Currently only service contract accounts are getting space . . . and all tariff and NVOCCs bookings are being rejected.'; 'All existing NVOCC [contracts] will be fully implemented [at] the US $300 Peak Season Surcharge . . . such that those unwilling to accept or a little hesitate will definitely not be able to get any space for the rest of the next two months.'; 'And because of the tight space problem, NVO shipments is (sic) always the first once (sic) to go.' '' (emphasis added).
Voiding of Service Contracts: NVOCCs last year in the Chicago area, as well as in California, New York, Boston, South Florida, essentially the entire country, were told by TSA members that their contracts were no longer valid because the minimum amount of cargo as agreed to be shipped had been completed. Traditionally, carriers and shippers, including NVOCCs, have continued to utilize a service contract for their transportation needs throughout the entire duration of a contract, regardless of the volume shipped at any given time during the year. The carriers' actions last year resulted in termination of valid contracts in the middle of the peak shipping season and forced NVOCCs to take the higher rates imposed on them by the shipping lines without any true alternatives.
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Refusal to Deal: Now that we are entering the 1999-2000 shipping season on the Pacific, shippers and NVOCCs have been attempting to ''negotiate'' for the past month or so with the TSA lines. The TSA ''voluntary guidelines'' appear once more to be restricting true competition in the trades. NVOCCs have found that all contract offers from the TSA steamship lines, now including China Ocean Shipping Company (''COSCO''), a traditional independent carrier, are almost identical, from rates to surcharges, to even the language of the new ''confidentiality clauses'' which the Reform Act makes a reality. In effect, TSA has unilaterally raised rates for the current shipping season by 50% over last season. The impact of this is severe since the TSA is comprised of 95% of the carriers in that trade lane.
Indeed, most carriers in the TSA have taken a ''non-negotiable'' approach to the language of the confidentiality clause. The option many lines ''give'' to shippers is: use the language offered for confidentiality of the contract or the contract will be ''public'', thus defeating the very benefit of the Reform Act for NVOCCs and smaller shippers. The TSA is building a commodity/shipper specific data base which will then be used by the TSA as internal guidelines so that members cannot underbid each other. They are collectively sharing vital commercial information in such a pervasive way as to completely remove competition. This is in an era of so-called confidential service contracts. But the most egregious aspect of this practice is that service contract information is available to 95% of the carriers by virtue of the antitrust immunity on the books. Again, where is the increased competition that OSRA was to have provided?
Favorable Treatment Given to Large Accounts: As the FMC stated in its Report Summary on the Won Investigation, some carriers afforded special treatment to so-called ''VIP'' accounts last year. The FMC found that documents obtained during the investigation indicate that certain large, ''reliable'' contract shippers generally received preferential space allocation. Documents indicate that, in September, 1998, NVOCCs, as a class, were forced to accept increases of at least $300 from several carrierswhich was on top of the initial $300 increase which was imposed in May, 1998. The FMC found that no such wholesale attempt was made to increase the rates for certain proprietary shippers.
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This year, NVOCCs in Chicago, San Francisco and New York, to mention only a few locations, report that lines on the Pacific told NVOCCs that they would not ''negotiate'' with them until after all proprietary, large volume accounts were finalized. These NVOCCs tell us that carriers did not want to even discuss the possibility of inbound contracts until a week or so before the May 1 deadline. This tactic forced NVOCCs into a ''wait and see'' mode, and left much uncertainty with whether NVOCCs would even be able to provide contract rates and space allocations to their shipper-clients. As a result, some traditional NVOCC shippers decided to go directly to the steamship lines in order to secure contract rates before the new shipping season began. It is important to note here, Mr. Chairman, that many lines have been seizing upon the inequity in the Reform Act that prohibits NVOCCs from signing contracts with shippers by offering ''confidentiality'' as ''something that NVOCCs can not offer.''
It is important to note that the ''discussion agreement'' concept is not limited only to the Pacific trades. In every major trade lane connecting the United States and our trading partners, carriers are grouping together into ''discussion agreements'' to establish ''voluntary rate guidelines'' that in effect result in anti-competitive behavior. Carrier antitrust immunity coupled with the evolving ''discussion agreements'' has resulted in the almost complete denial of open market pricing for most shipperseven before the Reform Act took effect. This anti-competitive behavior is occurring as we speak in the South American trades, which includes such important markets for the United States as Brazil and Chile. Carriers have decided, under their ''discussion agreements,'' what the governing prices will be, and have begun to impose the new rates on NVOCCs with very little notice. In the North Atlantic, which covers the high volume trades between the United States and Europe, carriers are contemplating the creation of a ''super discussion agreement,'' which would include almost 99% of all major shipping companies.
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There is a pattern beginning to emerge: the carriers see the ''benefits'' of the TSA in the Pacific and are trying their best to extend this new form of cartel price fixing into the ''deregulated'' marketplace under the Reform Act. Mr. Chairman, the ocean shipping industry will not be truly deregulated until there is formal consideration by Congress of the carriers' antitrust immunity. In light of the collective conduct of the steamship lines on the Pacific, complete elimination of that immunity or, at the very least, an increase of regulatory powers of the FMC or other regulatory agencies is necessary, to adequately oversee and combat the discriminatory and anti-competitive behavior of the carriers under OSRA.
The Emerging Discussion Agreements. What are they? It would do well to quickly review how the ''talking agreement'' we have been mentioning repeatedly became such a monster. On its face it seems harmless enoughWhat could be so bad about ''just talking?'' It turns out that it is not just ''about talking.'' Under the Shipping Act of 1984, and its predecessor, the Shipping Act of 1916, carriers formed into steamship conferences where they would, by virtue of the antitrust immunity granted by federal statute, collectively set freight rates, rationalized shipping space, and did other things collectively which normally would be violations of law but for the immunity granted. Under those statutes, competition was still protected, to some degree, by the participation of independents (or non-conference lines) in most important trade lanes. In other words, the independents kept the conference activities more or less responsive to the marketplace.
One of the egregious components of these conferences, from the perspective of shippers, was the inability of individual carrier members of the conferences to take independent actions on behalf of shippers or classes of commodities in competition with the conference. This was due to the laws relating to independent actions, and the fact that the conference membership was aware of intended independent actions to be taken by carrier members, and the pressures which this awareness brought to bear on the process. Under OSRA, this procedure was changed to facilitate Independent Actions (''IAs'') by members of conferences in a shortened period, without any obligation to inform the conference of the negotiations with regard to an independent action until shortly before it happened. Further the conferences were prohibited from disallowing IA's as these actions are called. This change with regard to IA's has become the death knell to the traditional concept of the conference. In really competitive trade lanes, the conferences have all but disappeared, or at least have diminished in size and importance.
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In anticipation of the disappearance of conferences, the so-called ''talking agreement'' has arisen. While the talking agreements can only provide ''voluntary guidelines,'' in fact, what has happened is what on the surface appears to be the creation of ''mega conferences.'' The so-called talking agreements are now comprised, not only of members that were traditionally considered conference carriers, but also those who were traditionally considered independent competitors. This is so much so that even COSCO, the Chinese state-owned and operated line, never a conference member, is now a member of TSA, presumably following the ''Voluntary Guidelines.'' No wonder Commissioner Won concluded that he found no competition in the inbound Far East trade lanes.
Mr. Chairman, Congressman Conyers, Members of the Committee, I trust that you can see from my comments that the concerns of our membership surrounding the carriers' antitrust immunity under the Reform Act are legitimate, substantial, and alarming. I also believe it is clear from the legislative history of the Reform Act that Congress has pledged to work with the disenfranchised segments of the ocean shipping industry to address the concerns that were purposely left out of last year's legislation. I know that some would prefer to simply allow the Reform Act to ''develop'' and wait and see what happens. However, Mr. Chairman, I believe that there is no need to waitthe carriers' conduct on the Pacific last year and again so far this year, illustrate what will occur under the Reform Act if carrier antitrust immunity is not addressed by Congress. Commissioner Won's report should be the guiding light for not only this Committee but for all of Congress. The Reform Act is far from perfect. Coupling confidential ''secret'' contracts with carrier antitrust immunity will only further enable steamship lines to discriminate against NVOCCs, smaller shippers and shippers' associations, all under the pretext of a so-called ''discussion agreement'' and ''voluntary rate guidelines.''
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We strongly urge the Judiciary Committee and Congress to consider the following legislative options in face of the carriers' conduct on the Pacific, in South America, and in anticipation of the implementation of ''discussion agreements'' in other trades, such as the important US-Europe trade:
1) As OSRA now stands, Section 10(b)(16) of the Shipping Act of 1984 does not appear to prohibit ''discussion agreements'' from collecting and exchanging information on shippers, including NVOCCs; as noted above, it is clear that the TSA is building a commodity/shipper specific data base which will then be used by 95% of the carriers in the Far East to set price and service benchmarks, completely undermining competitive forces; this must be prevented by legislation prohibiting such sharing of commercial information among carriers through ''discussion agreements'';
2) Require the Federal Maritime Commission (''FMC'') to exercise Section 15 authority on anti-competitive activities in all agreements of any kind where the composition of the membership of the agreement is comprised of more than 60% of the total vessel capacity in a trade lane;
3) Permit private parties to seek enforcement of the shipping laws under Section 6(g) of the 1984 Act, and allow double or treble attorney's fees;
4) Permit the US Department of Justice, and/or the FMC, without limitations, and with the full right of intervention to shippers, to challenge implementation of agreements which are anti-competitive under Section 6(g);
Page 100 PREV PAGE TOP OF DOC5) Allow NVOCCs to enter confidential service contracts with shippers so as to allow them the same advantages of OSRA as steamship companies enjoy; and
6) Short of passage of all of the above legislative remedies, and in view of the abuses inherent in discussion agreements, we strongly encourage the complete repeal of carriers' antitrust immunity, especially since they do not benefit in any significant manner any United States interests.
Mr. Chairman, Mr. Conyers, Members of the Committee, I thank you for taking the time to consider the concerns and interests of our membership and that of the National Association and other forwarder/NVOCC associations from across the country. I am hopeful that upon completion of today's hearing and the testimony that you will hear from the other witnesses on this panel, you will be convinced that congressional action is necessary to properly address the antitrust immunity conflicts that the Reform Act has created for shippers and NVOCCs alike. I would again like to stress that although the Reform Act is only days old, the conduct of the steamship lines on the Pacific last year and again so far this year, provide the perfect case study for what will happen to smaller shippers, forwarders and NVOCCs when you combine the antitrust immunity of the carriers with the formation of carrier ''discussion agreements.'' The collective discrimination, collusion, and anti-competitive behavior of the lines last year is why we are here today. Confidential contracts will further enable the lines to discriminate against smaller shippers and NVOCCs and heighten the seriousness surrounding the antitrust immunity aspects of our nation's shipping laws. I would like to end by stressing a point that I made at the beginning of my remarks: we do not oppose deregulation of the shipping industry; our members embrace the concept. However, the Reform Act, as it is written, does not provide for true deregulation; NVOCCs cannot benefit fully from confidential contracts because the law prohibits them from signing contracts with their clients, the exporting and importing companies of America and the world. The Reform Act also does not address the anti-competitive aspects of combining antitrust immunity with confidential contracts and the role of carrier ''discussion agreements.''
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The effect of discussion agreements with the legal ability to pronounce Voluntary Guidelines as to rates, charges, and service terms and conditions have never been reviewed by Congress. What we have seen so far is wholesale devastation for small and medium sized shippers, including NVOCCs.
That having been said, the question that will stand at the end of this hearing is: Who truly benefits from antitrust immunity? Our members look forward to the day when all members of the shipping industry and public will be able to benefit from the market forces of a truly deregulated environment. Until that day, carrier antitrust immunity will continue to permit blatant discrimination by steamship lines against small and medium-sized companies, forwarders and NVOCCs. Ultimately, we also think that the entirety of the shipping communitybig and smallwill be adversely affected by the proliferation of ''talking agreements'' which have the tendency to act as ''mega conferences'' and to eliminate competition for all.
I thank you, Mr. Chairman, Congressman Conyers, and the Members of the Committee for their time today. I will be happy to answer questions which you or other Members of the Committee may have.
Mr. HYDE. Mr. Winstead.
STATEMENT OF GARY WINSTEAD, PRESIDENT, AMERICAN HERITAGE INTERNATIONAL FORWARDING, INC.
Page 102 PREV PAGE TOP OF DOC Mr. WINSTEAD. Thank you, Mr. Chairman. Mr. Chairman, members of the committee, thank you for the opportunity to testify
Mr. HYDE. Would you move the mike?
Mr. WINSTEAD. Thank you for the opportunity to testify today with regard to antitrust in ocean shipping. You have my written testimony, so, for the sake of brevity, at this time I would like to point out a few of the highlights.
As president of the American Shippers Alliance, I represent a small but critical segment of the U.S. shipping industry. Our members are involved in the door-to-door movement of military household goods worldwide. Our industry has grave concerns that the transparency of rates in service contracts, eliminated by the Ocean Shipping Reform Act of 1998, will eliminate the ability of the Department of Defense to verify competitiveness of ocean freight costs. The DOD spends approximately $900 million annually for ocean transportation.
The Cargo Preference Act of 1904, as amended, and other related maritime laws, require that U.S. preference cargo be transported on U.S. flag ships. Further, this body of law requires that DOD not pay freight charges greater than the lowest available commercial rates. Under the framework of the Shipping Act of 1984, these rates could easily be compared because they were visible to DOD, the GAO, and to the forwarding industry. Should GAO determine that rates higher than the lowest available commercial rates had been charged, it could direct the ocean carriers to refund overcharges. We believe the framework of the Ocean Shipping Reform Act, with its private tariffs and secret service contracts, would make it impossible to ascertain the commercially prevailing rates, therefore, monitoring compliance with the 1904 Shipping Act and related maritime law will also become impossible.
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With respect to U.S. flag impaled cargo, we believe that antitrust immunity and secret service contracts should be mutually exclusive. The U.S. flag operators are guaranteed military cargo by mandate. To allow these carriers to enter into secret service contracts for cargo they're already guaranteed, with no opportunity to monitor the prevailing commercially available rate, is to literally put the fox in charge of the henhouse.
During the Senate debate over the Ocean Shipping Reform Act, Senator Hutchison stated her concern over the Federal agencies' abilities to share service contract information with other agencies to assure compliance with cargo preference law. Unfortunately, Senator Hutchison's comments do not represent statutory language, and would do little to ensure compliance in a legal proceeding.
In summary, the potential for a group of U.S. flag carriers enjoying antitrust immunity to engage in secret service contracts on U.S. flag impaled cargo creates an environment for fraud and abuse. While we can continue to support antitrust exemptions, we cannot support these exemptions in the environment of secret, non-transparent service contracts created by the Ocean Shipping Reform Act of 1998,
Competition and the assurance that American taxpayers are getting the best value for their shipping dollar demand that we operate in an environment of transparency. The combination of antitrust immunity and rate secrecy is a recipe for disaster. I urge you, Mr. Chairman, to reconsider these provisions in the bill. Thank you again for your attention, and I'll be happy to answer any questions you may have.
Page 104 PREV PAGE TOP OF DOC [The prepared statement of Mr. Winstead follows:]
PREPARED STATEMENT OF GARY WINSTEAD, PRESIDENT, AMERICAN HERITAGE INTERNATIONAL FORWARDING, INC.
Mr. Chairman, Members of the Committee, please let me thank you for the opportunity to testify today and speak on a subject which is both controversial and difficult to understand. My name is Gary Winstead and I am the President of American Heritage International Forwarding, a small military household goods freight forwarding company based in Wilmington, North Carolina. I also am the current Chairman of the Government Affairs Committee for the Household Goods Forwarders Association of America. In addition, I serve as the President of the American Shippers Alliance (ASA) which is an association of other small military household goods freight forwarding companies organized in December of 1998 to develop competitive ocean freight rates for America's small business movers.
The ASA was formed with one eye on current practices that favor large shipping commitments and the other eye on the pending implications of the Ocean Shipping Reform Act of 1998. Under both considerations, our members realized that the anti-trust exemptions now allowed in the ocean shipping industry required us, as small businesses, to band together as a cohesive group or face the certainty of insolvency as individual companies. The ASA represents a small, but critical, segment of the U.S. shipping industry. Our members are involved in the door-to-door movement of military household goods worldwide. In all there are approximately 180 firms that currently perform such services for the Department of Defense (DoD); 85% of which are small business.
Many in my industry are very concerned that the Ocean Shipping Reform Act of 1998 will adversely impact the way in which the DoD contracts for ocean shipping transportation. Currently, the DoD is able to determine if U.S. flag carriers, which we are required to utilize for the transportation of cargo preference shipments under the Jones Act and related U.S. maritime laws, are overcharging the DoD. The DoD is able to determine this because the Shipping Act of 1984 required that tariffs and service contracts be publicly filed. Therefore, such rates become transparent to the public, to the DoD and to all DoD contractors. Not only does this rate transparency allow the DoD to verify appropriate ocean freight charges, but it also has the benefit, at least in the military household goods market, of encouraging competitive ocean freight rates.
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Each year, the United States government, through the DoD and other federal agencies, pays approximately $900 million for ocean freight expenses. Put another way, there is nearly a billion dollars of taxpayers' money appropriated to move our government families overseas; ship supplies and materials; and deploy and maintain our troops for national security concerns. A billion dollars for transportation of containerized freight that must, under the current law, be carried on U.S.-flag ships.
The Cargo Preference Act of 1904 requires that the DoD not pay freight charges greater than the lowest prevailing commercially available rates. Under the Shipping Act of 1984 framework, the prevailing commercially available rates are clearly visible to DoD through the contractorthat is, the military household goods freight forwarders. It is the ocean freight forwarders, and not the DoD, who review the publicly filed tariffs and service contracts for ocean freight rate consistency and competitiveness. Under the Shipping Act of 1984 freight review procedures, by relying on the transparency of freight rates, both the ocean freight forwarders and General Accounting Office (GAO) can verify consistency. Should the GAO determine that rates higher than commercial rates are being charged, it can direct the U.S. Flag steamship companies to refund overcharges of U.S. taxpayer dollars for the higher rates. A poignant example of this is the Guam settlement of 1998 where several U. S. Flag carriers were required through litigation to reimburse the citizens of Guam approximately $24 million for overcharges that would not have been visible under deregulation.
The Ocean Shipping Reform Act of 1998 creates confidential rates and service contracts between large moving and forwarding companies and ocean carriers. Under the new law, no longer would rates have to be filed with a government agency. Tariff rates would be informally, electronically maintained on an individual basis. More importantly, service contracts, which are the most prevalent methods by which ocean transportation is negotiated by ocean carriers, would be secret. The DoD and the GAO would no longer be able to determine whether U.S. flag carriers are complying with the Cargo Preference Act of 1904.
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We believe that it would become impossible to ascertain the commercially prevailing rates of the carriers. In Short, if overcharges exist in the current environment of transparency, it is reasonable to assume that overcharges will only be escalated in an environment of secrecy.
Concerns of the military freight forwarding industry in this area perhaps are best demonstrated in one recent ''Cargo Preference'' violation which occurred in 1997. At that time, one of the existing conferences responsible for the establishment and maintenance of ocean freight rates entered into an agreement with a European based company. This agreement prevented open competition in the movement of this nation's military goods to Europe. Specifically, that conference used its anti-trust immunity, and the requirement that U.S. military goods must be shipped on U.S. flag vessels, to help create a favorable market condition for a non-American shipping company at the expense of American firms and American taxpayers.
