SPEAKERS CONTENTS INSERTS Tables
Page 1 TOP OF DOC
67–304
2000
FREE MARKET ANTITRUST IMMUNITY REFORM (FAIR) ACT OF 1999
HEARING
BEFORE THE
COMMITTEE ON THE JUDICIARY
HOUSE OF REPRESENTATIVES
ONE HUNDRED SIXTH CONGRESS
SECOND SESSION
ON
H.R. 3138
MARCH 22, 2000
Serial No. 124
Printed for the use of the Committee on the Judiciary
Page 2 PREV PAGE TOP OF DOC
For sale by the U.S. Government Printing Office
Superintendent of Documents, Congressional Sales Office, Washington, DC 20402
COMMITTEE ON THE JUDICIARY
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
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
DAVID VITTER, Louisiana
Page 3 PREV PAGE TOP OF DOC
JOHN CONYERS, Jr., Michigan
BARNEY FRANK, Massachusetts
HOWARD L. BERMAN, California
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
HEARING DATE
March 22, 2000
Page 4 PREV PAGE TOP OF DOC
TEXT OF BILL
H.R. 3138
OPENING STATEMENT
Hyde, Hon. Henry J., a Representative in Congress From the State of Illinois, and chairman, Committee on the Judiciary
WITNESSES
Baer, Alan, president and CEO, Ocean World Lines, Inc.
Cashman, George, port division director, International Brotherhood of Teamsters
Clancey, John, chairman of the board, Maersk, Inc.
Coleman, Bob, president, Total Logistics Resource, Inc.
Creel, Harold, Chairman, Federal Maritime Commission
MacDonald, Bill, president, KMJ International, Inc.
Page 5 PREV PAGE TOP OF DOC
McDavid, Janet, partner, Hogan & Hartson
Nannes, John, Deputy Assistant Attorney General, Antitrust Division, United States Department of Justice
Pecquex, Frank, executive secretary treasurer, Maritime Trades Department, AFL–CIO
Rhein, Timothy, chairman, American President Lines, Ltd.
Smith, Daniel, senior consultant, Mercer Management Consulting, Inc.
Welsh, Hugh, deputy general counsel, the Port Authority of New York and New Jersey
Won, Delmond, Commissioner, Federal Maritime Commission
LETTERS, STATEMENTS, ETC., SUBMITTED FOR THE HEARING
Baer, Alan, president and CEO, Ocean World Lines, Inc.: Prepared statement
Cashman, George, port division director, International Brotherhood of Teamsters: Prepared statement
Page 6 PREV PAGE TOP OF DOC
Clancey, John, chairman of the board, Maersk, Inc.: Prepared statement
Coble, Hon. Howard, a Representative in Congress From the State of North Carolina: Prepared statement
Coleman, Bob, president, Total Logistics Resource, Inc.: Prepared statement
Creel, Harold, Chairman, Federal Maritime Commission: Prepared statement
Hart, Clyde J., Jr., Administrator, Maritime Administration, U.S. Department of Transportation: Response to Hon. David Vitter's letter of March 15, 2000
Hyde, Hon. Henry J., a Representative in Congress From the State of Illinois, and chairman, Committee on the Judiciary: Prepared statement
MacDonald, Bill, president, KMJ International, Inc.: Prepared statement
McDavid, Janet, partner, Hogan & Hartson: Prepared statement
Nannes, John, Deputy Assistant Attorney General, Antitrust Division, United States Department of Justice: Prepared statement
Pecquex, Frank, executive secretary treasurer, Maritime Trades Department, AFL–CIO: Prepared statement
Page 7 PREV PAGE TOP OF DOC
Rhein, Timothy, chairman, American President Lines, Ltd.: Prepared statement
Smith, Daniel, senior consultant, Mercer Management Consulting, Inc.: Prepared statement
Welsh, Hugh, deputy general counsel, the Port Authority of New York and New Jersey: Prepared statement
Won, Delmond, Commissioner, Federal Maritime Commission: Prepared statement
APPENDIX
Material submitted for the record
FREE MARKET ANTITRUST IMMUNITY REFORM (FAIR) ACT OF 1999
WEDNESDAY, MARCH 22, 2000
House of Representatives,
Committee on the Judiciary,
Washington, DC.
The committee met, pursuant to call, at 10:05 a.m. in room 2141, Rayburn House Office Building, Hon. Henry J. Hyde (chairman of the committee) presiding.
Page 8 PREV PAGE TOP OF DOC
Present: Representatives Henry J. Hyde, George W. Gekas, Howard Coble, Bob Goodlatte, William L. Jenkins, Asa Hutchinson, David Vitter, John Conyers, Jr., Jerrold Nadler, Robert C. Scott, Melvin L. Watt, William D. Delahunt, Steven R. Rothman, and Chris Cannon.
Staff present: Thomas F. Mooney, Sr., general counsel-chief of staff; Daniel M. Freeman, parliamentarian-counsel; Joseph Gibson, chief antitrust counsel; Will Moschella, chief oversight counsel; Sharee Freeman, counsel; Becky Ward, office manager; Vince Garlock, counsel; Ray Smietanka, counsel; Michele Utt, administrative assistant; Amy Rutkowski, staff assistant; Samuel F. Stratman, communications director; James B. Farr, financial clerk; Robert Jones, staff assistant; and Susan Conklin, counsel.
OPENING STATEMENT OF CHAIRMAN HYDE
Mr. HYDE. Today the committee conducts a legislative hearing on H.R. 3138, the Free Market Antitrust Immunity Reform [FAIR] Act of 1999. I introduced H.R. 3138 on October 25th of last year.
[The bill, H.R. 3138, follows:]
106TH CONGRESS
1ST SESSION
H. R. 3138
To amend the Shipping Act of 1984 to restore the application of the antitrust laws to certain agreements and conduct to which such Act applies.
Page 9 PREV PAGE TOP OF DOC
IN THE HOUSE OF REPRESENTATIVES
OCTOBER 25, 1999
Mr. HYDE introduced the following bill; which was referred to the Committee on the Judiciary, and in addition to the Committee on Transportation and Infrastructure, for a period to be subsequently determined by the Speaker, in each case for consideration of such provisions as fall within the jurisdiction of the committee concerned
A BILL
To amend the Shipping Act of 1984 to restore the application of the antitrust laws to certain agreements and conduct to which such Act applies.
Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled,
SECTION 1. SHORT TITLE.
This Act may be cited as the ''Free Market Antitrust Immunity Reform (FAIR) Act of 1999''.
SEC. 2. AMENDMENTS.
Section 7(a) of the Shipping Act of 1984 (46 U.S.C. App. 1706(a)) is amended—
(1) in paragraph (1)—
(A) by inserting ''entered into only among marine terminal operators with respect to an activity described in section 4(b)'' after ''agreement'',
(B) by striking ''section 5(d) or'', and
(C) by adding ''and'' at the end,
Page 10 PREV PAGE TOP OF DOC
(2) in paragraph (2)—
(A) by striking ''or agreement'' and inserting '', assessment agreement, or agreement of the kind described in paragraph (1) that is'', and
(B) by striking the semicolon at the end and inserting a period, and
(3) by striking paragraphs (3), (4), (5), and (6).
SEC. 3. EFFECTIVE DATE; APPLICATION OF AMENDMENTS.
(a) EFFECTIVE DATE.—Except as provided in subsection (b), this Act and the amendments made by this Act shall take effect 1 year after the date of the enactment of this Act.
(b) APPLICATION OF AMENDMENTS.—The amendments made by this Act shall not apply with respect to conduct occurring before the effective date of this Act.
Mr. HYDE. The bill would repeal the current antitrust immunity for ocean carriers, but would leave intact the antitrust immunity that ports and unions enjoy under the Shipping Act.
Let me first say that I believe that the changes that the Ocean Shipping Reform Act of 1998 made are good changes. The market that exists today is freer than what we had before. But that is no excuse to stop improving the situation.
And as those who follow this issue well know, I have long questioned the justification for the antitrust immunity that the Shipping Act provides to carriers.
When I introduced H.R. 3138, I gave a lengthy speech that set forth the case for repealing that immunity. I will not repeat that long speech here. But I will note that it appears in full on the committee's web site, for those who care to read it. Let me just repeat the essentials.
Page 11 PREV PAGE TOP OF DOC
The ocean shipping industry has evolved to the point that the immunity now almost exclusively benefits foreign-owned carriers at the expense of Americans—American shippers, Americans who consolidate small shipments into large shipments who are known as non-vessel operating common carriers, or NVOs, the shippers' associations, and ultimately, American consumers.
In recent days, I have learned how American truckers also suffer from this immunity. I am particularly pleased that they have decided to join with us to try to pass this much needed legislation. I am also pleased that there are increasing signs that a number of our major trading partners are beginning to question continued immunity, including a major OECD conference in Paris in May.
The American public sends us here to serve their interests. This immunity directly contravenes that interest. If we were voting on it as a new law, I think we would have a difficult time rounding up many votes for this policy in light of today's conditions. Who would want to vote for a policy that almost exclusively benefits foreigners at the expense of Americans?
Now I know that some have argued that these issues were thoroughly aired and resolved in the 1998 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 the 1998 procedure as an excuse to cut off further airing of these issues. And if, as I claim, the immunity makes no sense, then regardless of how long ago we acted on the 1998 act, why should we wait another day to repeal that?
Page 12 PREV PAGE TOP OF DOC
Having said all that, let me also say to those on the other side of the issue that I certainly invite your full participation in this debate. This is one reason why I have scheduled this hearing. I want you to have your day in court. 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 how to proceed.
As I conclude, let me note, we are going to have a markup in this room this afternoon. And we will need to conclude by about 1 o'clock. I believe that if everyone cooperates, we should be able to get everything done in time, assuming there are no Floor votes. That is a big assumption. If not, we will get as far as we can, and we will follow up with written questions.
With that, I am now pleased to recognize the distinguished ranking member, Mr. Conyers, for his statement.
[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 a legislative hearing on H.R. 3138, the ''Free Market Antitrust Immunity Reform (FAIR) Act of 1999.'' I introduced H.R. 3138 on October 25, 1999. The bill would repeal the current antitrust immunity for ocean carriers, but would leave intact the antitrust immunity that ports and unions enjoy under the Shipping Act.
Page 13 PREV PAGE TOP OF DOC
Let me first say that I believe that the changes that the Ocean Shipping Reform Act of 1998 made are good changes. The market that exists today is freer than what went before. But that is no excuse to stop improving the situation.
And as those who follow this issue well know, I have long questioned the justification for the antitrust immunity that the Shipping Act provides to carriers. When I introduced H.R. 3138, I gave a lengthy speech that set forth the case for repealing that immunity. I will not repeat that long speech here, but I will note that it appears in full on the Committee's website for those who care to read it.
Let me just repeat the essentials. The ocean shipping industry has evolved to the point that the immunity now almost exclusively benefits foreign-owned carriers at the expense of Americans: American shippers; Americans who consolidate small shipments into large shipments, who are known as non-vessel-operating common carriers or NVOs and shippers' associations; and ultimately American consumers. In recent days, I have learned how American truckers also suffer from this immunity. I am particularly pleased that they have decided to join with us to try to pass this much needed legislation. I am also pleased that there are increasing signs that a number of our major trading partners are beginning to question continued immunity, including a major OECD conference in Paris in May.
The American public sends us here to serve their interests. This immunity directly contravenes that interest. If we were voting on it as a new law, I think we would have a difficult time rounding up many votes for this policy in light of today's conditions. Who would want to vote for a policy that almost exclusively benefits foreigners at the expense of Americans?
Page 14 PREV PAGE TOP OF DOC
Now I know that some have argued that these issues were thoroughly aired and resolved in the 1998 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 the 1998 procedure as an excuse to cut off further airing of these issues now. And, if, as I claim, the immunity makes no sense, then regardless of how long ago we acted on the 1998 Act, why should we wait another day to repeal it?
Having said all that, let me also say to those on the other side of the issue that I invite your full participation in this debate. That is one reason why I scheduled this hearing. I want you to have your day in court. 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 how to proceed.
As I conclude, let me just note that we are going to have a markup in this room this afternoon, and we will need to conclude by about 1:00 o'clock. I believe that if everyone cooperates, we should be able to get everything done in that time assuming there are no floor votes. If not, we will get as far as we can and follow up with written questions.
With that, I now recognize the distinguished Ranking Member, Mr. Conyers, for his statement.
Mr. CONYERS. Thank you, Mr. Chairman, and good members of the committee and all of our guests that are here.
Page 15 PREV PAGE TOP OF DOC
We are revisiting the Ocean Shipping Reform Act, which continues for ocean-going cargo carriers, an antitrust immunity to such shipping rates. And so there are questions raised about not only the shipping industry, but also how we should apply our antitrust laws.
Unfortunately, those who seek an exemption normally have the burden of trying to prove why the exemption should be maintained. And in one sense, this issue is one that primarily affects the ocean carrier industry. And those who want to abolish the antitrust exemption, including shippers and the customs brokers, are concerned about the rates they pay to carriers.
They are concerned that the private confidential contracts permitted by the Ocean Shipping Act of 1998 prevents them from obtaining a fair bargaining position in rate negotiations. And they also claim that because there are few owner carriers, the antitrust immunity benefits foreign interests, primarily.
But the carriers argue that this 1998 law should be given time to work. They say that the limited antitrust immunity is necessary to remain competitive in the world market, where foreign lines are subsidized and where antitrust immunity is recognized universally.
There is also the claim that because they run on set schedules, they must sail, regardless of the cargo demand. And so it is not insignificant that the Maritime Trades Department of AFL–CIO supports the exemption.
Page 16 PREV PAGE TOP OF DOC
The issue of antitrust immunity in the shipping industry also raises some broader concerns. The Teamsters are concerned about the ability of independent truckers to organize and bargain effectively with carriers.
And I am learning how removing the shippers' immunity will affect competition, not only in the shipping industry, but also in other cargo industries such as railways and air freight.
So the exemption creates the problem that brings us here. I would like to just observe that a primary use of the antitrust exemption is to allow the carriers to share their vessels to increase efficiency, and provide diverse services over geographic areas. Almost all the carriers serving the United States participate in the agreements.
More than 100 have alliance agreements on file with the Federal Maritime Commission. And they are the reason why shippers today enjoy such a diverse and broad range of services. And there is no opposition to such arrangements from any corridor. Yet, we would repeal the antitrust exemption that protects these alliances.
Also, we want to consider that the antitrust exemption is, itself, limited and coupled with regulatory oversight. This industry has only a partial antitrust exemption. Mergers and acquisitions involving carriers are fully subject to antitrust review under Hart, Scott, Rodino.
The only actions that are exempted are those described in agreements filed with the Maritime Commission, which has the authority to investigate the effects of agreements, and frequently uses the review process to review or modify those agreements that could produce anti-competitive results.
Page 17 PREV PAGE TOP OF DOC
Additionally, the shipping act specifically prohibits boycotts, predatory practices, refusals to deal, and other matters of that kind.
So it is very interesting how this kind of small matter has gained such a large attention, that requires the full committee of Judiciary to meet here and consider what we do with this matter.
I know we have a balanced set of witnesses. And I thank you, Mr. Chairman, for allowing me to make these opening remarks.
Mr. HYDE. Thank you, Mr. Conyers. I might mention or reiterate what we had previously said, that we do not think the alliance agreements violate antitrust law. They probably do not.
But should that change or should the truth be the opposite of that, it is our intention in this legislation to protect the alliance agreements. We have no interest in impacting on them.
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.
Page 18 PREV PAGE TOP OF DOC
Our next witness is the Honorable Delmond Won, another Commissioner on the Federal Maritime Commission. He 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, Hawaii 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 for himself as an individual commissioner. His remarks represent his own views, and not necessarily those of the whole Commission. Chairman Creel will represent the views of the Commission as a whole.
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 DC Circuit, and Justice William Rhenquist of the Supreme Court. He spent 3 years at the Antitrust Division in the mid-1970's. And after that, he spent many years in private practice in Washington. He took his current position in 1998.
And I will start with Chairman Creel. If you can constrain your remarks to 5 minutes, your full statement will be made a part of the record. We will try to be a little flexible on that, but just so you will know, we have a long day, and we have to leave at 1 o'clock.
Chairman Creel?
Page 19 PREV PAGE TOP OF DOC
STATEMENT OF HAROLD CREEL, CHAIRMAN, FEDERAL MARITIME COMMISSION
Mr. CREEL. Thank you, Mr. Chairman, Mr. Conyers, and members of the committee. I appreciate the opportunity to appear before you once again. The last time you were very gracious and let me run over. So I will try to keep my remarks to 5 minutes.
And I would just like to note, also, if someone happens to come running out of the room today, it may be our fellow Commissioner Moran, whose wife is due to give birth today. So please excuse him if you will. He gets special points for being here.
Generally, Mr. Chairman, I believe that because the Ocean Shipping Reform Act was passed, we should give it a chance to work. I cannot, therefore, support H.R. 3138.
I understand your interest and the committee's interest in antitrust immunity and shipping. Immunity from the antitrust laws is a privilege. It is an exception to the law. Justification must be given for an exception to the law.
And I believe there is a justification. And it is not just to help carriers, but to prevent volatility and uncertainty and instability in the U.S. trades.
Limited antitrust immunity slows consolidations and mergers, and thereby avoids further market concentration. This benefits carriers by attracting capital investment, but it also benefits shippers, and ultimately the American consumer.
Page 20 PREV PAGE TOP OF DOC
Importantly, it encourages beneficial arrangements, which you have alluded to—vessel sharing agreements and operational alliances.
Ocean shipping is different than other industries. It is not simply market based. Foreign government owned companies, both ship operating companies and ship building companies, skew the ocean shipping market.
Without antitrust immunity, it is these government-owned companies that benefit; for example, the Chinese companies—COSCO, Sinotrans, China Shipping Container Lines.
Immunity does not mean that carriers are effectively controlling the rates. Market forces control the rates and drive the rates.
The Ocean Shipping Reform Act limited the effect of antitrust immunity, especially with the confidential contracting between an individual carrier and individual shipper; not with a conference.
Furthermore, this bill is at odds with our major trading partners who have competition exemptions. The Ocean Shipping Reform Act has many pro-competitive aspects, but most important of all, I think, is the ability to enter into these individual, one-on-one contracts between a shipper and an individual carrier; not just with the conference.
Despite antitrust immunity, rates are lower than they were 10 years ago by 15 percent; 47 percent lower if adjusted for inflation. Service is up tremendously over the last 10 years.
Page 21 PREV PAGE TOP OF DOC
Other market conditions show no need for removal of immunity. Conferences are failing quicker than expected. They are down from about 22 to a high of 33.
Service contract numbers have increased 128 percent under OSRA. And we expect even more service contract innovation this coming year.
Data seem to indicate that NVOs are not harmed by OSRA, either. In 1999, the proportional growth in NVO exports over 1998 far exceeded the growth in total exports.
NVO exports were up 20.5 percent, while total exports were flat. NVO import growth more than doubled the proportionate growth of total imports, up 23.5 percent over 1998, as opposed to total imports, which were up only 11 percent.
These are preliminary numbers. We need to take a comprehensive review of them, and that is what we intend to do at the Federal Maritime Commission. We have proposed to do a 2-year study of OSRA, to see how it has affected the industry. And we are starting on that right now, and hope to have that completed by next summer.
Antitrust immunity was one of the three legs of the compromise, developed over 5 years. If we remove antitrust immunity, the entire compromise fails.
Mr. Chairman, H.R. 3138 would destroy this very delicate compromise that seems to be working. I believe the bill would negatively impact U.S. shipping companies, U.S. importers and exporters access to foreign markets, as well as the U.S. consumer.
Page 22 PREV PAGE TOP OF DOC
I urge you to allow the Ocean Shipping Reform Act to work, and to let us see how the new limits on antitrust immunity are changing the business environment in ocean shipping.
Thank you very much.
[The prepared statement of Mr. Creel follows:]
PREPARED STATEMENT OF HAROLD CREEL, CHAIRMAN, FEDERAL MARITIME COMMISSION
Thank you, Mr. Chairman, for giving me this opportunity to testify on H.R. 3138, which eliminates antitrust immunity for shipping lines in our international trades. As I will explain, we have some preliminary signs that the Ocean Shipping Reform Act (''OSRA'') is working as Congress intended, bringing more competition into the marketplace. However, it is too soon to evaluate in meaningful detail the full effects on the industry of the changes made by the shipping reform legislation. Thus, I cannot at this time support making major changes to the carefully crafted, long-established system of competitive checks and balances set forth in the Shipping Act of 1984 (''1984 Act'').
As a general matter, let me begin by noting that the purpose or rationale for antitrust immunity is not simply to ensure adequate returns for the liner shipping sector. Rather, the objective is far broader and much more important: to ensure an adequate and efficient supply of ocean transportation services so that U.S. exports and U.S. trade can compete in the global marketplace. When shipping lines use antitrust immunity to coordinate their operations or share assets to cut costs or improve service, or to stem losses from low rates that might threaten their viability, it is not just the carriers, but also U.S. businesses and consumers, who stand to benefit.
Page 23 PREV PAGE TOP OF DOC
Historically, the liner shipping industry has been given limited antitrust immunity to allow it the flexibility to address serious pricing and service volatility, which arise from a number of factors peculiar to this industry. For example, the industry has always had to contend with chronic overcapacity, which creates sharp short-run downward pressure on rate levels. Overcapacity can result from the introduction of progressively larger ships necessary to accommodate projected trade growth, or from chronic imbalances in trade flows, so ships sailing full in one direction will have empty space and empty equipment on the return. Unlike airline passengers, cargo rarely books a round-trip ticket. Overcapacity also stems from seasonal fluctuations in trade flows, so that vessel space adequate for strong summer months leads to overcapacity in a weaker winter season. Non-commercial interests, such as national pride or national security, also lead some nations to maintain the presence of a national flag fleet.
When faced with overcapacity, carriers compete aggressively on price in order to fill their ships, as an empty slot generates no revenue at all. Given carriers' high fixed costs for vessels and equipment, it is not economical for carriers to simply idle their ships to reduce capacity. Thus, in their efforts to fill empty slots, carriers are prone to bidding rate levels down so that they are close to or even below their long term average costs. A degree of antitrust immunity allows carriers to engage in limited ''self-regulation''—through conferences or discussion agreements—to try to keep rates from sinking to loss-making levels, or to try to restore rates to provide adequate returns when overcapacity abates.
We know from the minutes of the carrier agreements filed with the FMC, and from the low rates of return of the carriers themselves, that their efforts to influence prices often fail because individual carrier pricing decisions are very much subject to market forces. Nevertheless, the ability to engage in some collective self-regulation apparently provides many carriers with some protection from risk, sufficient to justify their continuing to make enormous long-term investments in serving our trades. Without these protections, operating ships to serve U.S. shippers would look like an even riskier and less attractive investment for many of these carriers, one that some may well be unwilling to make.
Page 24 PREV PAGE TOP OF DOC
Antitrust immunity allows for a broad number of other efficiency-creating arrangements as well. It has provided carriers a valuable way to form alliances, groups of carriers which integrate their operational activities, such as vessel operations, terminal and shoreside services, equipment use, and information and electronic data management, while often preserving separate competing commercial and marketing entities. These groupings create operational efficiencies, leading to lower costs and improved service for customers. Such cooperation can also facilitate entry into new trades, as carriers often begin serving a new route through a partnership with another line, instead of investing in putting a whole new string of vessels in the trade. While not all such arrangements would run afoul of the antitrust laws, I am concerned that, under this bill, the status of many of these operational agreements would be unclear. The result could be the disintegration of these alliances, causing serious disruptions and inefficiency for both carriers and shippers, or a rapid move towards full-scale mergers by alliance partners.
I see a number of other potential risks and pitfalls in doing away with antitrust immunity as well. One is the potential for regulatory uncertainty or conflicts of law that could result if the United States abandons an approach that is shared, to varying degrees, by most of its trading partners. In recent years a number of countries, most recently Japan and Australia, have reviewed their policies of providing competition exemptions for liner shipping. While some countries have proposed or adopted more limits on carriers' collective action—for example, allowing independent contracting, increasing government oversight, or limiting cooperation on inland rates—none has seen fit to eliminate immunity altogether. As I testified last year, I see benefits in trying to forge a consensus with our trading partners in this area, to avoid creating an inefficient global patchwork of discordant regulatory systems.
Page 25 PREV PAGE TOP OF DOC
Another potential hazard is the acceleration of the consolidation of the industry. Without limited immunity, carriers' returns could decline even below current standards, chilling investment, and prompting carriers to leave less profitable trades or cease operations altogether. Our trading partners have clearly recognized this possibility. In its December, 1999 report reviewing and reaffirming antitrust immunity, the Australian government recognized that trying to stop cooperation in this industry presents an unsatisfying Catch–22: ''if conferences were proscribed, carriers would merge, thus internalizing the conference, or . . . some lines currently operating within a conference would leave the trade, allowing remaining providers to expand and take a larger share of the trade.'' The point was that in any case, ''one form of cooperation, the conference, essentially is replaced by another—a larger, formal company.''
While consolidation itself may be troubling, what is more alarming is the question of who benefits from such consolidation. While antitrust optimists may suggest that the most efficient and well-run carriers would prevail in such an environment, I believe that the more likely winners will be those carriers with the highest level of government support and backing. Of particular concern here are the large Chinese state-owned carriers, COSCO and Sinotrans. As a matter of fact, another large government-owned carrier, China Shipping Container Lines, entered our trades in November with six vessels, and has already announced plans for expansion. The possibility of the United States substantially increasing our dependance on the Chinese government-owned entities to move our international trade leaves me ill at ease.
The dream of a free market for shipping could be undermined by foreign countries in other ways as well. If limited self-regulation by conferences and other agreements is ended, national governments will face substantial political pressures to protect their carriers from losses. This protection could take the form of direct regulation, if governments step in to bar the sort of below-cost spot pricing that is so commonplace in shipping. On the other hand, government intervention could come in the form of escalating, market-distorting subsidies. I believe that either scenario could prove more troubling than the current system.
Page 26 PREV PAGE TOP OF DOC
It is these risks and pitfalls that make me unable to support, at this point, sweeping changes to the system of competitive checks and balances that is already in place. That system does not give carriers unlimited, unfettered antitrust immunity to manipulate the market at will. Even before the amendments to the 1984 Act made by OSRA, the statutory regime imposed major pro-competitive checks on the privilege of immunity. Under the 1984 Act, carriers acting concertedly were subjected to stringent prohibitions enumerated at section 10(c) of that Act, barring boycotts, allocation of shippers, unreasonable discrimination and predatory practices. In addition, carriers could deviate from conference rate and service items on 10 calendar days' notice, providing competition within the conferences and ensuring that members could leave conferences without penalty. The FMC was charged with reviewing carrier agreements for excessively anticompetitive effects, and was authorized to use its authority to seek injunctive action as leverage to negotiate changes to agreements which may violate the section 6(g) standard of the 1984 Act, i.e., whether the agreement is likely, by a reduction in competition, to produce an unreasonable reduction in transportation service or an unreasonable increase in transportation cost. For example, in late 1996, the Transpacific Stabilization Agreement (''TSA'') filed an amendment to artificially limit capacity. The Commission, fearing such a system would unreasonably diminish competition, coordinated with shippers and prepared to seek an injunction against the capacity management plan; our intention to proceed in this manner helped in ultimately persuading the carriers to delete those provisions from the agreement.
With the passage of OSRA, which went into effect in May of 1999, additional checks and limits were imposed on the antitrust immunity conferred on ocean carriers. Independent action may now be taken on 5 calendar days' notice rather than 10. OSRA continues to impose specific prohibitions on certain concerted carrier activity in section 10 of the 1984 Act: for example, cooperating carriers are prohibited from discriminating in their service contracting against persons because of their status as a shippers' association or an ocean transportation intermediary. While the standards and procedures of section 6(g) for the review of agreements for anticompetitive effect were unchanged, the conference report for OSRA provided the FMC with directions and guidelines for more aggressive oversight of agreements. Most significantly, a centerpiece of OSRA is that conferences may no longer prohibit or restrict a member from negotiating service contracts, nor may they require disclosure of contract negotiations or adopt enforceable rules affecting service contracting. Given that service contract rates and some other essential terms are no longer made publicly available, these new statutory reforms not only give shippers and carriers the ability to engage in confidential service contracts, but also free shippers from the administrative impediments and the collective inflexibility which often accompanied conference and agreement control over the contracting processes.
Page 27 PREV PAGE TOP OF DOC
Because of these measures, the high level of competition in most trades, and the usual healthy and competitive presence of independent carriers that are not members of conferences and agreements, ocean carriers' freight rates and their rates of return are not excessive. In fact, rates today are significantly lower than they were ten years ago. The mergers and acquisitions commonly occurring in the industry further suggest that this is not an industry which is using its privilege of immunity to generally exploitative effect. It is, in fact, surprising that the carrier industry is somewhat incapable, given its authority to discuss and even set rates, at using that authority better to its advantage. I am often advised by shippers across the country that their focus of attention is not usually the level of rates, with which they are generally satisfied, but rather with service issues, which are more often the distinguishing factor in choosing a carrier.
In addition to rate levels, we have seen a number of other general indicators suggesting that competition and marketplace responsiveness have continued to increase since OSRA took effect. Most dramatic have been the effects of OSRA's service contract provisions on the way business is conducted in the ocean transportation industry. An increasing amount of cargo is moving under service contracts, a majority of which are being negotiated between individual ocean carriers and shippers. Since last May, there has been a tremendous increase in the number of service contracts: we have received more than 104,000 filings, including over 32,000 new contracts and 72,000 amendments, representing an increase of 128 percent compared to the same period in the previous year.
We expect this trend to continue, especially during the upcoming negotiation season. In addition, we anticipate more innovation in contracting, with contracts tailored more to shippers' individual needs, including more variation in the duration of contracts, with the traditional negotiating season becoming less important; spot contracts, which cover a shorter duration and lower volume commitment; an increase in global and multiple trade lane contracts; and more contracts with unrelated shippers. Recent press reports indicate that the National Industrial Transportation League, one of the largest U.S. organizations representing importers and exporters, is no longer pushing to end antitrust immunity, believing that under OSRA, market forces, rather than the conference system, dictate rates. Thus, OSRA appears successful in fostering a market-based transportation system.
Page 28 PREV PAGE TOP OF DOC
Another indication of the market-based changes reshaping the industry is the sharp decline of traditional rate-setting conferences in favor of looser cooperative arrangements. For example, the two major Pacific conferences, the Transpacific Westbound Rate Agreement (''TWRA'') and the Asia-North America Rate Agreement (''ANERA''), have suspended their operations. This is a major development in how business is done. In the mid–1990's, neither conference allowed independent service contracting; indeed, TWRA had very few service contracts of any kind. In contrast, those same carriers are now dealing one-on-one with shippers. We've seen a similar move away from conferences in the U.S.-Japan and Latin American trades as well, and the conferences that do remain have been substantially weakened. For example, the Trans-Atlantic Conference Agreement's (''TACA'') membership has declined from 17 members to 7 in the past two years and it has entered into only four conference contracts since May 1, compared to 400 for the previous year.
Operational agreements such as vessel sharing agreements are now the predominant form of agreement being filed with the Commission, reflecting carriers' changing focus away from rate-setting and towards increasing operational efficiencies to cut costs and improve service.
Conferences also have been supplanted in large part by discussion agreements. Although discussion agreements long have been among the various forms of carrier agreements filed at the Commission, the decline in conferences in the U.S. trades has increased the role and visibility of such arrangements. Unlike conferences, discussion agreements do not set fixed common prices for numerous individually defined commodities, nor do they negotiate contracts or interpose themselves between carriers and customers. Discussion agreements do, however, provide carriers an opportunity to perform trade-wide economic analyses, and a forum to coordinate the process of implementing rate increases or stemming sharp declines in rates, subject to FMC oversight. In many ways, discussion agreements represent a substantial improvement over traditional conferences, in that they do not interfere with shipper-carrier negotiations and relationships, and they afford carriers far more flexibility to tailor rates and services to meet the needs of particular shippers.
Page 29 PREV PAGE TOP OF DOC
Discussion agreements do, of course, have a number of potentially anti-competitive characteristics that necessitate close, ongoing monitoring and oversight by the Commission. For example, their inherent flexibility has made them attractive to traditionally independent lines; as a result, they have been able to amass market shares generally higher than the conferences that came before. For instance, TSA's market share coverage is 85 percent. Moreover, discussion agreements also have shown themselves to be particularly effective in certain market conditions at implementing across-the-board price increases, such as general rate increases and the imposition of surcharges. The Commission must carefully scrutinize such moves to ensure that they are not unreasonable under the standards of the 1984 Act.
In addition, discussion agreements (and other agreements) under OSRA are permitted to collectively agree on guidelines for members' individual or group service contracts so long as such guidelines are voluntary and unenforceable. Different agreements have adopted guidelines covering the content of members' service contracts in varying degrees of detail. The Commission must ensure that use of these guidelines does not unreasonably restrict competition on prices and service among contracting carriers. Also, we are watching closely to ensure that voluntary guidelines are not used to share information about service contracts in a manner that would frustrate Congress' intent regarding the confidentiality of service contracts.
To evaluate these types of issues, the Commission has initiated a project to assess the long term impact of OSRA on the transportation industry based on its first two years in effect. The OSRA Impact Study will examine whether OSRA is yielding the benefits envisioned and whether it has had any detrimental impact on the industry as a whole or on a discrete segment. The study will be conducted in-house, and will explore changes in shipper-carrier relations stemming from the new service contract provisions; the role of pricing agreements and their relationship to capacity in the new environment; whether ocean transportation intermediaries have suffered any competitive disadvantages; and the accessibility and accuracy of common carrier-published tariffs. It will also address OSRA's impact on the Commission's responsibilities and programs. We will, of course, share the results of our study with Congress. In the meantime, we plan to issue an interim status report on the industry under OSRA this summer, which will include documentation of industry compliance efforts and the general direction in which OSRA has led the industry to date.
Page 30 PREV PAGE TOP OF DOC
In light of the extensive policy underpinnings of antitrust immunity, as well as the current state of the marketplace, the new pro-competitive provisions of OSRA and the need for closer economic analysis, I am not able to support H.R. 3138, the subject of today's hearing. As you know, Mr. Chairman, this bill amends section 7 of the 1984 Act, so that only certain agreements among marine terminal operators would be exempt from the antitrust laws, while all agreements among ocean common carriers subject to the 1984 Act and previously exempt would now become subject to the antitrust laws. I believe that there are several problems with the approach taken in the bill.
In the first instance, it amends a statute that was enacted only recently. OSRA went into effect on May 1, 1999, and thus the ocean transportation industry has been operating under it for less than a year. We believe that, at the very least, it is simply too soon to tell whether OSRA's deregulatory and procompetitive provisions are working as intended by Congress, although our very preliminary indications are that it is. In this regard, I would note that OSRA took over five years to enact and during that process Congress received input from all segments of the ocean transportation industry and from various Federal agencies.
In addition, H.R. 3138 addresses only one small section of a fairly complex and comprehensive statutory scheme. Both the 1984 Act and OSRA represent a delicate compromise among all the affected parties. The retention of antitrust immunity for agreements among ocean common carriers was a major part of this compromise. However, the extent of this immunity is extremely limited and is circumscribed by many other provisions of the 1984 Act, including, of course, the agreement review standard in section 6(g), independent action on rates and service contracts, and the prohibited acts proscribed by section 10. Antitrust immunity for carriers, therefore, should be considered in light of the entire statutory scheme enacted by Congress and not considered in isolation.
Page 31 PREV PAGE TOP OF DOC
The bill also appears to take a much too broad approach to the various types of agreements among ocean common carriers from which it would take away antitrust immunity. As noted above, it would subject all such agreements to our antitrust laws, inflicting a severe chill, if not an outright bar, on such operations. In so doing, it would also affect many arrangements that are beneficial to shippers. For example, vessel sharing and space charter arrangements benefit the shipping public by providing more transportation options or more frequent and extensive service patterns. Yet these kinds of arrangements would be reached by the bill, together with what might arguably be considered the more anticompetitive agreements, such as conference agreements.
Mr. Chairman, you have expressed interest in Fact Finding Investigation No. 23, which was initiated in response to the complaints of carrier activities informally brought to the Commission's attention by press reports and numerous shippers during the peak shipping season of 1998. Commissioner Delmond Won undertook the role of Investigative Officer in the proceeding, in order to conduct a timely examination of what were alleged to be inappropriate and possibly unlawful carrier responses to unanticipated and rare trade conditions: demand outstripping supply. The effort was undertaken primarily to make both the carriers and affected shippers aware of the Commission's intention to pursue the allegations, and to deter any similar unlawful activity in the future. Initiation of the Fact Finding Investigation and the publicly-released summary of the Won Report achieved these objectives. In the 1999 contract season, we did not see a recurrence of the activities giving rise to the Fact Finding. A secondary objective of the Fact Finding was to secure evidence that would be necessary to enforcement proceedings for any violations of the 1984 Act.
Page 32 PREV PAGE TOP OF DOC
Commissioner Won used the Commission's subpoena power in Fact Finding Investigation No. 23 to compel testimony and the production of approximately 40,000 pages of documents relating to peak season pricing and space allocation from the conference, discussion agreement, individual carriers, and specific individuals. These subpoenas went to those who were alleged or appeared to be involved in activities in violation of the Act.
However, there was strong shipper reluctance to assist the Commission's inquiries from the outset. Although seven shippers testified under oath, the remaining 23 of 30 shippers who were interviewed or provided documents in the initial phase of the investigation declined to testify. Some shippers gave as a reason for their reluctance a fear of retaliation by carriers with which they necessarily have ongoing relations. With a single exception, the investigative officers chose not to issue subpoenas to the shippers who had complained of these activities, who appeared to be victims rather than participants or perpetrators of the abuses. The single exception noted involved a shipper initially suspected of participating in possibly unlawful actions.
Although Commissioner Won's Report to the Commission described various carrier actions considered ''abusive'' by shippers, and was supported by voluminous carrier- and some shipper-provided documents, that documentation alone was insufficient to constitute conclusive evidence of carrier activities which violated the Shipping Act. That is why the Fact Finding Investigation was continued, with appointment of the Commission's Director of the Bureau of Enforcement as the new Investigative Officer.
However, the strong shipper aversion to any visible participation in the investigation never abated. During this second phase of the Fact Finding Investigation, 64 follow-up letters sent to shippers identified through the examination of carrier-provided documents netted only four responses. Although the response to the 64 letters, as well as the initial contacts, was disappointing, it was not inconsistent with the responses from shippers and other industry participants that the Commission has encountered in pursuing other matters, including those involving TACA and, upon occasion, Section 19 inquiries regarding restrictive foreign practices.
Page 33 PREV PAGE TOP OF DOC
I am not criticizing or blaming shippers, many of whom appeared uncertain as to whether the carrier actions were legitimate, albeit cut-throat, marketplace decisions, or were in fact violations of statutes. Many shippers appear to have made a business decision, which we must respect, not to encourage or assist in FMC enforcement action, lest their business relationships with those carriers become strained or encumbered as a result. Some non-vessel-operating common carriers may have feared to come forward because they may have passed on the higher costs to their shippers in a manner not consistent with the 30-day notice requirements for rate increases. Whatever their reasons, the usefulness of the Fact Finding Investigation as a base from which the Commission could develop specific, prosecutable evidence of carrier wrongdoing was severely hampered.
This is not to say that no enforcement action occurred. The Commission instituted an adjudicatory proceeding concerning the ''opt out'' provision used in the 1998 ANERA service contracts, and directed the Bureau of Enforcement to pursue additional informal enforcement efforts, including those concerning apparent failures by ANERA to file minutes of meetings. The ''opt out'' proceeding addressed concerted activity among the carriers, specifically a conference practice which permitted carriers to claim entitlement to shippers' committed cargo on the one hand, but on the other hand, allowed the carriers to avoid the contracts' rates by ''opting out'' of those rates and imposing their higher tariff rates instead. That practice was found to be unlawful, not merely as exercised in a specific contract or by a specific carrier, but across the board, and will serve as precedent governing future carrier contracting activity. An ancillary and supporting part of the effort to secure the information necessary to assess the carriers' concerted activities—a penalty claim against carriers who had not fully supplied information on conference meetings—was settled.
Page 34 PREV PAGE TOP OF DOC
The formal Fact Finding Investigation was discontinued at the end of the year based on the recommendation of the Investigative Officer in his ''Second Report and Recommendations.'' However, the fact that we issued a report at the end of the year to summarize our activities to date and terminate the formal proceeding does not indicate we are washing our hands of the issue. Enforcement efforts continue. Cases relating to this controversy are still being pursued, as the Commission has authorized its enforcement staff to continue to follow up on leads.
Some people have voiced disappointment with the outcome of the investigation as a whole. Particularly mentioned has been the focus of the Commission's enforcement efforts on individual carrier lapses. I share Commissioner Won's concern that the collective nature of the alleged wrongdoing was not more directly addressed. I would have preferred to look further into the degree to which the alleged carrier abuses were facilitated or enabled by their collective authority and activities. There was obviously no consensus among what was then our body of four Commissioners to go further in that direction.
We take our enforcement responsibilities seriously at the FMC, but our general approach, which reflects the intent of OSRA, is that our primary objective is to achieve compliance and to clarify uncertainty as to legal issues, not to impose penalties for the sake of appearances or to appease unhappy shippers. To this extent, our actions in Fact Finding 23 were a qualified success. There have been few, if any, recurring allegations of similar carrier behavior. Carriers are better informed as to the boundaries of permissible activity in conditions of under-capacity. Shippers are better informed as to how to protect their interests, particularly in contract negotiations. I should add that OSRA's enactment and other commercial developments since the 1998 contract season will also preclude the recurrence of some of the activities complained of: conferences no longer control contract terms; ANERA has since suspended operations; and with additional entrants in the trade, capacity and cargo seem to be in better balance. In short, the events which gave rise to Fact Finding 23 do not, in my opinion, lend support to the objectives sought to be achieved by enactment of H.R. 3138.
Page 35 PREV PAGE TOP OF DOC
Rather than eliminating immunity altogether, I believe that further fine-tuning of the existing system may be desirable. Throughout the consideration of OSRA, I advocated changes to the administration of the section 6(g) ''general standard'' to increase the Commission's effectiveness, responsiveness, and efficiency in responding to shipper complaints about carrier agreements, and I continue to support such an approach now.
In particular, I favor amending sections 6(g) and (h) to place enforcement of the general standard with the Commission, rather than a U.S. district court. Under this scenario, a case under the section 6(g) standard would be treated like any other proceeding involving a violation of the 1984 Act. Private parties could file complaints with the agency, or the agency could launch an investigation on its own motion. If an agreement were found in violation of the standard, the Commission would use the remedies available under the 1984 Act, including modification or cancellation of the agreement or assessment of penalties. Of course, judicial review of such actions, as with other Commission orders, would be available in the federal appeals courts.
The current procedures required to enforce the general standard—an injunctive action in U.S. district court—were borrowed from proceedings under the antitrust laws to block proposed mergers, and are not best suited to a regulated industry where antitrust immunity is allowed for ongoing ventures, subject to constant monitoring and policing. The current sections 6(g)–(h) procedures do not allow persons harmed by an agreement, such as shippers, intermediaries, ports or independent carriers, to bring an action if they wish. Moreover, requiring the Commission to analyze an agreement, make its findings, then undertake an entire subsequent proceeding before a district court imposes a substantial layer of delay, burden, and expense on all parties. Placing enforcement of the section with the Commission would alleviate these problems and provide more efficient and effective oversight of carrier activity benefitting from antitrust immunity.
Page 36 PREV PAGE TOP OF DOC
Mr. Chairman, I hope that my comments have served to give you an indication of the importance of the antitrust immunity provisions under the Shipping Act of 1984 and the need to allow sufficient time to evaluate how the ocean transportation industry is working under OSRA.
Mr. CONYERS. Mr. Chairman?
Mr. HYDE. Yes.
Mr. CONYERS. I must go to the Floor, but I am going to return immediately thereafter.
Mr. HYDE. Very good, thank you.
Mr. CONYERS. Thank you.
Mr. HYDE. Thank you, Chairman Creel.
Commissioner Won?
STATEMENT OF DELMOND WON, COMMISSIONER, FEDERAL MARITIME COMMISSION
Mr. WON. Mr. Chairman and distinguished members of the committee, the first thing I would like to do is make a technical correction to my submitted written statement.
Page 37 PREV PAGE TOP OF DOC
On page 5 of that statement, I referred to TSA's market share as being 90 percent. That number should be 85 percent. I think it is important to know that that market share does fluctuate seasonally. But the more proper number, as far as market share, should be 85 percent.
Let me begin by saying that I believe that I have heard most of the views that you will be hearing today. And I also believe that there is some merit to all of those arguments. As a result, I have often found myself having some difficulty really trying to crystalize my position on the issue of antitrust immunity.
However, what I have intended to do with my written statement is to offer up a perspective that I feel has been helpful to me in my carrying out my duties and responsibilities on the Federal Maritime Commission.
While I am not totally comfortable with the complete elimination of antitrust immunity for ocean carriers, I fully support the need for reform to limit its use. Regulation exists to provide a sense of fairness in the marketplace, which otherwise may bestow an unfair advantage on one or more participants.
The House Merchant Marine and Fisheries Committee recognized this in 1914, in recommending that antitrust immunity should apply to carrier agreements. They found that immunity was necessary to avoid depriving U.S. shippers of various advantages of cooperative agreements, available to their foreign competitors, but that such agreements must be under effective government supervision to prevent abuses.
Page 38 PREV PAGE TOP OF DOC
Conditions for international trade have changed significantly since 1914. Globalization and inter-dependency among trading partners have reduced, but have not eliminated the threat of national protectionism and discrimination against U.S. importers and exporters.
To the extent that antitrust immunity facilitates efficiency and better service, ensures fair access to ocean transportation for U.S. shippers, and neutralizes competing national trade policies, I support its continuation.
However, I have serious concerns with the use of antitrust immunity to provide ocean carriers with an unfair advantage over the same U.S. shippers. The use of that immunity as leverage against shippers is not a proper use of that privilege.
One perspective I gained from Fact Finding Investigation Number 23 is that although individual carrier activity may comply with the law, this fact does not imply that the carrier's collective activity is reasonable.
Like the trend toward deregulation in all other industries, OSRA emphasizes greater reliance on the marketplace to promote U.S. exports. And few would disagree that this means the free marketplace, subject to U.S. antitrust laws.
However, the new law's continuation of antitrust immunity in the face of this direction, I believe, places the FMC in the difficult position of administering a law containing philosophical and policy contradictions.
Page 39 PREV PAGE TOP OF DOC
This difficulty was evident in the FMC's decision on rules governing voluntary guidelines for service contracts and, in the lack of a majority vote, to pursue the collective market distorting behavior described in Fact Finding Investigation Number 23.
Competition must apply to both the buyer and seller's side of a business equation. And ocean carriers may be using antitrust immunity to eliminate competition on the seller's side of ocean transportation.
Some options which I believe should be considered to prevent carrier abuse of antitrust immunity, while preserving its intended benefits are: 1) limit carrier's ability to agree on voluntary service guidelines; 2) limit antitrust immunity to operational cooperation; 3) limit antitrust immunity to small groups of carriers without market dominance; and 4) enhance the FMC's ability to curb unreasonably anti-competitive behavior.
I was struck in reading the Merchant Marine and Fisheries Committee report in 1914 at a phrase that appeared in numerous occasions in discussing antitrust immunity. And that phrase referred to, ''if honestly and fairly conducted.''
I believe that that is the intent of the FAIR Act. And I hope that my suggestions will help achieve that goal.
Thank you.
[The prepared statement of Mr. Won follows:]
Page 40 PREV PAGE TOP OF DOC
PREPARED STATEMENT OF DELMOND WON, COMMISSIONER, FEDERAL MARITIME COMMISSION
SUMMARY
While I am not totally comfortable with the complete elimination of antitrust immunity for ocean carriers, I fully support the need for reform to limit its use. Regulation exists to provide a sense of fairness in the marketplace which, otherwise, may bestow an unfair advantage on one or more participants. The House Merchant Marine and Fisheries Committee recognized this in 1914 in recommending that antitrust immunity should apply to carrier agreements. They found that immunity was necessary to avoid depriving U.S. shippers of various advantages of cooperative agreements available to their foreign competitors, but that such agreements must be brought under effective government supervision to prevent abuses.
Conditions for international trade have changed significantly since 1914. Globalization and interdependency among trading partners have reduced, but have not eliminated, the threat of national protectionism and discrimination against U.S. importers and exporters. To the extent that antitrust immunity facilitates efficiency and better service, ensures fair access to ocean transportation for U.S. shippers, and neutralizes competing national trade policies, I support its continuation.
However, I have serious concerns with the use of antitrust immunity to provide ocean carriers with an unfair advantage over the same U.S. shippers. The use of that immunity as leverage against shippers is not a proper use of the privilege. One perspective I gained from Fact Finding Investigation No. 23 is that, although individual carrier activity may comply with the law, this fact does not imply that the carriers' collective activity is reasonable.
Page 41 PREV PAGE TOP OF DOC
OSRA emphasizes greater reliance on the marketplace to promote U.S. exports, and few would disagree that this means the free marketplace, subject to U.S. antitrust laws. The new law's continuation of antitrust immunity in the face of this direction places the FMC in the difficult position of administering a law containing philosophical and policy contradictions. This difficulty was evident in the FMC's decision on rules governing voluntary guidelines for service contracts and in the lack of a majority vote to pursue the collective, market-distorting, behavior described in Fact Finding Investigation No. 23.
Competition must apply to both the buyer and seller side of a business equation, and ocean carriers may be using antitrust immunity to eliminate competition on the seller side of ocean transportation. Some options which should be considered to prevent carrier abuse of antitrust immunity while preserving its intended benefits are: (1) Limit carriers' ability to agree on voluntary service contract guidelines; (2) Limit antitrust immunity to operational cooperation; (3) Limit antitrust immunity to small groups of carriers without market dominance; and (4) Enhance the FMC's ability to curb unreasonably anticompetitive behavior.
STATEMENT
Mr. Chairman and distinguished Members of the Committee, I would like to thank you for inviting me to present my views on H.R. 3138, the ''Free Market Antitrust Immunity Reform (FAIR) Act of 1999.''
While I have been consistent in saying that I am not totally comfortable with the complete elimination of antitrust immunity for ocean common carriers, I fully support the need for reform with an eye towards limiting its use.
Page 42 PREV PAGE TOP OF DOC
Let me begin by saying that I believe that the very essence of regulation is to implement a sense of fairness in the marketplace. I believe that regulation exists simply because we feel that absent regulation, the marketplace would bestow what we consider to be an unfair advantage to a market participant.
The House Committee on the Merchant Marine and Fisheries, in its Investigation of Shipping Combinations under House Resolution 587 during the Sixty-Third Congress in 1914, recognized this in recommending that antitrust immunity should apply to carrier agreements. In its Report, at p. 416, the Committee stated that:
[T]he prohibition of cooperative agreements between practically all the lines in nearly all the divisions of our foreign trade would not only involve a wholesale disturbance of existing conditions in the shipping business but would deprive American exporters and importers of the advantages claimed as resulting from agreements and conferences if honestly and fairly conducted, such as greater regularity and frequency of service, stability and uniformity of rates, economy in the cost of service, better distribution of sailings, maintenance of American and European rates to foreign markets on a parity, and equal treatment of shippers through the elimination of secret arrangements and underhanded methods of discrimination.
That Committee continued to state, at p. 417, that:
While admitting their many advantages, the Committee is not disposed to recognize steamship agreements and conferences, unless the same are brought under some form of effective government supervision. To permit such agreements without government supervision would mean giving the parties thereto unrestricted right of action.
Page 43 PREV PAGE TOP OF DOC
Since 1914, it's probably safe to say that the conditions for international trade have changed significantly. With the continuing globalization of the world economy, we see a greater recognition of interdependency among trading partners and consequently, a reduced threat of some country discriminating against American exporters and importers in favor of protecting and furthering its own national economy.
The key word here is a ''reduced'' threat, not a threat that has been eliminated. To the extent that antitrust immunity facilitates efficiency and service enhancing arrangements, ensures fair access to ocean transportation services for American exporters and importers, and contributes to the neutralizing of competing, national trade policies, I support the continuation of antitrust immunity.
However, I have serious concerns when antitrust immunity is used to provide the carriers with an unfair advantage over the same American exporters and importers.
I admit to experiencing some difficulty in trying to crystallize my personal position on the issue of antitrust immunity. I find my position constantly shifting as I notice subtle, but significant differences in how antitrust immunity is used by the carriers. The 1914 report by the House Committee on the Merchant Marine and Fisheries also sheds some light on this matter. It states, at p. 304:
While carriers by land are supervised and must conform to statutory requirements in the matter of rates and treatment of shippers, steamship companies, through private arrangements, have secured for themselves monopolistic powers as effective in many instances as though they were statutory . . . They exercise their powers as private combinations and are apt to abuse the same unless brought under effective governmental control.
Page 44 PREV PAGE TOP OF DOC
Essentially, I believe that there is some merit in allowing carriers, under the grant of antitrust immunity, to exchange information which results in arrangements which facilitate fair and efficient trade between countries.
I do not believe, however, that the use of antitrust immunity by a group of carriers as leverage against shippers is a proper use of that privilege. One of the perspectives I developed as a result of the recent Fact Finding Investigation No. 23 is that, although individual carrier activity may be in compliance with the law, this fact does not automatically imply that the carriers' collective behavior is reasonable.