By way of background, most of the ocean freight conferences were formed following enactment of the 1984 Shipping Actlegislation which allowed the U.S.-flag carriers to join together for several purposes, including the establishment of ocean freight rates. Through such conferences, the American flag carriers establish ocean rates for the movement of military household goods in numerous traffic channels with antitrust immunity. Historically, the shipping conferences establish rates for ocean transportation that would be available to all companies involved in the movement of military household goods. These rates are published in advance of industry rate filing with DoD and are effective concurrent with the duration of a six month rate cycle.
Page 107 PREV PAGE TOP OF DOC With respect to the Cargo Preference violation to which I referred, during the filing of the Summer 1997 rate cycle for military household goods, the shipping conference announced that it had entered in to a service contract with a Belgian based company. The shipping conference had established an ''any quantity rate'' of $4000 per forty-foot container (FEU). The shipping conference entered into a contract with the Belgian company for $2510 per FEU. The Belgian company, in turn, began charging American military household goods forwarders $3410 per FEU. This contract called for 11,000 FEU for the six month rate cycle, which represented about 90% of the cycle capacity.
Thus, at $900 per container mark up, the Belgian company made over $9.9 million over the duration of the six month contract. Since the members of the shipping conference controlled the U.S. flagged capacity to and from Europe , our members had no choice but to utilize the rates filed by the Belgian company. Had our members chosen to ship directly with the U.S. flag carriers, their costs would have been $4000 per FEU.
During this same Summer 1997 rate cycle, the ocean costs for non-military household goods were approximately $1900 per FEU. The process by which DoD contracts for its overseas shipments of household goods has historically laid the burden of Cargo Preference compliance at the feet of ASA members. The DoD and ultimately the GAO rely on the household goods forwarder contractor base to alert them of violations of the Cargo Preference law.
If it were not for the transparency of the common carriage system, industry would not have known that the shipping conference entered in to a discriminatory contract. Further, DoD would have never known that they were paying almost twice the commercial rate to move military household goods to Europe. Under the Ocean Shipping Reform Act of 1998, the 180 DoD approved military forwarders will not be able to alert the government to future cargo preference violations, thus leaving DoD without the ability to confirm Cargo Preference compliance.
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After careful study of the legislation, it is clear that the Ocean Shipping Reform Act of 1998 does not address the DoD/Cargo Preference concerns. In particular, paragraph 8(s) ''Service Contracts'', requires the:
''. . . disclosure of information by an ocean common carrier only if there exists an applicable and otherwise lawful collective bargaining agreement which pertains to that carrier.''
The legislation does not address the issue. The legislation does not provide the Federal Maritime Commission (FMC) with the function of ''disclosing'' the confidential service contract information that is given to the individual carrier and/or conference of carriers.
The only reference to the issue is found in the floor statement of Senator Kay Bailey Hutchison (RTX). She stated:
Mr. President, I want to make it clear that the FMC is authorized to share with another Federal agency service contract information that parties of the service contract have legally decided to protect from public disclosure in order to enable that Federal agency to ensure the compliance of US-flag ocean common carriers with cargo preference law shipping rate requirements. Of course, that confidential service contract information would remain protected from disclosure to the public consistent with the Shipping Act of 1984, as amended by the Ocean Shipping Reform Act of 1998, and other applicable Federal laws.
Page 109 PREV PAGE TOP OF DOC Unfortunately, Senator Hutchison's statement is not statutory language and would not be taken into consideration in any legal proceedings. Secondly, Senator Hutchison does not take into consideration the process by which military household goods historically have been contracted and the pivotal role DoD's contractors play in verifying compliance and exposing violations of the Cargo Preference Act in the movement of military household goods.
Since military household goods forwarders are so essential in assuring compliance with the Cargo Preference Act, we are deeply concerned about this role in the future. Specifically, how will compliance of the Act in the movement of military household goods be monitored and enforced after May 1, 1999?
Our members are deeply concerned that if such predatory and non-competitive market practices were encouraged in an environment that was predicated on transparency of pricing information, what will happen to the free market conditions when transparency is removed? The costs to the American taxpayers, the threat to the competitive pricing and servicing components of the existing program, and the elimination of an infrastructure that has taken years to develop are critical considerations.
In summary, the potential for a group of U.S. flag steamship companies, enjoying anti-trust exemptions, to engage in secret service contracts on cargo preference cargo that has to move on U.S. flag vessels, creates an environment conducive to fraud and abuse. While we can continue to support the anti-trust exemptions that the ocean carriers enjoy, we cannot support the secretive contracts that the 1998 Act will allow them to secure. Competition in the marketplace and some assurance that the American taxpayers are getting the best bargain for their money demand that we operate with some transparency. The combination of anti-trust immunity and secrecy is a recipe for disaster. I urge you to reconsider these provisions in the bill.
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Thank you for your consideration of our position.
Mr. HYDE. Thank you very much, Mr. Winstead.
Next, Mr. Andrew Danas. Mr. Danas.
STATEMENT OF ANDREW DANAS, ASSISTANT GENERAL COUNSEL, AMERICAN INSTITUTE FOR SHIPPERS' ASSOCIATIONS, INC.
Mr. DANAS. Thank you, Mr. Chairman, and members of the committee. My name is Andrew Danas. I am here today in my capacity as assistant general counsel for the American Institute for Shippers' Associations, Inc. You have my prepared statement, so I'll briefly summarize some of the highlights.
The Shippers' Association industry is an industry that basically consists of small to medium sized shippers that join or form shippers' associations in order to achieve economies of scale to get volume discount rates on service contracts. Up until enactment of the Ocean Shipping Reform Act of 1998, we supported the antitrust exemption for the ocean carrier industry. As a matter of fact, we joined with the Ocean Common Carrier Coalition back in 1995 to oppose the changes that ultimately led to OSRA, and I could recite chapter and verse all of the reasons why the antitrust exemption should stay on the books.
We have now changed our position, and we believe there should be a repeal of the antitrust exemption, or at least some of the provisions of the Ocean Shipping Reform Act should be reconsidered. The reason for that is very simple. In the international shipping industry, there has always been a quid pro quo as far as having an antitrust exemption. The reason for that is that ocean shipping is the gateway to international trade. It is a derived demand. Nobody buys ocean shipping services simply to go and say, ''I want to ship a box somewhere because it is fun to ship the box.'' They do it because they have markets overseas, or they are trying to import goods into the United States. So, for the ocean carrier industry to have an antitrust exemption it is because it is looking for stability of service, stability of rates, and to provide a common carrier service. As long as the antitrust exemption provides that, we support it, and we support it if it is done in a non-discriminatory manner. That means that common carriage principles apply, and that all shippers have equal opportunity based on objective transportation factors, economic factors, to get competitive access to ocean transportation; and to make sure that a large shipper and a small shipper are not having their competition in foreign markets or U.S. markets distorted by the fact that the ocean carrier industry itself has an antitrust exemption.
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During the legislative debate over the Ocean Shipping Reform Act, that very basic principle was addressed, and Congress decided to change it. They decided that discrimination would be allowed on service contracts. They decided that there wouldn't be rate transparency so that the industry and market participants could know whether or not they are being discriminated against. All of that is fine and good. We don't object to competition. We don't object to the fact that individual contracts should be negotiated. We think that is actually very pro-competitive. We actually don't even object to the confidentiality, provided that there are safeguards in the law. We don't represent NVOCCs. We represent actual beneficial interest shippers and small to medium sized non-profits. But what we want is the opportunity to come in and have a fair deal.
Nothing says it better for me, quite frankly, as to the change in the law and the direction that OSRA is taking us, than this. Because we are not arguing for a repeal of OSRA. But, we think that OSRA is leading toward the repeal of the antitrust exemption. Maybe not now, but down the road. I would like to introduce as part of my testimony in the record, today's Washington Post, page A8, May 5th.
It is an advertisement by APL, probably run in anticipation of this hearing, where it says, ''at APL, it is our business to develop global transportation and logistic solutions for our customers, the details of which are nobody else's business. Customized, confidential, and competitive. Just as it should be.''
The Ocean Shipping Reform Act works on this principle, and we are all for that. But if you're going to have that, then you can't have voluntary guidelines that the ocean carrier industry is operating under with a 90 percent marketshare, pursuant to confidential, voluntary guidelines that the shipping portion of the industry doesn't know about, that the carriers' are acting collectively together with, and that they are allowed to engage in individual discrimination against smaller shippers because the large shippers will have the power to break those guidelines. You can't have that and then go and say that this is a competitive statute, or that the antitrust exemption should be kept.
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You either have to go and say that we are going to have confidential contracts, have a level marketplace for everybody and make it fair, in which case we are going in the direction this APL ad says we're going, or, alternatively, you have to have oversight and safeguards. I have a suggestion in my prepared statement as far as the voluntary guidelines and my time is almost up, so I'll leave it right there. I think that the committee should really take a very serious look at this issue. We are moving toward the 21st century with technological and other significant changes out there. OSRA provides quite a few opportunities, but there are dangers of abuses as well. Thank you, Mr. Chairman.
[The prepared statement of Mr. Danas follows:]
PREPARED STATEMENT OF ANDREW DANAS, ASSISTANT GENERAL COUNSEL, AMERICAN INSTITUTE FOR SHIPPERS' ASSOCIATIONS, INC.(see footnote 1)
Mr. Chairman Hyde and Distinguished Members of the Judiciary Committee:
My name is Andrew M. Danas. I am appearing before the Committee today in my capacity as the Assistant General Counsel for the American Institute for Shippers' Associations, Inc. (''AISA''). It is a distinct honor and privilege to appear before the Committee today on this timely and important subject.
The American Institute for Shippers' Associations, Inc., is a thirty-eight year old Washington, D.C. trade association representing the domestic and international shippers' association industry. Shippers' associations are non-profit groups of shippers that consolidate or distribute freight in order to obtain volume discount rates through economies of scale. They have existed since the turn of the last century and were first statutorily recognized by Congress in the Interstate Commerce Act in the 1940s. Congress recognized the role of shippers' associations as a distinct legal entity in international ocean commerce with the enactment of the Shipping Act of 1984. It has continued that recognition of shippers' associations under the Ocean Shipping Reform Act (''OSRA''), and in fact recognized that they will have an increasingly important role in protecting the interests of small to medium-sized shippers in the new marketplace environment that debuted under OSRA on May 1st.
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AISA believes that the topic of today's hearing, the ''Antitrust Aspects of the Ocean Shipping Reform Act of 1998'', is especially timely, given the fact that OSRA has just gone into effect. While it is clearly too soon to tell whether OSRA will turn out to be a good or bad piece of legislation, during the past four years of legislative debate culminating in its enactment, AISA has consistently voiced concern that the statute may have structural problems that potentially will lead to discriminatory anticompetitive activities in ocean shipping. Unfortunately, at no time over the past four years did Congress ever directly examine the antitrust ramifications of OSRA, which is extremely surprising given the fact that the entire purpose of the Shipping Act is to confer an exemption from the antitrust laws on the ocean carrier industry. AISA recognizes and appreciates that this Committee and Chairman Hyde did raise this issue last year with the House leadership and attempted to conduct such an examination prior to OSRA's enactment. The shippers' association industry thanks you for your willingness to revisit this issue now.
AISA's purpose in appearing today before this Committee is not to rehash old arguments concerning the merits of OSRA. Instead, the shippers' association industry believes that since OSRA is now law, both Congress and the Federal Maritime Commission should be actively monitoring the industry for these potential problems. Shippers' associations sincerely believe that OSRA does provide new opportunities for shippers' associations and carriers, both individually and collectively, to work together to provide more efficient and cost-effective ocean transportation services. However, shippers' associations remain very concerned that the new law increases the possibility of anticompetitive abuses in the ocean transportation industry. Should this, in fact, occur, AISA believes that Congress will be required to enact remedial legislation correcting these deficiencies and limiting the scope of the industry's antitrust exemption.
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AISA'S POSITION ON THE OCEAN CARRIER ANTITRUST EXEMPTION
Until enactment of OSRA, AISA had never opposed the exemption from the antitrust laws enjoyed by the ocean liner industry. In fact, historically the shippers' association industry has in general supported the antitrust exemption for ocean carriers. Ever since the 1914 Alexander Committee Report, both Congress and the international shipping industry have made a compelling argument as to why ocean carriers, unlike most other industries, should be allowed to fix prices; limit the volume or character of cargo carried; or, as explicitly provided for by Section 1703(a)(6) of Title 46, ''control, regulate, or prevent competition in international ocean transportation.'' Ocean carriers have consistently argued that their industry is uniquely structured so as to be subject to high barriers to entry; cutthroat competition; and preferential treatment of flag carriers and shippers from foreign countries. Indeed, the exemption from the antitrust laws largely has been justified on the grounds that ocean carriers have to work together in order to provide the industry stability and scheduled liner service demanded by shippers.
Until enactment of OSRA, the shippers' association industry was on the same page as the ocean carriers. The interests of shippers' associations are generally those of their small to medium-sized shipper members. International ocean transportation is the gateway to international trade. Guaranteed access to non-discriminatory competitive ocean transportation services is important to small to medium sized importers and exporters who are seeking to open new markets abroad; introduce foreign products to U.S. consumers; or simply to expand their market presence beyond U.S. shores. The ability to obtain equal access to foreign suppliers and distributors is especially important for smaller U.S. companies seeking to compete in a supply chain or ''Just-In-Time'' global economy.
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Competitively-priced, regularly scheduled, non-discriminatory ocean transportation services with predictable costs and dependable services is what most shippers want from the ocean carrier industry. To the extent that the antitrust exemption of the ocean carrier industry can be argued to have enabled that industry to coordinate sailings or rationally utilize equipment to ensure equal access to global markets for all shippers, smaller shippers and shippers' associations have consistently supported the industry's claims that it both needed and should have enjoyed an exemption from the antitrust laws.
This has all changed with the enactment of OSRA, because OSRA fundamentally changes the premise upon which the industry has previously operated. Under the Shipping Act of 1984, the quid pro quo for ocean carriers being able to enjoy an exemption from the antitrust laws was transparency of their activities so that the exemption was not abused. Combined with regulatory oversight, in the form of the public availability of service contract essential terms as a form of common carriage made available to similarly-situated shippers, the premise of the Shipping Act of 1984 reflected a simple regulatory equation that ensured a level playing field for all shippers: the liner conference industry could enjoy an exemption from the antitrust laws, provided that it did not abuse that exemption by discriminating against similarly-situated shippers. In other words, ocean carriers could engage in what would otherwise be a per se unlawful anticompetitive activity to ensure stability of services and prices based on traditional transportation economics, provided that such anticompetitive activity benefitted all shippers of like volumes, goods, and commodities, and did not have potentially adverse affects in secondary levels of competition between competing shippers.
This has been classic U.S. antitrust policy for the regulated transportation industries since at least Theodore Roosevelt's day. In regulating the various modes of transportation, Congress has traditionally balanced the carriers' need to engage in collective action otherwise condemned by the antitrust laws with the need to prevent the carrier's exemption from the antitrust laws from either unreasonably discriminating against certain classes of shippers or alternatively disrupting the competitive marketplace between competing shippers who use such carriers. Where Congress has chosen to allow less regulation of various modes of transportation, and/or move away from a system of common carriage regulation to one governed more by private contract, it has also correspondingly chosen to weaken the exemption from the antitrust laws that the carriers have enjoyed when acting collectively. OSRA is fundamentally flawed because it does not follow this model, but, in fact, in some ways actually strengthens the antitrust exemption for ocean carriers by eliminating the regulatory safeguards against anticompetitive abuses which existed in the Shipping Act of 1984.
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In enacting the Shipping Act of 1984, Congress recognized that authorizing ocean carriers operating pursuant to an exemption from the antitrust laws to enter into service contracts could distort the competitive environment for shippers seeking access to ocean carrier services. To offset this potential problem, Congress authorized smaller shippers to form and join shippers' associations, and made sure that shippers of similar goods and volumes were entitled to receive similar contractual transportation services as a form of common carriage. Unreasonable discrimination was prohibited, and the general terms of service contracts were transparent, allowing shippers to determine when and where potential discriminationand abusewas occurring in an industry in which Congress said the normal rules of competition did not have to exist.
With the enactment of OSRA, the ocean carrier industry and larger shippers have succeeded in persuading Congress to eliminate the marketplace common carriage and rate transparency oversight protections contained in the Shipping Act of 1984 on the grounds that the carriers' customers want more individual service contracts; a ''one-on-one'' relationship with individual ocean carriers; and the freedom to discriminate when entering into confidential contracts. At the same time, OSRA has strengthened the antitrust exemption afforded the industry by allowing them to enter into ''voluntary guidelines'' with respect to the terms and procedures of such individual contracts. Such ''guidelines'' are confidentially filed with the Federal Maritime Commission and are thus not publicly available to individual shippers. See, 46 U.S.C. §1704(c). The net result is that a statute which purportedly is intended to promote the negotiation of individual service contracts between single shippers and ocean carriers has instead created a marketplace wherein groups of carriers can collectively agree in secret as to what the terms of those contracts should ''voluntarily'' include prior to negotiating such individual contracts with single shippers. Such a provision does not promote or otherwise enhance competition, but instead enhances the ability of the industry to act collectively and collusively with a reduced level of public oversight.
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Simply put, the whole premise of OSRA is at odds with a blanket industry antitrust exemption. Allowing groups of ocean carriers to ''control, regulate, or prevent competition in international ocean transportation;'' ''discuss and agree on any matter related to service contracts;'' or to establish ''voluntary guidelines'' for the terms and conditions of individual carrier service contracts is fundamentally inconsistent with the premise that individual shippers and individual ocean carriers should be allowed to enter into confidential ''one on one'' service contracts to better fit the carriers' and shippers' individual needs. It is a blank check to ocean carriers to abuse the purpose of the antitrust exemption and discriminate against shippers who lack countervailing market power.
This is especially so from the perspective of shippers' associations and the small to medium-sized shippers that they represent. As noted, it remains too soon to tell how OSRA will play out. However, if history is any guide, there is a significant probability that ocean common carriers will abuse their antitrust exemption to unreasonably discriminate against ocean transportation intermediaries and, indirectly, the small to medium-sized shippers that they represent. As the Federal Maritime Commission's report in Fact-Finding Investigation No. 23 has apparently indicated (copies of the actual report are confidential), last fall there was wide-spread discriminatory activity by ocean carriers in the Trans-Pacific trades against intermediaries. Shippers' associations found that they were often required to ''voluntarily'' agree to increases to supposedly ''firm'' contract rate provisions in order to ensure that their cargo found vessel space, while at the same time many of the individual members of the associations with their own service contracts were not subjected to these rate increases.
It is certainly understandable that in a market environment consisting of limited capacity and imbalances in reciprocal trade lanes that ocean carriers would seek to maximize their revenues and recoup some of the losses that they were experiencing on the outbound trade routes. However, in a marketplace governed by the normal rules of competition, such decisions should be made individually by each carrier, not collectively by a group that now controls up to 90 percent of the marketplace. Furthermore, when the majority of such rate increases appears to have been selectively focused on particular classes of shippers, such as transportation intermediaries and shippers' associations, rather than to all accounts across the board, something other than normal market forces are at work.
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FMC Commissioner Won's report in Fact-Finding Investigation No. 23 correctly warns that there may have been a fundamental abuse of the industry's antitrust exemption last fall, and that such an abuse may be repeated or exacerbated by OSRA. The question presented by these hearings is what, if anything, should be done about it at this time. AISA believes that the following options are available to Congress, in descending levels of preferability:
1. Repeal the antitrust exemption for the ocean liner industry. The basic premise of OSRA is that marketplace principles of confidential contracting between individual ocean carriers and shippers should dictate the provision of international ocean transportation services. The retention of the antitrust exemption for the industry is fundamentally at odds with this premise. The industry should be stripped of its exemption and be required to operate pursuant to the normal rules of competition which govern all other U.S. industries and, indeed, the very shippers who are so dependent upon international ocean transportation;
2. Amend OSRA to limit potential abuse of the antitrust exemption and unreasonable discrimination. Ocean carrier agreements should not be allowed to establish ''voluntary guidelines'' on individual service contracts. This provision of OSRA is fundamentally at odds with the concept that individual shippers and carriers should enter into confidential service contracts free of collective industry interference. Congress should amend Section 1704(c)(3) of Title 46 to read as follows:
An ocean common carrier agreement may not
Page 119 PREV PAGE TOP OF DOC(3) adopt or discuss in any manner whatsoever rules or requirements, mandatory or otherwise, affecting the right of an agreement member or agreement members to negotiate and enter into individual service contracts.
In addition, Congress should repeal the following language from Section 1704(c) of Title 46:
An agreement may provide authority to adopt voluntary guidelines relating to the terms and procedures of an agreement member's or agreement members' service contracts if the guidelines explicitly state the right of members of the agreement not to follow the guidelines. These guidelines shall be confidentially submitted to the Commission.
These changes would truly implement the ostensible purpose of OSRA in allowing individual one-on-one service contracts without the interference of carrier agreements. The recent demise of the major conferences in most U.S. trade lanes demonstrates that individual service contracting is something that both the industry and shippers want. However, the growing power of discussion agreements which are legally entitled to establish the ''voluntary'' guidelines for service contracts present, in many ways, a far greater danger for shippers, especially smaller shippers, because membership in these discussion agreements are extremely high and thus more influential than the levels represented by conference agreements.
In conclusion, the continued exemption of the ocean carrier industry from the United States antitrust laws is fundamentally at odds with the stated purpose of the Ocean Shipping Reform Act to promote competition in international shipping through the use of confidential service contracts negotiated by individual ocean common carriers and shippers. Congress should repeal the industry's exemption from the antitrust laws, or, at a minimum, repeal those provisions of OSRA that permit carrier agreements to discuss or in any way interfere with such individual contracting decisions. The American Institute for Shippers' Associations, Inc. thanks both the Chairman and the Judiciary Committee for holding this hearing today and allowing it to participate. We would be happy to answer any questions that you may have.
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The American Institute for Shippers' Association, Inc. (''AISA''), supports repeal or modification of the antitrust exemption enjoyed by the international ocean shipping industry. AISA is a 38-year old Washington, D.C. based trade association representing the shippers' association industry. Shippers' associations are not-for-profit groups of shippers that consolidate or distribute freight on behalf of their members in order to obtain the economies of scale available from volume discount rates and service contracts. Until enactment of the Ocean Shipping Reform Act of 1998 (''OSRA''), the shippers' association industry supported the ocean carrier antitrust exemption, on the grounds stated by the carriers that it was needed in order to promote industry stability; prevent cutthroat competition; and ensure equal access to overseas markets by all shippers who rely upon nondiscriminatory competitive ocean transportation services to engage in foreign trade.
Enactment of OSRA has changed the shippers' association industry's support for ocean carrier antitrust exemption. In the past, the quid pro quo for the industry enjoying such an exemption was a level of government and market oversight against competitive abuses that might arise from collective industry action. This oversight, in the form of rate transparency and a non-discriminatory system of common carriage that ensured that similarly-situated shippers were entitled to similar contractual terms, has been repealed by OSRA.
A blanket industry exemption from the antitrust laws is at fundamental odds with the basic premise of OSRA, that individual ocean carriers and shippers should be able to negotiate individual confidential service contracts. When Congress has deregulated other modes of transportation, or has otherwise moved from a system of common carriage to private contract carriage, it has generally reduced the ability of carriers to act collectively without also being subject to the antitrust laws. OSRA does not do this. Rather than weaken the ocean carrier industry's ability to act collectively, OSRA carries a grave potential of enhancing potential anticompetitive abuses of the antitrust exemption, because it allows carriers to agree to confidential voluntary guidelines with respect to individual service contracts terms and processes without any true oversight protections. There is a particular danger that as enacted OSRA will have unintended anticompetitive ramifications in distorting competition between shippers who rely on international ocean transportation to obtain non-discriminatory competitive access to foreign markets.
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AISA thus supports repeal of the antitrust exemption for the ocean carrier industry.
Mr. HYDE. Thank you, Mr. Danas. Without objection, the newspaper page referred to in your testimony will be received into evidence and made a part of the record. Mr. Kamler?
[The information referred to follows:]
STATEMENT OF ARNOLD KAMLER, PRESIDENT AND CEO, KENT INTERNATIONAL, INC.
Mr. KAMLER. Mr, Chairman, members of the committee, let me first thank you for providing me the opportunity to testify before the Committee on the Judiciary. It is indeed an honor and a pleasure to appear before your committee as you consider various antitrust aspects of OSRA.
My name is Arnold Kamler. I am president and CEO of Kent International, but I'm here today also speaking for other similar sized importers. We, as a company, are in the business of importing bicycles and bicycle accessories for sale and distribution to companies such a Sears, Toys-R-Us, MeiJer's, and Target stores. We've been very frustrated in any types of negotiations with any of the steam ship carriers that we have had successful discussions with over the past years.
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My father started the company in 1958, and I began working at Kent in 1972, after my graduation from American University here. I've been dealing with the steam ship companies since 1976, and feel that I'm quite experienced in dealing in the Far East trade lines. The shipping scenario has changed considerably since I started with Kent. For example, U.S. flag carriers have slowly dwindled. Some carriers have just gone out of business. Others have been sold to foreign carriers. For example, while APL still acts responsibly in many ways, it is nevertheless owned by Singaporian interests. Lykes is owned by Canadian interests. Even Sea-Land is rumored to be on the selling block constantly.
One can look at the chart up here, and you can readily see that of the top 10 carriers in the U.S. trade lanes, only one American company survives. However, Sea-Land is only responsible for about 10 to 15 percent of the containers that move yearly to and from the United States. This clearly raises the question, why antitrust immunity for the benefit of foreign carriers?
What U.S. interests are served by this immunity? Surely, it is not in my interests as a small American importer or exporter to have foreign carriers dictate rates and services to us. If you look at the New York Times chart, even COSCO, the Chinese state-owned carrier, greatly benefits from this immunity. These recently became part of the Transpacific Stabilization Agreement, or TSA as it is referred to. This is a discussion agreement which exists only because of the antitrust immunity granted by Congress, which has been discussed much here today.
I'm going to skip over the next part of it and go to specific violations and my exact examples of problems that I've had. For the past 5 years, we shipped nearly 40 percent of our shipments from Asia to the United States using Sea-Land. During the crunch period of July, August, and September of last year, Sea-Land would not accept even one container from us, even though we had a valid service contract with them. At that time, we had the need for approximately 40 containers per week. It is not coincidental that Sea-Land, together with almost all of the other TSA members, were engaged in asking their good customers to rip up their existing contracts, or what they like to call amendments, and sign new contracts at $1,000, $1,500, and even as high as $2,000 higher, per container.
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If you ask me, that is breach of contract. To the best of my knowledge, all steam ships lines in the TSA, with the exception of American President Lines, and to some degree Evergreen, were negotiating these interim extortion-like contracts.
We also had approximately 100 container loads that we shipped with COSCO. Executives of COSCO in China told us that unless we agreed to pay $300, $400, $500 more per container, they would not accept our cargo. They weren't even a TSA member, but just really following the guidelines.
The TSA and its members have not only increased rates uniformly by about 50 percent from last year, but have also fixed arbitraries. Let me put down the rest of my agreement and just tell you the real crux of the matter.
There is no negotiation. They come in, they hand you the contract, they say, ''Thanks for your business in the past, here is the price, take it or leave it.'' The ability of the steam ship carriers to have their own talking agreements, while shippers are prohibited from doing the same, is out of balance. We have recently signed several service contracts. The entire negotiation process consists of how big your contract is going to be. We, for instance, had service contracts last year with individual companies, anywhere from 100 to 200 containers per contract.
Even if I was willing to go from 200 containers per year to 3000, and I don't even have that kind of leverage, there wouldn't be a decrease in my price right now by one dollar. Yet, if I went from 200 to 199, they would necessarily increase the price.
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I would like to thank the committee for allowing me this ability to testify before you. It is really an honor and a privilege to be here in Washington. Thank you very much.
[The prepared statement of Mr. Kamler follows:]
PREPARED STATEMENT OF ARNOLD KAMLER, PRESIDENT AND CEO, KENT INTERNATIONAL, INC.
Mr. Chairman, Congressman Conyers, Members of the Committee, let me first thank you for providing me with this opportunity to testify before the Committee on the Judiciary. It is indeed an honor and a pleasure to appear before your committee as you consider various antitrust aspects of the ''Ocean Shipping Reform Act of 1998'' (the ''Reform Act''). My name is Arnold Kamler and I am President and CEO of Kent International, Inc., located in Parsippany, New Jersey. Although I am here today in my private capacity as President of an American company which is engaged in the design and importing of bicycles and bicycle accessories for distribution to large mass market retailers such as Toys R Us, Target and Meijer's, I feel that I speak on this subject, not only for ourselves, but also for other similar small and medium-sized shippers who find themselves frustrated by the disappearance of competition from ocean shipping. I believe that this condition is principally caused by shipping laws which have for too long allowed shipping ''cartels'' to dictate to the shipping public the terms and conditions of shipping. I believe that the granting of antitrust immunity to carriers, the vast majority of which are not American owned, serves no useful purpose to the American shipping public.
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My father started our company in 1958, and I began working at Kent International in 1972 after my graduation from American University here in Washington. I have been dealing with the steamship companies since 1976, and feel that I am quite experienced in dealing with them, especially in the inbound Far East trade lanes. The shipping scenario has changed considerably since I started with Kent. For example, the U.S. flag carriers have slowly dwindled. Some carriers have just gone out of business, others have been sold to foreign interests. For example, while APL still acts responsibly in many ways, it is nevertheless owned by Singaporean interests. Lykes is owned by Canadian interests. Even Sea-Land is rumored to be on the selling block, and one can only guess that its international section will be sold to foreign interests.
One can look at the chart up here, and you can readily see that of the ten top carriers in the U.S. trade lanes, only one American company survives. However, even Sea-Land is responsible for only 10% to 15% of the containers that move yearly from and to the United States. This clearly raises the question: Why antitrust immunity for the benefit of foreign carriers? What U.S. interests are served by this immunity? Surely, it is not in my interest as a small and medium-sized American importer or exporter for foreign carriers to dictate rates and services to us. If you look at the New York Times chart, even COSCO, the Chinese state-owned carrier greatly benefits from this immunity, since they recently became part of the Trans Pacific Stabilization Agreement, or the TSA as it is commonly referred to. This is a ''discussion agreement,'' which exists only because of the antitrust immunity granted by Congress, and which has been much discussed here today.
In conjunction with the gradual disappearance of U.S. carriers from the horizon, the other change, which has taken place, is the disappearance of competition in ocean shipping. Traditionally, ocean freight rates were negotiated and set generally based upon the relationship of the value of a commodity to its density, such that a commodity with a low value and weight per cubic foot would take a lower freight rate than a commodity such as computers where the value per shipment would be high, with a corresponding higher freight rate. Part of the rationale for this was to allow lower cost items to move and sell in international commerce so that transportation costs would not impede the flow of certain commodities.
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The U.S. cartels have been superimposed on this price setting mechanism since 1916 by virtue of antitrust immunity laws. These conferences have over the years been viewed as ''necessary evils.'' These conferences have been tolerated in most trade lanes until recently so long as the conferences (or cartels) were not overly dominant in specific trade lanes. For example, the cartel which had been in place until recently in the inbound Far East trade lanes, the Asia North America Eastbound Rate Agreement, referred to as ''ANERA,'' represented about 60% of the freight from Asia and which was, of course, protected with antitrust immunity. While the conference acted in many ways to frustrate competitive activities, it was somewhat tolerable because there was the other 40% of carriers, not members of the cartel, which provided the necessary competitive leverage.
Then, the Ocean Shipping Reform Act of 1998 (''OSRA'') was passed last October. In anticipation of some of the features of OSRA, the traditional conferences, ANERA included, started to either disappear altogether or to change into a more modest role. The features of OSRA that would have the effect of dismantling the conferences had to do with the ease with which members of conferences would have to establish ocean rates independent from the conference. In effect, these ''independent action'' provisions would have the ability of creating utmost competition, and rendering the conferences ineffectual at effective, collective price setting.
In anticipation of this result, the carriers brought into prominence another more egregious phenomena: the ''discussion agreement.'' Again, this mechanism, the ''discussion agreement,'' or the ''talking agreement'' as it is sometimes called, exists because of the antitrust immunity enjoyed by the ocean carriers. It has been on the books awhile, but never has it had the importance it now enjoys in rendering whole trade lanes competition free. Commissioner Won of the Federal Maritime Commission correctly concluded in his Report Summary that competition was non-existent in the Far East inbound trade lanes last year. Commissioner Won here today, and in his Report Summary, has well documented the outrageous conduct of the carrier members of the Trans Pacific Stabilization Agreement, the discussion agreement in the Far East trade lanes. He has documented individual and collective practices of carriers relating to unilateral voiding of contracts and refusing to ship freight until the shippers agreed to substantial rate increases. In other words, they held cargo hostage during a vital peak season period until their demands had been met. These were collective demands. Commissioner Won has documented the practices of the TSA by which the carriers were collectively deciding how to deal with price increases.
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It has been my impression that the TSA did not have the proper authority to set prices. When I asked the TSA carriers to negotiate price increases, they, nevertheless, mentioned that their hands were tied by the guidelines of the TSA. Let me given you a few examples of what happened, and is happening in current negotiations to my company, and other small and medium-sized importers and exporters:
1. For the past 5 years, we shipped nearly 40% of all of our shipments from Asia to the United States via Sea-Land. During the crunch period of July, August, and September of last year, Sea-Land would not accept even one container even though we had a service contract with them. At that time, we had the need for approximately 40 containers per week. It is not coincidental that Sea Land, together with almost all other TSA members, were also engaged in asking their good customers to rip up their existing contracts and signing new contracts at $1,000$1,500 per container higher. Otherwise, the message was clear: ''you will not get any space.'' Sea-Land did sign many of these interim contracts, which in my opinion, is clearly a breach of contract. To the best of my knowledge, all steamship lines in the TSA, with the exception of American President Lines (APL) and to some degree Evergreen, were negotiating these interim contracts at levels predetermined by the TSA through so-called ''voluntary guidelines.''
2. We had approximately 100 container loads that we shipped with COSCO in which we were forced to pay $300 higher than our contract rate. Otherwise COSCO, the Chinese state-owned carrier, would not accept the cargo. At the time, COSCO was not a member of the TSA. They are now members of TSA. My information is that they are now setting rates at the collective TSA levels for this season, i.e., with increases of at least $1,000 per container.
Page 128 PREV PAGE TOP OF DOC3. It is my understanding that for this shipping season which just commenced May 1, there has been none or little negotiation with TSA carriers. TSA carriers are basically 95% of the carriers in the Far East trade lanes. In other words, the increases have been dictated by TSA and the members have held the line. TSA members have taken a ''take it or leave it'' position in negotiations. In other words, there has been no competition in the trade lane because of the TSA. The TSA has collectively fixed peak season rate increases of $300 per container. The peak season goes from July through November. Again this is 100% of the carriers in the TSA collectively raising peak season rates.
4. TSA and its members have not only increased rates uniformly by about 50% from last year, but have also collectively fixed arbitraries. Arbitraries are charges in addition to the base freight rates. For example, TSA carriers have collectively put in a $300 charge for cargo originating from Keelung; $100 for cargo originating from Kaoshiung. No TSA carrier is allowed to offer through rates from Taichung. This is amazing uniformity from over 95% of the carriers in the trade. It sure doesn't seem that the carriers are just talking in the ''talking agreement.'' There is no competition in the trade lane. Nothing to negotiate. This is principally because of the antitrust immunity granted these carriers by Congress. The carriers in the Far East inbound trade lanes are uniformly saying: ''If you don't like any of these terms, too bad! They are not negotiable! You don't sign, you don't get space. Use airfreight.'' This is antitrust immunity at work.
5. The TSA collective action is so pervasive that it even covers boilerplate language on service contracts. For example, confidentiality provisions in service contracts uniformly provide that shipper data can be shared with the ''talking agreement,'' the TSA, but the shipper is prohibited from sharing any information. It is clear that the TSA is building a commodity/shipper specific data base which will then internally be used by TSA to set benchmarks so that members cannot underbid each other. They are collectively sharing vital commercial information in such a pervasive way as to completely remove competition. Remember this is in an era of confidential service contracts. But the most egregious aspect of this practice is that service contract information is available to 95% of the carriers by virtue of the antitrust immunity on the books. Again where is the increased competition which OSRA was to have provided? Further discussion of this important issue of confidentiality is attached to the written version of this statement as an article contained in the May 3, 1999 edition of ''Traffic World.'' The conclusion in the article, as well as by me, is that antitrust immunity has provided a loophole by which steamship companies can readily exchange commercially sensitive information to the detriment of the American shipping public without any fear of violating any federal law. In fact this approach defeats the whole underlying thrust of the Ocean Shipping Reform Act, which was to provide the facility for carriers and shippers to enter confidential service contracts.
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I could go on and on, but it would only be more of the same. And I keep being told that the TSA charter does not allow for price fixing. I am sorry but I see a contradiction here where the vast majority of the carriers are acting pursuant to the guidelines as if they were mandates. But even assuming that the TSA members are acting on a voluntary basis, a most egregious aspect of such discussion agreements is that they exchange vast amounts of sensitive commercial information about the marketplace and shippers. With this vast commercial data, they then establish these so-called ''voluntary guidelines'' which are then followed to the letter by the carriers. In this case, the Far East inbound trade lanes, we are talking about the whole universe of available carriers in one of our most important trade lanes for the US economy. The TSA has demonstrated that it is a thin line, or no line at all, between voluntary guidelines and commercial collusion.
I agree with Commissioner Del Won. Competition is dead in shipping. One of the main reasons for this is the ability of otherwise competing carriers to sit around and set rates and shipping terms and conditions without restraints. Either the law should be substantially changed to provide meaningful oversight over these cartels, or better yet, Congress should remove antitrust immunity from this industry. Why is this industry different? What American interest does it serve? I believe the time has come for the end of a system that only benefits foreign carriers. I ask this Committee to seriously consider ending antitrust immunity.
In a letter I received two weeks ago from Michael Seymour who is the President and CEO of P&O Nedlloyd, a British and Dutch carrier, he speaks of the wonderful nature of the ''New Era of Deregulation.'' He goes on to mention that this new era will mean consolidations and a survival of the fittest. Surely, this spirit of free enterprise does not require antitrust immunity.
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Mr. Chairman, Congressman Conyers, Members of the Committee, I want to thank you again for the opportunity to appear here before you to share my thoughts on this most important topic. I would be glad to answer any questions that you may have.
Mr. HYDE. Thank you, Mr. Kamler. The committee is very interested in what you've told us, as we are in what everyone has told us. We'll study your full statement, and probably be back to you.
STATEMENT OF JOHN CLANCEY, PRESIDENT AND CEO, SEA-LAND SERVICE, INC.
Mr. CLANCEY. Thank you, Mr. Chairman. Unfortunately, we operate in an industry that many refer to as structurally defective. In the last year, 1998, the industry lost $3.5 billion. In the transpacific alone, the industry was losing on average of $30 million a week. Rates today are below what they were in the mid-1980's. In the past 12 months, with antitrust immunity, rates to and from South America, the Caribbean, and Central America, are down 33 percent. With antitrust immunity in the Atlantic, we managed to reduce prices by 20 percent in both directions, and likewise in the Mediterranean.