There is a distinct trend in our country to ''deregulate'' industries. OSRA, in fact, adds as a new purpose of our shipping laws, 'to promote the growth and development of United States exports through competitive and efficient ocean transportation and by placing a greater reliance on the marketplace.''
I don't think that any reasonable person would dispute that the term ''marketplace'' means the free marketplace subject to the kinds of antitrust laws we have in this country. That OSRA seeks to place a greater reliance on the marketplace while maintaining antitrust immunity places the FMC in the extremely difficult position of administering a law which contains philosophical and policy contradictions.
This difficulty was evident not only in the FMC's deliberations and vote on rules governing voluntary guidelines for service contracts, but also in our agency's failure to reach a majority to pursue the collective behavior described in Fact Finding Investigation No. 23, behavior which in my mind at least, was clearly market distorting.
Page 45 PREV PAGE TOP OF DOC
In encouraging more ''free market''-like competition, I believe and have often said that competition must apply to both the buyer and seller side of the business equation. My greatest concern lies in the potential for carriers to use antitrust immunity to eliminate competition on the seller side of the ocean transportation equation.
While there is no simple solution to these problems, there are options which should be considered.
1) Limit or eliminate OSRA's authority for carriers to agree on voluntary service contract guidelines.
I do not believe that allowing a group of carriers which would normally be competitors (especially a group which dominates a trade) to agree collectively on negotiating tactics and on contract terms and conditions, is consistent with OSRA's stated policy of placing greater reliance on the marketplace.
This subject was, in fact, considered by the FMC last year in the process of promulgating rules to implement OSRA. The FMC staff recommended to the Commission a rule which would have prohibited carriers from agreeing collectively on service contract terms and conditions.
However, the majority of the Commission at that time did not interpret OSRA to allow such a prohibition and decided to permit groups of carriers to agree on substantive guidelines for their individual service contracts. Amending OSRA either to prohibit such agreements or to convey authority to the FMC to do so would enhance carrier competition, consistent with the purpose of the statute.
Page 46 PREV PAGE TOP OF DOC
2) Limiting antitrust immunity to permit only operational cooperation.
This option would appear to be the most direct approach to maintaining the benefits of antitrust immunity while eliminating the greatest potential for abuse. Under this scenario, efficiency and service enhancing agreements, such as vessel sharing and operational alliances would be permitted, while price collusion within carrier groups (including discussion agreements) would be prohibited.
3) Limiting antitrust immunity to small groupings of carriers not affiliated with other pricing agreements.
This option would retain the current scope of antitrust immunity (including price fixing), but limit its applicability to smaller groups of carriers to ensure greater competition. One means of accomplishing this could be through a market share test, such as that used by the European Commission to determine the acceptability of consortia agreements. This would preclude a situation like that of TSA today, whose members control approximately 90 percent of the Transpacific trade. Such limits could result in several small groupings of carriers in the same trade competing against one another, an oligopolistic situation which would appear to be no worse than, and may have some advantages over, a few megacarriers which seems to be the direction in which most people believe the industry is headed, particularly if antitrust immunity is completely removed.
4) Enhancing the ability of the FMC to curb unreasonably anticompetitive behavior.
Page 47 PREV PAGE TOP OF DOC
The only authority provided to the FMC to address unreasonably anticompetitive behavior is contained in sections 6(g) and (h) of the 1984 Act. There are at least four problems with that part of the statute. First, the Commission has no direct authority to stop such behavior, but only the ''authority'' to seek an injunction in court. Second, the standards are so difficult to meet that the Commission has not sought to enjoin an agreement under these sections since their enactment in 1984. (Although, as the Chairman has indicated, the Commission has been successful on numerous occasions in ''jawboning'' carriers into backing away from certain agreements or activities under the threat of injunctive action). Third, shippers have no right to seek to challenge an unreasonably anticompetitive agreement and are prohibited from even participating in an injunction proceeding brought by the Commission. And fourth, there are no sanctions for unreasonably anticompetitive behavior, only the opportunity to convince a court to order it stopped. Establishing new, clear authority for the Commission itself to block and sanction such behavior, either on its own motion or upon shippers' complaints, would send a strong message that Congress expects the agency not only to be vigilant in protecting the shipping public against market distorting behavior, but also to be prompt and effective in ending such behavior.
It's my feeling that any of these options, or some combination of these options, would help prevent carrier abuse of antitrust immunity while preserving what I believe are the intended benefits. Since coming to the FMC, I have always felt that antitrust immunity was never intended to be used in an unfettered manner by the carriers. It was satisfying to have my feelings verified while reading the 1914 Congressional report on antitrust immunity. In my mind, the kinds of options raised here simply reinforce what Congress originally had in mind in allowing antitrust immunity in the first place.
Mr. HYDE. Thank you very much.
Page 48 PREV PAGE TOP OF DOC
Mr. Nannes?
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. It is a pleasure to be back here this morning, this time to testify in support of H.R. 3138.
I know your time is limited, so let me get right to the point. As I testified here last May, the Antitrust Division does not believe that the ocean shipping industry has extraordinary characteristics that warrant the exemption from the antitrust laws that it currently enjoys.
In our opinion, price fixing and other anti-competitive practices by conferences impose substantial costs on our economy. In the current era of expanding globalization of trade, in which we are evermore dependant upon an efficient ocean transportation system, it is all the more important that our public policy promote full and open competition.
We have today a regulatory statute that has gone through a number of revisions and fine tunings in an effort to create a regulatory environment that offers shippers only some limited benefits of competition, while protecting carriers from the full reach of competition.
Page 49 PREV PAGE TOP OF DOC
We know the benefits that competition offers—low prices, innovative service, and efficient operations. Yet, shippers have been denied those benefits because carriers have persuaded public policy makers that ocean shipping is sufficiently different from other industries that it is necessary to protect carriers from competition.
We have gone back to review the rationales advanced by supporters of the exemption, both in 1916, and again in 1984. We found that supporters of the exemption have basically been reciting the same rationales from the beginning. Whatever may have been their force in 1916, they seem increasingly dubious today, especially in the context of today's economic and legal environment.
Those rationales fall into two categories: those based on the economics of shipping, and those based on the international nature of the shipping business.
A consistent theme of those supporting regulations rather than competition in 1916 was that carriers needed protection from too much competition. Absent an exemption that would allow collective decisionmaking by carriers, it was feared, in the words of the Alexander Report, that carriers would engage in rate wars that would cause the elimination of the weak and the survival of the strong.
Concerns were expressed that in such an environment, carriers would be unable to cover their capital costs, and that would ultimately drive inefficient carriers from the trade.
Page 50 PREV PAGE TOP OF DOC
Note, though, the implications of these arguments. Carriers should be exempt from the antitrust laws because absent the ability to collude, prices would be lowered for shippers.
As the General Accounting Office indicated in 1982 in a report to Congress, a primary objective of shipping conferences is to increase the profits realized by their members as a group. This is the reason people form cartels in the first place. But simply because competitors desire to collude to maximize their profits does not mean that it is good public policy to allow them to do so.
Furthermore, this rationale is difficult to accept, even on its own terms. Arguments based upon concerns about ruinous or destructive competition are often made, but not easily substantiated.
Congress has heard this many times before, often with respect to transportation industries, like railroads and airlines and motor carriers. At one time or another, each of those industries was subject to pervasive Federal regulation, and enjoyed a broad exemption from the antitrust laws.
Over time, however, each of them has been substantially deregulated, and the applicable antitrust exemption has been curtailed or eliminated, without the parade of horribles predicted by industry, and with the result that competition has increased benefits for shippers and consumers.
In fact, economists have often found that a regulated cartel yields the worst of both worlds—high prices and low profitability, as companies over-invest in capacity, and lose the incentive to innovate and operate efficiently.
Page 51 PREV PAGE TOP OF DOC
Certainly, recent sales of U.S. carriers to non-U.S. companies have demonstrated that the ocean shipping exemption has not saved U.S. carriers.
Turning now to the international character of ocean shipping, it was said back in the early 20th century that it would be unfair to apply U.S. antitrust laws just to U.S. carriers, but that attempting to apply the U.S. antitrust laws to foreign carriers would provoke our trading partners. Whatever may have been the validity of such a concern at that time, it has no continuing validity today.
There has been no doubt for many years that the U.S. antitrust laws can properly be applied to U.S. or foreign carriers operating in the foreign trade between the United States and other countries.
Furthermore, the prospect that antitrust enforcement would create international disputes is far less now than then. And in intervening years, foreign governments have made a pronounced shift to free-market principles, and to adopt and apply antitrust laws.
Indeed, it is ironic to note that the most significant recent antitrust enforcement action with respect to ocean shipping occurred a few years ago, and was taken not by the United States, but by the European Commission, when it imposed fines on U.S. and foreign carriers operating in U.S. trades, after determining that they had exceeded the scope of the applicable European exemption.
Surely, this puts to rest any contention that it would be inappropriate, as a matter of fairness or comity, for the United States to apply its antitrust laws to carriers operating to or from the United States.
Page 52 PREV PAGE TOP OF DOC
Mr. Chairman, in 1998, we took an important but limited step forward toward more competition in ocean shipping. We now think the time has come for Congress to finish the job, to establish competition as the touchstone for this important industry, and we urge passage of the bill.
[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. It is a pleasure to be back before this Committee to discuss promoting competition in ocean shipping, this time to testify in support of H.R. 3138, a bill that would remove the antitrust exemption for ocean carriers from the Shipping Act of 1984. The bill would phase out the exemption for intercarrier agreements after one year, while not affecting the immunity for marine terminal operators.
As I testified here last May, when this Committee was examining competition in the context of the Ocean Shipping Reform Act of 1998, the Antitrust Division believes as a general proposition that competition under the antitrust laws is the way to provide consumers with the best products and services at the most affordable prices. We do not believe that the ocean shipping industry has extraordinary characteristics that warrant departure from normal competition policy. 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. In the current era of expanding globalization of trade, in which we are ever more dependent upon an efficient transportation system, it is all the more important that our public policy promote full and open competition.
Page 53 PREV PAGE TOP OF DOC
HISTORY OF COMPETITION POLICY IN OCEAN SHIPPING
Over the last century, our national policies concerning ocean shipping have resembled an awkward minuet, sometimes taking a step toward competition, sometimes taking a step toward regulation, and sometimes trying to go in both directions at once. It is instructive to review those policies and the assumptions upon which they rest, in order to determine the appropriate policies in today's economic environment.
At the time Congress was considering what became the Shipping Act of 1916, which included an exemption from the antitrust laws for ocean shipping conferences, conference agreements among ocean carriers were already prevalent. A 1914 report of the House Committee on the Merchant Marine and Fisheries, known commonly as the ''Alexander Report,'' found that these shipping conferences had effectively monopolized nearly every American foreign trade route, through price-fixing, allocation of markets, and pooling of revenues. They had successfully conspired to drive competitors from the market or coerce them to join the conferences, through the use of conference-subsidized ''fighting ships' that systematically undercut competitors' rates for however long it took to drive them out of business. Conferences also were using ''deferred rebates' to lock customers into exclusive long-term relationships that made it even more difficult for competing carriers to break into the market; these rebates were not based on cost savings derived from large volume commitments but, rather, were simply rewards for shipping exclusively with conference carriers throughout a given period. Furthermore, they were payable only after the shipper had continued the exclusive relationship throughout an additional period, thereby imposing a substantial monetary penalty on a shipper that dared to go outside the conference. Some conferences went so far as to blatantly refuse to carry shipments for shippers who had patronized non-conference carriers.
Page 54 PREV PAGE TOP OF DOC
In the words of the House Committee on the Merchant Marine and Fisheries in its report on the 1916 Act, Congress had two possible courses of action: either prohibit conference agreements and allow competition to take root, or accept conference agreements and regulate their rates and practices. Congress opted for the regulatory approach, influenced substantially by the fact that ocean shipping was predominantly international in character and our major trading partners at the time, lacking comprehensive antitrust laws, generally condoned the conference system.
In the 1916 Act, Congress outlawed deferred rebates and fighting ships and required that conferences be open to all carriers who desired to join. Congress prohibited conferences from refusing to carry a shipper's cargo in retaliation for the shipper's use of non-conference carriers. However, the 1916 Act also expressly conferred an exemption from the antitrust laws for conference agreements on shipping rates, pooling arrangements, and shipping route allocations, as long as those agreements were first submitted to and approved by the newly created U.S. Shipping Board (the body that later became the Federal Maritime Board and, eventually, the Federal Maritime Commission).
Following enactment of the 1916 Act, and particularly in the years after World War II as carriers once again were faced with overcapacity and competition from non-conference carriers, conferences began making extensive use of ''dual rate'' contracts to bind shippers to the conferences and stave off non-conference carrier competition. These dual-rate contracts, also referred to as ''loyalty contracts,'' offered discounted rates to shippers who agreed to use only conference carriers; they differed from the outlawed deferred rebates only in that the shipper could obtain the discount at the time it paid for a shipment. The Federal Maritime Board never challenged dual-rate contracts, but the Supreme Court ruled in Federal Maritime Board v. Isbrandtsen Co., 356 U.S. 481 (1958), that dual rate contracts, while not specifically prohibited by the Shipping Act, nevertheless violated a provision of section 14 of the Act that prohibited resort by carriers to discriminating or unfair methods because a shipper has patronized another carrier. The policy set by Congress in the 1916 Act, the Court held, was to allow a conference to deal with competitive issues among conference members themselves, but to prohibit anticompetitive conduct undertaken by a conference or its members toward non-conference carriers.
Page 55 PREV PAGE TOP OF DOC
In the wake of the Isbrandtsen decision, Congress amended the 1916 Act in 1961 to permit dual-rate contracts, though limiting the permissible discount to 15 percent. At the same time, Congress also amended the Act to require the filing of tariffs, to transfer the Board's authority to an independent Federal Maritime Commission, and to give the Commission the power to disapprove agreements between and among carriers that were ''contrary to the public interest.''
The Commission interpreted its public interest authority to encompass consideration of antitrust principles and, in Federal Maritime Commission v. Aktiebolaget Svenska Amerika Linien, 390 U.S. 238 (1968), the Supreme Court upheld that interpretation, along with the Commission's determination to approve conference restraints that conflicted with antitrust principles only if a conference could ''demonstrate that the . . . rule was required by a serious transportation need, necessary to secure important public benefits or in furtherance of a valid regulatory purpose of the Shipping Act.''
Carriers complained that the Commission's approach led to protracted proceedings that created regulatory uncertainty. Then, in 1979, the Department of Justice prosecuted a number of U.S. and foreign ocean carriers and their executives for violations of the antitrust laws with respect to anticompetitive behavior that exceeded the scope of approved conference and other carrier agreements in effect at the time. Carriers called for legislative changes, and, in 1984, Congress substantially rewrote the 1916 Act.
The Shipping Act of 1984 addressed both of these issues. Congress broadened the antitrust exemption for carrier agreements and streamlined the process for obtaining Commission approval of those agreements. The exemption from the antitrust laws now covered not only agreements that had gone into effect under the Act, but also activities, ''whether permitted under or prohibited by this Act,'' if they were undertaken ''with a reasonable basis to conclude'' that they were pursuant to an effective agreement. The antitrust exemption was further expanded to cover intermodal through rates incorporating rail, truck, and ocean legs. The 1984 Act abolished the Commission's public interest standard for reviewing carrier agreements. A carrier agreement would no longer require Commission ''approval,'' but would go into effect—and thereby become immunized from the antitrust laws—45 days after filing or submission of any additional information requested by the Commission. Once an agreement has been filed, the only way it can be challenged is if the Commission seeks to have a court enjoin the agreement on grounds that it is ''likely, by a reduction in competition, to produce an unreasonable reduction in transportation service or an unreasonable increase in transportation cost.'' (To the best of our knowledge, the Commission has never filed such a challenge.) The Act made clear that Commission enforcement would be the sole remedy for any conduct prohibited by the Act.
Page 56 PREV PAGE TOP OF DOC
The 1984 Act otherwise retained the common carrier provisions of the 1916 Act, as amended in 1961, under which the conferences were required to file published tariffs with the Commission, and retained and somewhat expanded the list of explicit prohibitions against specific acts, including the prohibitions against fighting ships and deferred rebates. The Act provided for the use of service contracts in limited circumstances. Additionally, the Act directed that a study commission be established to make recommendations to Congress about further legislative changes that might be warranted.
The study commission was formed, but it was unable to reach a consensus on recommendations. The commission issued its report in 1992, and Congress began work on what would become the Ocean Shipping Reform Act of 1998. The 1998 Act took some notable competitive steps in the right direction, but it stopped short in some important competitive respects.
On the procompetitive side, the 1998 Act better guarantees that conference members can take ''independent action''—that is, may negotiate service contracts with a shipper at rates that differ from the conference tariff—and thereby compete for large volumes of business by offering discounted rates. The 1998 Act improves on the 1984 Act not only by requiring shipping conferences to permit individually negotiated service contracts, but also by helping protect carriers from anticompetitive pressure from the conferences by prohibiting the conferences from requiring carriers to disclose the rates in those service contracts.
On the other hand, the 1998 Act allows conference members to adopt so-called ''voluntary'' guidelines regarding individual service contracts, which a conference can use, along with its already significant influence over its members, to signal them as to expected behavior. At a minimum, this can be used to discourage vigorous competition with respect to individual service contracts.
Page 57 PREV PAGE TOP OF DOC
These and other provisions of the 1998 Act perpetuate the conference system, either by facilitating intercarrier agreements that would be unlawful in the absence of an exemption or by restricting the ways in which conference members can meaningfully compete on an individual basis for the business of large and small shippers alike. The conference system could not exist in the absence of an antitrust exemption. Surely it is appropriate to ask whether such an exemption makes sense, especially at a time when countries all over the world are turning to competition, rather than regulation, as the best hope for economic prosperity.
REVISITING THE RATIONALES FOR THE ANTITRUST EXEMPTION
What we have today is a regulatory statute that has gone through a number of revisions and fine-tunings in an effort to create a regulatory environment that offers shippers some limited benefits of competition, while protecting carriers from full competition. We know the benefits of competition: low prices, innovative service, and efficient operations. Yet, shippers have been denied the full benefits of competition because carriers have been able to persuade policy makers over the years that the ocean shipping industry has certain characteristics that make it necessary to protect carriers from competition.
Supporters of the antitrust exemption for ocean carriers have been reciting essentially the same rationales from the beginning. Whatever may have been the force of those rationales at the time the exemption was first enacted in 1916, they have become increasingly dubious in the years since, and, when they are floated in the current economic and legal environment, they quickly take on water and begin to list.
Page 58 PREV PAGE TOP OF DOC
Let me review those rationales with you today and explain why, in our view, they do not justify a departure from the competitive principles that other industries throughout our country—and much of the world—have come to live by. They tend to fall into two categories: those based on the economics of shipping and those based on the international nature of the business.
A consistent theme of those supporting regulation, rather than competition, at the time of the 1916 Act was that carriers needed protection from the consequences of 'too much'' competition. Absent an exemption that would allow collective decision making by carriers, it was feared that carriers would engage in rate wars that would lead, in the words of the Alexander Report, to 'the elimination of the weak and the survival of the strong.'' It has been noted that the ocean shipping industry has high capital costs and that fixed costs are a high percentage of total costs. In such circumstances, concerns were expressed that carriers would be unable to cover their capital costs, which would ultimately drive inefficient carriers out of the market.
Note the implications of such arguments: carriers should be exempt from the antitrust laws because, absent the ability to collude, prices would be lower. As the General Accounting Office stated in a 1982 report to Congress, a primary objective of shipping conferences ''is to increase the profits realized by their members as a group.'' This is the raison d'etre of a cartel. But, simply because competitors desire to collude in order to maximize their joint profits does not mean that it is good public policy to allow them to do so.
Furthermore, this rationale is difficult to accept, even on its own terms. Arguments based upon concerns about ''ruinous' or ''destructive'' competition are often made, but not easily substantiated. Congress has heard them many times before, often with respect to transportation industries such as railroads, airlines, and motor carriers. At one time or another, each of those industries was subject to pervasive federal regulation and enjoyed a broad exemption from the antitrust laws. Over time, however, each of them has been substantially deregulated and the applicable antitrust exemption has been curtailed or eliminated, with the result that competition has increased for shippers and consumers, and without the parade of horribles predicted by industry. In fact, economists have often found that a ''regulated'' cartel yields the worst of both worlds: high prices and low profitability, as companies over-invest in capacity and lose the incentive to innovate and operate efficiently. Certainly, recent events have demonstrated that the ocean shipping exemption has not saved U.S. carriers.
Page 59 PREV PAGE TOP OF DOC
Also at the time of the 1916 Act, concerns were expressed that the international character of ocean shipping somehow made it inappropriate to subject the industry to antitrust laws. It was said that it would be unfair to apply U.S. antitrust laws just to U.S. carriers, but that attempting to apply them to foreign carriers would provoke our trading partners. Whatever may have been the validity of such a concern at that time, it has no continuing validity today. There has been no doubt for many years that U.S. antitrust laws can properly be applied to persons engaged in foreign commerce with the U.S. and that the transportation of freight between the U.S. and a foreign country falls well within that principle. Thus, foreign carriers serving the U.S., no less than U.S. carriers serving the U.S., are subject to our antitrust laws with respect to those activities. Furthermore, the prospect that antitrust enforcement would create international disputes is far less now than then. In intervening years, foreign governments have made a pronounced shift to embrace free-market competition and to adopt and apply antitrust laws. Indeed, it is ironic to note that the most significant recent antitrust enforcement action with respect to ocean shipping in U.S.-Europe trades was taken by the European Commission a few years ago, when it imposed fines on U.S. and foreign carriers operating between the United States and Europe after determining that they had exceeded the scope of the applicable European exemption. Surely this puts to rest any contention that it would inappropriate, as a matter of fairness or comity, for the United States to apply its antitrust laws to carriers operating to or from the U.S.
Perhaps a final rationale—and one that reflects both the economic and international character of shipping—is that some foreign countries subsidize their state-controlled carriers and operate them for reasons other than profit. This was a significant concern to U.S.-flag carriers in the 1970s, but Congress has already dealt with that. The Shipping Act of 1984 contained provisions giving the Commission powers to disapprove rates of such carriers that were below a just and reasonable level.
Page 60 PREV PAGE TOP OF DOC
In our view, the case for a broad exemption from the antitrust laws has never been a strong one and is especially weak today. Congress has acted decisively over the past 25 years to deregulate other transportation industries—railroads, airlines, and motor carriers—despite predictions that ruinous competition would harm carriers and consumers alike. The case for continuation of the antitrust exemption for ocean carriers is no stronger. Indeed, at a time when the U.S. model of deregulation—coupled with appropriate antitrust enforcement—is one of our most successful ''exports,'' the antitrust exemption for ocean shipping seems badly out of step with the times.
CONCLUSION
Mr. Chairman, as I stated in my testimony last summer, the 1998 Act took an important but limited step forward toward more competition in ocean shipping. We now think the time has come for Congress to finish the job of establishing competition as the touchstone in this important industry by enacting your legislation to remove the antitrust exemption for ocean carriers. We 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.
Rather than continue to tinker with a regulatory structure and attempt to legislatively define which specific anticompetitive practices should be tolerated in which circumstances, we urge Congress to enact your legislation and allow competition to flourish—subject only to the constraints imposed by our antitrust laws—in the same way they do in the rest of our economy. A competitive marketplace protected by the antitrust laws will do more than the most carefully constructed regulatory scheme to allow competitive forces in the ocean shipping industry to benefit consumers, shippers, the economy, and ultimately the ocean shipping industry itself.
Page 61 PREV PAGE TOP OF DOC
Mr. HYDE. Thank you very much, Mr. Nannes.
We will now question the panel.
Chairman Creel, I want to ask you about the recent discontinuance of the investigation of practices in the Trans-Pacific trade in 1998.
In preparation for this hearing, I sent you some questions about that decision, including a question about why the Commission did not subpoena shippers in the second phase of that investigation.
Part of your answer to that question was, ''Based on negative shipper reaction to receipt of subpoenas in prior investigations and the significant shipper reluctance, the investigative officer and staff concluded that shippers would not be amenable to subpoenas, or consider them likely to deter or shield them from possible carrier retaliation for Commission enforcement actions, based on their complaints, although such retaliation would be unlawful under the Shipping Act.''
That was a surprising admission from a law enforcement agency. If you do not issue subpoenas, because people do not like to receive them, how do you effectively enforce the law?
Mr. CREEL. Well, generally, Mr. Chairman, we like to use the subpoena authority to subpoena the perpetrators, not the victims. It seems if the victims are harmed, they should be willing to come forward. I do not think there is anything unusual about that.
Page 62 PREV PAGE TOP OF DOC
I would defer to Commissioner Won as to why they did not issue subpoenas to more than one shipper. We did use our subpoena authority in subpoenaing about 40,000 pages of documents. We subpoenaed 20 carriers. They are the regulated entities, as a matter of fact.
We had hearings around the country in five cities, to seek testimony. We had 30 shippers come in. We only had about seven testify. Of those seven, at the end of the day, they did not want to provide further documentation of the problems that they said they were experiencing.
And we have, by the way, the ability to address retaliation. There has been some discussion that the shippers were concerned that the carriers would retaliate against them for testifying or providing documentation.
Section 10(b)(3) of the act provides for that authority, for us to address retaliation by carriers. In fact, it provides for double reparation. So we do have the authority to address that particular issue.
But I think that we used subpoenas as we should have, to address the perpetrators. At the end of day, when the shippers did not want to come in and provide further information, that may very well be a business decision that was made on their own, which could be a valid one.
But we do have the ability to address retaliation, if that is what they were concerned about.
Page 63 PREV PAGE TOP OF DOC
Mr. HYDE. Thank you. Chairman Creel, you argue that one of the reasons for maintaining antitrust immunity is that there can be no free market, because other countries subsidize their shipping lines against losses.
If there are no major American-owned carriers left, why do we care if other countries choose to subsidize their carriers? Don't we benefit from those subsidies?
Mr. CREEL. I think doing away with antitrust immunity affects shipping and American trade generally—not just U.S. flag vessels; not just U.S. owned vessels.
On the ownership issue, I do not think ownership is that important anymore. I think the importance is flying the U.S. flag. And that is certainly one of our missions, to watch out for the U.S. flag. I think that doing away with antitrust immunity would affect the U.S. companies, whether U.S. owned or U.S. flagged.
I am concerned that the market out there is not a free market. If you do away with antitrust immunity, you do not have a free market in ocean shipping. It is different. You have countries that are subsidizing both ship building and ship operating. You have countries that actually own their ship operating and ship building entities.
You have other countries, like Japan, that have vertical integration in their corporations, all the way down from ship building to ship operating to making widgets. That is what I am concerned about.
Page 64 PREV PAGE TOP OF DOC
If we had a free market here in ocean shipping, I would agree with you, that we could do away with antitrust immunity, and let all carriers compete fairly.