This is an industry that requires an enormous amount of capital investment. In the longest bull market in the history of this country, where the S&P returns, as you know, exceeded 20 percent, where air carriers' were up 15 percent, and where third-party logistics providers' up 18 percent, the ocean carriers' returned between 1 percent and 1.5 percent.
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In the Pacific, for a number of years, most of the carriers have lost money. In the transpacific today, which people are focusing on, there is an enormous imbalance. You move two loads from Asia to the United States for one load going back. Last year we spent an incremental $100 million moving empty equipment through our system to support the demand to the United States.
The eastbound market is very, very strong. It is a matter of supply and demand. People might ask: ''What does this increase amount to?'' On a doll from Malaysia to Los Angeles, it is 6 cents. For a cellular phone from Thailand to the middle of the United States, it is 19 cents.
This is not a domestic industry. We compete with international carriers on a global basis. All of our major trading partners law have antitrust immunity for this industry. It's allowed significant improvements in service. We operate in a consortium. Our competitors operate in consortiums. It's allowed us to invest in a way that provides the highest level of service in terms of frequency and speed. On our own, as an individual carrier, we could not be able to do that.
We also have a problem in our business in that we have peaks. The middle of the year is a peak. The tail-ends are valleys. But we have to invest to provide an adequate level of service in the peak. That incents carriers in the valleys to price incrementally. The investment decisions that we make are 20-year decisions in the billions of dollars. You need the ability to work with your partners to make intelligent decisions, what they're going to invest, what you're going to invest.
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We do not have blanket antitrust immunity. We have to file our agreements with the FMC, and the act clearly defines limits on what we can do. But, it is a roundtrip business. When rates go up in one direction, it is the law of supply and demand. As we sit here, there is unmet demand in Asia. But, in 1998, we took capacity out of the transpacific. So did our competitors, because exports from the United States simply collapsed. Without the eastbound rate increase this year, we would have taken more capacity out. Without the increase, we wouldn't have six brand new competitors. Without the increase, we wouldn't have the adequate level of service to protect American importers.
As for the two shippers you mentioned, that feel like there would be retribution, I'd ask your staff to have them call me, and I'll ensure that we address their concerns. And, there won't be retribution. Thank you, Mr. Chairman.
Mr. HYDE. Thank you very much, Mr. Clancey. Your full statement will be studied very carefully.
STATEMENT OF TIMOTHY RHEIN, PRESIDENT AND CEO, APL, LIMITED
Mr. RHEIN. Thank you, Mr. Chairman. I am president and CEO of APL, Limited, the parent of American President Lines. As a strong supporter of OSRA, APL was instrumental in promoting balance among further deregulation, limited antitrust immunity, and regulatory oversight. Since we are one of the largest carriers in the transpacific, I would like to focus my remarks today, primarily, on the transpacific trade in the age of OSRA.
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Although OSRA has only recently become effective, the new law has already revolutionized how we do business. In past years, we negotiated service contracts with our customers through the conference of which we were a member. Contract offers and counteroffers were sent through this group, and voted on by all conference members. All that has changed. The conference has suspended all rate making activities as of 1 May. We deal directly with every one of our customers one-on-one. We alone decide whether we want to contract with a customer and at what terms. We alone communicate offers and counteroffers, often instantaneously across the table. We do not have to get anyone else's approval for any contract, rate, or term. As a matter of fact, we have signed close to 400 contracts in the last week alone that are all individual, many confidential, many with NVOCCs, many with shippers' associations. We've heard no complaint from any shipper or cargo owner about the contracting process.
That is not to say that we do not communicate with other carriers. Under the authority of the Transpacific Stabilization Agreement, carriers are authorized to discuss, among themselves, matters of interest in the transpacific trade. The right to do that was specifically preserved in OSRA. We talk about market conditions, trade conditions, and others.
The 1999 rate increases that have been referred to are a matter of carrier survival. Carrier revenues in the transpacific have been declining steadily for years. Even this year, many of the freight rates do not even cover carrier costs. On average, the proposed 1999 increases would bring the rates for most commodities back to their 1995 levels, without adjusting for inflation.
Since carrier costs are largely fixed costs, it costs almost as much to operate a ship with 100 containers as it does with 2,000 containers. In 1995, it cost a major shoe manufacturer $4,393 to ship a 40 foot container of shoes from China to the Midwestern United States. In 1999, if the proposed $900 rate increase is applied, it will cost you $4,060 to ship that same container. In other words, over $300 less, 4 years later.
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The shipping rates in 1984 are now represented at about 35 percent in real terms. Fifteen years of inflation and carrier competitiveness have brought the rates down that much. The total value of the shipping part of a transportation equation for an importer or an exporter represents less then 2 percent on average of the retail value of the goods.
I've been talking about the transpacific eastbound. It even gets more bleak when you look at the entire roundtrip, which we must consider, because the ships do not go just one way. Severely imbalanced, as Mr. Clancey referred. There were approximately 8 export loads for every 10 in 1996. In 1998, there were fewer than 5 for every 10. Rates in the westbound trades dropped an average of 33 percent from January 1997 to December 1998. It costs an average of $500 to $800 to reposition empty containers from the U.S. to Asia, to serve their Asian customers. It is no surprise that, during this past year, the transpacific carriers lost an estimated $30 million per week in the transpacific trade.
You can see that this year's rate increases are simply designed to bring the rates back up to near compensatory levels. Looking at both legs of the transpacific trade also illustrates how the market, and not antitrust immunity, is by far the strongest factor in determining rate levels. In the eastbound transpacific trade, the TSA carriers have a significant market share. The carriers discuss rate issues through TSA, and the carriers are on the verge of implementing a substantial rate increase. In the westbound transpacific trade, the WTSA has virtually the same carriers, the same marketshare, and the same communication system, but rates have plummeted for the last 2 years, and that's because of the Asian currency crisis, and the inability to sell our manufactured goods and agricultural products in this country to our Asian customers.
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The only explanation for this dilemma and dichotomy is economics, supply and demand. When the supply is greater than the demand, you're going to have low prices. When demand is greater than supply, which is the situation we faced last year in the Pacific, and we will face again this year, prices will go up. In the eastbound trade today, the ships are full. We cannot accept more cargo. Six new carriers are coming into the transpacific, adding more capacity. Two existing carriers are adding additional strings. But, this industry has invested billion of dollars in putting together this transportation system, which is the most effective in the world, and we have passed on the gains of productivity, of efficiency, of sharing space, with each other to utilize the ships better, make them more economic, of investing in terminals with productivity that was unheard of 20 years ago, and the situation that we've produced has made global sourcing and global manufacturing commonplace.
We talk about the global economy at if it exists without the ship part of it. It exists because of the ship part of it. Because it is efficient and cheap. It is essential that we as carriers maintain our limited antitrust exemption so that we can rationalize some of the more destructive tendencies of this unique business.
As an American carrier owned by a Singapore corporation, we, more than others, need the security of participating in discussions within our industry, with antitrust immunity. Otherwise, I can assure you, the discussions will go on, because it is legal in every other country that we deal with, and the Americans will be left out.
[The prepared statement of Mr. Clancey and Mr. Rhein follows:]
Page 136 PREV PAGE TOP OF DOCPREPARED STATEMENT OF JOHN CLANCEY, PRESIDENT AND CEO, SEA-LAND SERVICE, INC. AND TIMOTHY RHEIN, PRESIDENT AND CEO, APL, LIMITED
American President Lines, Ltd. and Sea-Land Service, Inc., the two leading American liner companies, have submitted to the Committee a joint statement including the following points:
The Ocean Shipping Reform Act (OSRA) represents a further evolution of the regulatory regime that has, since the passage of the Shipping Act of 1984, resulted in low cost, high quality, and increasingly sophisticated transportation services for U.S. importers and exporters. Although OSRA has only been effective for four days, it has already delivered substantial commercial flexibility to shippers and carriers alike.
OSRA appropriately continues a long history of international comity in shipping regulation. The consistency of U.S. law with the laws of other nations includes the continued recognition of a one hundred year old limited antitrust exemption for liner carriers. That exemption is recognized by all major U.S. trading partners.
The liner industry in recent years has been characterized by strong competition, chronic overcapacity, depressed freight rates, and returns on investment that are substantially below those in other transportation sectors.
Group carrier actions regulated under the Shipping Act rather than under the antitrust laws continue to be an appropriate tool for creating operational efficiencies and expanded service through carrier alliances, mitigating the most destructive impacts of rate and service oscillations caused by chronic overcapacity, and providing incentives to carriers to make the substantial capital investments needed to maintain and expand international ocean transportation services.
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The Asian economic crisis has created a severe imbalance between import and export cargo flows in the transpacific trades. Record high import volumes and sharply declining export volumes have caused carriers to spend millions of dollars to reposition empty shipping containers to Asia. Low export cargo volumes, steadily declining export freight rates, and repositioning costs will cause continued round-trip losses even with proposed import rate increases.
The Ocean Shipping Reform Act has already begun to deliver on its promise of a more flexible marketplace. The compromise reached in OSRA represents a delicate balance, however, and the industry requires a period of regulatory certainty in order to allow the market to adapt to the new law.
We are pleased to appear before the Committee today to discuss the Ocean Shipping Reform Act, which became effective four days ago.
We understand that the Committee is interested in the newly enacted Ocean Shipping Reform Act (OSRA) and the economic reality of the ocean shipping industry today. American President Lines and Sea-Land are the two leading American liner companies. We offer premier service to customers around the world and have been industry leaders in service and innovation.
We have also been at the forefront of advocating pro-competitive deregulatory changes to our industry. We supported the intensive efforts that led to the successful enactment of the Shipping Act of 1984, and the improved competitive environment of that law. We worked closely with this Committee during that process, and commend the thorough and careful deliberations of the House Judiciary Committee in helping to craft the 1984 Act. This Committee's report on that law still stands as an excellent explanation of the theory involved in balancing the pro-competitive requirements under Federal Maritime Commission regulation with a limited antitrust exemption. We appreciated the opportunity to work with this Committee then and are pleased to be here today.
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The Ocean Shipping Reform Act
Last Saturday, May 1, OSRA became effective. Already it is dramatically changing how the international liner industry and its customers do business.
The Shipping Act of 1984 was an important and very positive legislative development. It created regulatory clarity and certainty; it mandated the right of independent action on tariffs within conferences; and it resulted in a very efficient, competitive liner industry that has served our nation's international transportation needs exceptionally well. Under the terms of the 1984 Act, ocean carriers have created global service networks, specialized equipment fleets, improved transit times, greater schedule integrity, and advanced electronic communications and logistics services. At the same time, ocean freight rates have generally declined since 1984at times precipitously.
Even as the 1984 Act has been a tremendous success for the users of our international transportation system, the system as structured under the 1984 Act had become less attractive to shippers and carriers as our services have improved and customers' needs and expectations have developed. In particular, many carriers and shippers sought to have individual, confidential contracts rather than contracting through carrier conferences. As a result, Congress in February 1995 began the process of changing the Shipping Act, and finally passed the deregulatory changes last year.
Sea-Land and APL were pleased to be part of a coalition representing the vast majority of carriers, shippers, ports, and organized labor that supported passage of the final compromise bill. The bill was a true compromisenone of us got all we wanted. We recognize that some interests were not satisfied with the final product. However, we believe that, while all of us would have preferred certain changes, OSRA is a positive regulatory initiative that will produce a more efficient, less regulated shipping environment, better shipper/carrier relationships, and an improved transportation system. In short, we think the Congress should be pleased with the accomplishment.
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The magnitude of the changes occurring is substantial. For example, we have gone from an environment where all of our contractual relationships went through a collective carrier conference for action to an environment where all of our contracts are negotiated individually with our customers. The largest trade in the world is the eastbound (import) transpacific trade from Asia to the United States. Last year Sea-Land and APL had no individual contractual relationships with shippers in that trade. As of the first of this week, Sea-Land had signed approximately 300 individual contracts, APL had signed 350 individual contracts, and the conference in that trade had suspended activity.
These are huge changes for usfrom a sales, marketing, and administrative perspective. OSRA has also resulted in huge changes for the Federal Maritime Commission and for our customers as well. We are all learningvery quicklyand about operating in a less regulated environment. As we learn, we will become more proficient in delivering quality contract service to better meet shippers' varied needs. In order for our progress to continue, however, we believe that the rules set forth in the new Ocean Shipping Reform Act should not change any further. The Act should be given a chance to work.
Liner Shipping is a Very Competitive, International Business that Must Operate Under Internationally Accepted Regulatory Norms
Liner shipping is, by definition, an international business. As such, it is governed not just by the laws of the United States, but by the laws of all of the nations with which we trade. As has been the case for many years, the current U.S. regulatory regime is compatible with the laws of our trading partners in its recognition of a limited antitrust exemption for liner shipping. For example, Canada, Japan, China, the European Union, Latin American nations, Middle Eastern nations, and Australia all recognize the legality of carrier agreements and their related antitrust exemption. This international comity is essential to the continued viability, not only of U.S. carriers such as Sea-Land and APL, but also to the maintenance of service in the U.S. trades by our competitors from other countries. The retention in OSRA of a limited antitrust exemption as part of a comprehensive regulatory scheme also furthers one of the four Congressional policies stated in the Shipping Act, namely, ''to provide 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 policies.''
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While the industry operates under a universally recognized antitrust exemption, the liner shipping industry is intensely competitive. Since the enactment of the 1984 Act, rates have generally remained stable or declined in real terms even as services have expanded and improved dramatically. Recent performance statistics indicate the level of competition that exists in the industry. In the North Atlantic, rates went down 30% between the first quarter of 1998 and the first quarter of this year. In the trade between the United States east coast and the east coast of South America, rates dropped 33%, or an average of $834 per load, in 1998. Based on annualized 1999 rates, carriers in that trade will lose $140 million this year, and rates are still falling. In the transpacific last year, carriers were estimated to have lost $30 million per week. Worldwide, carriers last year lost an estimated $3.4 billion in the major trade lanes. These disturbing figures indicate an industry suffering, if anything, from too much rather than too little competition.
These figures, are, of course, a cause for very serious concern within the industry. If we are to continue to provide importers and exporters with the services that they require to move the $400 billion worth of goods that container ships carry in and out of this country each year, carriers must be able to take actions to stop the flow of red ink. There are a number of factors that will affect our ability as an industry to continue to act as the conveyors of international trade. One factor, and one that we understand this Committee to be focused on today, is the maintenance of the limited antitrust exemption that has been retained in OSRA. It is important for the Committee to understand why that exemption has existed for almost 100 years, and why it continues to be necessary today.
The Liner Shipping Industry Suffers From Chronic Overcapacity That Drives Rates Toward Non-Compensatory Levels
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The container shipping industry is inherently unstable. One characteristic of liner shipping responsible for that instability is the presence of structural overcapacity in the industry. That overcapacity exists for a number of reasons. One is that supply is by nature relatively fixed, while demand varies cyclically, seasonally, and directionally.
On the supply side, carriers must employ a certain minimum number of vessels on a given route if they are to be able to provide the regular, fixed day sailing schedules that our just-in-time economy demands. Furthermore, those vessels must be of a size that can accommodate the anticipated peak demand on that route. The combination of the twin requirements of regular schedules and adequate capacity to meet peak demand results in a supply of vessel capacity that is relatively inelastic, at least over the short to middle term.
In contrast, the demand side of the equationcargo seeking transportationis quite variable. Actual demand at any given time is often below the peak-level capacity around which liner services are structured. This structural over-capacity causes market instability because it induces liner companies to try to fill the inevitable empty space on the theory that some revenue is better than none. Rates for all of the space on the vessel are thus driven down toward marginal costs.
In an industry where marginal costs make up a large percentage of total costs, that kind of competition might lead to a very efficient market. In the liner industry, however, marginal costs are somewhere in the range of 25% of total costs, with fixed costs making up the difference. Pricing at marginal cost therefore results in rates that do not return enough revenue to support the massive capital investments needed to maintain a modern container fleet over the long haul.
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Another characteristic of liner shipping is that the international shipping market is not like a domestic U.S. market where all competitors operate under the same national laws, or have the same business and profit motives. While neither of our companies have earned our cost of capital in recent years, some liner companies haven't made a profit in over a decade. In addition, foreign shipbuilding subsidies continue to produce new tonnage into the business that market forces by themselves would not produce. This contributes to overcapacity in the industry.
As the financial performance figures noted above and those cited in the Mercer Management report submitted to the Committee indicate, the industry is currently experiencing a particularly severe round of the destructive competition that results from structural overcapacity.
Carrier Activities Allowed By A Limited Antitrust Exemption Are Necessary To Dampen Fluctuations in the Unstable Market For Ocean Shipping Services.
As disappointing as our recent financial results have been, they would have been even more disappointing in the absence of carriers' ability to work together to mitigate fluctuations in the market. Through conferences, and now more commonly through less restrictive discussion agreements, carriers are able to come together, discuss, and, within limits, agree on common approaches to the market. These group activities require an exemption from the antitrust laws. That exemption has been recognized here for almost 100 years.
As history and the figures stated here and in the Mercer Management report show, carrier group activities have not allowed carriers to control the market. If we had been able to control the market, we would not be performing at the financial levels that are so common in the industry today. Absent our ability to discuss commercial issues of common interest, however, we believe that the results would be much worse. Specifically, absent some ability to dampen the most drastic market swings, bankruptcies, consolidations, and mergersby no means unknown in the industrywould be far more frequent. Paradoxically, therefore, because of the unique nature of the industry, the antitrust exemption mitigates inherently destructive market forces that, left unchecked, would lead to destructive competition and reduced shipper choice.
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At the outset, it is important to recognize that the antitrust exemption is limited. Carriers may only exercise their exemption in accordance with detailed agreements that they must file with the Federal Maritime Commission. The Commission has a broad array of powers to insure that carriers do not abuse their exemption. First, the Commission has the statutory authority to go to court to enjoin an agreement that uses its authority to unreasonably raise rates or curtail service. In addition, there is a long list in the Shipping Act of so called ''prohibited acts''practices that are not allowed under any circumstances. All of these tools were designed, and have functioned, as part of the comprehensive regulatory scheme that places the liner industry under control of the Shipping Act rather than the antitrust laws.
In this regard, the Ocean Shipping Reform Act, which went into effect four days ago, further, limits the scope of permissible carrier action. For example, OSRA contains a new provision that prohibits groups of carriers from requiring their members to disclose information about confidential, individual service contracts, the commercial arrangement under which most cargo is expected to move under the new law. In addition, carrier groups must allow their members to enter into individual, confidential contracts, if they and their customers wish to do so. Our experience so far indicates that an increasing portion of the total cargo will move under such individual contracts.
It is also important to recognize that the antitrust exemption does not function to stabilize the market just through short-term common positions on rates. Group rate actions are themselves inherently unstable, and their effectiveness is limited by design by the Shipping Act of 1984 and, even more so, by OSRA. For example, since 1984, carriers in conferences have had an absolute right of ''independent action,'' the right to deviate from conference tariff rates. Under OSRA, individual rate actions are encouraged by provisions that prohibit carrier agreements from requiring their members to disclose service contract information. These statutory provisions ensure that carrier agreements cannot act as cartelsa name often erroneously appliedbecause agreement members by law are given an incentive to contract individually with customers.
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In light of these limitations on rate setting, it is apparent that the stabilizing value of carrier groups also encompasses something more subtle than rate setting. Specifically, the ability to discuss trade conditions and seek similar pricing strategies provides carriers a means of justifying the tremendous investments of capital that are necessary to maintain and expand capacity and services in an historically volatile industry. Given the long lead time (approximately 18 months for a large container vessel) and large capital investment ($7090 million for a 5,000 TEU vessel) required for new building, carriers must have some expectation of future return in order to justify continued participation in and expansion of services to meet the growing demand. The combination of tools allowed by carrier agreementsinformation exchange, market analysis, rate discussions, and the likeplays a significant role in providing carriers with some expectation that their investments are reasonable. Without that incentive to invest, creation of new capacity would wait until demand outstripped existing capacity. That circumstance would restrict U.S. trade and negatively affect the entire U.S. economy.
Something that is often overlooked is that mitigating destructive competition and encouraging investment are not the only advantages of the antitrust exemption. There is a very strong service function as well. Specifically, agreements authorized by the Shipping Act have allowed carriers to share ships and other assets in ways that have improved service and increased efficiency in trades all over the world. The tremendous cost savings resulting from those increased efficiencies have been passed on to our customers, resulting in rates that are today almost uniformly less in real terms than they were ten years ago. These carrier alliances are essential to the efficient operation of many lines, and the antitrust exemption is necessary to allow them to operate without legal threat.
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The Transpacific Trades Illustrate The Substantial Changes That OSRA Has Already Caused
Much attention has been given of late to the transpacific trades. We discuss below some of the particulars of that trade by way of example of the current state of the industry and the real-world economic conditions in which carriers and shippers operate.
The eastbound transpacific trade is the largest single U.S. trade lane. Approximately 2.6 million 40-foot containers of cargo moved in the trade in 1998. The westbound trade is also significant, with roughly the equivalent of 1.4 million 40-foot containers moving in 1998. The transpacific trade, particularly in the eastbound direction, is dominated by service contracts. Before May 1, over two thirds of the cargo moved under service contracts, and we anticipate under OSRA that that percentage will increase. Although we are only in the first week of its effectiveness, OSRA has already substantially changed the way we deal with our customers.
In past years, the conference of which we were members, the Asia North America Eastbound Rate Agreement, or ANERA, acted as an intermediary between us and our customers. We were prohibited by the ANERA Basic Agreement from offering our own individual service contracts. Contract offers and counter-offers were sent to customers through ANERA and voted on by all ANERA members. Proposed offers or responses to offers often had to wait several days until ANERA's next meeting. If one carrier wanted to offer a particular rate, but could not convince a majority of the conference members to support it, that carrier could not provide that rate under service contract. If one carrier wanted to contract with a customer, but a majority of the conference members did not, there was no contract with that customer. The same constraints limited carriers' ability to amend existing service contracts.
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This year, all that is changing. As required by OSRA, the prohibition on individual service contracts is gone. In fact, ANERA suspended all ratemaking activities as of May 1. Now, each carrier deals directly with every one of its customers, one-on-one. Each carrier alone decides whether it wants to contract with a customer and on what terms. Each carrier alone communicates offers and counter-offers, often instantaneously across the table. No carrier needs to get anyone else's approval for any contract rate or term.
That is not to say that carriers do not communicate with each other at all. Under the authority of the Transpacific Stabilization Agreement, or TSA, carriers are authorized to discuss among themselves matters of interest in the transpacific trade. We talk about market conditions, trade stability, prevailing rates and charges. The right to do that was specifically preserved in OSRA.
But there is one very important difference from the way things used to operate under the conference. Everything done in TSA is on a voluntary and non-binding basis. One carrier may ask another carrier if they are applying a charge, or what they think the rate should be for a commodity, but they may not get an answer. If an answer is received, without service contract rates being published, there is no way of verifying whether the answer is correct. Many carriers have contractual confidentiality restrictions that limit what they can discuss in the TSA context.
VI. The Proposed 1999 Transpacific Rate Increases Are Critical To The Survival of The Carriers in the Trade
Page 147 PREV PAGE TOP OF DOC As you probably know, many carriers are raising their rates in the eastbound transpacific by $900 to $1,000 this year. Some people have asked whether that increase is because of TSA. The answer is that TSA is not the reason for the increase. Purely and simply, the market is the reason for the increase.
When supply exceeds the demand for a product, prices fall, and when demand exceeds supply, prices rise. This year, projections are for an unprecedented demand for our services in the eastbound transpacific. Cargo levels in the trade rose by 17% in 1998, and near double digit growth is predicted for 1999. Our ships are already nearly full, and it is not yet even the peak shipping season. TSA or no TSA, it would be a very unusual market where the rates did not rise under these conditions.
The market has not always been like this. In fact, we have consistently seen the other side of the supply and demand curve. Over the past 15 years, the transpacific trade has been characterized by overcapacity and intense competition for the available cargo, leading to chronically depressed rates.
The 1999 rate increases are not just desirable; they are a matter of the carriers' very survival. Carrier revenues in the transpacific have been declining steadily for years. Even this year, many of the freight rates do not even cover carrier costs. Since carrier costs are largely fixed costsit costs almost as much to operate a ship with 100 containers as with 2,000 containersthose lost revenues come directly from the bottom line. On average, the proposed 1999 increases would only bring the rates for most commodities back to their 1995 levels, without adjusting for inflation.
Page 148 PREV PAGE TOP OF DOC Mercer Management Consulting was recently asked by a group of major ocean carriers to study trade conditions in the transpacific. A copy of their report has been submitted to the Committee. One of the most striking findings in the report relates to rate trends in the transpacific. Mercer studied rates for the major moving commodities in the trade. Their analysis confirms that in almost all cases the proposed rate increases in the eastbound trade would merely bring the rates back up to their 1995 levels, before adjustment for inflation. After adjustment for inflation, many rates will still be well below 1995 levels.
A few examplesand there are many in the Mercer studyserve to illustrate the point. In 1995, it cost a major shoe manufacturer $2,700 to ship a 40-foot container of shoes from Singapore to the west cost of the United States. In 1999, if the proposed $900 rate increase is applied, it will cost $2,400 to ship that same containerin other words, $300 less four years later, even before adjusting for inflation. Applying that rate to a single pair of shoes, which retail for anywhere from $50 to $150 per pair, results in an ocean transportation charge of around fifty cents per pair.
In 1995, it cost the major U.S. department stores $2,818 to ship a 40-foot container of their general merchandise from Hong Kong to the U.S. West Coast. In 1999, after the full rate increase, that same retailer could make the same shipment for $2,735nearly $100 less four years later, again before adjusting for inflation.
VII. Overall Financial Returns in the Transpacific Are Poor Because of Westbound Trade Losses And East-West Cargo Imbalance
Up to now we have discussed only the carriers' transpacific eastbound (import) losses. The picture is even more troubling when you look at our entire round trip voyage, which those of us that have bottom line responsibility for the company must do. If we could operate only in the eastbound direction this year, we would be in passably good shape with the rate increases. Of course, that is not possible. Ships and equipment carrying imports from Asia must somehow get back there to take the next load. And remember that with our high fixed costs, it costs almost as much to operate an empty ship as a full ship.
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This is a serious problem because, at the moment, the transpacific trade is severely imbalanced. The government announced last week that we are headed toward record trade deficits, particularly in the Asian trades, and the forecasts are that it will get worse. In 1996 there were approximately 8 export loads for every 10 import loads. In 1998, there were fewer than 5 export loads for every 10 import loads. As a result, rates in the westbound trades dropped an average of 33% from January 1997 to December 1998.
This cargo imbalance has led to a massive surplus of empty shipping containers in North America, and a shortage of containers in Asia. Ideally, carriers would make some money, or at least cover costs, with cargo shipments on the return trip to Asia. However, because of the imbalance, approximately 50% of all westbound containers are empty, which means there is no revenue to offset the costs. This situation led the marketing manager for the Port of Long Beach, the United States' largest port, to say that in the last year, ''Our number one export was empty containers.'' It costs carriers on average $500800 to reposition empty containers from the U.S. to Asia. The repositioning cost for empty containers is pure loss for the carriers. It is no surprise that during this past year the transpacific carriers lost an estimated $30 million per week.
This year's rate increases are simply designed to bring the rates back up near compensatory levels. We do not believe that is an unreasonable goal; indeed, it is the duty of any company to its stockholders. Taking a broader economic view, we must return ourselves to profitability in order to continue to supply the frequent, regular, and high quality service that our customers require and deserve.
Page 150 PREV PAGE TOP OF DOCVIII. The Difference In Eastbound and Westbound Rates Shows That The Market is Working in the Transpacific
The stark contrast between the eastbound and westbound legs of the transpacific trade illustrates that the market, not carrier group activity, is by far the strongest factor in determining rate levels. In the eastbound trade, the TSA carriers have a significant market share, the carriers discuss rate issues through TSA, and the carriers are on the verge of implementing a substantial rate increase. In the westbound transpacific trade, the WTSA has virtually the same carriers, the same market share, and the same rate discussion authority, but the rates have plummeted for two years. The only explanation for this is the marketsupply and demand.
Another sign of the strength of the market forces at work in the transpacific is the flood of new carriers entering the trade. Six shipping lines, including some of the largest in the world, have announced new transpacific services over the next few weeks: Mediterranean Shipping Company, Trans-Pacific Lines, Great Western Steamship Company, Compagnie Maritime d'Afretement/Compagnie Generale Maritime, Norasia Lines, and Far Eastern Shipping Company (''Fesco''). In addition, two existing carriers, Evergreen Marine Corp. and Zim-American Israeli Shipping Company, have added new vessel strings that will significantly increase the amount of capacity available in the trade.
New entrants will traditionally respond to a favorable or growing market. These new carrier entrants show that the transpacific is a fiercely competitive market environment. Their entrance also demonstrates that the expectation of remunerative rates is a key factor in encouraging timely improvements in and expansion of needed transportation services. Those rates and that expectation would not have materialized in time to induce new tonnage to enter the market before the peak season absent the ability of major carriers in the trade to agree last year on a rate restoration strategy.
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Third Party Concerns
We have been informed that one reason for this hearing is that some smaller nonvessel operating common carriers (NVOCCs) and freight forwarders are concerned about the effects of the new law.
It can be difficult transitioning from a tightly regulated, transparent common carriage system to a less regulated, confidential contract carriage system. Such change has proved highly successful in trucking, air cargo and rail. We are confident it will be successful in liner shipping as well.
Such change has always produced a more competitive and flexible market. This industry will be no exception. And it will be more competitive and less certain for NVOCCs and forwarders as well as carriers such as ourselves.
We appreciate that their marketplace is getting more competitive and that large NVOCC/forwarding companies are putting intense pressure on their smaller competition. While these companies don't require the immense capital investments of vessel operators, the competitive pressures they face are not insignificant.
Each of our companies does business with NVOCCs and forwarders, and we hope that will continue and grow. But a deregulated market will produce winners and losers in all our respective industries. We believe that the four day old Ocean Shipping Reform Act will allow the market to work more efficiently. The third party service providers which provide services valued by their customers will prosper. Those whose business relied on transparent, regulated pricing may face tougher competitive challenges. The same will be true of ocean carriers.
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Allegations Against Transpacific Carriers Are Unrelated To OSRA or the Antitrust Exemption
We would like to close with a few comments on the report of Commissioner Won of the FMC regarding transpacific carrier practices during last year's peak season. It is difficult to comment in great detail because the FMC has declined to give us a copy of the full report that was recently given to you. There are, however, a few things we can say.
First, as the Commission has acknowledged, the report represents only the preliminary findings of one investigator, not the Commission as a body. There has been no proceeding in which the carriers have been able to address the bulk of the allegations the report apparently contains. Certainly there have been no Commission findings of legal violations, only untested allegations.
Most important for purposes of this hearing, the allegations in the Won report have nothing to do with the antitrust exemption, and they have nothing to do with OSRA. In the report of his investigation, Commissioner Won has made some serious-sounding allegations. We strongly disagree with those allegations. Even putting that aside, the practices complained of do not relate to the antitrust exemption because they were not collective actions. The allocation of vessel space is a decision made by each carrier individually, not by TSA or any other group. Carriers simply do not, and cannot, tell other carriers what containers they should put on their ships.
The other point that we would like to make about the Commission's review of activities in the transpacific is that the investigation is only concerned with what happened last year. What happened or did not happen last year was under the old law and the old service contract system. Unfortunately, a perception may have arisen that the Commission's ongoing investigation is related to the implementation of OSRA. It is not, and we believe that is important that the two be separated. Otherwise, we make the already difficult job of implementing OSRA even more difficult by creating unfounded confusion and mistrust in the marketplace.
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OSRA has only been effective for four days, but it has already changed fundamentally the way that our industry does business. Getting to this point has not been easy, and it has caused a great deal of uncertainty and upheaval in the marketplace. We believe that the compromises reached in OSRA strike a balance that will encourage competition while also providing the stability necessary to allow us to continue to provide the superior service that our customers expect and deserve. In order to determine whether we have in fact struck the right balance, however, we all need a time during which the rules do not change further. The ocean shipping industry in the best of times operates in a very precarious equilibrium. The Asian economic crisis and the uncertainty associated with OSRA have made that equilibrium even more tenuous. We expect the Federal Maritime Commission to monitor our transition into this new era in ocean transportation, and we seek your assistance in making sure that the new system is given a chance to work.
Thank you for the opportunity to appear before you today.
Mr. HYDE. Mr. Rhein, I'm curious. How can you say it is an American industry owned by a Singapore interest? How does that work?
Mr. RHEIN. Because we are a subsidiary of a Singapore company. We are an American flag carrier. We are a Visa and MSC participant with the Government, so our ships have American crews, their American registry
Page 154 PREV PAGE TOP OF DOC Mr. HYDE. But the stockholders are Singapore?
Mr. RHEIN. Right.
Mr. HYDE. Right?
Mr. RHEIN. Correct.
Mr. HYDE. And I suppose the corporate decisions are made by the stockholders and the board of directors, not the employees?
Mr. RHEIN. No. That is not correct, other than major issues, but as far as the issues on the table here, they are made in Oakland, California.
Mr. HYDE. Mr. Rhein, thank you so much.
STATEMENT OF HUGH WELSH, DEPUTY GENERAL COUNSEL, THE PORT AUTHORITY OF NEW YORK AND NEW JERSEY ON BEHALF OF THE AMERICAN ASSOCIATION OF PORT AUTHORITIES
Mr. WELSH. Thank you, Mr. Chairman. I am the deputy general counsel of the Port Authority of New York and New Jersey. I am here today as the chairman of the Law Committee of the American Association of Port Authorities, and I want to thank you and the members of the committee for listening to the opinions of a group of ports that probably have the most at stake, but say the least on these issues.
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The American Association of Port Authorities is an organization that represents 140 public port authorities in the western hemisphere, 85 percent of which are United States ports. They have a huge financial investment in the future of the maritime industry. The oversight hearing today deals with the antitrust aspects of the Ocean Shipping Reform Act. Since antitrust immunity is a concomitant feature of regulation, the antitrust aspects of the Ocean Shipping Reform Act cannot be discussed in isolation from the question of continued regulation of the maritime industry.
Public port authorities of this country see no reason why, after so many years of review and scrutiny of the existing regulatory regime, that consideration should have to be given to altering the existing antitrust immunity found in either the Ocean Shipping Reform Act, or the preceding legislation.
As I mentioned before, public port authorities have a huge financial investment of public funds in the development of modern marine terminal facilities. Many of you are probably aware of some of the members of our association, ports that are famous, and that are remarkable in the commitment that they have made to the maritime industry. The ports of Los Angeles, Oakland, Long Beach, New York, Houston, Miami, Seattle, are all members of our association and all have made investments of hundreds of millions or billions of dollars.
There is no group with a larger stake in the future of the maritime industry than the public port authorities who have invested billions of dollars in marine terminals and navigation projects. These projects are the projects that have kept the arteries of commerce of our country open, and the beneficiary of that huge investment of public funds are, not only the people of the regions that we represent, but the ocean carriers, the shippers, the ocean transport intermediaries, and, in fact, even the United States Government.
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It is the responsibility of public port authorities to protect this investment of public funds, and to manage those facilities in a prudent manner, and in a business like way. While the public port industry is intensely competitive, the decisions of public port officials regarding their own operation is directed, not only by market consideration, but by public policies and political concerns. Simplistic suggestions that the market should control port development and operation with an application of the antitrust law, simply ignores the reality of the modern maritime industry.
It is not relevant in matters where the market is only but one factor in the decision making process. The public port industry has identified a number of clear advantages to the retention of the current regime of regulation and antitrust immunity. The current system permits public ports to better plan the allocation and investment of funds for the development and operation of public port facilities. Rates and service can be rationalized, and customers and markets allocated, thereby improving the efficiency of the investment of those public funds.
The effect of the Ocean Shipping Reform Act on ports, we believe, will be indirect and more subtle than was seen after the 1984 act. The primary focus of the Ocean Shipping Reform Act is the relationship between ocean carriers and shippers. To the extent that the new act puts pressure on ocean carriers to lower already low rates, those carriers will be inclined to, in turn, pressure ports for a decrease in already low rents and charges. If, in the future, the ocean carrier conference system is no longer available to maintain a level of minimum rates, which is projected, and as large shippers scurry to negotiate confidential contracts with carriers, there will be an increasing downward pressure on port charges. This, we suggest, will jeopardize the enormous public investment in port development in the United States.
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The option for public port authorities to form port conferences, to take reasonable and collective action, which would permit, among other things, a rationalization of rates and charges, is viewed by them as being in the public interest, and has the potential for providing protection for their investment of public funds.
Since 1916, the various shipping acts and the existing regulatory regime, with the concomitant antitrust immunity, has been exposed to Congressional scrutiny many times. The last time was only last year, and that legislation took effect only 5 days ago. We suggest that there is no need to once again reopen the issue when no need has been demonstrated to do so. I want to thank you for listening to the observations and suggestions of the public port industry.
[The prepared statement of Mr. Welsh follows:]
PREPARED STATEMENT OF HUGH WELSH, DEPUTY GENERAL COUNSEL, THE PORT AUTHORITY OF NEW YORK AND NEW JERSEY ON BEHALF OF THE AMERICAN ASSOCIATION OF PORT AUTHORITIES
My name is Hugh H. Welsh and I am the Deputy General Counsel of the Port Authority of New York and New Jersey. I serve as the Chairman of the Law Committee of the American Association of Port Authorities and my testimony here today represents the views of the United States delegation of the AAPA.
The oversight hearing today deals with the Antitrust Aspects of the Ocean Shipping Reform Act of 1998. The regulation of the ocean shipping industry has been the subject of congressional scrutiny many times since the Alexander Commission considered it in 1913. That investigation led to the passage of the Shipping Act of 1916. After the Merchant Marine Act of 1920, the International Shipping Act of 1933 and the Merchant Marine Act of 1936, in 1984 Congress, after lengthy debates, passed the Shipping Act of 1984. That Act purported to be a comprehension of the laws applying to the industry. During the hearings before the House Subcommittee on Monopolies on HR 1878, which was to become the Shipping Act of 1984, the Chairman of the Federal Trade Commission questioned the need for broad antitrust immunity for agreements involving marine terminal operators and port authorities. This proposition, which had little or no support from the marine transportation industry and was not based on any apparent complaint regarding the effectiveness of the existing regulatory system, was opposed by representatives of port authorities and terminal operators.
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The antitrust issue was raised in the closing hours of the debate on the Bill and the record on this and other issues was incomplete so the Committee and Congress chose instead to retain the immunity provision which was carried over from the 1916 Act. The Federal Maritime Commission was instructed to prepare an analysis of the impact of the Act which would address, among other things, ''the need for antitrust immunity for ports and marine terminals. . .''.
Section 18 of the 1984 legislation mandated a five-year study of the impact of the Act and created the Advisory Commission on Conferences in Ocean Shipping. The Commission completed still another study which resulted in no recommendations being made to alter the law applying to conferences in Ocean Shipping or antitrust immunity. Then again, after several years of discussion and debate, the law was once again reviewed and resulted in the passage of the Ocean Shipping Reform Act of 1998. That Act has been effective for only a few days and still another review is being undertaken.