Mr. HYDE. You mention that you are conducting a study of the impact of the 1998 act. We will hear from a witness later, Mr. Cashman, of the Teamsters. And he will ask, in his testimony, that you consider the plight of the poor drivers in this study.
And I trust that you agree that is important, and perhaps should be part of your study?
Mr. CREEL. We will certainly look at that. And I would be happy to include that in our study.
As for the truck drivers, I am not really clear on how they are affected by antitrust immunity in a deleterious way. In fact, I think that you could argue that by doing away with antitrust immunity, you could actually harm the truckers, because I think what would happen, you would have a downward pressure on rates, generally.
The carriers then are looking to save money in any way they can by turning to the terminal operators, or to the truckers. And I am concerned that that may have an impact on the truckers in a negative way.
[Letter follows:]
Page 65 PREV PAGE TOP OF DOC
| Federal Maritime Commission, |
| Office of the Chairman, |
| Washington, DC, April 14, 2000. |
Mr. GEORGE W. CASHMAN,
Director, Port Division,
International Brotherhood of Teamsters Local 25,
Washington, DC.
DEAR MR. CASHMAN: Thank you for your letter of March 24, 2000, regarding the working conditions of port drivers. As indicated at the House Judiciary Committee hearings, the Federal Maritime Commission plans to incorporate the issue into its study on the impact of the Ocean Shipping Reform Act of 1998. Enclosed is a copy of our press release on the study.
I appreciate your assurances of cooperation and assistance with this study. I have asked my staff to ensure that you are contacted during the information-collection period of the study for further information. Again, I thank you for your expressions of concern and cooperation.
Sincerely,
| Harold J. Creel, Jr., Chairman. |
Enclosure
cc:
Page 66 PREV PAGE TOP OF DOC
General President James P. Hoffa
International Brotherhood of Teamsters
25 Louisiana Avenue, N.W.
Washington. D.C. 20001–2198
The Honorable Henry Hyde
Chairman
House Committee on the Judiciary
2138 Rayburn House Office Building
Washington, DC 20515–6216
NEWS: FEDERAL MARITIME COMMISSION
CONTACT: Florence A. Carr, Deputy Executive Director, at (202) 523–5800
FOR RELEASE: March 24,2000
Federal Maritime Commission Chairman Harold J. Creel, Jr., provided details today concerning the Commission's OSRA Impact Study. The project is designed to assess the impact of the Ocean Shipping Reform Act of 1998 on liner shipping, based on the Act's first two years in force. Chairman Creel advised that the study would evaluate information covering the period from May 1999 through May 200 1, with the final report to be issued in the summer of 200 1. Interim comments on the study's status will be made public this summer, he added.
Page 67 PREV PAGE TOP OF DOC
Chairman Creel explained that the Commission initiated the project to examine whether OSRA was yielding the benefits envisioned, and whether it was having any detrimental impact. In particular, the Commission will be taking a close look at service contracting under OSRA to determine its effects on shipper-carrier relations, the types of contracts being signed, the use of joint contracting authority, the extent of innovation in contract provisions, and the impact of voluntary service contract guidelines. Chairman Creel noted that the Commission intends to make use of its extensive service contract database in analyzing how contracting, in the aggregate, is developing under the new legislation.
A second area on which the study will focus is carrier agreements. ''We already are aware that the implementation of OSRA has coincided with a decline in the role of traditional conferences as collective pricing forums and a new prominence for discussion agreements,'' Chairman Creel said. The OSRA Impact Study will address such issues as how discussion agreements are operating, what effects they may have on price competition and service, and what use they make of their authority under OSRA to establish voluntary service contract guidelines. In addition, the study will examine the changes in types and numbers of other agreements, such as space sharing and operational agreements, and will evaluate the likely effects of the ongoing concentration of the liner shipping industry via mergers, acquisitions, and alliances.
The Commission's study also will include a section that specifically addresses the situation of ocean transportation intermediaries, a new entity created by OSRA. ''We intend to evaluate the competitive circumstances faced by ocean transportation intermediaries under the new system,'' said Chairman Creel. ''Particularly given the concern expressed by some that OSRA was not advantageous to their interests, we want to assess the impact of the new law on everyone and to be able to report to Congress if someone is not getting a fair shake.''
Page 68 PREV PAGE TOP OF DOC
And, the study will examine certain issues that impact other shipping-related industries, including marine terminal operators, maritime labor, shippers' associations, and independent port drivers.
Tariff accessibility and accuracy, an area in which the Commission already has noted the existence of troubling shortcomings, also will be revisited as part of the OSRA Impact Study. The Commission will update its earlier audits to determine whether common carrier tariffs now published on the internet are indeed accessible to the shipping public at a reasonable cost, and whether the information they provide is useful and accurate.
The Commission views a two-year period as the minimum base on which to make a meaningful assessment of OSRA's various effects, especially with respect to service contracting. ''As the study progresses, we will be soliciting relevant information and insight from all segments of the international shipping community,'' Chairman Creel emphasized, ''and anticipate a cooperative working relationship with all concerned parties.''
Mr. HYDE. Mr. Nannes, you have testified metaphorically that the exemption has no clothes; there is no longer any justification for it. Could you elaborate on that?
Mr. NANNES. Certainly, Mr. Chairman. It seems to me that the economic context and the international context that gave rise to the exemption in 1916 and its expansion in 1984 simply do not apply in today's economic environment.
Page 69 PREV PAGE TOP OF DOC
I think all of the trends are in our favor—the trend toward globalization, the trend toward de-regulation, the trend toward open markets, the trend toward international alliances. All of these things suggest to me that the American model of a de-regulated, fully competitive system is one that the rest of the world is increasingly taking and finding is the appropriate model in which to enter this new century.
As that happens, we suspect that there will be a curtailment in the traditional kinds of rationales that underlay the exemption, and that the time is appropriate for the United States to lead, once again, with respect to injecting competition into this very important trade.
Mr. HYDE. Thank you very much.
Mr. Scott?
Mr. SCOTT. Thank you, Mr. Chairman.
I would ask any of the witnesses to comment on the effect that passage of this bill would have on market concentration.
Mr. CREEL. I will address that. I think, Mr. Scott, that what it would do is, it would accelerate consolidations.
Already, we are seeing mergers in this industry, like the rest of industry. We are seeing mergers, acquisitions, consolidations. I think this bill will accelerate that and have a deleterious effect on U.S. trades, generally.
Page 70 PREV PAGE TOP OF DOC
Mr. NANNES. Mr. Scott, if you do not mind, if I could offer our observation. Our observation on that question would be somewhat different. Obviously, if the antitrust exemption were removed, the antitrust laws would still apply to mergers and acquisitions, as they do today, throughout most of American industry.
Therefore, the antitrust enforcement agencies would have the ability to intercede and to prevent mergers or combinations that we thought would be competitively problematic.
On the other hand, I would like to just interject one thought about concentration. And that is, there certainly could be a scenario where, in the event of repeal of the exemption, there would be fewer carriers operating in a trade, but there would be greater competition, because there would be more independent companies operating, that operate today in a conference framework, where there is consensus decisionmaking.
You may have 10 carriers in a conference, but if they are basically deciding on a single price, you may in fact have less competition in that environment than you would if you had five or six carriers in the trade, but they were each pricing independently.
Mr. SCOTT. Well, there are some models where additional competition does not reduce prices. We found that in health care where, in fact, unfettered competition did not work, and in fact, had to create a scenario where you had to actually show a certificate of need, so that everyone was not competing with each other.
Page 71 PREV PAGE TOP OF DOC
Because by the time you added up all the costs, they would have to charge more than if you had restricted competition, where they could provide the services more efficiently.
Commissioner Creel, did you want to comment on that?
Mr. CREEL. Yes, I would, Mr. Scott.
First of all, I think we are confusing the issue here. The issue is not the size of the merged carriers.
If you look at the largest shipping company now, I think it only has like 15 or 18 percent of the whole market. That is not the issue. The issue is you would drive the companies out of business. And then you are dealing with government owned entities that you can not compete with fairly.
That is what skews this whole thing—government-owned entities, over-subsidized, Government subsidized entities, and also this vertical integration that you see abroad.
Mr. SCOTT. Could you comment on what American companies are competing with, on an international scale, in terms of their ability to collude?
Mr. CREEL. Let me tell you, you only have to look at the Chinese. And I do not mean to be picking just on the Chinese. But their companies are government owned. They have admitted that. They have filed their controlled carrier status with the Federal Maritime Commission.
Page 72 PREV PAGE TOP OF DOC
We have three major companies there. One is a new upstart that just started the end of last year, that has made no bones about the fact that they want to be in the top five shipping companies in the world in 5 years. And just recently there was an announcement that they are talking amongst themselves, as well. They do not answer to private shareholders. They answer to government ministers.
Mr. SCOTT. And did you want to comment on whether or not the health care model is more appropriate to this than the free and open competition?
Mr. NANNES. Certainly, sir, I think the one fact with respect to which all the people on this panel and maybe the next panel agree is that if the exemption were removed for ocean shipping, our rates would fall. Our position is, that is good. Some of the people who are concerned about rates falling think that would be bad. But I think everyone has agreed that the competitive model would be to lower prices.
Mr. SCOTT. But I think there is also the idea that if they fall initially, after you have run everybody out of business, they will ease back up.
Mr. NANNES. That is right. Well, there are an awful lot of assumptions between opening a market to competition and the prospect that you would have such a diminution in the number of competitors that there would be an anti-competitive price at the back end.
Mr. SCOTT. Well, would you have the same phenomenon that you have with the health care, where free and open competition might create inefficiencies?
Page 73 PREV PAGE TOP OF DOC
Mr. NANNES. Certainly, our operating assumption and the one that we think is borne out from other industries that have similar economic characteristics is that in an open environment without an immunity, you would have lower prices and greater efficiency. So we have some confidence about that.
Mr. CREEL. Excuse me, can I just address that? I mean, this is one thing that is sort of disturbing to me, that ocean shipping does get lumped in with these other industries. It gets lumped in with domestic trucking.
Well, trucking is domestic by nature. That is completely different. They are not controlled, Government-owned, subsidized carriers that you are competing with there.
It gets lumped in with airlines. Airlines are completely different in some ways, and in some ways, they are more regulated. Airlines have antitrust immunity to enter international agreements. And moreover, you have landing rights. Air agreements are made through bilaterals.
I would argue that international airlines are even more regulated than ocean shipping. And, moreover, airlines are different because they have two-way traffic.
One of the major problems here with ocean shipping is that you have one-way traffic. A passenger plane picks up passengers here, drops them off there, picks up passengers there, and drops them off here.
Page 74 PREV PAGE TOP OF DOC
Ocean shipping is most often seasonal. It is one directional. For example, now in the east-bound Pacific, the trade is phenomenal. In the west-bound, it is nothing. You can move a box west-bound for $500. It is phenomenal. So you have excess capacity, but it is necessary.
But what concerns me, and the last issue, is on the domestic rail, as well, that he mentioned. Do not use the rail industry as a model for de-regulation. My God, now there is a cry for re-regulation, because of captive shippers in the rail industry. Just ask them.
So I do not think any of those are good models. And what is always avoided and not addressed directly is the non-market forces that are out there in ocean shipping. And it is completely different.
Mr. HYDE. Mr. Gekas?
Mr. GEKAS. Yes, thank you, Mr. Chairman.
Mr. Creel, you mentioned in part of your testimony—and I can not find it now, but I remember that you said this——
Mr. CREEL. I probably could not find it, either. [Laughter.]
Mr. GEKAS [continuing]. That the system with the current state of affairs seems to be working, and that you are compiling evidence which would be completed this summer or next summer?
Page 75 PREV PAGE TOP OF DOC
Mr. CREEL. We hope to have an interim report out this summer.
Mr. GEKAS. And you believe that because of the trend of what has already occurred, that it would show the world that it really is working, and there is no need for remedial legislation. Is that correct?
Mr. CREEL. That is right.
Mr. GEKAS. And you state that part of the evidence to which you allude is the reduction in conferences from 30-some to 22, et cetera. But you still say it seems to be working, meaning that you are not dead certain that the final report will substantiate your current position.
Mr. CREEL. Let me put it this way, if I were a betting man, I would certainly bet that it is working, for the most part.
We have not heard the complaints from the industry that we would normally hear. Now I know the Ocean Transportation Intermediaries, the NVO, are concerned. I think their issue is not so much on antitrust immunity, as it is on the ability to offer individual confidential service contracts, as their competitors, the carriers, do.
This bill would do nothing to permit them to offer individual confidential service contracts.
Page 76 PREV PAGE TOP OF DOC
Mr. HYDE. If the gentleman would permit, we have a journal vote on the Floor. So we may as well recess temporarily, while we dash over and cast a vital vote on approving the journal from yesterday, which we have all read from cover to cover.
Mr. GEKAS. Mr. Chairman, this will not reduce my time, by any chance, will it?
Mr. HYDE. It may even add to your time. [Laughter.]
Mr. GEKAS. I thank the Chair.
Mr. HYDE. The committee will stand in recess, and please come back as soon as you vote.
[Recess.]
Mr. HYDE. The committee will come to order.
Mr. Gekas, you have 3 minutes and 15 seconds left.
Mr. GEKAS. Yes, thank you, Mr. Chairman.
Mr. Nannes, given the evidence that has been provided to us by Mr. Creel about the reduction in conferences and the improvement in the service contract, should we not give it another change; should we not give it the chance that he is talking about, at least until the summer of 2001, to see whether all other aspects of this current situation apply favorably?
Page 77 PREV PAGE TOP OF DOC
What is your haste in the matter? Do you have evidence contrary to what Mr. Creel says about the conferences, the reduction in conferences, or the improvement in the statistics in service contracts?
Mr. NANNES. Well, Congressman, from our perspective, we think we have been very patient. We have been waiting since 1916; not just since 1998.
Mr. GEKAS. I do not remember you at that time. [Laughter.]
Mr. NANNES. One of the difficulties, of course, is I think the FMC has access to information, through its regulatory role, that we might not have access to.
But just in terms of what is publicly available, the information that we understand that was uncovered by the Commission in its Trans-Pacific investigation suggests to us that some of the anti-competitive conduct that may be ongoing may be undertaken under the guise of these discussion agreements, and not even necessarily the conference agreements.
There are a number of mechanisms that are built into the 1998 act that we think deter and discourage carriers from taking full advantage of even the limited opportunities that the act provides.
Mr. GEKAS. But the reduction of conferences and the improvement in service contracts, at least, you are willing to acknowledge, I would trust, that there is some evidence that it is working.
Page 78 PREV PAGE TOP OF DOC
Mr. NANNES. Well, there is the suggestion, of course, that if there are more service contracts, it means that some people are negotiating arrangements that differ from the conference tariff. But my understanding is that even with the 1998 act, the carriers are entitled to act collectively in setting guidelines that limit the extent to which service contracts are going to be pursued, unilaterally.
So my only suggestion to you is that shear numbers alone may not be dispositive about the success or lack thereof of the act.
Mr. GEKAS. I have just one question for Mr. Won. And that is that in part of his statement, he said that, ''I do not believe, however, that the use of antitrust immunity by a group of carriers as leverage against shippers is a proper use of that privilege.''
Do we have any evidence that this kind of leverage has been operating, right beneath our noses?
Mr. WON. Well, I believe that we found strong indications that that was happening, as a result of Fact Finding Investigation Number 23.
Mr. GEKAS. Yes, that is what you say. But then you still are ambivalent about whether or not the current law is working.
Mr. WON. Well, yes, you know, I think there are a couple of things we need to keep in mind as we talk about OSRA. One is because the timing of when OSRA went into effect, May 1st, 1999, happened to have coincided with the effective date of the current contracts in place.
Page 79 PREV PAGE TOP OF DOC
So given that coincidence, I do not think that this first year after May 1, 1999 provides us a good picture of what OSRA has accomplished, or whether or not, you know, there is any movement toward what I believe is the intent of OSRA.
I think this upcoming contracting season, which I presume, at this point, would be May 1st of 2000, would give everybody a much better indication as to whether or not OSRA is accomplishing what it is intended to do.
Mr. GEKAS. I yield back the balance of my non-time.
Mr. HYDE. The gentleman from Michigan.
Mr. CONYERS. Chairman Creel, we have been impressed by your statement and your background in admiralty law and maritime activities.
But here is something that is important. If the antitrust exemption goes, is there a possibility that there could be fewer jobs, fewer ports, and a consolidation of the industry, generally?
Mr. CREEL. Without antitrust immunity?
Mr. CONYERS. Yes.
Mr. CREEL. Yes, sir, I believe that is precisely what would happen. And I think that you would see companies that are not controlled by private individual shareholders, but rather Government controlled, Government subsidized companies, that are the winners in all of this; not U.S. companies, not non-subsidized, non-government controlled, non-vertically integrated companies.
Page 80 PREV PAGE TOP OF DOC
Mr. CONYERS. Well, that is what it would seem to me might follow with this exemption. And then I support George Gekas' notion that we could kind of hold on until your report comes out. I know some people have been waiting several generations now. But, I mean, that is another year, since 1916, you know.
But let me just ask my last point. And that is, as a friend of truckers, you said that the antitrust immunity elimination might actually cause them some harm.
Mr. CREEL. That is one thing I am concerned about. To be quite honest with you, Mr. Conyers, the first I heard about the Teamsters' concern was about a week ago. We have been addressing this issue for over 5 years, and actually longer than that, when I was in my previous job.
And the first I had heard from the Teamsters was not even directly, but just indirectly, about a week ago. And given that we are going to be conducting this 2 year study, I think that that would be an issue that would certainly be appropriate to look at, in that study.
I would argue that it may be that if you have carriers that are going out of business or suffering pressure on their rates, to look for somewhere to make up the difference. And traditionally, they turn shoreside to the terminals, and also to the truckers themselves.
And I would just like to point out one last point on that. The carriers negotiate individually with the truckers. They do not have antitrust immunity to set rates with truckers. In fact, the most recent amendment to the act said and pointed out very clearly that if they talked collectively with truckers, it has to be subject to the antitrust laws.
Page 81 PREV PAGE TOP OF DOC
Mr. CONYERS. Well, you have been very helpful, and I also thank the other witnesses in the first panel, Mr. Chairman.
Mr. CREEL. Thank you.
Mr. HYDE. Thank you, sir.
Mr. Coble?
Mr. COBLE. Mr. Chairman, I thank you for conducting this hearing. I think hearings such as this one forge a forum whereby fairness and equity can be promoted, because we are hearing from both sides.
And Mr. Chairman, before I forget it, I would like to ask unanimous consent to insert into the record my opening statement.
Mr. HYDE. Without objection, so ordered.
[The 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. You will also find that my position on this issue has not changed since our hearing last May.
Page 82 PREV PAGE TOP OF DOC
As the former chairman of the subcommittee with primary jurisdiction over the Ocean Shipping Reform Act (OSRA), I recognize that the compromise reached last year represented a delicate balance that had the support of a majority of the stockholders in the ocean shipping industry. To repeal this legislation or remove the antitrust exemption would be a step backwards and severely impact the operational capabilities of the maritime industry.
The Ocean Shipping Reform Act has dramatically changed the regulatory and competitive environment of the ocean shipping industry. In fact, since the May 1, 1999, implementation date, more than 95,000 contracts and amendments have been filed with the FMC which represents a 142% increase over the same period in 1998. While the dramatic increases in contract filings would seem to indicate that the Ocean Shipping Reform Act is working, it is important to recognize that the changes brought about by this legislation took effect less than a year ago and it is too early to predict the impact of these reforms. In recognition of this notion, the FMC has just embarked on a two-year study to determine whether these reforms are having the intended effect, and I believe it would be premature for Congress to take additional action prior to the completion of this study.
With respect to this hearing and its focus on the antitrust aspects of the Ocean Shipping Reform Act, the limited exemption from antitrust laws for ocean carriers has existed since 1916 and is the policy of our international trading partners. It is my belief that unilateral action by the U.S. to revoke antitrust immunity would disrupt international trading conditions and unfairly disadvantage U.S.-flag carriers. Additionally, both the railroad industry and the motor carrier industry, both of which operate in a deregulated environment, enjoy similar immunity. Should we also then consider legislation to repeal the limited immunity enjoyed by these transportation modes?
Page 83 PREV PAGE TOP OF DOC
As I stated at the hearing last year, I believe that shipping reform will also provide a unique opportunity for non-vessel-operating common carriers (NVOCCs), shippers' associations and freight forwarders to thrive. In fact, according to a recent article in the Journal of Commerce, some of the NVOCCs are doing quite well in a deregulated environment. Either way, I do not believe the solution to their problem in the repeal of antitrust immunity.
Mr. Chairman, in an ideal world we would operate in a deregulated global shipping market with full competition. We all recognize that this notion is not realistic, and therefore, I maintain that antitrust immunity is desirable in order to protect U.S.-flag carriers and is in the national security interest of our country.
Mr. COBLE. I was going to talk about concentration and consolidation and the level thereof, but Mr. Conyers and Mr. Scott have both broached that subject, gentlemen. So I think you all adequately answered that.
Let me ask you this, starting with you, Chairman Creel. Is it true that our trading partners throughout the world provide for antitrust immunity for ocean carriers?
Mr. CREEL. Yes, sir, that is true. In fact, there has been some reference to the EU changing their approach on this, and that there is an OECD panel that is looking at this. There is nothing conclusive on that at all. In fact, I think it may go the other way, where they would not vote to address this, in terms of doing away with antitrust immunity.
Page 84 PREV PAGE TOP OF DOC
Also, I think that at least 17 of our trading partners all provide some sort of antitrust immunity. Just recently, Australia reaffirmed its antitrust immunity. And one point that they said, which I thought was very good, they said if you do away with antitrust immunity, what they are worried about is what they call ''internalizing the conference.''
In other words, you do not have the conference, but you have something worse than the conference, because you do not have control over it. And Japan also has just reaffirmed its antitrust immunity.
Mr. COBLE. So that would be without exception that all of our trading partners would extend antitrust immunity?
Mr. CREEL. Let me get back to you on the exact number, but I think the vast majority of them do.
[Mr. Creel later provided the following information:]
All our major trading partners who have U.S.-style antitrust laws (i.e., laws barring horizontal price fixing) maintain some exception for liner shipping. This includes all the countries in the European Union, Australia, Canada, Japan, New Zealand, Norway, and South Korea.
In addition there are 78 countries that are signatories to the UN Convention on a Code of Conduct for Liner Conferences (adopted 1974, in force 1983). This convention, to which the U.S. is not a member, explicitly provides for the recognition of, and rules for, liner conferences by its signatory countries.
Page 85 PREV PAGE TOP OF DOC
Mr. COBLE. Do either of you two want to add to this, to confirm or reject?
Mr. NANNES. Congressman, the only point I would make is that even some of our largest trading partners that do have some form of antitrust immunity, in certain respects, have a narrower immunity than we do. And I think what is being tabled up for the OECD in May is an exploration of the rationale for the antitrust exemption.
So I do not think there are any presumptions, going in, that the case for the exemption will be reaffirmed. Indeed, I think the predicate for the examination is that it might be appropriate to take a fresh look in today's economic environment.
Mr. CREEL. But Mr. Coble, I would add that there is also no presumption that that will carry the day, either, that there will be a scaling back on antitrust immunity. So there is strong opposition in the OECD by the Maritime Transport Committee, I know.
Mr. COBLE. Mr. Won, do you want to be heard on that issue?
Mr. WON. I have no reason to dispute what the two gentlemen have said.
Mr. COBLE. Let me give you a chance to be heard on this question then, Mr. Won, if I might.
Page 86 PREV PAGE TOP OF DOC
Mr. WON. Yes, sir.
Mr. COBLE. Are you aware of any violations or abuse by the carriers of their limited antitrust immunity, under the new Ocean Shipping Reform Act?
Mr. WON. At this time, I have no personal knowledge of that.
Mr. COBLE. Does anybody else want to weigh in on that?
Mr. CREEL. No, sir, we have one case that has been filed with us. And I would point out that it is over discrimination, Mr. Coble, not on the abuse of antitrust immunity so much, but discriminating against an ocean transportation intermediatory. And I point out that that is not a case that has been filed alleging conduct between or amongst carriers, and was also filed against a Chinese company.
Mr. COBLE. Mr. Chairman, I noticed the clock on the wall indicates we are not going to have a lot of time. In the event that I am not here for the second round, which may be true because of a luncheon meeting, I would like permission to submit questions in writing to the witnesses on the second panel.
Mr. HYDE. That will be encouraged. Thank you, Mr. Coble.
Mr. COBLE. I thank the chairman, and I thank you gentlemen for being with us.
Page 87 PREV PAGE TOP OF DOC
Mr. HYDE. I am going to ask my remaining colleagues to try to be brief. We have 10 more witnesses, and we have to give the room up at 1. And I want to give them an opportunity to at least make their statements in chief.
So I ask the indulgence of Mr. Nadler and Mr. Rothman. You seem that you have an urgent question that you want to ask. And I will recognize you now for that purpose.
Mr. ROTHMAN. That is kind of you, Mr. Chairman.
I have two very brief questions, I hope, for the chairman. Has there been any evidence of discriminatory conduct on the part of ocean carriers since OSRA became effective?
Mr. CREEL. Just the one case that I have mentioned, that was filed against the Chinese shipping company, Cosco. But that was not an allegation of antitrust immunity abuse, but of discrimination. It was against one carrier, and not a group of carriers.
Mr. ROTHMAN. And my other question, Mr. Chairman, was has there been a change in the international ocean transportation market, since the passage of OSRA?
Mr. CREEL. There has. And I think, again, this is the purpose of our Ocean Shipping Reform Act impact study. And we will have a good feel for that next year, next summer. But preliminary indications are that it has had a tremendous impact, a positive impact.
What we have seen is just an explosion of individual, confidential one-on-one contracts between an individual carrier and a shipper. Some of that seems very obvious, but never happened before.
Page 88 PREV PAGE TOP OF DOC
We talk about the power of conferences and what they are doing and how bad they are. Conferences are basically a thing of the past. And this is really odd to me, but before OSRA passed, what we saw, carriers were coming in, complaining about confidential contracts—oh, we do not want this; we do not like this. The shippers wanted to have the one on one contracts.
Now they all like them, because you do not have to give everybody the same rate. You can fill a ship, if there is extra space. Maybe you give a little shipper a good rate, and maybe you give them the same rate that Wal-Mart gets. But you would not give him that if all the rates were public, because Wal-Mart would not want them to get as low a rate.
So I think it is having a tremendous impact, from at least what we see preliminarily. And I hope that the study will enlighten us more on that. But we will have a better idea in about a year.
If I could, Mr. Rothman, just make one point, too. The reason we have a 2-year study is that what we found in the first year after the act was that carriers and shippers were hustling to try to get their contracts signed.
Now we are starting to see, or at least we are hearing anecdotally, that there is some innovation going on. And I think it is going to take this year to see where we really are going to be, and a truer picture of where we are going to be.