Congress when passing the Ocean Shipping Reform Act of 1998 did not see fit to directly alter the regulation applying to United States Ports. The Act continued antitrust immunity for both carriers and ports. We see no reason why antitrust immunity should now be altered or why the Ocean Shipping Reform Act of 1998 should now be revisited. We know of no reason for or a suggestion having been made that the public port industry should be subject to the antitrust laws. Neither have any abuses been identified warranting such action. The Shipping Act of 1984, and the Ocean Shipping Reform Act of 1998 represent a series of compromises and accommodations which now have resulted in a body of legislation that has not been shown to be deficient. Certainly no one has presented a strong case for altering the current regulatory regime applying to public port authorities. Changes now would substitute uncertainty and uneven application of the antitrust laws for an existing effective and comprehensive system.
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The American Association of Port Authorities was founded in 1912 and today represents more than 140 public port authorities in the United States, Canada, Latin America and the Caribbean. In addition, the Association represents over 200 sustaining and associate members, firms and individuals with an interest in the seaports of the Western Hemisphere. AAPA port members are public entities mandated by law to serve public purposes.
85% of the AAPA's members are United States port authorities, public agencies which have made a huge investment of public funds in the development and operation of our country's ports. The names of many of the United States ports represented in the AAPA may be familiar to members of the Committee. In California, the Ports of Los Angeles, Long Beach, Oakland and San Francisco, among others, are represented. So are the many ports in Florida, the Massachusetts Port Authority, the North Carolina State Port Authority, the South Carolina State Port Authority, the many Great Lakes ports and others.
The public port industry in the United States has invested vast resources of public funds in the development and maintenance of a port system that is one of the most efficient in the world. The facilities developed by members of the AAPA serve the interests of ocean carriers, marine terminal operators, non-vessel operating common carriers, shippers and the public.
U.S. port development and maintenance is a shared responsibility of Federal, state and local governments with extensive private sector participation. Under this relationship, rooted in the U.S. Constitution, the Federal government maintains harbor access channels, while individual ports construct and maintain the landside terminal facilities, dredge their own berths, and contribute to channel improvement cost-sharing programs. Relying in good faith on this long-standing partnership, local port authorities have spent almost $17 billion since World War II.
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According to the U.S. Maritime Administration at the Department of Transportation, ports are spending record levels to update and improve their facilities. In 1997, ports invested $1.5 billion, including: $225 million for general cargo; about $550 million in investments related to containers; $315 on infrastructure improvements; and $130 million related to dredging. My own port, the Port Authority of New York and New Jersey has recently committed to contribute approximately $183 million as its share of one dredging project to keep the navigation channels open.
During the 5-year period between 1998 and 2002, ports predict they will spend just under $7.7 billion. They plan to invest approximately $1 billion to accommodate general cargo; $2.7 billion for containers; $1.8 billion for infrastructure and $950 million for dredging.
The members of the AAPA are public entities mandated by law to serve public purposes, primarily the facilitation of commerce through waterborne trade. As such, public ports are economic development entities, charged by their local publics and the legislative bodies which created them to make investments that create local employment and other economic benefits.
Public port authorities are organized in a variety of institutional forms and are governed by elected or appointed Board or Commissions and managed by professional staffs. As public agencies, AAPA members carry out a legislative mandate imposed by the legislation to which they owe their authority to act.
While the port industry is intensely competitive, the decisions of public port officials regarding their operation is directed not only by market considerations but also by public policy goals and political considerations. That is, public port development does not result from the investment of only private capital, which implies the application of purely market forces. Instead, the development of public port facilities is undertaken with public funds and quite often involves matters of public policy that include local and regional economic development considerations.
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The condition of our ports in servicing the flow of waterborne trade and in providing capabilities for national defense strategies must be considered in terms of the nation's interest. It must be recognized that in serving these definable national needs, our ports represent considerable investment by the local and state port authorities. Our public port system is a national asset supported by local funds.
Any debate regarding regulation with antitrust immunity versus deregulation with no immunity is not unlike a similar debate that took place early in the century prior to the passage of the 1916 Shipping Act. It's not necessary now to recount in detail the history of the Shipping Acts other than to note that the Alexander Committee, which studied maritime industry practices at that time, recommended that industry be placed under government supervision and that an administrative agency be invested with the power to approve and disapprove agreements under the conference system. For the greater part of this century, it has been the policy of the United States in the ocean carrier and marine terminal industry to curb anti-competitive abuses by requiring regulatory agency approval of various agreements rather than through the application of the antitrust laws. Not because of any identified abuses or complaints of anti-competitive conduct but rather only an academic observation, public port authorities were asked in the past to defend their need for continued antitrust immunity under the Shipping Act of 1984. This they have done during the debate regarding the 84 Act, during the Section 18 study and during the debate relating to the Ocean Shipping Reform Act of 1998.
During the discussion relating to the passage of those Acts, comments of various ports were received which are germane to the issue of the need for continuing antitrust immunity. Most commenting ports recognized a continuing need for regulation and the fact that regulation was linked to the antitrust laws. The ports identified certain activities which required antitrust immunity, including but not limited to rate-setting, allocation of customers and of markets, and reciprocal exchanges of information among competitors. It has been suggested that without antitrust immunity, rate wars could ensue driving terminal operators out of business, adversely impacting on ocean carriers and causing widespread instability in the industry.
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An analysis of the comments made by public port agencies reveals a common thread running through all of them. Public ports are not trucking companies, telephone companies, or brokerage firms, nor do the services they supply and their other characteristics make them akin to machine shops, hotels and repair facilities, as an official at Department of Justice once suggested. Public ports are public agencies that carry a legislative mandate imposed by the legislation to which they owe their authority to act. While the port industry is intensely competitive, as I previously noted, the decisions of public port officials regarding their operations are determined not only by market considerations but by public policy and political imperatives. Port development is not an investment of private capital with an economic analysis based on solely market principles. Rather, the development and operation of public port facilities are undertaken with public funds and quite often involve matters of public policy that transcend distinctly economic considerations. In short, any suggestion that we should let the market control simply is not relevant in matters where the market is but one factor and cannot by itself control.
The public port industry has identified a number of clear advantages to the retention of the current regime of regulation with antitrust immunity. All of these must be considered within the context of a discussion of an industry that invests millions of dollars of public funds annually and whose members for the most part are carrying out the mandate of the States and cities which created them.
Continued antitrust immunity permits public ports to better plan the allocation and investment of funds for the development and operation of public port facilities. Rates and service can be rationalized and customers and markets allocated thereby improving the efficiency of investment. Modern ports no longer rely on cargo captive to them but must fiercely compete with other ports. Rate wars within a port have the potential of destroying a ports's ability to compete with neighboring ports hence, a system which permits a port to avoid destructive rate wars and plan for the efficient development and operation of its facilities will, over the long term, protect the investment of public funds and also foster inter port competition.
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Below cost operation can deprive communities of the financial resources to maintain and improve the physical infrastructure of the port. Such an occurrence would be detrimental to our nation's economy by inhibiting our ability to trade and compete in the international marketplace.
As responsible public agencies, we cannot also be unmindful that another destructive result of loss of antitrust immunity will be the plethora of frivolous lawsuits brought by steamship lines for the purpose of extracting the lowest price possible from the port, or by stevedoring companies attempting to gain the greatest possible advantage in negotiating agreements with public port agencies. At the present time, a primary benefit of the FMC's procedures for acquiring immunity is total certainty of application as far as the antitrust laws are concerned.
Some have contended that state and local antitrust immunity will serve to fill the gap should federal immunity be eliminated. In short, it has been suggested that upon deregulation, public port authorities would continue to enjoy antitrust immunity. This enticing prospect has been held out to port authorities through a suggestion that the Local Government Antitrust Act, 15 U.S.C. 36 or the ''state action'' doctrine might provide the best of both worlds for public port authorities. An analysis of these possibilities reveals if nothing else, the uncertainty of immunities developed through judicial opinion or by statutes of limited applicability.
The state action doctrine is not based upon an affirmative declaration of immunity but rather on implied exemptions to the antitrust laws. It is possible that the doctrine would apply to public port agencies in varying degrees depending on the nature of the agency and applicable enabling legislation. There would no longer be a uniform comprehensive regime applicable to all public port agencies.
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Public Port Authorities are public agencies charged with a public trust. They have a legislatively mandated responsibility to protect and promote the commerce of the regions they represent and the fiduciary responsibility to protect the public assets entrusted to them. Authority now provided under the Shipping Act for port agencies to form port conferences could provide a vehicle for reasonable collective action which would permit, among other things, a rationalization of rates and practices. This can provide public port agencies with the ability to avoid duplication of assets, excess capacity and a better stewardship of the public funds entrusted to them.
Mr. GOODLATTE [presiding]. Thank you, Mr. Welsh.
Mr. Kadar, welcome.
STATEMENT OF MARK KADAR, VICE PRESIDENT, MERCER MANAGEMENT CONSULTING, INC.
Mr. KADAR. This close enough? I am Mark Kadar, a vice president with Mercer Management Consulting of Boston. Mercer was requested by a group of major container operators to prepare a brief study
Mr. GOODLATTE. Mr. Kadar, I do think you need to pull the microphone a little closer to you.
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Mr. KADAR. How's that?
Mr. GOODLATTE. That's better.
Mr. KADAR. Wonderful. We were asked by a number of major container lines to prepare a study looking at the overall economics of the liner shipping business and some of the specific dynamics of the transpacific trade. That study, with its graphs and charts, is in evidence. I think that we were uniquely qualified to prepare this study, not only because we know the liner shipping industry very well, but we have worked extensively, as have I personally, with all of the different transportation modes, as well as with many, many shippers and intermediaries. Thus, I believe our viewpoint can be truly independent.
I would like to just make three simple points today. First, to try to explain a little why the economics of the shipping lines, which have been so ably described by Mr. Clancey and Mr. Rhein, are so poor overall, and they are truly terrible.
Second, to make the point that, as far as we're concerned, the transpacific eastbound rate increase is market driven, justified, and necessary.
Finally, to indicate that the impact of this increase is truly very small, since ocean shipping remains one of the great bargains in the world today.
Let me try to just give a few facts concerning the economics of the liner industry. They are terrible. Average operating margins are around 4 percent, the lowest in the transportation industry. It is very, very troubling in a time when shareholder value growth is going through the roof, and the Dow is over 10,000 that the lines are not only not earning their cost of capital, but, basically not returning anything to their shareholders. All rational shareholders, regardless of where they are, be it Oakland, or Hamburg, or Singapore, obviously are led to ask, ''There must be an easier way for me to get rid of my money than staying in this business.''
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This is the case despite millions and billions of dollars in cost reductions that have been undertaken over the last few years. Why is this? A number of reasons, and I think one of the most important is just the high level of competition and the high level of commercial fragmentation in every one of the major trade lanes.
Second, despite very, very large investments, particularly by the leading lines, to improve their service, this service, in the view of most shippers, is insufficiently differentiated. Therefore, most shippers view liner shipping essentially as a commodity business, and indicate that their switching costs are very low.
Number three is what I refer to as a history of volume-driven, ''just fill the ships,'' price-based competition, in order to try to meet the very high marginal costs of operating these assets on a daily basis. This has led to rates plunging dramatically on all trade lanes over the course of the last 5 years.
The transpacific is no exception. In some ways, the lines are worse off in the transpacific than anywhere else in the world, for two reasons. It is the most sophisticated trade: The services that are required in the transpacific by shippers and provided by the largest lines, are much, much higher than in many of the other trade lanes.
This lane, more than any other, has been hit hardest by the combination of the Asian financial crisis, and the increased strength of the U.S. economy, leading to the need for over a million containers to be transported back to Asia to be reloaded. The cost of this is actually extremely high. And, although the lines are thrilled to have their ships full eastbound, no doubt they would be economically better off if the trade were more balanced and perhaps not quite full in one direction.
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Total rates have decreased approximately 30 percent per slot between 1995 and 1998, and the rate increases that are proposed now will bring rates, adjusted for inflation, up to about where they were in 1995, and are extremely reasonable in terms of the impact on consumers.
We are fully of the opinion that the rate increase is necessary, and that the market in liner shipping is changing. Lines are trying very hard to reduce their costs and to increase services to shippers. We believe that the economics of OSRA actually will help. But, in order to give the lines a chance to break out of a vicious cycle of poor performance, we believe that demand-based pricing, which this rate increase represents, is critical. Thank you.
[The prepared statement of Mr. Kadar follows:]
PREPARED STATEMENT OF MARK KADAR, VICE PRESIDENT, MERCER MANAGEMENT CONSULTING, INC.
Mark H. Kadar, a Vice President with Mercer Management Consulting, Inc. (Mercer), has over 15 years of experience working in and consulting to the transportation industry. He presently heads Mercer's liner shipping and port consulting practices. The purpose of Mr. Kadar's testimony is to provide the Committee with Mercer's perspective on the characteristics and economics of the ocean liner shipping industry, together with the market dynamics of the transpacific trade.
Page 168 PREV PAGE TOP OF DOC The international ocean carrier industry is highly fragmented and intensely competitive. This has caused the industry to incur poor financial returns, despite ongoing volume growth and extensive cost-reduction efforts. Operating margins are slim and, in general, carriers return less value to shareholders than is typical for other transportation modes. The key levers available to carriers to improve financial performance are vessel utilization and rate levels. Vessel utilization (amount of vessel capacity filled) is a function of import and export demand. When demand weakens on a specific trade lane (for example, U.S. exports to Asia), carriers must reduce their rates to compete effectively for less cargo. Conversely, when demand rises sharply, carriers can charge more as capacity becomes scarce.
One of the problems impacting carriers of late is the severe imbalance of trade on several trade lanes, including the transpacific (North America-Asia). U.S. imports from Asia greatly exceed U.S. exports to the region. In fact, the drop in U.S. exports to Asia has become so severe that overall utilization ratesand therefore roundtrip revenueshave fallen. To make up for the loss of revenues on U.S. export trade, carriers need to raise rates on U.S. import trade.
Because rates on U.S. exports will continue to fall, even with the rate increase for imports, transpacific revenues (per slot of capacity) will still be less in 1999 than they were in 1995. And, much of the proposed rate increase will be absorbed by the cost of moving empty containers back to Asia.
Furthermore, ocean shipping is only one component of total shipment cost, and transpacific rates for imports are typically less than 5 percent of declared cargo value. Thus, the rate increase will add only 12 percent to cargo value and have even less of an impact on the retail cost of goods to U.S. consumers.
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Market fragmentation, undifferentiated services, declining freight rates, and poor financial performance have created a ''vicious circle'' for liner shipping companies. The liner shipping industry's economic performance is typical of an industry in which intense competition has kept rates lownot one with unbridled pricing power. In order to survive in this competitive environment and invest in service improvements to meet the needs of its customers, net revenues must cover long-term costs.
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Mr. HYDE [presiding]. Thank you very much.
The gentleman from Tennessee, Mr. Jenkins. Do you have any questions?
Mr. JENKINS. Thank you, Mr. Chairman. I don't have any questions at this time.
Mr. HYDE. Thank you. The gentleman from Arkansas, Mr. Hutchinson?
Page 175 PREV PAGE TOP OF DOC Mr. HUTCHINSON. Thank you, Mr. Chairman. I appreciate you holding this hearing. I've been reading the testimony, as well as hearing it today, and am learning a great deal. It appears to me that the Antitrust Division of the Department of Justice expressed some concern that there should be more competitive behavior in this industry. Mr. Won certainly indicated some significant anti-competitive behavior that was resulting in rate increases that perhaps were unjustified, and what appears to be inappropriate coordination of rate increases during a peak period of shipment. I've heard the testimony today, and it raises some concerns as to whether the antitrust exemption should be continued.
Now, I've heard the explanation that, well, it is a unique industry, and other countries have antitrust exemptions, but, every industry could probably make the claim that there's unique circumstances, and there needs to be protection, but, from what I've heard today, this appears to me to be a serious problem. If there needs to be greater competition in the marketplace, is the Transpacific Stabilization Agreement, which is a result of the discussions between the carriers, necessary in order to protect the industry? And, why is it better for the industry than leaving more of an open marketplace where there could be more competition and more transparency. Who would like to address that?
Mr. RHEIN. Maybe both of us. The Transpacific Stabilization Agreement is the latest deregulatory vehicle going back many years from closed conferences and conferences closing all of the capacity in and out of a particular trade, to open conferences with no independent action, to the 1984 act which mandated independent action, to OSRA, which now mandates confidential contracts and no transparency.
The stabilization agreement is a forum for the carriers that choose to join together to discuss rates, conditions, rate conditions, economics, operating difficulties, natural disasters, strikes
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Mr. HUTCHINSON. Does it represent about 90 percent of the transpacific trade?
Mr. RHEIN. Slightly less than that.
Mr. HUTCHINSON. And, is the result that you have a common rate structure between all of the participants in the TSA?
Mr. RHEIN. Absolutely not.
Mr. HUTCHINSON. It results in individual bargaining, which is allowed, and I guess it is moving in that direction
Mr. RHEIN. It has already moved, Congressman. Our company alone has over 400 contracts, they're all individually negotiated, some of them are confidential, and the rates are not uniform.
Mr. HUTCHINSON. During the peak season last year, whenever there was a great demand, did your industry ask the shippers to renegotiate their contract and raise the price?
Mr. RHEIN. I cannot say on behalf of the industry that that didn't happen. I don't know. It did not happen in our company.
Page 177 PREV PAGE TOP OF DOC Mr. HUTCHINSON. How about Sea-Land Service? Did it happen with Sea-Land Service?
Mr. CLANCEY. No, it did not.
Mr. HUTCHINSON. We've heard complaints that it did. Mr. Won certainly indicated that it did. There was a unilateral position that, ''if you want your products shipped, you're going to have to renegotiate the contract and raise the rates.''
Mr. CLANCEY. It was not the case with Sea-Land. There are allegations that we ''opted out'' of contracts, but we did that as part of our contracts way before the peak shipping season began. Antitrust immunity, which was the premise for your question, is not the issue here. If you look at it in the context of the westbound trade, the market from the United States to Asia, the rates are falling as we sit here. We have the same people in the same room with the same antitrust immunity. We're talking about a situation that is driven by supply and demand. It is very difficult to get a discount airline ticket for December 24. It is impossible today to get a discount
Mr. HUTCHINSON. Excuse me.
Mr. CLANCEY. To move cargo from the Asian countries to the United States when no one can afford to reinvest in the business.
Mr. HUTCHINSON. If it is driven by supply and demand, then you don't need an antitrust exemption. The whole idea of an antitrust exemption is that the law of supply and demand does not work, and you need special protections for an industry. So, it appears to be inconsistent, what you're telling me.
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Mr. CLANCEY. We need the antitrust immunity because, one, we all operate in consortiums. We could not afford to operate globally today unless we had our partners, and that is true of all of our major competitors throughout the world. It is the only way to rationalize billions of dollars of investments. It is not like an airline where you can just take the plane and park it. We own port infrastructure. We have billions of dollars of investments in terminal facilities around the world. We don't have round-trip passengers; we have containers with cargos that move in one direction. We have 235,000 containers that cost anywhere from $6,000 to $30,000. They don't go away. Antitrust immunity allows us to rationalize those flows on a global basis, and, as testimony has demonstrated, the level of service has improved significantly in the last 15 years, and the cost to the American shipper has come down.
Mr. HUTCHINSON. Mr. Chairman, I thank you for holding this hearing, and thank the panelists for their testimony today.
Mr. HYDE. Thank you very much.
Mr. Clancey, are there Government subsidies to your shipping lines?
Mr. CLANCEY. In the Atlantic and Pacific, in order to maintain adequate American crews in the time of a crisis to the United States, we are given about half the cost difference between a foreign crew and an American crew. It is part of an agreement with DOT, the Department of Defense and the Transportation Command, that the U.S. Government, in a time of national emergencyone might possibly erupt very sooncan take our U.S. flag, U.S. crewed assets. But, in order to use the assets, they need American seafarers; the officers, the engineers, and the crews on the ships.