Mr. HYDE. Thank you.
Page 89 PREV PAGE TOP OF DOC
Mr. Vitter?
Mr. VITTER. Thank you, Mr. Chairman.
First of all, Mr. Chairman, on March 15th I wrote a letter containing several questions to the Administrator of the Maritime Administration on this bill and this issue. And if I could request unanimous consent to submit into the record my letter and his responses.
Mr. HYDE. Without objection.
Mr. VITTER. Thank you.
[The referenced document follows:]
| Congress of the United States, |
| House of Representatives, |
| Committee on the Judiciary, |
| Washington, DC, March 15, 2000. |
CLYDE J. HART, JR., Administrator,
Maritime Administration,
U.S. Department of Transportation,
Washington, DC.
Re: Impact of H.R. 3138 on the Voluntary Intermodal Sealift Agreement (VISA)
Page 90 PREV PAGE TOP OF DOC
DEAR ADMINISTRATOR HART: In preparation for a hearing March 22, 2000 in the House Committee on the Judiciary, I request your assistance in helping me to understand the potential impact of H.R. 3138 on the Maritime Security Program and its integral ''Emergency Preparedness Agreement'' called the Voluntary Intermodal Sealift Agreement (''VISA'') program.
As you know, H.R. 3138 would repeal the limited antitrust immunity currently afforded to ocean common carriers under the Shipping Act of 1984, as amended, and as expressly retained by the Ocean Shipping Reform Act of 1998 (OSRA). All but five of the forty-seven (47) vessels participating in the Maritime Security Program are in common carrier liner service.
I ask that you provide to me, in advance of the March 22 hearing, a written response to the following questions:
1. Is the VISA program an integral part of the defense readiness plan of the United States?
2. Does the contractual commitment of carriers participating in the VISA program include worldwide intermodal, management, logistics, and communications support as well as a commitment of vessel capacity?
3. Is the scope and effectiveness of the VISA programs dependent in part on participating carriers maintaining worldwide commercial sailing schedules, port facilities, and intermodal systems?
Page 91 PREV PAGE TOP OF DOC
4. If repeal of antitrust immunity affected the viability of liner carriers, especially U.S.-flag carriers, and led to carrier services that were less diverse in terms of ports called, inland points served, and frequency of service, would that have a new positive or negative effect on the effectiveness of the VISA program?
5. Repeal of carrier antitrust immunity also makes me wonder about national security implications. If the predicted precipitous fall in freight rates causes the decommissioning or reflaging of U.S.-flag capacity, what is the effect on the pool of trained U.S. seafarers needed to meet the nation's need during a contingency?
I thank you in advance for your assistance in providing me with this information. I would ask that you forward your response at the latest by March 17, 2000. This is necessary so that I and other members of the Judiciary Committee may review it prior to the scheduled hearing.
Sincerely,
| David B. Vitter, Member of Congress. |
RESPONSES FROM MR. HART
Question 1: Is the VISA program an integral part of the defense readiness plan of the United States?
Answer: The VISA program is the Emergency Preparedness Program (EPP) designated by the Department of Transportation to meet the requirements of the Maritime Security Act of 1996 (MSA). In January 1997, the VISA program was approved by the Secretary of Defense as the Department of Defense's (DOD's) principal sealift readiness program. This new EPP is co-sponsored by the Maritime Administration (MARAD) and the U.S. Transportation Command; and modeled after the highly successful Civil Reserve Air Fleet (CRAF) program. Joint planning between MARAD, DOD and Industry under the VISA program is a significant improvement to the mobility process.
Page 92 PREV PAGE TOP OF DOC
The VISA program's major component includes Maritime Security Program (MSP) vessels operating pursuant to the terms and conditions as set forth in the MSA and supporting regulations. Approximately 70 percent of the ship capacity committed to VISA is derived from the MSP fleet. The VISA program assures the DOD access to the U.S. commercial fleet by providing intermodal sealift and total logistical support to DOD in time of war, national emergency, or whenever the Secretary of Defense determines it is necessary for national security. This enables DOD to secure space to transport military supplies and equipment.
Background: Since the mid 1970's, a DOD program called the Sealift Readiness Program (SRP), was used as the vehicle for DOD to obtain commercial ocean transportation services in the event of contingencies, short of utilizing MARAD's requisitioning authority. The basic tenant of the SRP, was that U.S. commercial carriers had to enroll 50% of their U.S. flag ships in the SRP, in return for being able to bid on DOD peacetime cargo. The SRP was never actually tested, and when Operation DESERT SHIELD occurred, it was determined that the SRP was not feasible for use, so a Special Middle East Shipping Agreement (SMESA) was rapidly patched together between DOD and industry. Among the ''lessons learned'' from the Gulf War, was that a new EPP for sealift was needed, similar to the CRAF program which facilitates DOD use of commercial airlift. MARAD, DOD and industry set to the task of developing a new program and after a lengthy process of consensus building, VISA was approved by the Secretary of Defense (SECDEF) in January 1997 to replace the SRP. VISA exists via DOT's authorities under the Defense Production Act of 1950. The primary incentives for industry participation in VISA are MSP benefits and/or access to DOD peacetime cargo. Furthermore, enrollment in VISA satisfies the requirement that MSP operators be enrolled in an EPP. VISA brings more than just ships to meet the governments needs.
Page 93 PREV PAGE TOP OF DOC
Question 2: Does the contractual commitment of carriers participating in the VISA program include worldwide intermodal, management, logistics, and communications support as well as commitment of vessel capacity?
Answer: VISA carriers commit ship capacity, intermodal equipment, personnel and management systems which include logistics and communications support. Further, the VISA program provides a forum to conduct joint planning between the Maritime Administration, the Department of Defense and the maritime industry to meet contingency requirements while minimizing commercial disruption. This forum; entitled the Joint Planning Advisory Group (JPAG), meets approximately two times a year during peacetime, and as necessary during war or national emergency.
MSP participants in the VISA program have a contractual commitment of 100 percent for their MSP capacity and associated intermodal resources. As of March 15, 2000, MSP participants' capacity commitments represent approximately 70% of the U.S.-flag commercial dry cargo capacity committed to the VISA program. Vessels and operators not covered by the MSP are only required to commit a portion of their intermodal.capacity and related resources.
Question 3: Is the scope and effectiveness of the VISA program dependent in part on participating carriers maintaining worldwide commercial sailing schedules, port facilities, and intermodal systems?
Answer: The principal reason for establishing the VISA program was to take advantage of U.S.-flag carriers global network which include port facilities and intermodal systems. The U.S. Transportation command and its components, the Military Sealift Command and the Military Traffic Management Command have negotiated contingency compensation contracts with VISA carriers that are based, to a significant extent, on utilization of VISA-carriers existing commercial vessel trading routes, and intermodal systems. It is therefore imperative that participating VISA carriers maintain their worldwide commercial sailing schedules. Maritime Security Program participants, representing over 70 percent of the VISA capacity commitments, are required to operate their MSP vessels in U.S. foreign trade. In order to meet this requirement, maintenance of commercial sailing schedules is necessary.
Page 94 PREV PAGE TOP OF DOC
Question 4: If repeal of antitrust immunity affected the viability of liner carriers, especially U.S.-flag carriers, and led to carrier services that were less diverse in terms of ports called, inland points served, and frequency of service, would that have a net positive or negative effect on the effectiveness of the VISA program?
Answer: While it is unclear whether repeal of antitrust immunity would effect ports called, inland points served, and frequency of service, if this led to carrier. services that were less diverse it is clear that there would be a negative impacton the effectiveness of the VISA program..
Question 5: Repeal of carrier antitrust immunity also makes me wonder about national security implications. If the predicted precipitous fall in freight rates causes the decommissioning or reflagging of U.S.-flag capacity, what is the effect on the pool of trained U.S. seafarers needed to meet the nation's need during a contingency?
Answer: We cannot tell whether freight rates would fall due to the repeal of carrier antitrust immunity. However, if we do experience a precipitous fall, we could expect a negative impact on the availability of U.S-flag capacity and the pool of trained U.S. seafarers to meet national security requirements.
Mr. VITTER. Thank you. And also, Mr. Chairman, like Mr. Coble, I would like unanimous consent to submit some questions for the second panel, in case I am not here.
Page 95 PREV PAGE TOP OF DOC
Mr. HYDE. Without objection.
Mr. VITTER. Thank you very much, Mr. Chairman. I just have one question for Chairman Creel.
Mr. Chairman, I am concerned about national security implications of this. As I understand it, the discussion has underscored that there is a Chinese subsidization of many of their operations. Is that fair to say?
Mr. CREEL. Actually, it is not a subsidization, Mr. Vitter, it is ownership—outright ownership.
Mr. VITTER. So, clearly, they have an advantage, given that outright promotion and ownership by the Government.
Mr. CREEL. They are not constrained by notions of profit and loss.
Mr. VITTER. Well, particularly in light of that, do you feel like the repeal of this immunity could decrease the number of U.S. flag vessels and U.S. flag capacity significantly, and what national security implications does that have? Because, certainly, that is at least a secondary, if not, you know, a primary ultimate goal of policy with regard to U.S. flag vessels.
Mr. CREEL. And it is one of our statutory responsibilities to be concerned about the U.S. flag.
Page 96 PREV PAGE TOP OF DOC
I do not know exactly what will happen to the U.S. flag. But I will tell you, generally, that I think that what will happen to vessels calling at U.S. ports, engaged in the U.S. trade, that doing away with the antitrust immunity will push them somewhere else.
They will go to where they can find subsidies, if there are countries that offer subsidies. I think in that light, I think it would have a deleterious effect on the U.S. flag.
Mr. VITTER. Thank you. That is all I have, Mr. Chairman.
Mr. HYDE. I want to especially thank Mr. Nadler for his indulgence. And I will give you extra time on the next panel.
I want to thank you gentlemen for a solid contribution. It has been a good debate. It will be ongoing, I am sure. You have all made a contribution. Thank you.
Mr. CREEL. Thank you, and thank you for your staff's help, as well.
Mr. HYDE. Thank you.
Our second panel consists of 10 private sector witnesses who represent various perspectives in the shipping industry. Our first witness will be Alan Baer, president and chief executive officer of Ocean World Lines, a major non-vessel operating common carriers or NVO.
Page 97 PREV PAGE TOP OF DOC
Mr. Baer is a graduate of Syracuse University and the New York University Business School. Before coming to Ocean World Lines, he worked at Dart Container Line, an Atlantic overseas agency. Mr. Baer has been CEO of Ocean since 1989. He appears here today on behalf of the Coalition for Fair Play in Ocean Shipping.
Our next witness is Mr. Bob Coleman, president and chief operating officer of TLR, Total Logistics Resource, Inc. Mr. Coleman began his career in international trade in 1969. After working for two international trade providers, he founded his own company and operated it until it merged with TLR in 1989. He appears here today on behalf of the Pacific Coast Council of Custom Brokers and Freight Forwarders Association, the National Customs Brokers and Forwarders Association of America, and the New York/New Jersey Foreign Freight Forwarders and Brokers Association.
Our next witness is Bill MacDonald, president of KMJ International. Mr. MacDonald has a bachelor's degree and an MBA from the University of Washington. He has long worked in exporting forest products and building materials from the West Coast. He appears here today on behalf of the Pacific Northwest Asia Shippers Association.
Our next witness is Mr. George Cashman, the Port Division director of the International Brotherhood of Teamsters. Mr. Cashman is a lifelong teamster, having begun his career as a rank and file driver in 1967. In 1991, he was elected president and business agent of Local 25 in Boston. And he remains in that position today, having been twice reelected. He serves in numerous positions, both in the local and in the national union.
Page 98 PREV PAGE TOP OF DOC
Our next witness is Ms. Janet McDavid, a partner in the law firm of Hogan & Hartson. Ms. McDavid is a graduate of Northwestern University and Georgetown University School of Law. She has been at Hogan & Hartson throughout her career. She practices antitrust law. And she is widely known as an author and speaker in that field. And she appears here today on behalf of the Section of Antitrust Law of the American Bar Association.
Our next witness is Mr. John Clancey, chairman of the board of Maersk, Inc. 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 Maersk's predecessor, Sea-Land, in 1970. He has been with the company since that time. He became CEO of Sea-Land in 1991, and chairman of the board when Maersk acquired Sea-Land in 1999.
Our next witness is Mr. Timothy Rhein, chairman of the American President Lines 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. He took his current job in 1995.
Next 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. And during his time at the Port Authority, he has represented it in a variety of congressional and international forums. He appears here today on behalf of the American Association of Port Authorities.
Our next witness is Mr. Frank Pecquex, the executive secretary treasurer of the Maritime Trades Department of the AFL–CIO. Early in his career, Mr. Pecquex worked for the Seafarers International Union in New York. In 1980, he moved to Washington to work for the Maritime Trades Department, and has assumed his current position in 1993.
Page 99 PREV PAGE TOP OF DOC
And, finally, we have Mr. Daniel Smith, a senior consultant to Mercer Management Consulting. He has a bachelor's and a master's degree from the University of California at Berkeley. He has extensive experience consulting in the ocean shipping and other transportation industries, and is a frequent speaker and writer in this field.
We are delighted to have a high powered, authoritative assembly. Will you please try to limit your remarks to 5 minutes, so we can hear you all. Your statements will be received in the record in full. And then with such time as we have left over, hopefully we will get to questions. Meanwhile, we will begin with Mr. Baer.
STATEMENT OF ALAN BAER, PRESIDENT AND CEO, OCEAN WORLD LINES, INC.
Mr. BAER. Thank you, Mr. Chairman.
Mr. Chairman, Congressman Conyers and members of the committee, on behalf of the Coalition for Fair Play in Ocean Shipping, let me first thank you for providing me with this opportunity to testify before the Judiciary Committee, as you consider H.R. 3138.
The coalition was formed in 1999 by exporters and importers of all sizes, including ocean transportation intermediaries. The objective of the coalition was to provide a unified voice for its members on issues confronting the ocean shipping world.
I am also president of Ocean World Lines, a U.S. based NVOCC with offices and agents worldwide. Ocean World is one of the largest NVOs in the world today.
Page 100 PREV PAGE TOP OF DOC
Enactment of H.R. 3138 and the resulting removal of carrier antitrust immunity is needed, and the coalition strongly encourages this Congress to move forward on H.R. 3138.
Under OSRA, carriers can still form groups which are legalized cartels called conferences. They can discuss, formulate, implement, and enforce collective rates for all shippers. They may form discussion agreements, which can include both conference and non-conference carriers to establish pricing structures, exchange data on shippers that monitors what each carrier is doing, even with a confidential environment.
They can collude and discriminate against shippers, based on the type of company they may be, as they see fit, and continue to avoid our antitrust and competitive laws.
Mr. Chairman, it is important to note that Sea-Land, American President Lines, Crowley Maritime and Lykes Brothers were all sold to foreign interests.
When Congress first granted the immunity to the lines, one of the reasons was to assist with the development of U.S. shipping lines. This is no longer necessary.
On the question of whether OSRA is working, the coalition believes that it is, but only in part. Recently, the European Commission confiscated the record of all carriers in the Trans-Atlantic Trade on the basis of suspected carrier collusion, relating to the application of a surcharge that was applied by all carriers, late last year.
Page 101 PREV PAGE TOP OF DOC
The most egregious practice under OSRA is the strengthening of discussion agreements. Discussion agreements are comprised of almost all ocean carriers' competitors in most trade lanes. Discussion agreements are able to establish rate guidelines on ocean rates and surcharges.
This has had a chilling anti-competitive effect in the marketplace today. These agreements have acted as mechanisms for discrimination against shippers. Last year, the West Coast of South America Discussion Agreement established general rate increases that apply only to NVOCCs.
These increases for NVOs were applied despite overcapacity in the trade, which normally should indicate a lowering of rates. Discussion agreements have not formed in the Trans-Atlantic trade, because the European Union will not allow them.
The TSA in the Trans-Pacific inbound trade lanes have announced GRIs of $400 per 40 foot container, and an additional $300 peak season surcharge. Whether these increases will stick remains uncertain.
But what is certain is that a discussion agreement comprised of most of the ocean carriers in one of our most important trade lanes referenced earlier, 85 percent of the capacity has unilaterally announced substantial rate increases. The TSA has collectively established the benchmark from which the marketplace will function. This is a serious interference with the existing marketplace.
Another carrier argument and also presented today is that H.R. 3138 would put the United States out of step with our trading partners. This is not entirely true.
Page 102 PREV PAGE TOP OF DOC
As noted, the EU does not permit carrier discussion agreements. Canada is readying ocean shipping reform that would curtail carrier antitrust immunity.
Mr. Chairman, I would like to submit today, for the record, a copy of today's Journal of Commerce, which expands on the proposed Canadian legislation, that will eliminate antitrust immunity for discussion agreements, under the new Canadian law being considered.
Mr. HYDE. Without objection, the exhibit will be received and made a part of the record.
[The referenced document follows:]
COPYRIGHT 2000 JOURNAL OF COMMERCE, INC.
JOURNAL OF COMMERCE
MARCH 22, 2000, WEDNESDAY
SECTION: NEWS; Pg. 1
LENGTH: 763 words
HEADLINE: Government to unveil its version of OSRA
BYLINE: BY COURTNEY TOWER
DATELINE: OTTAWA
Page 103 PREV PAGE TOP OF DOC
BODY:
Canada's federal government plans within a few weeks to introduce legislation resembling the Ocean Shipping Reform Act of the United States.
Though the legislation will mirror OSRA, it will be adapted to Canada's somewhat different system for dealing with conferences and their freight rates.
Like OSRA, the Canadian bill would allow conferences to continue to exist, but also would allow confidential contracts between shippers and carriers. Under OSRA, confidential contracting has weakened or killed conferences.
The proposed Canadian bill would not extend antitrust immunity to ''stabilization agreements,'' under which conference and non-conference carriers discuss rates and set voluntary guidelines. Such agreements remain legal under OSRA, and have been criticized by shippers and cargo intermediaries.
The Canadian legislation would prohibit carriers from aligning to use voluntary guidelines or other devices to raise rates or curtail capacity, and may include a ''sunset'' clause that would end conferences after 10 years.
As with OSRA, conferences would be allowed to negotiate inland rates.
The bill will contain the essential elements of a position developed by the Canadian Shippers Council, but won't endorse the council's goal of outlawing rate-setting conferences.
Page 104 PREV PAGE TOP OF DOC
The changes to Canada's Shipping Conferences Exemption Act are meant to counter whatever effect OSRA may have in luring U.S. cargo back from being shipped through Canadian ports.
U.S. exports and imports comprise half of Montreal's container traffic. The Port of Halifax also has been increasing its volume of U.S.-European cargo through rail links with the U.S. Midwest.
There has been expectation, but little evidence, that OSRA would reduce the market share of Canadian ports by cutting rates through U.S. ports.
American and European shippers have chosen Montreal and Halifax not only because of higher conference rates in the United States, but because of rail connections and the U.S. harbor maintenance tax, now removed from exports but maintained on imports.
Montreal's North Atlantic container traffic rose by 5.2 percent last year. Normand Filion, vice president of the Montreal Port Authority, said OSRA could cut into that but that his port still has advantages of distance, lower handling costs and competitive pricing.
He said that over the long term, OSRA ''will contribute to the further consolidation of the ocean shipping industry'' by reducing the number of carriers.
The Canadian shipping legislation will be introduced by Transport Minister David Collenette. ''We will try to fit it in just before or just after Easter,'' said a legislation assistant for the government in the House of Commons.
Page 105 PREV PAGE TOP OF DOC
It's uncertain how quickly Parliament will act on the bill. Lawmakers also are dealing with other priority pieces of transport legislation, including bills relating to airline restructuring and the hotly disputed issue of rail transportation and marketing of western Canadian grain.
Final passage of this bill through the Commons and Senate could take several months or could be slipped through quickly.
Lisa MacGillivray, managing director of the Canadian Industrial Transportation Association, said she hopes Parliament acts in a hurry.
''They are dragging their feet, and the Canadian shipping industry is being disadvantaged,'' she said. ''There is no reason why the bill can't be fast-tracked through Parliament. The bill is not controversial, except perhaps to the few conference carriers. We view it as kind of a no-brainer.''
MacGillivray said there is no real evidence yet of any shift from Canadian to American ports because of the difference in the nations, shipping laws. But she added that ''the longer this goes on, the more chances there are that shippers might get better deals out of other ports.''
Walter Mueller, executive secretary of the Canadian Shippers Council, said Collenette had indicated in a meeting with shippers that the bill ''would certainly mean complete alignment with United States regulations.''
Page 106 PREV PAGE TOP OF DOC
It has been easier for shippers in Canada to negotiate rates than it was in the United States before OSRA, so the proposed changes may not be radical. Canada has long permitted confidential contracting, but only with conferences such as the Canada-U.K. and Canada Continental Europe groups. But the content of those contracts soon became known, and served as industry benchmarks.
Government transport officials say the proposed law would include a dispute-resolving mechanism with penalties.
Mr. BAER. The OECD is also reviewing the validity of carrier antitrust immunity. Who is out of step?
One of the comments you may hear from the carriers today is that antitrust immunity has had little favorable impact on the carrier bottom line. My reaction is then, why keep it?
The marketplace is sensitive, first to the volume of cargo in a particular market lane, versus the vessel capacity to carry that cargo. When there is more vessel space than there is cargo, the ability of the carriers to control prices is diminished. However, as we have seen, discussion agreements still distort that market place.
When ships are full, the ability for ocean carriers to build a pricing consensus is dramatically increased. At that time, antitrust immunity provides the means for higher rates and charges than a free market would allow.
Page 107 PREV PAGE TOP OF DOC
With tonnage being controlled by a shrinking pool of owners, the need to eliminate carriers antitrust immunity has increased dramatically. We have witnessed large jumps in prices in almost all import markets.
The impact of this higher revenue, coupled with the ability to compare notes and market positions, provides the carriers with a power beyond any other industry in America. Carriers, most of which are foreign owned, do not need antitrust immunity.
One of the goals of OSRA was to provide confidential contracting and negotiation. However, carriers make unilateral GRI announcements. Would we allow this collusive behavior with any other industry group? Obviously, the answer is no.
Why, then, do we still need this protection in America? The answer is simple. It tips the balance of market power and controls toward them.
In closing, we endorse the removal of antitrust immunity. However, the coalition favors retaining antitrust immunity, if needed, for rationalization of resources such as through vessel sharing, space chartering, and equipment sharing arrangements.
Mr. Chairman, Mr. Conyers, members of the committee, I thank you for taking the time to consider the concerns and interests of the coalition.
[The statement of Mr. Baer follows:]
Page 108 PREV PAGE TOP OF DOC
PREPARED STATEMENT OF ALAN BAER, PRESIDENT AND CEO, OCEAN WORLD LINES, INC.
INTRODUCTION
Mr. Chairman, Congressman Conyers, and members of the Committee, on behalf of the Coalition for Fair Play in Ocean Shipping (the ''Coalition''), let me first thank you for providing me with the opportunity to testify before the Judiciary Committee as you consider H.R. 3138, the ''Free Market Antitrust Immunity Reform Act'' (the ''FAIR Act''). It is indeed an honor to appear before the Judiciary Committee as you consider various antitrust aspects currently facing the international ocean shipping industry and public. H.R. 3138 represents a bold and needed step forward for my industry. We are pleased to see that the Committee remains committed to overseeing implementation of recent changes to our nation's shipping laws, and more importantly, that this body is serving as a forum for open debate of the issues confronting our industry and, indeed, the American public.
I am testifying before the Committee today as Chairman of the Advisory Council of the Coalition. I am also President and CEO of Ocean World Lines, Inc., a U.S. based NVOCC with offices and agents worldwide. OWL is one of the six largest NVOCCs in the world.
By way of background, the Coalition was formed in 1999 by exporters and importers of all sizes, ocean transportation intermediaries—or freight forwarders and non-vessel-operating common carriers (''NVOCCs')—and shippers' associations. The Coalition was formed in response to the political battles that each segment of the ocean industry and public faced during the debate over the ''Ocean Shipping Reform Act of 1998'' (''OSRA''). The objective of the Coalition was to provide a unified voice for its members on legislative and regulatory issues facing the ocean shipping world. In particular, the Coalition focused its energy on the carrier abuses of their antitrust immunity during the 1998–1999 TransPacific shipping season. The carriers' activities and conduct has been highly documented and, in fact, was the subject of review by this Committee last May, as well as the target of a formal investigation and fact-finding review by the Federal Maritime Commission (''FMC'').
Page 109 PREV PAGE TOP OF DOC
The Coalition is pleased to see that the Committee is not simply willing to ''wait and see'' what happens under OSRA as some, including some of my colleagues on this very panel, would prefer. In fact, it is undisputed that Congress rarely decides to review U.S. ocean shipping laws and policies. For example, and by most accounts, it took over six years for the Shipping Act of 1984 to become law, and Congress spent four years debating and crafting the ''delicate compromise'' that eventually led to the passage of OSRA. This is why the Coalition is pleased to see that the Committee continues to be aggressive on the issue of antitrust immunity for ocean carriers, as well as being proactive. I can say without any reservation simply that the fact that you, Chairman Hyde, and the Committee have expressed an interest in this topic has helped to keep attention focused on carrier activities in all trades and the question of whether antitrust immunity, which was originally granted to the shipping companies in 1916, still serves a valid public policy purpose. But that is not enough. Enactment of H.R. 3138, and the resulting removal of carrier antitrust immunity is needed, and the Coalition strongly encourages Congress to enact H.R. 3138.
Mr. Chairman, my testimony will not solely be the views or experiences of the intermediary sector of the industry, but reflects the experiences and views that are common throughout the shipping public and industry. Mr. Chairman, some thought that your attention and introduction of H.R. 3138 was the doing of a small band of disgruntled NVOCCs. That is far from the truth. Simply by looking at my fellow witnesses seated with me, and those that have testified prior, you can see that H.R. 3138 receives widespread support from the shipping community, large and small shippers, the inland trucking industry, legal community experts in the field of antitrust law, and the U.S. Department of Justice. I must stress the importance of these hearings and H.R. 3138 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. The carriers, and others, may argue 1) OSRA is working, and that things are just fine in the world of ocean shipping, 2) we must not tinker with our shipping laws now because OSRA is still young, and 3) that any attempt by the United States to unilaterally revise antitrust immunity for ocean carriers would disturb international comity that our nation shares with other trading partners.
Page 110 PREV PAGE TOP OF DOC
Mr. Chairman, in brief, these arguments are not valid and represent nothing more than the attempt to validate an immunity that was granted during the early days of the 20th Century, at a time when the world of ocean shipping was very different than today. My testimony will touch upon each of the above arguments, and I hope that upon completion of my testimony and other testimony from this panel, you will reach the conclusion that ocean carrier antitrust immunity must be repealed, or at least substantially modified to reflect the current ocean shipping environment confronting both shippers and carriers.