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Mr. HYDE. Do you factor in those subsidies? Mr. Rhein was talking about the astronomical losses? I've never understood high finance, how people can stay in business absorbing enormous losses that Mr. Rhein was talking about. Do you factor in the governmental subsidies in calculating those losses?
Mr. CLANCEY. Well, in a cost base of $4 billion, there's not much to the subsidy.
Mr. HYDE. Mr. Rhein?
Mr. RHEIN. As Mr. Clancey said, it covers half of the difference between a foreign crew and an American crew.
Mr. HYDE. Is there a standard for the foreign crew, or does that vary with different
Mr. RHEIN. It varies.
Mr. HYDE. And you have a formula that
Mr. RHEIN. Based on what we compete with, it is a mixture based on the Pacific carriers for the Pacific trade. But, if we were shrewd businessmen, we would operate foreign ships, because there is no money in it for us.
Page 180 PREV PAGE TOP OF DOC Mr. HYDE. Why don't you then? You are nothing if not a shrewd businessman. [Laughter.]
Mr. RHEIN. Well, there are certain restrictions that would take a long time to explain. Once you're U.S. flag, it is hard to become anything other than U.S flag.
Mr. HUTCHINSON. All right. Mr. Jacobsen and Mr. Winstead, NVOs complain that they're disadvantaged because the 1998 act doesn't allow them to enter into confidential service contracts. Can you explain what that means to their business in practical terms? Either one, or both.
Mr. WINSTEAD. From the perspective of the military freight porter, where the cargo is already guaranteed to the U.S. flag carriers by mandate, we see no reason for secret service contracts to exist. Therefore, we'd like to see an exemption to that rule for U.S. flag impaled cargo.
Mr. HYDE. I have several questions here that have been prepared for me by staff, but, the impact I'm getting from your testimony are two diametrically opposed propositions, which is so often the case. We've heard from Mr. Clancey, and Mr. Rhein, and Mr. Kadar very interesting testimony about how they're hanging on by an unraveling thread without the protection. I'm just wondering if you have any response to some of the things they've said? Either of you. Anybody.
Mr. DANAS. I'll jump into that, Mr. Chairman. I'd like to make two comments. First of all, almost all the testimony you've heard today about all of the improvements were under the Shipping Act of 1984. It is not under OSRA. OSRA has only been in effect for 5 days, although the marketing plans and everything else have occurred really since last October, when it was signed into law.
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That's certainly one of the arguments that those of us who are concerned about the bill have that the 1984 act seemed to be working very well. The second point is that we are now entering into a new marketplace. OSRA has a lot of potential to actually help the industry, and the carriers in particular. A lot of the testimony that you've heard from the carrier side today, justifying the rate increases in the transpacific, is understandable, at least from the perspective of the shippers' associations, who certainly don't like to pay higher prices, but they understand the fact that there are capacity imbalances, and that carriers need to make a profit.
The primary concern that the shippers' associations have is the fact that they feel that they are going to be discriminated against, that they have been discriminated against, because they've gone and come up with consolidated volumes of cargo which, obviously, from a carriers' perspective, it makes quite a bit of sense that they'd rather deal with the individual shipper because they've got a higher profit, and that the associations and the NVOs, by analogy, are being discriminated against because that's a source of higher revenue for the carriers.
Our primary concern with OSRA is that it does not have enough safeguards in the law itself to protect the small to medium sized shipper, and it took quite a bit of negotiation just to get a recognition of the fact that there shouldn't be unreasonable discrimination on a class basis. There is still a question, even in the FMC rule-making proceedings, as to whether or not individual discrimination against an individual shippers' association is something that is permitted under the law.
Page 182 PREV PAGE TOP OF DOC The problem that we have is that if the law is going to work just like APL says it is going to in its ad, we need to have a guarantee that they are not going to favor the largest shippers in the world, and then say that their competitors, the smaller companies that engage in the same trade, the same commodities, same trade lanes, but have to go and consolidate their volumes, are not going to be able to negotiate similar kinds of contracts that are tailor made to give profit to the carriers' bottom line, which the carriers' need, and we support, and, at the same time, ensure that small to medium sized shippers, who are the growth of this economy, are able to compete in overseas markets.
I attended a seminar on Monday where a major U.S. shipper, absolutely huge, went through and discussed exactly how they are tailoring their contracts, all the benefits they are going to see in this new law, and it was a fabulous presentation. It is a wonderful opportunity. It is absolutely the type of thing that does increase competition. The problem with it is, you can get a whole slew of their competitors that are smaller that can't do it on a one-on-one basis with the carriers unless they have a niche capacity to fill. They go, and if they do it through a shippers' association, or even a specialized NVOCC, as soon as you get something like Fact Finding Investigation No. 23, with a Transpacific Stabilization Agreement, you see that they get targeted, and that they are discriminated against based on the fact that the champion accounts get to retain access to the cargo capacity.
That is our concern with OSRA. It's something that wasn't addressed with the bill. The voluntary guidelines would be one way, if that could be tailored back, that would be one way to alleviate the problem. There are lots of other solutions as well. Time will tell, and we are willing to live under the statute for a while, but we think there are serious problems with it.
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Mr. HYDE. Our job is difficult because we get different stories from different people. Now, we hear from you that these contracts are take it or leave it, bang, this is it. We heard from Mr. Clancey and Mr. Rhein that these are individually worked out and negotiated. Somewhere is the reality, maybe they're both true. I don't know. I don't know how that can be, not vis-a-vis the same contract.
Mr. DANAS. Mr. Chairman, if I can jump in for 1 second?
Mr. HYDE. Yes.
Mr. DANAS. Years ago, a carrier employeeand I won't name the carrier or the employeesaid to me that it depends on where you are sitting. If it is a large U.S. shipper coming in, they are dictating the terms of the contracts to the ocean carriers. If you're a small shipper, the ocean carrier is dictating the terms to you. That is the concern that we have with the antitrust exemption now. As long as the law had transparencies, so you saw what was happening in the marketplace, and as long as you had protections out thereif you take a look at the legislative history of the 1984 act, it specifically said it was worried about service contracts taking capacity off the market to the detriment of small and medium sized shippers.
OSRA does not address this issue, and essentially says that the carriers are going to be able to take capacity off the market and give a beneficial deal, and it just depends on who is the 800 pound gorilla at the table.
Page 184 PREV PAGE TOP OF DOC The carriers are, with respect to small and medium sized shippers, what the larger shippers are with respect to the carriers. They have a very valid point as far as that is concerned, that the carriers are not in a great bargaining position against a large shipper.
Mr. HYDE. Can improved communication between you help matters? Mr. Clancey?
Mr. CLANCEY. Mr. Chairman, the act is only 5 days old, but we believe that the small shipper and the shippers' associations won't be disadvantaged. It is not always volume; it is cost to serve. It is geography to geography, and we have a number of contracts with middle sized customers, NVOs, and third parties, where they seem very satisfied with what was accomplished in the last 2 or 3 weeks in terms of the contracting process. Certainly, we're asking for, what is viewed historically, as a significant sum of money. But, on a roundtrip basis, it is absolutely necessary. What we've done is demonstrated to them what it costs us to operate the system, and, for the most part, they've been fine with that.
Mr. HYDE. Mr. Kamler?
Mr. KAMLER. My question for both Mr. Rhein and Mr. Clancey, if I was sitting up where you are, is that you mention all these new contracts where everyone is so satisfied. So, my question would be, are any of those contracts at less than the TSA guidelines of $900 and $1,000 that are tailor made?
Mr. HYDE. Well, assume I asked that question. [Laughter.]
Page 185 PREV PAGE TOP OF DOC Mr. RHEIN. Some are higher and some are lower. It is a matter of individual negotiation. In fact, in our firm, we have 53 contracts with NVOCCs, and 13 with shippers' associations, and they follow the same financial scale as the rest of our contracts.
Mr. HYDE. Well, we're sensitive to the fact that the antitrust immunity benefits largely foreign-owned carriers, and, God bless them, but we're interested inI understand that you're an American company owned by someone over in Singapore, and I'm still trying to straighten that out in my mind. But, in any event, yes, the act has been in effect but a few days.
Mr. RHEIN. Could I comment on how it helps the foreign carriers? It only helps the foreign carriers because they represent a larger percentage of the supply. But, the fact that there are so many foreign carriers is all the more reason why the American carriers need to have this antitrust immunity. We are competing against the government of China. We're competing against the government of Taiwan. We're competing against the Japan, Inc., where their carriers are very large and very unprofitable. But, their unprofitability is tolerated within Japan, Inc., because it is part of a larger scheme. Now, for us as independently-owned and operated American companies, it is very important that we not be eliminated or precluded from sitting down with these people to make some sense out of our business.
Mr. HYDE. How many of these American companies are there?
Mr. RHEIN. About six.
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Mr. HYDE. Six?
Mr. RHEIN. The two largest ones are Sea-Land and APL.
Mr. HYDE. You're counting yourself as an American company?
Mr. RHEIN. Yes, sir.
Mr. HYDE. All right.
Mr. RHEIN. Our ships have American crew, 100 percent. Our subsidiary is an American company.
Mr. HYDE. Well, I think both of you have something important to tell us. We need to have a healthy shipping industry. I'm not certain we have a healthy shipping industry. I am certain that a lot of your problems are the result of an imbalance in our trade and everything goes east and not much goes west. That could change a lot of things if that were remedied. I sure don't have the answers to that. I also am persuaded that the smaller consolidators have a pretty uphill battle trying to get fairly treated by the big carriers, so, I can just say that this has been a useful hearing for everybody. Yes, it is only 4 days into the new act, but at least you know we're concerned about it and that we will watch carefully and listen carefully. We have no legislative plans to rush ahead and do this or do that. We don't. This was just to educate us. We're going to read everything you've said at a more leisurely pace and digest it. We want to be helpful to your industry, which is to the American economy. I'm sure that we all share that goal.
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So, I want to thank everyone of you for making a significant contribution to our instruction on this issue. Thank you.
The committee stands adjourned.
[Whereupon, at 12:06 p.m. the committee was adjourned.]
A P P E N D I X
Material Submitted for the Hearing Record
Hon. HENRY J. HYDE, Chairman,
Committee on the Judiciary,
House of Representatives, Washington, DC.
DEAR DEAR CHAIRMAN HYDE: I wish to clarify for the record an issue raised by the testimony of Mr. Arnold Kamler of Kent International, Inc. at the Committee's ocean shipping hearing on May 5. Specifically, Mr. Kamler asserted that:
''During the crunch period of July, August, and September of last year, Sea-Land would not accept even one container even though we had a service contract with them.'' (page 5 of Kamler testimony)
''Sea-Land . . . [was] asking their good customers to rip up their existing contracts and [sign] new contracts . . .''
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'Sea-Land did sign many of these interim contracts, which in my opinion, is clearly a breach of contract.''
The facts are different and are as follows. Sea-Land had no contract with Kent International per se. ANERA, the conference of which Sea-Land was a member, had a contract with the Bicycle Shippers Association, of which Kent International was a member. (Service Contract Number 7353/98). Under that contract, ANERA lines jointly agreed to provide BSA members with vessel space for 1430 forty foot containers of cargo at the favorable contract rates during a one year period, in exchange for BSA's commitment to ship 1430 containers with ANERA carriers during that period. The 1430 container commitment was called a ''Minimum Quantity Commitment'' or ''MQC''. ANERA's records indicate that ANERA had more than fulfilled its obligation to provide space to BSA members only three months into the one year contract. By the end of July, BSA members had received space for over 1800 containers. In other words, the Association members received considerably more space at the contract rates than the carriers had promised to them.
Sea-Land complied with the terms of the contract. There was no contractual obligation to carry volumes tendered above the MQC at the contract rate. The contract provided that any volume tendered by the shipper beyond the MQC would be carried at the carrier's option. Obviously, shippers had the ability when negotiating their contracts to negotiate larger MQC's to cover their year's cargo volume, but in this case the MQC was met before the peak of the season referred to by Mr. Kamler. Sea-Land did charge rates for the carriage of goods above this contract rate once the contract carriage commitment was fulfilled. However, this was a natural result of the trade's supply and demand. Sea-Land was not in breach of its contractual obligations. Sea-Land did not ask Kent or BSA to ''rip up their existing contracts''.
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While we understand that Kent wanted Sea-Land to move cargo volume during the 1998 peak season in excess of the shipper's MQC at the former, lower contract rates, that was not the bargain negotiated in the contract.
Sea-Land believes that in the new deregulated contract environment of the Ocean Shipping Reform Act, carriers and shippers will not only be acting pursuant to more individualized contracts, but that the negotiations may address the issues of cargo forecasting, cargo commitments and service commitments with greater focus.
|Peter J. Finnerty, Vice President,|
Chairman Hal Creel
Commissioner Ming Hsu
Commissioner John Moran
Commissioner Del Won
Hon. HENRY J. HYDE, Chairman,
Committee on the Judiciary,
House of Representatives, Washington, DC.
Re: ''Antitrust Aspects of the Ocean Shipping Reform Act''; May 5, 1999 Hearing
DEAR CHAIRMAN HYDE: This is in response to the letter to the Committee dated May 12, 1999, by Mr. Peter J. Finnerty, Vice-President of Public Affairs for Sea-Land International, Inc. (''Sea-land''). Mr. Finnerty addressed Sea-land's concerns with certain aspects of my testimony which I provided to the Judiciary Committee on May 5, 1999, on behalf of Kent International Inc. (''Kent'').
By way of background, Mr. Kamler, the undersigned, essentially stated at the May 5th hearing that Sea-land violated its service contract with Kent during the peak shipping season in the Far East inbound trade lanes last year by refusing to book cargo for Kent, pursuant to that service contract, unless Kent paid additional freight from that contained in the service contract. I still make that assertion.
Mr. Finnerty countered in his letter that Sea-land adhered to the service contract provisions in that Kent, as a member of the Bicycle Shippers Association, had entered into a service contract with the Asian North America Eastbound Rate Agreement (''ANERA''), a conference of which Sea-land is member. Mr. Finnerty further asserts that Sea-Land was excused from further performance under that contract because the BSA had already met its minimum commitment. Kent agrees with Mr. Finnerty that the service contract obligated ANERA, and consequently Sea-land, and that the BSA had net the minimum quantity commitment (''MQC;;) of one thousand, four hundred and thirty (1430) containers early in the contract period. Indeed, Kent even agrees that. there is a provision in the subject contract that would have allowed Sea-Land to remove itself from further obligation under the BSA contract after the minimum volumes were shipped. Rule 101 (D) of the service contract provided for such withdrawal, but only effective thirty (30) days after written notice would have been given to the BSA and to ANERA. No such notice was provided to the BSA or, presumably, to ANERA.
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Sea-Land never gave such written notice, and, in fact, I have mason to believe that Sea-Land continued to book other cargo through April of 1999 pursuant to the BSA service contract. Notwithstanding what Mr. Finnerty has stated, Sea-Land never removed itself from the service contract, and apparently selectively attempted to obtain rates greater than those contained in the service contract, at least, from Kent.
In addition, ANERA traditionally permits shipments in excess of the MQC in its time/volume agreements. 1n fact, Kent continued to ship with other ANERA members during the same shipping season at the reduced negotiated rates. ANERA's customary acceptance of containers above the MQC and Kent's continued shipments with other ANERA members evidence ANERA's collective agreement to ship containers above the MQC.
Sea-land cannot truthfully now characterize the MQC as some form of maximum quantity commitment, and that Sea-Land opted out of its obligations. That simply is not the truth. Therefore, Mr. Finnerty is wrong when he asserts that Sea-land was not legally bound to honor the BSA-ANERA service contract allowing shipments in excess of the MQC. hi fact, Sea-Land selectively continued to allow bookings on that contract, but not from Kent, and perhaps other BSA members.
Mr. Finnerty's convenient comments notwithstanding, we stick to our assertion that Sea-Land refused Kent bookings, and attempted to obtain greater freight amounts than they were entitled to, in order to allow Kent to continue shipping with Sea-Land.
Very truly yours,
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|KENT INTERNATIONAL, INC.|
Hon. HENRY J. HYDE, Chairman,
|Sea-Land Service, Inc.,|
|Washington, DC, May 12, 1999.|
Committee on the Judiciary,
House of Representatives, Washington, DC.
DEAR CHAIRMAN HYDE: During the Committee's May 5 oversight hearing on Ocean Shipping, a witness, Mr. Gary Winstead, stated that, under confidential service contracts, which can be entered into under the new Ocean Shipping Reform Act (OSRA), the U.S. government would no longer be able to determine whether U.S. flag carriers are complying with the requirements of the Cargo Preference Act of 1904.
1 would like to clarify for the record that this is not correct. The Federal Maritime Commission has issued its regulations implementing OSRA. Those regulations specifically provide that the government may have access to carriers' confidential service contracts to ensure compliance with the Cargo Preference Act of 1904. See FMC Docket No. 9830.
Hon. HENRY J. HYDE, Chairman,
|Carlos Rodriguez & Associates,|
|Attorneys & Counselors at Law,|
|Washington, DC, October 15, 1999.|
Committee on the Judiciary,
House of Representatives, Washington, DC.
Re: May 5, 1999, Oversight Hearing on Antitrust Aspects of the Ocean Shipping Reform Act
DEAR MR. CHAIRMAN: The following is submitted on behalf of our client, Mr. Gary Winstead, Chairman of the Board of the American Shipper's Association, Inc., and is in response to the letter to the House Committee on the Judiciary dated May 7, 1999, by Mr. Peter J. Finnerty, Vice-President of Public Affairs for Sea-Land International, Inc. (''Sea-Land''). Mr. Finnerty addressed Sea-Land's concerns with certain aspects of Mr. Winstead's testimony, which was provided to the Judiciary Committee on May 5, 1999. We would like to clarify for the record Mr. Winstead's testimony and concerns regarding the Ocean Shipping Reform Act of 1998 (''OSRA''), confidentiality of service contract rates, and U.S.-flag carrier compliance with the Cargo Preference Act of 1904 and related laws (''Cargo Preference Act'').(see footnote 2)
In brief, the Cargo Preference Act states that U.S.-flag carriers are prohibited from charging the U.S. government any rate above the ''commercially prevailing'' rate for similar proprietary cargo. By way of background, Mr. Winstead essentially stated at the May 5th hearing that the new ''contract carriage'' scheme for transportation of goods, which OSRA created, presents questions of whether OSRA is compatible with requirements under the Cargo Preference Act, as well as potential problems for the U.S. government in determining whether the carriers are complying with the law. Specifically, Mr. Winstead stated that since OSRA provides for ''confidential service contracts,'' the Cargo Preference Act may be undermined by the inability of the U.S. government to check non-compliance, thus creating the potential for overcharges by the carriers. As Mr. Winstead testified, historically, military freight forwarders, which are certified under regulations promulgated by the Military Traffic Management Command (''MTMC''), provide valuable assistance to the U.S. government under the Cargo Preference Act. Under OSRA, MTMC freight forwarders do not have the authority to review confidential service contract information, which impacts the overall ability to ensure compliance with the Cargo Preference Act.
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Current law restricts the movement of military and other government cargo to U.S.-flag carriers that operate under antitrust immunity. The Cargo Preference Act was enacted to provide the government with the ability to guard against the misuse of taxpayers money when the government relies on U.S.-flag carriers for ocean transportation. Concerns of possible noncompliance with the Cargo Preference Act under OSRA are real. In fact, the Clinton administration noted that Cargo Preference Act compliance is a concern under OSRA. See Statement of Administration Policy on S. 414, the Ocean Shipping Reform Act of 1998. Every year, the government, through proceedings before the General Accounting Office, must challenge abuses by U.S.-flag carriers that overcharge the government for ocean transportation. The shipping companies are forced to repay substantial amounts to the government in freight that they initially overcharged and collected from various federal agencies. To illustrate this point, just last year, the FMC ruled that several U.S.-flag companies had overcharged shippers, including the Territory of Guam, by approximately $24 million dollars during the late 1980s and early 1990sagain, evidence that abuse of the system by shipping companies is very real.