OSRA IS NOT WORKING—AND ENACTMENT OF H.R. 3138 IS NEEDED
First, Mr. Chairman, OSRA is not working. We have heard from Commissioner Won, and others, both today and last May that although OSRA represents an improvement in the shipping regime of this nation, it is inherently flawed and will never provide the needed protection to smaller shippers and ocean transportation intermediaries that is required to prevent widespread discriminatory conduct by ocean carriers. OSRA, and the ''confidential world'' that it created, has indeed resulted in a ''new'' way for carriers and shippers to do business. OSRA was, in theory, a good thing. However, the fact that carrier antitrust immunity was not touched by OSRA, and was actually expanded in certain respects, now provides the carriers with the best of all worlds to the extreme detriment of smaller shippers and forwarders and NVOCCs. Carriers may still formally group in legalized cartels—or ''conferences'—to discuss, review, formulate, implement and enforce collective rates for all shippers; they can form ''discussion agreements,'' which include both conference and non-conference carriers to review and establish pricing structures to be used by the carriers in a given trade; they can exchange information on shippers that enables them to monitor what each carrier is doing, even in a ''confidential environment;'' they can collude and discriminate against shippers based simply on the type of company that may be seeking to use their transportation services; and they continue to avoid application of U.S. antitrust and competition laws and regulations as a result of the 1916 immunity. The question that must be asked is: how does Congress rationalize that U.S. exporters and importers involved in international commerce are subject to antitrust laws, when foreign steamship lines continue to operate immune from the very same laws? Mr. Chairman, it is important to note that there have been major developments since the Committee's last hearing on ocean shipping, specifically the sale of the last, true major U.S.-owned, operated and flagged international liner, Sea-Land Service, Inc., to the Danish mega steamship company, A.P. Moller-Maersk. In fact, Mr. Clancy, who just last May testified on behalf of Sea-Land, now works for the Danish-owned U.S. subsidiary, Maersk-SeaLand. But that was not the first acquisition by a foreign company of U.S. shipping interests. Mr. Rhein also works for a foreign-owned U.S. subsidiary, APL–NOL, which is owned by the Singaporean-based line Neptune Orient Line. Last May, Mr. Chairman, you and other members of the Committee appeared to have trouble with how Mr. Rhein could state his company was a ''U.S. company.'' It appears that today we must unfortunately ask the same question of Mr. Clancy's company. Last year also saw the sale of Crowley Maritime's South American operations to German-owned Hamburg-Sud, resulting in Crowley Maritime operating only in the U.S. domestic offshore trades, which does not fall under the jurisdiction of the FMC nor subject Crowley Maritime's present activities to the Shipping Act of 1984, as amended. Also, another U.S.-flagged liner, Lykes Bros. Steamship Company, was sold to Canadian Pacific in 1997. This complete deterioration of U.S. shipping has occurred at the same time that many are questioning whether it is in the interest of our nation to permit foreign ownership of our rail lines. Mr. Chairman, I attach a copy of a recent article from Traffic World that illustrates these concerns with foreign acquisition of U.S. rail companies. Yet, until now, there has been no real examination of what has happened to U.S. shipping interests. The end result: no matter how they may attempt to rationalize it, the sad and unfortunate fact is that there is no true U.S.-owned and operated international steamship company providing service to U.S. ports today. When Congress first granted the immunity to the lines, one of the reasons was to assist with the development of U.S. shipping lines. I proffer that the drafters of the Shipping Act, 1916, which granted the immunity, would not be very pleased at the state of U.S. shipping today. Yet, we still have antitrust immunity on the books that benefits foreign interests over American interests. I ask all members of the Committee, how many would vote today for an antitrust immunity that benefits solely foreign interests over those of clearly identifiable American interests?
Page 111 PREV PAGE TOP OF DOC
CONGRESS MUST CONTINUE TO REVIEW OCEAN SHIPPING POLICY
Opponents of the FAIR Act will argue that OSRA has killed the steamship cartels and, therefore, there is no need to remove the immunity that the carriers have enjoyed since 1916. Steamship cartels, like those that existed before OSRA, may in fact be dead in most trades. However, in their places the carriers have re-invented a device called the ''discussion agreement.'' These ''discussion agreements' have been the focus of attention by many, including the Committee, since OSRA became law. In general, shippers, intermediaries, and shippers' associations are united in calling for the application of antitrust and competition laws to carrier ''discussion agreements' because, in effect, these agreements act like 'super-cartels' by including over 90% of all carriers in a given trade—except one: the North Atlantic. As a result of a carefully examined and implemented prohibition, the European Union does not permit carriers to operate in a ''discussion agreement.'' This has already proven beneficial to us in the United States. Last year, in preparation for the May 1, 1999, effective date of OSRA, all major and many minor carriers providing fixed container service between the United States and Europe, met to establish a mega-discussion agreement called the ''North Atlantic Agreement.'' The proposal was filed with the Federal Maritime Commission, as well as with the appropriate European Commission. The EC's Competition Directorate (DGIV) announced that it had problems with the proposed agreement and articulated its opposition, on the grounds that the agreement would amount to a carrier ''discussion agreement,'' which is prohibited under EU law. In contrast, the FMC did not oppose the carrier agreement, and, in fact, would have approved the agreement if not for the fact that the carriers withdrew the proposal when it became clear that the EC would strike it down.
Page 112 PREV PAGE TOP OF DOC
IS OSRA REALLY WORKING?
On a related note, and an argument that opponents of H.R. 3138 will advance, is the question of whether OSRA is truly working and is it too early to begin again congressional action? First, it is clear by today's hearing and the introduction of legislation that this Committee appears ready to listen to our concerns and move forward with new ocean shipping reform legislation. For that, we thank the Committee for its work to-date on this topic.
On the question of whether OSRA is working, the Coalition clearly believes, in certain respects, that the new act is not working, and that there must be congressional action to specifically address the problem of carrier ''discussion agreements,'' which is directly related to carrier antitrust immunity. For example, just within the past few weeks, the European Commission's DGIV, in conjunction with its Transportation Directorate (DGVI), have focused on apparent carrier collusion on the Atlantic, with regard to the application of a surcharge that was announced and applied by both conference and non-conference lines late last year.(see footnote 1) The joint review by DGIV and DGVI indicates that things are not as peaceful as some would want the Committee to believe under OSRA. A sharp contrast to the proactive stance taken by the EC can be found in an examination of competition activities taken by the FMC since OSRA became law. Both the FMC and the EC have respective jurisdiction over shipping matters on the Atlantic, but to-date the FMC has done nothing that comes close to the enforcement action taken by the EC in recent weeks.
Carriers do in fact review pricing information, shipper information—including confidential information that OSRA was intended to protect—and establish price ''guide lines' for certain type of shippers, such as smaller shippers and NVOCCs. Mr. Chairman, I would like to offer for the record a copy of typical carrier boilerplate service contract language that clearly provides the carrier with authority to provide otherwise confidential business contract information negotiated between two private parties (carrier and shipper) to a ''discussion agreement'' secretariat, which is the administrator of the carrier agreement. See Attached copy of Hamburg Sud/Columbus Line contract language.
Page 113 PREV PAGE TOP OF DOC
Now, the carriers have argued that discussion agreements lack enforcement, but that is not entirely true, nor is it the issue. The fact that ''discussion agreements' exist, and are able to establish ''rate guidelines' on ocean rates and surcharges, for example, is inherently anticompetitive and permits open discrimination against shippers. Last year, the West Coast of South America Discussion Agreement established General Rate Increases (''GRI'') that applied ONLY to NVOCCs. These GRIs were effective May 1, 1999, the same day that OSRA became law, and were announced despite overcapacity in the trade, which resulted in supply overshadowing demand. This discriminatory behavior was the direct result of the discussion agreement. The carriers have used this type of model for all trades outside of the Atlantic. All one needs to do is look to the past and present activities of the Pacific carriers for further evidence of the anticompetitive activities of carrier ''discussion agreements.''
The current shipping season has once again been dominated by the carrier ''discussion agreement'' in the Pacific, the ''TransPacific Stabilization Agreement'' (''TSA''). As noted, 1999 also saw the arrival of new carriers to the trade. In January, 1999, Mediterranean Shipping Co. (''MSC'') was the first carrier to announce that it planned on entering the Pacific trades and was soon followed by Great Western Steamship Co., Norasia Line, Companie Maritime d'Afretement-Companie General Maritime (French Line), Far Eastern Shipping Co., Trans-Pacific Lines, and most recently, the new P.R.C.-controlled line, China Shipping Container Line Company, Ltd. (not COSCO). The following provides a breakdown of all currently active major(see footnote 2) carriers operating in the inbound Pacific trades as of January, 2000.
TSA Carrier Membership
Page 114 PREV PAGE TOP OF DOC
APL Co. PTE Ltd.
Evergreen Marine Corp. (Taiwan) Ltd.
Hanjin Shipping Co., Ltd.
Hapag-Lloyd Container Linie GmbH
Hyundai Merchant Marine Co., Ltd.
Kawasaki Kisen Kaisha, Ltd. (''K Line'')
Maersk-SeaLand
Mitsui O.S.K. Lines, Ltd.
Nippon Yusen Kaisha
Orient Overseas Container Line, Inc.
P&O Nedlloyd
Yangming Marine Transport Corp.
Cosco Container Lines Ltd.
Non-TSA Carriers
China Shipping Container Line Company, Ltd.(see footnote 3)
Cho Yang Shipping Co.
Companie Maritime d'Afretement-Companie General Maritime
DSR-Senator Linie GmbH
Far Eastern Shipping Co.
Norasia Line
Trans-Pacific Lines
Page 115 PREV PAGE TOP OF DOC
Zim Israel Navigation Co.
The entrance of new carriers and the expansion of service by Evergreen and Zim resulted in an increase of almost 18% to the overall inbound capacity for the 1999–2000 shipping season. The Journal of Commerce PIERS reported that the 2000 forecast of container volume for the coming shipping season is predicted to grow by 11% over 1999 volume of containerized cargo from Asia to the U.S.(see footnote 4) Carrier representatives have predicted somewhat lower growth for the coming season, mainly around the 5% to 10% range.
Early in 1999, carriers predicted that the increase in tonnage would ease the space crunch that dominated the 1998 season. Although there was not as much reporting on the space conditions during the current season, smaller shippers, shippers' associations, and NVOs in general continued to experience problems resulting from TSA-designed and imposed rate guidelines and space allocation measures. 2000 remains an uncertainty as to the influence of TSA and the overall space conditions that shippers may encounter.
The forthcoming 2000 Eastbound Pacific shipping season will mark the second shipping year of ''confidential contracts' under OSRA. However, TSA carriers have announced GRIs of USD $400 per 40'' container effective May 1, 2000. This increase represents an increase of over 10% for most cargoes in the eastbound Pacific trades. It is less than half of the US $900 per 40'' that the TSA imposed on shippers for 1999, but more than the USD $300 GRI of 1998. In addition to the GRI, the TSA has announced that it will impose a USD $300 per container ''Peak Season Surcharge'' (''PSS'') from July 31 through October 31, 2000. The TSA-announced PSS is shorter in duration than in the past, ending in October instead of the traditional November date. The TSA projects an 8% increase in containerized imports from Asia next year and based its announced GRI on ''cargo demand, available vessel space, and other market conditions.''(see footnote 5) Other observers comment that the carriers will run between 65% to 75% full during the 2000 season. The actions of the TSA reveal carriers continue to price-fix and collude in the busiest U.S. trade lane—even under the ''deregulatory'' changes made by OSRA.
Page 116 PREV PAGE TOP OF DOC
THE INTERNATIONAL COMMUNITY HAS DECIDED TO REVISIT CARRIER ANTITRUST IMMUNITY
Another argument that you may hear is that enactment of H.R. 3138 would put the United States out of step with our trading partners. That is not entirely true. In fact, there is growing momentum in the international community to revisit and, perhaps, rewrite the carriers' antitrust immunity. As noted, the EU does not permit carrier discussion agreements, which is clearly at odds with the U.S. approach; Canada is readying ocean shipping reform legislation that would contain a sunset provision for carrier antitrust immunity, and, most importantly, the Organisation for Economic Co-Operation and Development (''OECD'') is reviewing the validity of carrier antitrust immunity in light of changes to U.S. and other member OECD countries' shipping laws. In fact, last summer the Maritime Transport Committee of the OECD proposed a ''working paper'' that called for the complete elimination of the antitrust immunity, as well as alternatives that would substantially modify the current immunity that the carriers enjoy. The fact that a well-regarded and established organization like the OECD is looking at carrier antitrust immunity tells us something: no longer are the decade-old arguments offered by the carriers of value; no longer is it simply an easy way out to say that ocean shipping is different than other modes of transport; and no longer will the carriers be able to count on governments to grant blanket immunities to them to operate in ''cartels' or cartel-like groups.
In addition, Mr. Chairman, it is important to note that the issue of carrier antitrust immunity cannot be pigeonholed into the context of ocean shipping. In fact, just last month the International Competition Policy Advisory Committee to the Attorney General and Assistant Attorney General for Antitrust issued its final report (the ''Advisory Committee''). The Advisory Committee focused on the increasing importance of international trade and application of domestic antitrust and competition laws and regulations to help insure that cartels and other anticompetitive devices do not impede continued expansion of the world economy. The Advisory Committee reviewed in detail such issues as increased transparency and accountability of government actions; expanded and deeper cooperation between the U.S. and overseas competition enforcement authorities; greater soft harmonization and convergence of systems; and the global economy and general competition policy. Although the Advisory Committee did not specifically address ocean shipping, it did review other industries that have been deregulated over the years and are subject to antitrust and competition laws and regulations. The Coalition believes that the findings of the Advisory Committee are relevant to the Committee's consideration of ocean carrier antitrust immunity and request that the Committee review the findings of the Advisory Committee to help foster a more global understanding of antitrust immunity and ocean shipping.
Page 117 PREV PAGE TOP OF DOC
INCREASED VESSEL CAPACITY, OVERTONNAGING—U.S. SHIPPERS PAY THE PRICE THROUGH HIGHER RATES
The removal of ocean carrier antitrust immunity and the protection it affords carriers to set pricing at the expense of U.S. shippers, is vitally important to the continued economic expansion of the U.S. economy. One of the comments you may hear from the carriers today is that anti-trust immunity does not really work, adds little value for the carriers, and has little favorable impact on the carrier bottom line. My reaction, is then why keep it? The issue is far more complicated. In fact, the market place is sensitive first to the volume of cargo in a particular market lane versus the vessel capacity to carry that cargo. When there are low volumes of freight, i.e., more vessel space than there is cargo, in any one direction the ability of the carriers to control prices is diminished. When ships are full or overbooked the ability to build a consensus is dramatically increased.
However, this theory is enlarged by what I term the global filling factor of the major carriers. When an increasing number of vessel strings reach-filing degrees in excess of 80% the carriers become far more cohesive in raising rates. With more and more tonnage being controlled by a shrinking pool of owners, the need to eliminate carriers immunity has increased dramatically. We have witnessed large jumps in price in the Pacific inbound trade. Now we face similar increases in the Atlantic and Mediterranean inbound markets as well. All of these trades have filing degrees of 90-plus %. This added revenue enables the carriers to become far tougher in the outbound markets and other trade lanes. The weighted average impact of this higher revenue coupled with the ability to compare notes and market positions provides the carriers with a power beyond any other industry in America. With goods that must reach the market, shippers will be forced to pay ever-higher rates. The carriers must be forced to develop signaling ability to indicate where they intend to set prices and not be allowed to sit behind closed doors and make unilateral price decisions.
Page 118 PREV PAGE TOP OF DOC
One of the goals of OSRA was to provide confidential contracting and one on one negotiation. While some groups profess that this has occurred, the reality is that carriers quietly discuss contract prices with each other. Carriers make GRI announcements in trade lanes rather than negotiate a one on one increase. For example, recently we witnessed in South America $500 USD per Twenty-foot Equivalent Unit (TEU) increases announced by all carriers. This was reached after they all attended a joint meeting to set prices in a ''discussion agreement.'' Would we allow this same meeting to take place between all the milk companies or other suppliers of vital goods and services?
The question before this body, and ultimately the entire Congress, is what is in the best interest of The United States of America and the citizens each of you represents. Why would our government choose to protect foreign owners from the reality of market forces? These same owners face a deregulated market all over the world and have survived. Why then do they still need this protection in America? The answer is simple; it gives them an edge. It tips the balance of market power and control towards them. Why else would they be here today to defend something they say is of such little value?
RECOMMENDATIONS
The Coalition encourages the Committee to favorably report out H.R. 3138 and for Congress to enact the FAIR Act. Short of passage of H.R. 3138 as currently written, the Coalition calls upon Congress to specifically address the ''discussion agreement'' dilemma and to provide a much needed legislative remedy for all shippers. The Coalition asks the Committee to look to the European and Australia models for regulation of carrier ''discussion agreements' during its consideration of H.R. 3138. The Coalition is also pleased that the legislation does not adversely impact labor and port concerns. The current immunity for Marine Terminal Operators and labor-carrier assessment agreements must be preserved, and the Coalition believes that there are adequate public policy reasons for these immunities to remain. Further, the Coalition believes that efficiency enhancing carrier activities, such as alliances, consortia, space sharing and equipment pooling agreements, provide benefits for both carrier and shipper. The Coalition is pleased to see that the Chairman does not believe that H.R. 3138 would impact these current carrier activities and encourages the Committee to revise the legislation if it is found later that the FAIR Act would impair the carriers to operate in these agreements.
Page 119 PREV PAGE TOP OF DOC
It should be noted that the Coalition prefers that the antitrust immunity for the ocean carriers be revoked with passage of H.R. 3138. For all of the reasons stated herein, it is the position of the Coalition that enactment of the FAIR Act is the most prudent and reasonable action that Congress could take on this issue.
CONCLUSION
Mr. Chairman, Mr. Conyers, members of the Committee, I thank you for taking the time to consider the concerns and interests of the Coalition. On behalf of the American companies that are members of the Coalition, we strongly urge the Congress to enact H.R. 3138. Now is the time for Congress to finally revisit the issue of antitrust immunity for ocean carriers. There was a time for this immunity, and that time was in 1916. As we stand at the beginning of a new century, it is time for Congress to act boldly to protect true American interest in international trade—and those interests are found in the thousands upon thousands of U.S. companies that export and import the goods that help drive our economy. For far too long now, antitrust immunity has benefited carrier interest over shipper interest. Ladies and gentlemen, it is time to let the market do what it does best. It is time to bring the carriers into the 21st Century. Ultimately with enactment of the FAIR Act, ocean carriers will benefit, the importers and exporters will benefit, and finally the American citizens will benefit.
I thank you, Mr. Chairman, Congressman Conyers, and the members of the Committee for your time today. I will be happy to answer questions which you or other members of the Committee may have.
Page 120 PREV PAGE TOP OF DOC
67304x.eps
67304y.eps
67304z.eps
67304aa.eps
67304ab.eps
67304ac.eps
Mr. HYDE. Thank you, Mr. Baer.
Mr. Coleman?
STATEMENT OF BOB COLEMAN, PRESIDENT, TOTAL LOGISTICS RESOURCE, INC.
Mr. COLEMAN. Thank you, Mr. Chairman.
On behalf of my own company, the Pacific Coast Council, the National Customs Brokers & Freight Forwarders Association and the New York/New Jersey Association, we endorse your legislation, because it is our experience that antitrust immunity accorded to ocean carriers is detrimental to the U.S. economy, and particularly detrimental to U.S. small business.
Page 121 PREV PAGE TOP OF DOC
Our business is the facilitation of international trade, particularly for U.S. importers and exporters, who themselves are small businesses, and do not have the volume or wherewithal to employ their own in-house import and export departments.
We, as freight forwarders, serve essentially as the export department for most U.S. small business exporters. We are the ones who negotiate on behalf of U.S. exporters for transportation arrangements that will allow them to sell competitively abroad.
If we, as forwarders and NVOCCs are not able to successfully negotiate or arrange international transportation, then many U.S. exporters are locked out of foreign markets. I am not speaking about a hypothetical problem.
For example, utilizing their antitrust immunity, the ocean carriers, during the early 1980's, agreed upon and set rates of compensation for ocean freight forwarders at levels sufficiently low as to literally drive some freight forwarders out of the export business.
The difficulty is the small U.S. exporter needs the freight forwarder. It does not have the capability of learning about ocean transportation, of determining the optimal routing, of deciding whether cargo should go by air or by ocean, whether it should go (break bulk), or by containerized vessel, who should make arrangements for trucking and warehousing, how to handle documentation, and how to have the product delivered to the customer at the other end.
And the small shipper who calls the conference carrier may or may not get a return call, particularly if the customer has only one or two containers to ship.
Page 122 PREV PAGE TOP OF DOC
By collectively agreeing to reduce compensation to the freight forwarder, the carrier cartels, previously called conferences, demonstrated again no concern for the impact on the U.S. exporter, particularly the small companies.
In fact, it took an act of Congress, vigorously opposed by ocean carriers, to prevent carriers from collectively setting forward compensation rates below unreasonable levels.
Another example, NVOs have experienced blatant discrimination, which hurt not only our own businesses, but the relatively small U.S. importers that we assist.
NVOs acquire cargo space from carriers, and then resell small portions to the small importers and exporters. These importers and exporters come to us because the big steamship lines are not interested in selling one quarter or one eighth of a container load. So we do that. If we did not do that, the small importers and exporters simply could not engage in international trade.
Relatively recently, the carriers, even though required by law to treat all shippers equally and not to discriminate, imposed an unwritten policy, charging NVOCCs $250 per container more than if they sold the cargo space to the cargo owner.
In other words, a large importer, say, a discount chain which imports large numbers of container loads, could negotiate a per container price directly with the steamship line. But the small bicycle shop, which imports only enough bicycles to fill half a container, requires the service of an NVO. And thus, because he uses the NVO rates, he would be penalized by paying a higher freight rate.
Page 123 PREV PAGE TOP OF DOC
In this way, both the NVO and the small bicycle importer were penalized by the foreign ocean carrier. This collective discrimination against NVOs and small importers could not have occurred without immunity from U.S. antitrust law.
Under the Ocean Shipping Reform Act of 1998, ocean carriers are allowed to negotiate confidential transportation contracts with their shipper customers. And that includes contracts with NVOs.
However, we, the NVOs are not allowed to keep the terms of transportation that we are providing our customers (again, generally small importers and exporters) confidential. So while the big shipper can keep its terms confidential, the freight rates paid by the small U.S. businesses are exposed. Once exposed, they become more easily policed by the carrier cartels. We have found that when carriers do not participate in this collective activity, they are much more willing to work with small importers and exporters, and with the freight forwarders and the NVOCCs. But when they gather together in these collective agreements, they become much more adverse to the interests of the small importer or exporter, and to the forwarders and NVOs who facilitate the cargo movement.
Antitrust immunity has done nothing to protect U.S. flag merchant marine. Antitrust immunity has existed since 1916. And since that time, the U.S. ocean carriers have declined, and in past years, have disappeared entirely.
Nor has the antitrust immunity which allows carriers to jointly set pricing provide any stability. We can point out that antitrust immunity has made ocean transportation less dependable, less predictable, and less stable.
Page 124 PREV PAGE TOP OF DOC
In conclusion, our interests are that of the U.S. importer and exporter. We have seen, first hand, that ocean cartels do not care about the small U.S. importers and exporters. In fact, they take every opportunity to put them at a competitive disadvantage.
Our industry is interested in maximizing the import and export business opportunities for U.S. small businesses. It is precisely because ocean carriers using their antitrust immunity in a manner which is adverse to their interests of the U.S. importers and exporters that we are united in support of H.R. 3138, the FAIR Act.
[The statement of Mr. Coleman follows:]
PREPARED STATEMENT OF BOB COLEMAN, PRESIDENT, TOTAL LOGISTICS RESOURCE, INC.
Good morning, my name is Robert Coleman, President of Total Logistics Resource, and speaking as President of the Pacific Coast Council of Customs Brokers & Freight Forwarders Association. The PCC is the organization that represents the independent customs brokers, freight forwarders and NVOCCs along the West coast. We are comprised of five local associations: San Diego, Southern California, Northern California, Columbia River and Washington State. In total, we represent 8,000 individuals engaged in facilitating international trade along the nation's largest trade gateway.
I am also speaking today on behalf of the National Customs Brokers & Forwarders Association of America and the New York/New Jersey Foreign Freight Forwarders and Brokers Association. My biography and statement that neither my company nor these organizations received federal grants, contracts, or subcontracts, is attached to this statement.
Page 125 PREV PAGE TOP OF DOC
The Committee should recognize that I am representing organizations comprised overwhelmingly of small businesses. Our companies are almost all based here in the U.S. and owned by U.S. citizens. Our business is the facilitation of international trade, particularly for the U.S. importers and exporters who are themselves small businesses and do not have the volume or wherewithal to employ their own in-house export or import departments. We as freight forwarders serve essentially as the export department for most U.S. small business exporters. Transportation is a huge component of the landed cost of U.S. products sold abroad. We are the ones who negotiate on behalf of U.S. exporters for transportation arrangements which will allow them to sell competitively abroad. If we as forwarders and NVO's are not able to successfully negotiate or arrange international transportation, then many U.S. exporters are locked out of foreign markets.
On behalf of U.S. export community, it is our experience that the antitrust immunity accorded to ocean carriers is detrimental to the U.S. economy and particularly detrimental to U.S. small business. For this reason, the Pacific Coast Council, the NCBFFA and the New York/New Jersey Association all strongly endorse your legislation to eliminate ocean carrier antitrust immunity.
CARRIERS USE ANTITRUST IMMUNITY TO INJURE U.S. SMALL BUSINESS
We should emphasize that we see no problem with continuing the antitrust immunity accorded to port authorities and marine terminal operators. We appreciate the fact that your legislation distinguishes between port authorities and ocean carriers and would maintain the antitrust immunity for port authorities.
Page 126 PREV PAGE TOP OF DOC
In contrast, antitrust immunity for ocean carriers is simply bad for the economy of the United States. We know, because we are engaged in facilitating virtually all import and export transactions to and from this country. I am not speaking about a hypothetical problem. There are many many instances which demonstrate that the ocean carriers can and do use their antitrust immunity in a manner which is detrimental to the U.S. economy, and to the thousands of small businesses I am representing here today.
Collective Carrier Actions To Deny Freight Forwarding Services To Small U.S. Exporters
For example, utilizing their antitrust immunity, the ocean carriers during the early 1980's agreed upon and set rates of compensation for ocean freight forwarders at levels sufficiently low as to literally drive some companies out of the export business. The carriers' presumption, I take it, was that by cutting out the freight forwarder, the exporter would deal directly with the steamship line. The difficulty is that the small U.S. exporter does not have the capability of learning about ocean transportation, of determining the optimal routing, of deciding whether cargo should go by air or ocean, whether it should go by break bulk or containerized vessel, who should make arrangements for trucking and warehousing, how to handle documentation, and how to have the product delivered to the customer on the other end. And the small shipper who calls the conference carrier, may or may get a return phone call, particularly if the customer only has one or two containers to ship.