As you are aware, OSRA substantially altered the ocean shipping environment. Prior to May 1, 1999, ocean transportation rates were ''transparent,'' or public to all shippers, which also provided the government and military freight forwarders with access to rate information necessary to determine Cargo Preference Act compliance by U.S.-flag carriers. OSRA creates confidential contracts between a shipper and either an ocean carrier, conference of carriers, or agreement. All rates are now confidentially filed with the Federal Maritime Commission (''FMC''). See 46 U.S.C. App. §8(c)(2) Filing requirements. Pursuant to the statutory language of OSRA, the only party that may gain access to the confidential information from service contracts are members of a collective bargaining unit, organized labor. In fact, the Act ''requir[es] the disclosure of information by an ocean common carrier only if there exists an applicable and otherwise lawful collective bargaining agreement which pertains to that carrier.'' See 46 U.S.C. App. §8(c)(4)(C) (Emphasis added.) There is no reference to MTMC, the Department of Defense (''DoD''), or any other department of the federal government that has the authority to access, retrieve, and review confidentially-filed rate information. Most importantly under OSRA, the FMC does not have the statutory authority to provide MTMC, DoD, military freight forwarders, or any other party, with confidentially filed service contract rate information.
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Mr. Finnerty argues that the FMC has promulgated final regulations that implement OSRA and resolve any Cargo Preference Act concerns on the basis of the legislative history. See 46 CFR §530.4. The FMC's final regulations permit a government body to enter into a Memorandum of Understanding with the Commission that would permit the release of confidential rate information. Although Mr. Finnerty is correct in his statement that the FMC has promulgated regulations that address intra-governmental release of confidential service contract information, he does not address Mr. Winstead's primary concern, which is that MTMC forwarders are not permitted to access this same information. Thus, the ability to determine ''market rates'' for compelled cargo, which MTMC forwarders traditionally provided the government, is eliminated under OSRA.
In promulgating the regulations, the FMC discussed the issues surrounding the Cargo Preference Act and decided that the legislative history of OSRA clearly enables the Commission to release such confidential information to other government agencies. However, there was no mention of military freight forwarders in the comments of the Interim Final Rule. See Fed. Reg., Vol. 64, No. 44, Monday, March 8, 1999, at 11186 et seq. As noted, MTMC forwarders play a vital role in the procurement of ocean transportation rates for DoD and other agencies, as well as assist the federal government with Cargo Preference Act compliance. Since the FMC final OSRA regulations do not permit military freight forwarders to access confidential service contract rates, Mr. Winstead's concerns remain valid.
As a result, it is clear from OSRA's legislative history that the Cargo Preference Act concerns raised during Mr. Winstead's testimony are legitimate and must be addressed by Congress to ensure continued compliance by U.S.-flag carriers moving military and other federal government-compelled cargo. We enclose copies of statements from DoD regarding OSRA and the Cargo Preference Act which were produced during deliberation of the legislation. Further, we attach a copy of the Administration's Statement of Administrative Policy, dated March, 1999, which states that one of the Administration's concerns with OSRA is the ''assur[ed] continued access by Federal agencies to information necessary to assure compliance with statutory requirements regarding shipping rates charged to Federal agencies by U.S. ocean carriers.''
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Notwithstanding FMC regulations and Mr. Finnerty's statement, the Cargo Preference Act concerns under OSRA voiced by Mr. Winstead have not been addressed by Congress, despite being clearly articulated by the Administration and others involved in ocean shipping.
We respectfully request that this response further supplement Mr. Winstead's testimony of May 5, 1999, and become part of the record. Should you have any questions regarding this matter, please contact the undersigned.
Very truly yours,
|CARLOS RODRIGUEZ & ASSOCIATES|
Mr. Gary Winstead
Chairman of the Board
American Shipper's Association, Inc.
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Hon. HENRY J. HYDE, Chairman,
|White Consolidated Industries, Inc.,|
|Washington, DC, May 4, 1999.|
Committee on the Judiciary,
House of Representatives, Washington, DC.
Re: Ocean Shipping
DEAR CONGRESSMAN HYDE: The Eureka Company and other small and medium sized shippers were led to believe that Ocean Shipping Reform would increase competition and improve pricing practices by allowing more flexibility among all the stakeholders to customize needs and service. The opposite has happened. As you know, ''talking agreements,'' inclusive of all shippers in the Far East trade lanes, are now controlling and imposing:
40100% (plus) higher prices
service levels and equipment availability
They are taking advantage, as never before, of the traditional anti-trust immunity continued in the Ocean Shipping Reform.
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This anti-competitive action will bring irreparable harm to short and long-range planning in our company, particularly in new products that complete a full, complementary Eureka line. This will considerably lessen our competitive position in America.
We support your urgent attention to these issues, including your scheduled Hearing on May 5. WCI companies, including Euroclean, Dimas and Partner Industrial Products of lllinois' 6th District (and a neighboring District), join us in asking for your leadership in bringing some fairness into this very large arena. We are against anti-trust immunity. We believe strong and immediate oversight and authorizing legislation is necessary, perhaps through the Federal Maritime Commission, focused on:
Current negotiations and the senior officials involved
Agreements on the peak season period (JulyNovember)
Please let us know how we can help move forward to competitive, healthy trade in the Pacific and elsewhere through your office.
Thank you for your excellent representation in Congress,
|Linda W. Greiner, Director.|
Page 199 PREV PAGE TOP OF DOCThe Honorable Thomas W. Ewing
The Honorable Lane Evans
Hon. HENRY J. HYDE, Chairman,
|Transportation Trades Department,|
|Washington, DC, May 4, 1999.|
Committee on the Judiciary,
House of Representatives, Washington, DC.
RE: Hearing on the Anti-Trust Aspects of the Ocean Shipping Reform Act of 1998
DEAR CHAIRMAN HYDE: As your Committee begins to examine certain aspects of the recently passed Ocean Shipping Reform Act (OSRA), I wanted to share with you our perspective on this issue. The Transportation Trades Department, AFLCIO (TTD)(see footnote 3) was directly involved in the debate over the passage of OSRA and worked with our nation's ocean carriers, shippers, and ports to ensure that the legislation was fair, balanced and to the extent possible, protected the interests of workers dependent on a strong and vibrant ocean shipping industry.
Our eventual support for OSRA did not come easily and in fact we initially approached ocean shipping reform with great skepticism and concern. TTD and our affiliated unions have seen the effects that ill-conceived deregulation has had on workers, communities and customers in other modes of transportation. For example, after Congress deregulated the airline industry in 1978, major carriers, including pioneer companies Pan Am and Eastern, went broke, reorganized, or were sold off in pieces. Tens of thousands saw their jobs disappear and uncertainty reigned as carriers cut comers in an attempt to survive in this unstable environment. The same fate fell on workers in the trucking and rail industry when Congress continued this dangerous policy experiment without fully understanding and appreciating the wide and negative impact it would have.
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These collective experiences led TTD to vigorously oppose earlier attempts to pass ocean shipping reform including legislation (H.R. 2149) authored by Transportation and Infrastructure Committee Chairman Bud Shuster in the 104'' Congress. But as proponents of ocean shipping reform pressed their case in the Senate, transportation labor and the port community were brought to the table in an effort to craft a compromise bill that could be universally supported. The OSRA was a product of those discussions. As is true in all compromises, every party did not receive everything that it wanted. That was of course true for workers, but on the whole we felt the bill was a measured reform effort that contained sufficient protections for workers in the longshore and related industries.
I know that some opposed the provision in the bill that prohibited Non-Vessel Operating Common Carriers (NVOCCs) from entering into confidential service contracts with shippers. It must be remembered that a service contract requires entities to make certain service commitments to shippers, which NVOCCs simply cannot do since they own no vessels. Essentially, NVOCCs were attempting to create a legal fictionthey wanted the benefits that are conferred on vessel operating carriers without having to make the same commitment to workers, shippers and ports. It has been the experience of the longshore unions that NVOCCs use their position in the marketplace to undercut established wage agreements which directly threaten workers and the local economies in and around the port communities.
The actual effect of this prohibition and the countless changes contained in OSRA are of course uncertain. Regulations promulgated by the Federal Maritime Commission that implement the Act have just become effective and it will take time to fully understand what all these changes will mean for workers and other interests in the industry. While we appreciate and, in some cases, share the concerns that have been expressed about the impact of OSRA, we believe it is too early to make a full evaluation of the compromise bill that Congress approved overwhelmingly just last year. We do look forward to working with this Committee and others to ensure that ocean shipping policy is carried-out in a manner that encourages a strong shipping industry able to support thousands of good-paying and stable jobs.
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Thank you for considering our views.
|Edward Wytkind, Executive Director.|
The Honorable John Conyers, Ranking Member
Members, House Judiciary Committee
The following labor organizations are members of and represented by the TTD:
Air Line Pilots Association
Amalgamated Transit Union
American Federation of State, County and Municipal Employees
American Federation of Teachers
Association of Flight Attendants
Page 202 PREV PAGE TOP OF DOCAmerican Train Dispatchers Department
Brotherhood of Locomotive Engineers
Brotherhood of Maintenance of Way Employes
Brotherhood of Railroad Signalmen
Communications Workers of America
Hotel Employees and Restaurant Employees Union
International Association of Fire Fighters
International Association of Machinists and Aerospace Workers
International Brotherhood of Boilermakers, Blacksmiths, Forgers and Helpers
International Brotherhood of Electrical Workers
International Brotherhood of Teamsters
International Longshore and Warehouse Union
International Union of Operating Engineers
Marine Engineers Beneficial Association
National Air Traffic Controllers Association
Professional Airways Systems Specialists
Retail, Wholesale and Department Store Union
Service Employees International Union
Sheet Metal Workers International Association
Transportation Communications International Union
Transport Workers Union of America
United Brotherhood of Carpenters and Joiners of America
United Mine Workers of America
United Steelworkers of America
United Transportation Union
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Hon. HENRY J. HYDE, Chairman,
|International Longshore & Warehouse|
|Washington, DC, May 5, 1999.|
Committee on the Judiciary,
House of Representatives, Washington, DC.
DEAR CHAIRMAN HYDE: As President of the International Longshore and Warehouse Union (ILWU), AFLCIO, representing over 60,000 workers in the United States and Canada, I am writing to submit our views in conjunction with the Judiciary Committee's hearing on various aspects of the Ocean Shipping Reform Act (OSRA). As you may know, the ILWU played a key role in developing the delicate compromise crafted by Senator Kay Bailey Hutchinson and other lawmakers. Retention of anti-trust immunity for ocean carriers was an important aspect of this compromise.
We believe that abolishing anti-trust immunity for ocean carriers would create great instability in the maritime industry and lead to the loss of thousands of jobs. Virtually every country in the world recognizes the financial risks involved in this industry and provides some form of anti-trust immunity to ocean carriers. Significant instability in the industry would certainly discourage any new investment because the risks would be too great. U.S. carriers alone have invested between $5 billion to $7 billion in this industry over the last ten years. These are job-creating investments that would be put at risk if anti-trust laws were applied to this industry.
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There have been suggestions that non-vessel operating common carriers (NVOCCs) were not treated fairly under the terms of the Ocean Shipping Reform Act. We strongly disagree with this assessment. The NVOCCs have asked Congress to grant them preferential treatment in being considered both a carrier and a shipper.
Preferential treatment for NVOCCs is inconsistent with U.S. policy of maintaining a strong U.S. flag merchant marine fleet. U.S. carriers would be hard-pressed to ever expand their fleet if they could operate as an NVOCC without having to make the millions of dollars of investments required to operate.
NVOCCs would like to engage in confidential service contracts with shippers. However, service contracts by definition require service commitment from the carrier in return for a cargo commitment from the shipper. Vessel operating common carriers have made significant investment in vessels, terminals, containers and other equipment which enable them to make service commitments. NVOCCs have no vessels and little or no other equipment and are therefore incapable of making any service commitment to a shipper.
The longshore unions are taking the necessary steps to be able to compete for work related to NVOCCs including the stuffing and stripping of containers at container freight stations. Confidential service contracting for NVOCCs would offer shippers a disincentive to deal directly with carriers and their largely union workforce. Secret deals between NVOCCs and shippers would leave longshore and other port workers without any of these job opportunities.
The ILWU reluctantly supported the passage of OSRA because somenot all of our objectives were met including the ability to request information from our employers that is vital to the enforcement of our collective bargaining agreement. We would not have supported OSRA if we expected parts of this delicate compromise would unravel. I strongly urge the Committee to reject any changes to the Act and would appreciate this letter being submitted for the record.
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|Brian McWilliams, President.|
Cc: The Honorable John Conyers, ranking member
PREPARED STATEMENT OF THE INTERNATIONAL LONGSHOREMEN'S
It is the position of the International Longshoremen's Association, AFLCIO, the principal representative of longshore workers in ports on the East and Gulf Coasts and the Great Lakes of the United States as well as Puerto Rico that:
1. It is absolutely essential that the Ocean Shipping Reform Act of 1998 as enacted should be maintained and put into effect as scheduled on May 1, 1999, with no further delay.
2. It is imperative to the continued stability and competitive environment of the industry that OSRA98 not be revisited now. The issues have been discussed in lengthy Congressional sessions, the parties have been permitted to present their positions, and Congress acting upon the record has enacted OSRA98. There is no logical reason why this process should be stymied now.
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3. The continued antitrust immunity provided to ocean common carriers by OSRA98 is a central component of that legislation and crucial to the stability of the international ocean transportation industry. Our members are dependent upon such industry stability for their jobs and benefits. We oppose, therefore, any change to the carefully constructed compromise of OSRA98.
4. It is our understanding that it is the NVOCC'S who are pushing this committee. That effort is a backdoor tactic orchestrated to destroy the OSRA98 compromise.
5. Moreover, this type of action, at this juncture, is premature as the Act has not yet been implemented, nor has there been an opportunity to measure its impact and effects upon the shipping industry.
Some additional comments regarding NVOCC's and their activities may be of value to the committee:
When a NVO arranges for consolidations of freight at an inland facility, it effectively denies that work to longshoremen at the ocean terminals. The advent of container freight stations at waterfront terminals will be seriously undermined if the NVO's are able to keep their own arrangements ''under wraps'', via confidential service contracts. The NVO's are not parties to longshore agreements nor are they the employers of longshore labor. Rather, they are off-pier outfits which have the attributes of ''brokers'' rather than of ''transporters'' of ocean cargo. The NVO's are often paper operations which collect and consolidate shippers' products for exportor deconsolidate or arrange delivery on importwithout any interest, per se, in the cargoes other than for transportation. Their operations will oftentimes subvert agreements and understandings between the carriers and stevedore employers of longshore employees and the unions to bring stuffing and stripping work and related work back to the piers, where these functions are and will be performed by longshore employees, under these understandings. This will not only handicap the carriers and stevedores in meeting their obligations to the union; it can will totally undermine the entire concept of container freight stations which, to a measurable extent, tends to compensate for some of the losses incurred by longshore employees because of containerization and other automated methods of handling cargo.
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OSRA98 should proceed as intended with no changes.
PREPARED STATEMENT OF AMERICAN INTERNATIONAL FREIGHT ASSOCIATION AND TRANSPORTATION INTERMEDIARIES ASSOCIATION
The American International Freight Association (AIFA) is a trade association of ocean transportation intermediaries with operations in the United States. AIFA is the U.S. member of the International Federation of Freight Forwarders Associations (FIATA). FIATA regular members include the national trade associations of transportation intermediaries in more than 70 countries and associated members in more than 60 countries without national associations, including more than 35,000 freight forwarders and NVOCCs worldwide.
The Transportation Intermediaries Association (TIA) is the leading organization of North American transportation intermediaries representing transportation intermediaries of all disciplines. The members of TIA include: international forwarders, NVOCCs, property brokers, domestic freight forwarders, air forwarders, intermodal marketing companies, perishable commodity brokers, and logistics management companies.
The members of AIFA & TIA are fiercely independent businesses that fully support deregulation and competitive markets. With enactment of the Ocean Shipping Reform Act of 1998 (OSRA), Congress has continued on a path of deregulation for the entire transportation industry, which has shown to be a tremendous success! All of the modes of transportation that have been fully or partially deregulated are better and stronger today than they were prior to deregulation.
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OSRA did not make any substantive changes from the Shipping Act of 1984 concerning ocean carriers' anti-trust immunity. But events last fall in the Asian-Pacific region has called into question the future of this immunity.
As documented by several of the witnesses, several carriers participating in discussion agreements and conferences using anti-trust immunity unilaterally raised service contract rates by $300 and added several other surcharges during last fall's peak shipping season. Transportation intermediaries and NVOCC's appeared to be targeted especially hard by these tactics. Several were denied space unless they agreed immediately to pay the increased charges.
Transportation intermediaries faced a dilemma. Either pay the substantial increased costs, or tell their shipper customer they could not move their cargo. Many intermediaries had hoped to pass these increased costs onto the shipper, but statutory requirements force them to give a 30-day notice for any increase in rates. Therefore, they were left in the unenviable position of absorbing the cost themselves or find themselves locked out of the market during the peak shipping season.
This situation is fundamentally unfair and grossly discriminatory. AIFA, TIA and other transportation intermediaries in the Asian-Pacific market voiced their concerns to the Federal Maritime Commission (FMC). To the credit of the FMC, the agency initiated a fact finding investigation, led by Commissioner Delmond Won. Commissioner Won submitted his report and finding to the full FMC in January. AIFA and TIA believe the investigation was thorough and did show conclusively that the carriers operating in the region sought to reduce or eliminate loads under current year service contract by sudden and substantial rate and other surcharge increases.
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As a result of the Won report, the FMC has directed its Bureau of Enforcement to take actions against carriers who participated in this type of illegal conduct. AIFA and TIA will be closely watching these enforcement actions. We believe these carriers should be punished harshly for creating an anti-competitive environment in the Asian-Pacific ocean lane and abusing the use of their anti-trust immunity to unfairly raise rates on short notice to a targeted class of shippersNVOCC's.
If carriers are to maintain their anti-trust immunity, the FMC must demonstrate to the ocean shipping community that it can fairly but firmly enforce the intent of Congress to have a deregulated, competitive industry environment. If the FMC shows that it can not properly use its oversight authority on the carriers anti-trust immunity, then Congress should revisit the issue and consider whether the immunity should be limited or removed.
AIFA and TIA believe the FMC should be given an opportunity to complete its enforcement action before judgement can be made on the viability of the carriers anti-trust immunity. We applaud the efforts of Commissioner Won in the Transpacific investigation and anxiously await final FMC action in this matter.
(Footnote 1 return)
American Institute for Shippers' Associations, Inc., P.O. Box 33457, 1730 M Street, N.W, Washington, D.C. 20033. Tel. (202) 6280933; Facsimile (202) 2967374. Website: http://www.shippers.org. Telephone number for Andrew M. Danas (202) 2962900.
(Footnote 2 return)
See generally Cargo Preference Act of 1904, 10 U.S.C. 263 1, Title IX of the Merchant Marine Act of 1936, as amended, 46 U.S.C. 1241; the Cargo Preference Act of 1954, 46 U.S.C. 1241(b);and section 2634(a) of Title 10 United States Code.
(Footnote 3 return)
TTD consists of 30 affiliated unions that together represent workers throughout the transportation industry. Attached is a list of our member unions.