But customer service is not the first reason ocean carriers form conferences; the reason is clearly to increase revenue. By agreeing to reduce the compensation to the freight forwarder, there was no consideration of the impact on the U.S. exporter, particularly the small companies. In fact, it took an Act of Congress, vigorously opposed by the ocean carriers, to prevent carriers from collectively setting forwarder compensation rates below unreasonable levels. Keep in mind, that at no time did Congress say that an ocean carrier was required to pay a certain amount of compensation to a freight forwarder, Congress only said that the ocean carriers could not act collectively to set rates below reasonable levels. Even so, carriers fought hard against this provision.
Page 127 PREV PAGE TOP OF DOC
Collective Carrier Actions To Discriminate Against The Small U.S. Exporter/Importer
The ocean carriers have used their antitrust immunities to injure American business in ways that are quite subtle. For example, NVOCCs have experienced blatant discrimination, which hurt not only our own businesses, but the relatively smaller U.S. importers that we assist. NVOCCs acquire cargo space from the carriers and then resell portions to the small importer or exporter. These importers and exporters come to us, because the big steamship lines are not interested in selling 1/4 or even 1/8 of a container load. So we do that. If we did not, these small importers and exporters simply could not engage in international trade.
Relatively recently, the carriers, even though required by law to treat all shippers equally and not to discriminate, imposed an unwritten policy charging NVOCCs $250 per container more than if they sold the container space to the cargo owner. In other words, a large importer, say a national discount chain, which imports numbers of container loads, could negotiate a low per-container price directly with the steamship lines. But the small bicycle shop which only imports enough bicycles to fill half a container requires the services of a NVOCC. And thus, because he uses the NVOCCs rates, he would be penalized by paying a much higher freight rate. In this way, both the NVOCC and the small importer were penalized, discriminated against. Who pays for this? The small U.S. business who might lose the ability to import or export profitably, and her customer, the U.S. consumer, pays more. Not every bicycle is sold at chain stores, there are independent bike shops. They are small businesses. The many challenges they face , should not be, in my view, include discriminatory treatment by foreign ocean carriers who are allowed to collectively discriminate against them because Congress has given them immunity from U.S. antitrust law.
Page 128 PREV PAGE TOP OF DOC
Carriers Collectively Police And Restrict The Rates Paid By Small Shippers
As NVOCCs, we serve the small U.S. exporter and importer. We purchase transportation from an ocean carrier and resell it to the small importer and exporter who does not have the volume or the negotiating clout to interest or attract the attention of the ocean carrier itself. Under the Ocean Shipping Reform Act of 1998, ocean carriers are allowed to negotiate confidential transportation contracts with their shippers customers, and that includes contracts with the NVOCCs. However, we the NVOCC are not allowed to keep the terms of transportation that we are providing to our customers (again generally the smaller importer and exporter) confidential. So while the big shipper can keep its terms confidential, the freight rates paid by small U.S. business are exposed. Once exposed, they become more easily policed by the carrier cartels. All businesses should benefit from confidentiality.
All Carrier Agreements Requiring Antitrust Immunity Injure U.S. Small Business
Let me note that the carriers do not like the term ''cartel,'' so they use other terms such as ''conferences'' or ''talking agreements'' or ''stabilization agreements.'' In fact the objective and impact of these arrangements is always the same: to share pricing information, agreeing on what services will be offered, ports served, commodities carried. They are continuously pushing prices of transportation costs up, undermining the ability of the small importer and exporter to compete globally.
We have found that when carriers do not participate in these collective activities, they are much more willing to work with the small exporter and importer, and with the freight forwarder and NVOCC. But when they gather together in these collective arrangements, they become much more adverse to the interests of the small importer and exporter and to the freight forwarder and NVOCC who facilitates their cargo movements. In our view, all carriers should be ''independent'' just as all our NVOCCs and freight forwarders are independent, just as every domestic and international airline and trucking company, and every U.S. business is today.
Page 129 PREV PAGE TOP OF DOC
Carriers can and do engage in efficiency and enhancing agreements, such as space sharing, slot charters, vessel sharing. We encourage these arrangements. They do not require antitrust immunity. They can be organized much as joint ventures are organized by companies in every other sector of the economy, which must adhere to U.S. antitrust laws.
ANTITRUST IMMUNITY BENEFITS FOREIGN CARRIERS—SERVES NO U.S. INTEREST
It is devastating to recognize that we have given a complete exemption from U.S. antitrust laws to a handful of foreign companies who control virtually all of the U. S. waterborne import and export shipments. To be captive of foreign companies providing transportation services is one thing, but to grant them an exemption from the rules of competition which control all other components of the U.S. economy (except major league baseball) is quite another.
Antitrust immunity has done nothing to protect the U.S. flag merchant marine. Antitrust immunity has existed since 1916 and sine that time the U.S. ocean liner industry has declined and in the past year has disappeared entirely. The people who will be testifying before you today on behalf of two former U.S. companies, are now employees of Dutch and Singapore companies, which together with a Canadian company now own what is left of the so called U.S. container fleet. Antitrust immunity did not save their companies.
Nor has antitrust immunity, which allows the carriers to jointly set prices, produced any stability. In fact the carriers may even say today that some rates are at an all time low. If that is the case, where is the stability provided by antitrust immunity? We can point out that antitrust immunity has made ocean transportation services less dependable, less predictable and less stable. Even with antitrust immunity many ocean carriers have gone out of business, others have consolidated, and as I have said, there are no U.S. companies left. And the carrier conferences use their antitrust immunity to drive rates through the ceiling, as they have done just recently and in the U.S./South America trade by suddenly announcing a $1000 price increase for each container moving between the U.S. and South America.
Page 130 PREV PAGE TOP OF DOC
In the future, as there are fewer companies left, their ability to act collusively, to jointly agree on transportation prices and services is made even easier. There are essentially no more (independent) carriers. Those independent carriers in the past were generally more favorably disposed to the small U.S. importer and exporter and to the NVOCC and freight forwarder who facilitates their shipments. But even those carriers are now part of these collective carrier groups.
Absent any benefits for U.S. carriers, there are simply no justifiable rationales for retaining antitrust immunity. Many of the arguments you will hear from carrier representatives today will be repeats of the same points made by carrier representatives in the trucking, rail, and aviation industries prior to their deregulation. Yet, each of those industries is far more vibrant, and serves their customers far better, now that they are exposed to the rigors of free market competition, than they were when protected by the dead hand of antitrust immunity. Like other capital intensive industries that survive—and thrive—in the free market, ocean shipping should be released from the failed economic dogmas of the last century.
Carriers Act Without Restriction—The TSA Experience
History has shown that the law which grants antitrust immunity to the steamship lines has not provided the FMC with the authority or resources to adequately oversee the steamship activity.
While the ink was not yet dry on Ocean Shipping Reform Act (OSRA) the carriers in the Pacific trades, under the TransPacific Stabilization Agreement, engaged in patently anti-competitive abuses and discriminations against smaller shippers and NVOCCs that would in any other industry have resulted in civil and perhaps criminal enforcement actions. Ignoring contracts and tariff obligations, those carriers collusively acted to force shippers and NVOCCs to pay substantially higher rates or face the reality of having their cargo languish on the loading docks in the various Pacific ports. Yet, at the end of its lengthy investigation of the matter, the FMC elected not to proceed against the TSA or the individual carriers nor to take any formal action, other than to levy a nominal $50,000 fine against the carriers for not having recorded what they were doing in their minutes.
Page 131 PREV PAGE TOP OF DOC
CONCLUSION
Theoretically, we can do very nice business by keeping our mouths shut and simply booking cargo at the rates set by the carrier cartels, and collect our compensation. But our interests are that of the U.S. small importer and exporter. And we have seen, first hand, that the ocean cartels do not care about the small U.S. exporter and importer; in fact they take every opportunity to put them at a competitive disadvantage, even driving them out of business. Our industry is interested in maximizing the import and export business opportunities of the U.S. small business importer and exporter. It is precisely because the ocean carriers using their antitrust immunity act in a manner which is adverse to the interests of U.S. exporters and importers, that we feel compelled to speak today and are united in support of HR 3138, the FAIR Act.
Mr. HYDE. I thank you very much, Mr. Coleman.
We have two votes on. The first is a previous question and then on the rule, on important nuclear waste legislation. The first vote is a 15 minute vote, which has about 7 minutes left. And the second will be a 5-minute vote. Therefore, it should not take us too long. So if you will please hold tight, we will hurry back.
[Recess.]
Mr. HYDE. The committee will come to order.
Page 132 PREV PAGE TOP OF DOC
Next, we will hear from Mr. MacDonald.
STATEMENT OF BILL MACDONALD, PRESIDENT, KMJ INTERNATIONAL, INC.
Mr. MACDONALD. Mr. Chairman, and members of the committee, Pacific Northwest Asia Shippers Association strongly supports this bill.
We have no quarrel with the individual carriers, themselves. In fact, I helped Sea-Land load their first two containers of lumber for the Vietnam conflict around 1970, and helped APL write their lumber loading guidelines for Eagle Marine when that division was formed.
The problem develops when individual carriers get together and form their cartels. They get greedy, and force rates higher than they would be in a competitive environment. The ocean shipping cartels have done this consistently, causing U.S. lumber exporters to lose foreign sales.
My written testimony illustrates how they have created and maintained higher freight rates in our trade lanes, despite the fact that we have had the ability to have confidential contracts since 1961.
In 1985, the Trans-Pacific West Bound Rate Agreement was formed. And once they had achieved a majority of cargo capacity from the Western U.S. to Asian markets, they promptly announced a 100 percent rate increase from $500 to $1,000 per container, effective immediately.
Page 133 PREV PAGE TOP OF DOC
As detailed in my written testimony, this created for us immediate cash losses on then-current business, and lost future business to our Canadian competition.
Because of this, several of us were forced to appeal to the Federal Government for relief. The Federal Maritime Commission and Senate Slade Gorton of Washington stepped in, and were able to negotiate a repeal of this increase in a short period of time.
This was great government in action. But government intervention should not have been necessary. Free market forces will do the job more efficiently.
While we won this battle, ultimately, we lost the rate war because of antitrust immunity. Although rates dropped for a short period, they soon started climbing, and by 1987, stood at $925 per container.
Between 1988 and 1997, rates stayed above $1,100 per container, before the Asian economic crisis and the U.S. economic boom created a container imbalance that forced them down to more reasonable levels for the first time in 8 years.
This was during a time of falling U.S. exports that peaked in 1989 at nearly 1.5 billion board feet. These have fallen steadily since then to a level of 280 million board feet, an 80 percent decline in 10 years.
During this period, Canadian exports, which were nearly equal to U.S. exports in 1987, are now seven times our volume. These changes occurred for a number of reasons, but cartel-controlled, artificially high freight rates were certainly a major factor.
Page 134 PREV PAGE TOP OF DOC
This has resulted in a major loss of jobs in the mills and on the waterfront, and our wholesale export businesses have suffered, as well. The reduction of about 1.2 billion board feet of export shipments means 80,000 truckloads of lumber, per year, that are no longer produced, trucked, or transferred across the dock for export. That is a lot of jobs and a lot of income.
We were successfully promoting second growth forest products, but high export rates, combined with low rates from Europe to Japan have allowed in new European competition. As a result, our second growth white fir business is gone, and we are at risk of losing our second growth pine and Douglas fir business, as we speak.
The most recent example of the cartel's power is occurring right now, under the name of the WTSA, or Westbound Trans-Pacific Stabilization Agreement. Because of a shift of Canadian lumber to container shipping, the carriers believe that they have an excuse to force rates higher.
They have announced and implemented a 25 percent rate increase on March 1st, and announced another 50 percent rate increase on May 1st, an increase of 87.5 percent in 2 months. Their justification is increased lumber exports. But our statistics show that this is Canadian cargo. U.S. exports continued to decline in 1999.
Because our business has a 1 to 3 month lead time, we faced lost profits of up to $350 per container on current business, and are forced to raise prices into a Japanese market that is still struggling from their severe economic conditions.
Page 135 PREV PAGE TOP OF DOC
Does it make sense for the American government to continue to grant antitrust immunity to foreign flag carriers, allowing them to control our foreign commerce, and justify rate increases, based on foreign cargos?
I do not think so. I do not think we can allow this to continue. No other industry enjoys antitrust immunity, and certainly not a foreign industry that controls our ability to conduct foreign commerce.
The Pacific Northwest Asia Shippers Association strongly supports the passage of the Free Market Antitrust Immunity Reform Act of 1999.
[The statement of Mr. MacDonald follows:]
PREPARED STATEMENT OF BILL MACDONALD, PRESIDENT, KMJ INTERNATIONAL, INC.
Good morning, I am Bill MacDonald, speaking on behalf of the Pacific Northwest Asia Shippers Association, an association of U.S. Lumber and Forest Porducts Exporters. My biography and statement that neither my company nor PNASA receives federal grants, contracts or sub contracts, is attached to this statement.
The Pacific Northwest Asia Shippers Association supports H.R. 3138, the ''Free Market Anittrust Immunity Reform (FAIR) Act of 1999, to repeal antitrust immunity for ocean carriers because of past and current abuses by the carriers through their ''agreements'' and conferences. The antitrust immunity allows carriers to form ''agreements'' and conferences to collectively increase freight rates at will and limit the availability of container space when it serves their purposes. In my testimony, I will describe how this type of collusive activity injures U.S. exporters and why it should be prohibited.
Page 136 PREV PAGE TOP OF DOC
PNASA is a 15 member shippers association of exporting producers and exporting wholesalers of Forest Products, primarily softwood lumber, plywood, particleboard, medium density fiberboard, and engineered wood products like fingerjointed lumber, edge glued panels, laminated beams, and I-joists. Most product exported is from the Pacific Northwest to Japan, Korea, Taiwan, and more recently China and the Philippines. At present, the focus of PNASA is this type of building material oriented product, and does not include pulp and paper to any significant degree, though these are also very large exports. As an association, we ship about 40,000 TEU's (20,000 40' containers) each year on average.
Wood products markets are very competitive, with many producers and consumers worldwide, and very efficient distribution channels. Forest products are a relatively low value cargo moving in large volumes. Ocean freight costs are the largest single cost factor in our business other than the cost of the product itself. Our margins on forest products are relatively thin. Export business is usually done with a 1 to 3 month lead time. As a result, large and sudden freight rate increases by these cartels severely decreases our profitability on current business and seriously undermines our ability to get new business. We are competing in a world market for forest products, and these increases open the door for ever more foreign competition in our markets.
The Shipping Act of 1984 continued the Antitrust Immunity for carriers, but also allowed the formation of Shippers Associations. At that time, there were still several American flag carriers, and our members generally supported this Act at that time, even though the Act does not include Antitrust Immunity for shippers associations.
Page 137 PREV PAGE TOP OF DOC
At present, there are no U.S. flag carriers in our primary trade lanes(U.S.NW to Asia) and 12 of the 14 container carriers are part of the Westbound Transpacific Stabilization Agreement(WTSA), which controls approximately 90% of available cargo space.
Because of the sales of Sealand to Maersk(Denmark), and American President Lines to NOL(Singapore), we are now being held hostage by foreign flag carriers, and this determines our ability to compete in foreign markets. Antitrust Immunity gives them the ability to restrict our competitiveness overseas, and this is counter to the interests of American producers and exporters. Let me give an example of this:
In 1985, a number of carriers formed the Transpacific Westbound Rate Agreement, and once they had signed up a majority of carriers, they immediately tried to double our freight rates overnight and without prior notice, from $500 per container to $1000 effective immediately. The immediate affect of this was disaster to our profits and curtailment of new business.
At that time, Hem-fir ''baby squares'' were selling for about $450 per thousand board feet(MBM). The freight cost at $500 per container was about $40.00/MBM, and at $1000, about $80.00/MBM. Our profit margin on current business is about 4% of the CIF value, or about $18.00/MBM. The immediate increase caused us to lose $22.00/MBM on current business, and we lost large volumes of potential new business to Canadian competition who had no increase on their breakbulk carriers.
Several lumber exporters appealed to the Federal Maritime Commission and Senator Slade Gorton of Washington. This led the carriers to rollback the increase to original levels, and helped maintain a more open market environment for freight rates for at least a short period of time. It is unfortunate, but true, that we had to appeal to the Federal Government to protect our U.S. exporters from the actions of a cartel that the carriers could not have formed without Antitrust Immunity.
Page 138 PREV PAGE TOP OF DOC
Because of this event, a number of West Coast exporters formed the Pa;cific Northwest Asia Shippers Association, one of the early shippers associations. The purposes of PNASA are:
1. to obtain fair and reasonably stable ocean freight rates.
2. to obtain from the carriers assurance of cargo space on a regular basis.
3. to enhance our ability to negotiate freight rates in a reasonably competitive open market environment.
4. to gain favorable carrier freight rates based upon our ability to deliver large volumes of predictable ''base cargo'' on a long term basis.
The members of PNASA seek a cooperative relationship with the carriers and ask only for reasonably stable and competitive freight rate costs. Our job is to sell foresrt products, and the less time we have to fight the carriers, the more time we have to do our job and support the U.S. lumber industry.
We recognize that freight rates will fluctuate with supply and demand, as does the price of our product. When the carriers are acting independently, there is a semblance of competition and an open market environment. At these times, freight rates move up and down in small increments. When the carriers act in consort, the freight rates change(increase) in larger and more frequent amounts.
Page 139 PREV PAGE TOP OF DOC
The transpacific trade is a two-way trade lane, with U.S. exports of forest products, agricultural products and chemicals as the primary west bound cargo. Higher value consumer imports are the primary eastbound cargo. Typically, the westbound volume is slightly smaller than the eastbound volume, so rates tend to be lower on this part of the trade(though this has reversed on a few occasions).
PNASA, through our Independent Administrator, does not try to force rates down to the lowest possible levels. We believe that it is more important to have a viable ocean shipping industry, regular space, and reasonably stable rates. We do ask that carriers deal with us in an open and fair manner and help keep us competitive in a world market for forest products. However, their Antitrust Immunity causes the carriers to talk to each other, rather than to their customers and allows them to act collectively in ways which hurt U.S. exporters such as ourselves.
We have very strong competition in our primary Asian markets from forest products producers in Southeast Asia, Scandinavia, Continental Europe, New Zealand, South America(Chile, Argentina, and Brazil), Russia, and more recently Africa. When very large and sudden rate increases are imposed on us here in the U.S., our ability to win sales against this foreign competition is severely undermined. These increases come when demand for space starts to increase and the carriers feel they can utilize the Antitrust Immunity to force increases and get away with it. This creates many problems in dealing with our customers, increases our prices to them, and forces them to look to our foreign competition for supply.
Here is another example:
Page 140 PREV PAGE TOP OF DOC
I have attached a recent message from the WTSA, which is the carrier agreement which controls virtually all the container shipping across the Pacific, to our independent administrator. It announces dramatic rate increases of $100 per container on January 1st and $250 per container on May 1st. The first increase (implemented at once by many carriers, delayed to March 1st by some carriers due to our contract provisions) is a 25% increase over the base rate(at that time) of $400 per container to Japan base ports(and an even larger percentage increase for Korea and Taiwan base ports). The second increase is a 50% increase over the new base rate for Japan base ports of $500 per container. Although the WTSA says it is not a ''cartel'' or ''conference'' and calls these ''guidelines'', the rate increases are in fact being universally implemented by all carriers individually in a cartel-like environment.
A current example of how this affects our members is Douglas fir beams for the Japanese market. The current price of this product is abut $750/MBM. The $350 per container rate increase increases our product cost by almost $25.00/MBM. With the same 4% profit margin mentioned earlier, or $30.00/MBM, you can see the detrimental affect on profits on current business. We cannot afford to do business for $5.00/MBM, we would be broke in a very short time. At the same time, it severely reduces our competitive position against the Canadian shippers who still have the ability to ship on breakbulk vessels. We cannot afford to lose this vital component of our export market.
We cannot live with these sudden large increases which are created artificially by the cartel and do not reflect the supply and demand for container space. . Most export has been sold for shipment in 1–3 months from date of contract, and prices are fixed at that time. Increases like these do several things:
Page 141 PREV PAGE TOP OF DOC
1. they reduce or eliminate profit on current contracts.
2. they reduce our ability to compete and gain new contracts.
3. they anger our foreign customers and our suppliers as one or the other must absorb most of the increased costs if we are to do any business.
4. they cause our foreign customers to look for other sources in Europe, Asia, Russia, or Latin America.
These abuses have become so widespread that the OECD is also reviewing Antitrust Immunity(per the attached) and I believe a representative of the OECD may be in attendance at this hearing.
Most appalling is the Agreement's justification for these rate increases! The Agreement says that the increases are due to increased lumber exports, which is not true. It is our competitors, the Canadian lumber exporters, whose shipments have increased dramatically on the container carriers, while U.S. lumber exports have recovered only very slightly. However, the Agreement is forcing U.S. exporters to pay higher freight rates.
I am attaching some information and graphs to illustrate how the conference system detrimentally impacts the flow of Forest Products exports by allowing the carriers to manipulate increases and decreases in ocean freight rates. I have assembled data from several sources, primarily Random Lengths, a widely read and respected forest products publication. These statistics show that the exports of U.S. Forest Products have fallen dramatically from 1989 through the present, to less than one third of the volume in 1989, due to a combination of restricted U.S timber supply, high freight rates, and emerging foreign competition. At the same time, Canadian exports climbed dramatically through 1996, before the economic crisis in Japan slowed that activity. It is only in the last half of 1999 that the Canadian exports have started to climb again.
Page 142 PREV PAGE TOP OF DOC
A second chart shows the approximate levels, per container, of ocean freight rates to the base ports of Japan. Much of the time during this period, freight rates have been on a per container basis, but in some years, rates were on other weight or measure basis. I've tried to convert these rates to per container rates as closely as possible to be representative. As we did not have contracts in 1986, I have estimated the rate structure from early 1986 to late 1986 when we were again able to make contracts(individually) with the carriers.
From 1987 through last year, a very large majority of Canadian cargo moved on breakbulk vessels from the Coastal ports to overseas destinations. These are not container ships and are not operating in ''conferences'' or ''Agreements'' which jointly fix rates. Because the Canadian cargo was moving in breakbulk vessels, it had very little impact on container rates.
However, from 1987 through 1996, the container rates for U.S. lumber exports rose to high levels and stayed there despite the continuing drop of U.S. Forest Products exports. This would not have been possible if not for the cartel-like environment created by the TWRA conference and it's successor, the WTSA agreement. At this time, PNASA members and other U.S. shippers had little access to breakbulk shipments.
The rates stayed at these high levels until the Asian economic crisis forced large reductions in outbound cargoes, and the boom in the U.S. economy dramatically increased demand for consumer products. This created a huge imbalance in container movements, and the carriers were willing to take any rate, just to get the containers back to Asia for the return trip. One carrier did not even take back return cargo, they simply loaded empty containers in the Southern California ports and headed back to Hong Kong for the fastest turn-around.
Page 143 PREV PAGE TOP OF DOC
On the return trip, there were a large number of sudden and dramatic rate increases that I believe will be documented by another witness in this hearing.
It was only in the last half of 1999 that much larger Canadian volumes have changed to container shipment. This is due to the lower container rates, which have made it feasible for the outlying mills to truck cargo to the Port of Vancouver (British Columbia), load containers, and ship via container economically.
As a result, the 31.2% increase in shipments of lumber and logs overseas, cited in the WTSA message, is almost entirely Canadian cargo. We believe this figure is overstated. The figures they show are for only the first 9 months of both 1998 and 1999. Our figures show that in 1998, the total volume of lumber and logs shipped to the Pacific Rim was 83,049 TEU's(or twenty foot container equivalents). In 1999, this figure had increased to 103,410 TEU's, a 24% increase. At the same time, capacity to the Pacific Rim in 1997 was 5,224,000 TEU's, increasing to 6,252,000 TEU's, an increase of about 20%. Therefore, the of increase in Forest Products cargo only marginally exceeded the rate of increase in capacity, and is still a relatively small component of over-all export cargoes. This should not force the large and sudden rate increases were it not for the monopoly position that the carriers hold.
As the figures show, the increased cargo that the WTSA cites as reason for an increase is almost entirely foreign cargo that is competing with us and displacing us from their ships and from the international marketplace.
Granting the WTSA the luxury of Antitrust Immunity so they can increase our freight rates because of foreign competition, seems like shooting ourselves in the foot, politically and economically.
Page 144 PREV PAGE TOP OF DOC
Antitrust Immunity does not serve the interests of the American public in any way. It allows the ''conferences'' or ''agreements'' to force up freight rate costs at any time they believe they can get away with it. This results in:
1. higher costs on exports resulting in lost sales and profits of U.S. exporters and producers, plus all supporting industries.
2. higher costs on imports of all types.
3. loss of jobs and even entire companies that depend on exports.
4. more opportunities for our foreign competitors in our Asian markets.
There is no possible justification for allowing foreign flag carriers to regulate our ability to compete and control our destiny in foreign commerce. This is not allowed in any other segment of the domestic market, except the port authorities, as would be preserved under H.R. 3818 which we feel is important.
The Pacific Northwest Asia Shippers Association enthusiastically supports H.R. 3138, the ''Free Market Antitrust Immunity Reform (FAIR) Act of 1999 and urges the passage of this resolution.
Attachments:
Biography and Federal Grant/Contract Disclosure
Page 145 PREV PAGE TOP OF DOC
WTSA Rate Program Message
Forest Products Exports, U.S. and Canada(mixed units)
Forest Products Exports—charted totals(mixed units)
Approximate Freight Rates per container, quarterly, 1985–present
Approximate Freight Rates charted
67304ad.eps
67304ae.eps
67304af.eps
67304ag.eps
67304ah.eps
67304ai.eps
67304ak.eps
ADDENDUM TO TESTIMONY
An argument which has been frequently raised against any amendments to the Ocean Shipping Act is that the recently enacted Ocean Shipping Reform Act of 1998 (OSRA) should be ''given a chance to work.'' In fact, the experience of forest product exporters shows that the primary reform of OSRA (confidential contract rates) will not reduce the detrimental impacts of antitrust immunity.
Page 146 PREV PAGE TOP OF DOC
Since 1961 when ocean tariffs and contract terms were first required to be publicly filed, forest products have been exempt from such requirements. Thus, freight rates and contracts for forest product shipments have been confidential for nearly forty years. OSRA's primary reform was to allow for a few select terms of ocean shipping contracts to be confidential. Opponents of Congressman Hyde's bill say that they believe that these confidential contract rates will undermine the ability of carriers to work collectively to manipulate rates and service. Thus, they say, antitrust immunity is no longer a threat. They are wrong. During the forty years of forest products rate and contract confidentiality, we have found that confidentiality does not, in itself, prevent the ocean carriers from working together collectively, to the detriment of U.S. exporters and importers.
Even with complete confidentiality of rates and contracts for forest products, the ocean carrier conferences (the TWRA and the more recent version of the conference, the so called ''agreement'' The Westbound TransPacific Stabilization Agreement) has been able to manipulate freight rates and service to the detriment of the U.S. forest products industry, as described in my written testimony.
In sum, to those who say it is too early to revise our Ocean Shipping Act, that confidential contracts will protect shippers from the carrier abuses of their antitrust immunity privilege, I say that we have forty years experience under such confidential contracts and we know that by themselves, confidential contracts do not protect the shipper from collective carrier activity. This is why our conclusion, based on forty years of experience, is that the only way to protect the interest of the U.S. shipper is to eliminate ocean carrier antitrust immunity.
Page 147 PREV PAGE TOP OF DOC
Mr. HYDE. Thank you, Mr. MacDonald.
Mr. Cashman?
STATEMENT OF GEORGE CASHMAN, PORT DIVISION DIRECTOR, INTERNATIONAL BROTHERHOOD OF TEAMSTERS
Mr. CASHMAN. Mr. Chairman and distinguished members of the committee, my name is George W. Cashman, and I am the director of the Port Division of the International Brotherhood of Teamsters. It is a pleasure to appear before you today to support H.R. 3138, the Free Market Antitrust Immunity Reform or FAIR Act of 1999, that proposes to eliminate antitrust immunity for ocean carriers.
I am here today on behalf of General President James P. Hoffa, and the 1.4 million members of the Teamsters Union. I am also here today representing the over 40,000 truck drivers who haul intermodal containers in ports located throughout the United States, and who, in the near future will be Teamster members.
In addition to my role as the director of the Teamster's Port Division, I am also a board member of the Massachusetts Port Authority. I am secretary treasurer and principal officer of Joint Council 10 of New England, and president of Teamsters Local 25, Boston, Massachusetts.
Mr. Chairman, I thank you for the opportunity to address these important issues.
Page 148 PREV PAGE TOP OF DOC
The United States ports and the shipping industry formed the foundation for international trade on which the vitality of the United States' economy depends. According to the Journal of Commerce in 1999, shipping lines transported over 17 million intermodal containers, valued at approximately $652 billion dollars. It is predicted that container volumes will increase 8 percent annually, through year 2002.
Based upon these promising statistics, one could easily assume that everyone associated with the flourishing shipping industry is reaping its rewards. This is certainly true for owners of the large foreign-owned ocean carriers, which have reported substantial growth in earnings. It is also true for port authorities, which directly benefit from increased container traffic at their port facilities.
Unfortunately, this has not been the case for two critical segments of the industry: port truck drivers and non-vessel operating common carriers, or NVOs.
In October, Mr. Chairman, you made reference to the fact that in passing the Ocean Shipping Reform Act, OSRA, of 1998, Congress left out the little guys. You were referring to the NVOs, freight forwarders, small and medium sized shippers and shippers associations.
The real little guys who have been left behind and ignored in this process are the port truck drivers. Until now, port drivers have had no voice in the process. Thus, not only did they not receive any of the protections handed out by Congress in OSRA, their plight was not even considered or discussed.
Page 149 PREV PAGE TOP OF DOC
Port drivers are one of, if not the most, poorly treated class of workers in the United States. This is due, Mr. Chairman, in large measure to the unchecked bargaining power of the foreign-owned shipping lines. Despite the financial success of the shipping lines, port drivers earn sub-standard wages, and have not received any type of pay increase in over a decade.
On average, port drivers earn an effective wage of $7 to $8 per hour, or approximately $14,000 to $16,000 per year. They are not provided health benefits, either for themselves or their families, nor do they receive pension or retirement benefits. They have no job security. They are required to perform unpaid work in the ports for which they are not insured against injury. Routinely, they are required to clean up containers and expose themselves to hazardous materials and toxic substances. They are also forced to drive overweight and unsafe containers on public streets and highways.
They are required to drive unsafe chases and trailers, provided to them by the trucking companies or shipping lines. And they are also subject to harassment or retaliation if they report unsafe or illegal activities to the appropriate authorities.
Hidden behind the protection of antitrust immunity, shipping lines participate in rate setting discussion groups. The coordination, however, does not stop with rate setting. They then utilize these groups to enter into secret contracts to set rates exclusively to their own benefit, and to the detriment of, among others, the port drivers.
This is done by collectively setting rates that include the cost of transporting the containers inland. The shipping lines apparently have agreed that they will effectively provide inland container transportation as part of the shipping charge to their customers. Thus, the highly profitable shipping lines pay low rates to trucking companies which, after taking their percentage, pay port drivers a bare minimum for the transport of containers.
Page 150 PREV PAGE TOP OF DOC
The shipping lines also appear to have agreed, for the most part, not to contract with trucking companies that hire union drivers. What is shocking is that Congress has seen fit to continue the antitrust immunity for these huge foreign-owned conglomerates that earn millions of dollars in profits, annually, much of which is from American consumers, while at the same, leaving the hard working American port drivers unprotected.
Because port drivers have been improperly branded independent contractors, they are prohibited under Federal laws and antitrust laws from organizing or taking collective action concerning the slave wages they are paid. Meanwhile, immune from the antitrust laws, the foreign-owned shipping lines keep reaping monopoly profits.
Indeed, when port drivers have attempted to band together to make the public and others aware of the horrific conditions they face, the Federal Trade Commission, at the urging of the shipping lines, initiated an investigation of the port driver's activities.
Mr. Chairman, as this committee is well aware, under the guise of open market competition in the ocean shipping industry, OSRA continued the policy of granting shipping lines antitrust immunity for setting so-called voluntary rate guidelines and entering into confidential contracts in which the rates are kept secret.
Antitrust immunity for ocean carriers was granted by Congress in the shipping act of 1916, to put American shipping lines on an even keel with their foreign competitors, which since 1975 have banded together in conferences that separates on the trade lanes that they served.
Page 151 PREV PAGE TOP OF DOC
Antitrust immunity was not designed simply to protect the United States flag fleet, but was also based on the belief that in return for making enormous capital investment in vessels and equipment, ship owners, and I quote, ''secure a dependable return on investment, thus enabling the lines to protect new facilities for the development of the trade.'' That is a quote from the House Merchant Marine Committee's Alexander Report in 1914.
The sound and rational reasons for establishing ocean carrier antitrust immunity over 80 years ago are no longer valid. First, there is virtually no United States flag fleet. In the last 3 years, American flag vessels, that is, shipping lines owned and based in the United States, have disappeared.
Sea-Land has been sold to Maersk, a wholly owned subsidiary of Denmark's A.P. Moller. Crowley Maritime's South American services were sold to Germany's Hamburg-Sud, and American President Lines has been sold to Singapore's Neptune Orient Line. Thus, protecting the United States flag fleet can no longer be used as a basis to support antitrust immunity.
Second, the rationale of protecting shipping lines' capital investment in vessels and equipment so that they can secure a dependable return, thus enabling the shipping lines to provide new facilities for the development of the trade, is no longer applicable.
As a matter of policy, why is the United States Government protecting the investment returns of foreign owned shipping lines? It would be one thing if the United States shipbuilding industry were flourishing, because these foreign conglomerates were building their new ships in the United States. That is certainly not the case.
Page 152 PREV PAGE TOP OF DOC
More fundamentally, the Government does not offer antitrust immunity to any other comparable industry. Air carriers are not exempt from antitrust laws, despite their enormous investment in aircraft and equipment.
It is also telling that the foreign-owned shipping lines are not using the profits they reap from antitrust immunity to invest in capital equipment. The chassis or trailers upon which containers are transported are owned by the shipping lines. The shipping lines, however, fail to maintain the chassis. They are not safe.
This is demonstrated by the Department of Transportation's current rulemaking to address this problem. Remarkably, when a chassis is cited for violating DOT safety regulations, it is the port driver who is required to pay the fines levied, not the shipping lines, whose responsibility it is to maintain the equipment, and who would have been granted antitrust immunity so that they can fund such repairs.
Ocean shipping lines represent the oldest established floating cartel in the world. Voluntary pricing guidelines which, in reality, are simply cartel price fixing, are established and carrier discussion agreements to discriminate against small shippers and intermediaries and also against the port truck driver.
In May, 1999, with their immunity, ocean carrier groups implemented $400 to $900 per container shipping rate increases. How much of that increase was passed on to port drivers? The answer to that question is none.
Page 153 PREV PAGE TOP OF DOC
The Teamsters are committed to remedying this situation. During the past several months, the Teamsters have delivered to port authorities around the United States a port driver's bill of rights, which states that port drivers have certain fundamental rights.
These rights include the right to earn fair wages and receive health and pension benefits, the right to be paid for all their time at work, now performed for no pay, and required by the trucking companies, shipping lines and/or ports, including waiting time, maintenance, and repair time, and time moving containers within the port, the right to be supplied a safe chassis, and properly labeled and safe, non-overweight containers, to drive on public streets and the highways, to be informed of the contents in a container, and to report improperly labeled containers transporting toxic substances and/or hazardous materials to the appropriate port or other government agency without the threat or fear of retaliation or incrementation.
They have the right to weigh containers before transporting them on public streets and highways, and report overweight containers to the appropriate port or other government agency, without the threat or fear of retaliation or incrimination.
Mr. HYDE. Mr. Cashman, could you bring your remarks to a close? I know you have a lot more there, but we are trying to hold people down to 5 minutes.
Mr. CASHMAN. Sure, port drivers, Mr. Chairman, are left with deciding whether to buy food for their families or properly maintain their trucks. As a result, this is not just a problem for port drivers, it is a problem for anyone who drives on America's highways. No one wants a port truck driver to chose between feeding his family and properly maintaining his breaks or tires.
Page 154 PREV PAGE TOP OF DOC
Critics of your bill, Mr. Chairman, say it is too soon to act. They say, wait 2 years and see how OSRA works. Port drivers cannot wait and see. And as it stands right now, whether or not OSRA works, it will have no bearing on the lives of port drivers. OSRA will not provide them with a living wage and safe trucks.
Let me conclude by thanking you, Mr. Chairman, for the opportunity to address these important issues. I believe it is significant that a person of your stature, as chairman of the House Judiciary Committee, is interested in the plight of the port truck drivers.
[The statement of Mr. Cashman follows:]
PREPARED STATEMENT OF GEORGE CASHMAN, PORT DIVISION DIRECTOR, INTERNATIONAL BROTHERHOOD OF TEAMSTERS
Mr. Chairman and Members of the Committee, my name is George W. Cashman and I am the Director of the Port Division of the International Brotherhood of Teamsters. It is a pleasure to appear before you today to support H.R. 3138, the Free Market Antitrust Immunity Reform or ''FAIR'' Act of 1999, that proposes to eliminate antitrust immunity for ocean carriers. I am here today on behalf of General President James P. Hoffa and the 1.4 million members of the Teamsters Union. I am also here today representing the over 40,000 truck drivers who haul intermodal containers in ports located throughout the United States and who, in the near future, will be Teamsters members. In addition to my role as the Director of the Teamsters Port Division, I am also a Director on the Massachusetts Port Authority, Secretary-Treasurer and Principal Officer of Joint Council No. 10, New England, and President of Teamsters Local No. 25, Boston, Massachusetts. I thank you for the opportunity to address these important issues.
Page 155 PREV PAGE TOP OF DOC
United States ports and the shipping industry form the foundation for international trade on which the vitality of the United States economy depends. According to the Journal of Commerce, in 1999, shipping lines transported over 17 million intermodal containers valued at approximately $652 billion. It is predicted that container volumes will increase 8% annually through 2002.
Based upon these promising statistics, one could easily assume that everyone associated with the flourishing shipping industry is reaping its rewards. This is certainly true for owners of the large, foreign-owned ocean carriers, which have reported substantial growth in earnings. It is also true for port authorities, which directly benefit from increased container traffic at their ports.
Unfortunately, this has not been the case for two critical segments of the industry: port truck drivers and non-vessel operating common carriers or NVOs. In October, Mr. Chairman, you made reference to the fact that in passing the Ocean Shipping Reform Act (''OSRA'') of 1998, Congress left out the ''little guys.'' You were referring to the NVOs, freight forwarders, small and medium sized shippers, and shippers' associations. The real ''little guys,'' who have been left behind and ignored in this process, are the port drivers. Until now, port drivers have had no voice in the process. Thus, not only did they not receive any of the protections handed out by Congress in OSRA, their plight was not even considered or discussed.
Port drivers are one of—if not the—most poorly treated class of workers in the United States. This is due in large measure to the unchecked bargaining power of the foreign-owned shipping lines. Despite the financial success of the shipping lines, port drivers earn substandard wages and have not received any type of pay increase in over a decade. On average, port drivers earn an effective wage of $7.00 to $8.00 per hour, or approximately $14,000 to $16,000 per year. They are not provided health benefits—either for themselves or their families, nor do they receive pension or retirement benefits. They have no job security. They are required to perform unpaid work in the ports for which they are not insured against injury. Routinely, they are: (1) required to clean out containers and expose themselves to hazardous materials and toxic substances, (2) forced to drive overweight and unsafe containers on public streets and highways, (3) required to drive unsafe chassis and trailers provided to them by trucking companies or shipping lines, and (4) subjected to harassment and retaliation if they report unsafe or illegal activities to the appropriate authorities.
Page 156 PREV PAGE TOP OF DOC
Hidden behind the protection of antitrust immunity, shipping lines participate in rate setting discussion groups. The coordination, however, does not stop with rate setting. They then utilize these groups to enter into secret contracts to set rates exclusively to their own benefit and to the detriment of, among others, the port drivers. This is done by collectively setting rates that include the cost of transporting the containers inland. The shipping lines apparently have agreed that they will effectively provide inland container transportation as part of the shipping charge to their customers. Thus, the highly profitable shipping lines pay low rates to trucking companies which, after taking their percentage, pay port drivers only a bare minimum for the transport of containers. The shipping lines also appear to have agreed, for the most part, not to contract with trucking companies that hire union drivers.
What is shocking is that Congress has seen fit to continue antitrust immunity for these huge, foreign-owned conglomerates that earn millions of dollars in profits annually, much of which is from American consumers, while at the same time leaving the hard-working American port drivers unprotected. Because port drivers have been improperly ''branded'' independent contractors, they are prohibited under federal labor and antitrust laws from organizing or taking collective action concerning the slave wages they are paid. Meanwhile, immune from the antitrust laws, the foreign-owned shipping lines keep reaping monopoly profits. Indeed, where port drivers have attempted to band together to make the public and others aware of the horrific conditions they face, the Federal Trade Commission, at the urging of the shipping lines, initiated an investigation of the port drivers' activities.
As this Committee is well aware, under the guise of open market competition in the ocean shipping industry, OSRA continued the policy of granting shipping lines antitrust immunity for setting so-called ''voluntary'' rate guidelines and entering into confidential contracts in which the rates are kept secret. Antitrust immunity for ocean carriers was granted by Congress in the Shipping Act of 1916 to put American shipping lines on an even keel with their foreign competitors, which since 1875 had banded together in conferences to set rates on the trade lanes they served. Antitrust immunity was not designed simply to protect the United States flag fleet, but was also based on the belief that in return for making the enormous capital investment in vessels and equipment, ship owners should 'secure a dependable return on investment, thus enabling the lines to provide new facilities for the development of the trade.'' House Merchant Marine Committee's Alexander Report in 1914.
Page 157 PREV PAGE TOP OF DOC
The sound and rational reasons for establishing ocean carrier antitrust immunity over eighty years ago are no longer valid. First, there is virtually no United States flag fleet. In the last three years, American flagged vessels, that is, shipping lines owned and based in the United States have disappeared. Sea-Land has been sold to Maersk, a wholly owned subsidiary of Denmark's A.P. Moller. Crowley Maritime's South American services were sold to Germany's Hamburg-Sud, and American President Lines has been sold to Singapore's Neptune Orient Lines. Thus, protecting the United States flag fleet can no longer be used as a basis to support antitrust immunity.
Second, the rationale of protecting shipping lines' capital investment in vessels and equipment so that they can 'secure a dependable return,'' thus enabling the shipping lines to provide new facilities for the development of the trade, is also no longer applicable. As a matter of policy, why is the United States Government protecting the investment returns of foreign-owned shipping lines? It would be one thing if the United States ship building industry were flourishing because these foreign conglomerates were building their new ships in the United States. That is certainly not the case. More fundamentally, the Government does not offer antitrust immunity to any other comparable industry. Air carriers are not exempt from antitrust laws despite their enormous investment in aircraft and equipment.
It is also telling that the foreign-owned shipping lines are not using the profits they reap from antitrust immunity to invest in capital equipment. The chassis or trailers upon which containers are transported are owned by the shipping lines. The shipping lines, however, fail to maintain the chassis—they are not safe. This is demonstrated by the Department of Transportation's current rulemaking to address this problem. Remarkably, when a chassis is cited for violating DOT safety regulations, it is the port driver who is required to pay the fines levied, not the shipping lines whose responsibility it is to maintain the equipment and who have been granted antitrust immunity so they can fund such repairs.
Page 158 PREV PAGE TOP OF DOC
Ocean shipping lines represent the oldest established floating cartel in the world. ''Voluntary'' pricing guidelines—which in reality are simply cartel price fixing—are established in carrier discussion agreements to discriminate against small shippers and intermediaries, and also against port truck drivers. In May 1999, with their immunity, ocean carrier groups implemented $400 to $900 per container shipping rate increases. How much of that increase was passed on to port drivers? None.
The Teamsters are committed to remedying this situation. During the past several months, the Teamsters have delivered to port authorities around the United States a Port Drivers' Bill of Rights which states that port drivers have certain fundamental rights. These rights include the right:
to earn fair wages and receive health and pension benefits;
to be paid for all their time at work (now performed for no pay) required by the trucking companies, shipping lines, and/or ports, including waiting time, maintenance and repair time, and time moving containers within the port;
to be supplied a safe chassis, and properly labeled and safe (non-overweight) containers to drive on public streets and highways; to be informed of the contents in a container and to report improperly labeled containers transporting toxic substances and/or hazardous materials to the appropriate port or other government agency without the threat or fear of retaliation or recrimination;
Page 159 PREV PAGE TOP OF DOC
to weigh containers before transporting them on public streets and highways and report overweight containers to the appropriate port or other government agency without the threat or fear of retaliation or recrimination;
to report to the appropriate port or other government agency without the threat or fear of retaliation or recrimination the use of the same container to transport food products and toxic substances or hazardous materials without being properly fumigated and/or cleaned by trained persons wearing protective clothing;
to refuse to clean out containers that transported toxic substances or hazardous materials; to have safe and healthy working conditions; and to be free from occupational safety and health hazards at the ports; and
to earn their living in an environment free from all forms of harassment, discrimination, retaliation, and oppression.
Hard-working Americans are entitled to these basic, fundamental protections. Every day, port drivers work side by side with longshoremen, shipping line employees, and port authority employees all who have these basic, fundamental protections.
What is shocking is that, in an industry that generates hundreds of billions of dollars each year, we allow these port drivers to be treated so unfairly. I request that, in addition to eliminating ocean carrier antitrust immunity, the Members of this Committee request that Federal Maritime Commission Chairman Creel add to his ''OSRA Impact Study'' the Act's effect upon port drivers. So many times, Chairman Creel has testified that the purpose of OSRA was to level the playing field—I am here to tell you that the playing field is not level for port truck drivers.
Page 160 PREV PAGE TOP OF DOC
Adding insult to injury is the skyrocketing price of diesel fuel. In the last month, fuel prices have risen 60%. Nationwide, the price per barrel of crude oil has increased by 119% in the past year. Port drivers are paid on a per trip basis and their pay has not increased in more than a decade, while fuel, insurance, repairs, and all other costs to operate their trucks have continued to rise. The foreign-owned shipping lines under cover of their discussion groups secure fuel surcharges for themselves, but do not pass them on to the port drivers. Even when a shipping line decides to pass on a portion of the surcharge, the port drivers do not receive the surcharge because the trucking companies pocket it for themselves. Even when the port drivers do receive the surcharge—or a portion of it, the amount they ultimately receive is a pittance compared to the 60% increase in fuel prices.
Port drivers are left with deciding whether to buy food for their families or properly maintain their trucks. As a result, this is not just a problem for port drivers, it is a problem for anyone who drives on America's highways. No one wants a port truck driver to have to choose between feeding his family and properly maintaining his brakes or tires. Unfortunately, this is currently a fact of life for port drivers.
Critics of your bill, Mr. Chairman, say it is too soon to act. They say wait two years and see how OSRA works. Port drivers, however, cannot wait and see. As it stands right now, whether or not OSRA works will have no bearing on the lives of port drivers. OSRA will not provide them with a living wage and safe trucks. And I am here to tell you that American port drivers do not have the luxury of time. They need your help now. Two years from now, too many American port drivers will have lost their trucks, their homes and their livelihoods. Two years is too long a time to wait when you are not earning a livable wage, are not provided healthcare benefits, and are not earning retirement benefits.
Page 161 PREV PAGE TOP OF DOC
Let me conclude by again thanking you, Mr. Chairman, for the opportunity to address these important issues. I believe that it is significant that a person of your stature, as Chairman of the House Judiciary Committee, is interested in the plight of the port drivers, and we truly hope that you will also join with the Teamsters Union to level the playing field for port truck drivers by eliminating antitrust immunity for the shipping lines. Thank you again for the opportunity to address these important issues.
Mr. HYDE. Well, I thank you very much. And the tenor of your remarks makes me feel guilty, having to ask you to bring them to a close. They were music to my ears.
We have a vote on, unfortunately. So we will have to recess while Mr. Conyers and I and Mr. Watt dash over and vote. And we will come back, so if you will just hold tight, we will be back. The committee stands in recess.
[Recess.]
Mr. CANNON [ASSUMING CHAIR]. I apologize that as chairman, I do not have the presence of ''the chairman,'' but we would like to proceed as quickly as we could. The chairman apologizes that he could not be here. He had another commitment. And I think, Ms. McDavid, it is your turn.
STATEMENT OF JANET MCDAVID, PARTNER, HOGAN & HARTSON
Page 162 PREV PAGE TOP OF DOC
Ms. MCDAVID. Thank you very much. We, in the Antitrust Section of the American Bar Association, are particularly delighted to have been invited here today. We appreciate this committee's long standing commitment to bi-partisan antitrust enforcement, and the values that competition provide to our economy.
I am here today only on behalf of the Antitrust Section, but I am accompanied by Jim Dick, who is the chairman of our Transportation Committee.
The Section of Antitrust strongly supports Chairman Hyde's bill, H.R. 3138. We believe that competition is the fundamental underpinning of the American economy, and we see no reason that this industry should be treated differently than any other industry.
We have consistently supported antitrust exemptions in other industries, such as, notably, in health care, where we opposed the Campbell bill. We have opposed the antitrust exemptions for baseball and for insurance. I can not think of an antitrust exemption that we have ever supported.
We believe, as a matter of principle, that collusion rarely yields benefits to consumers. Competition provides the lowest prices and best products and services to consumers in America and around the world.
One of America's strongest exports in recent years has been our antitrust laws. There are now over 80 other countries in the world that have and are enforcing antitrust laws. And so the interests of international comity that may have formerly justified the existence of an exemption in this industry are no longer as persuasive, especially as our major trading partners are limiting or lessening the sorts of exemptions that they provide to this industry in the past.
Page 163 PREV PAGE TOP OF DOC
The concerns that have been advanced to justify the continued exemption in this industry are the kinds of things that we have heard very often with respect to other industries. In fact, one might have heard them in the past with respect to, for example, telephone service in America.
The existence of regulation is not a substitute for competition, as has been demonstrated by the vibrant economy that we have in other industries that have been recently deregulated. The failure of regulation in this industry to correct or prevent abuses in the past is a vivid illustration of the benefits that could be brought to this industry by competition.
The argument that oligopoly might be the consequence of a failure of antitrust exemption is an interesting one, because what we have in place in the place of oligopoly at the moment is collusion, which is actually one step worse than oligopoly.
The alliances being offered as a justification for the continued maintenance of this exemption, I think, are probably not valid. The antitrust laws do not prohibit efficiency enhancing joint ventures. We have many joint ventures in this country and around the world that are being tolerated and, indeed, encouraged by the antitrust laws. The Federal agencies recently released draft guidelines on joint ventures that encourage the formation of the kind of efficiency enhancing alliances that exist in this industry.
The notion that these are high capital cost industries with fluctuating demand is certainly not unique to this world. I represent companies in the defense industry, in the petroleum industry who face similar issues. Look at the fluctuation supply and demand conditions in the petroleum industry. People are investing hundreds of millions of dollars to find oil, when they do not know whether the price today or tomorrow will be $30 a barrel or $15 a barrel.
Page 164 PREV PAGE TOP OF DOC
So we do not find the kinds of arguments that have been advanced with respect to the maintenance of an antitrust exemption in this industry at all persuasive. We encourage the committee to provide the benefits of competition to this industry, to its consumers, and to American consumers generally, the benefits of competition that are enjoyed in other segments of our economy.
[The statement of Ms. McDavid follows:]
PREPARED STATEMENT OF JANET MCDAVID, PARTNER, HOGAN & HARTSON
SUMMARY
H.R. 3138, introduced by Representative Henry J. Hyde, would repeal the antitrust immunity currently enjoyed by ocean carriers under the Shipping Act of 1984. The Hyde Bill, which would be known as the ''Free Market Antitrust Immunity Reform Act of 1999,'' would eliminate antitrust immunity for ocean carriers. It would preserve antitrust immunity only for marine terminal operators, which are largely public port authorities accountable to the legislatures that created them.(see footnote 6)
The Section of Antitrust Law of the American Bar Association (''Antitrust Section'') supports the Hyde Bill and supports the elimination of the antitrust exemption for the ocean shipping industry for the reasons explained in detail below. The Antitrust Section disfavors antitrust exemptions directed at specific industry categories or conduct. The antitrust laws are designed to provide general standards of conduct for the operation of our free enterprise system. Special exemptions from these standards rarely are justified: they often are not necessary to eliminate the risk of antitrust liability for procompetitive conduct, and the goals for such protection often can be achieved in a manner consistent with established antitrust principles and enforcement policy. The Antitrust Section—consistent with its opposition to other antitrust exemptions(see footnote 7)—strongly endorses the introduction of competition in ocean shipping to develop competitive and efficient markets and to benefit consumers.
Page 165 PREV PAGE TOP OF DOC
LEGISLATIVE BACKGROUND
The ocean shipping industry has been largely immune from the operation of the antitrust laws for more than 80 years. Under the Shipping Act of 1916, carriers were required to file conference agreements with the U.S. Shipping Board. If approved by the Board, those agreements permitted the member carriers to fix rates and engage in other collective activity without fear of antitrust challenge. The 1916 Act was amended in 1961, in part to require common carriers and conferences to file tariffs showing all of their rates and charges with the Federal Maritime Commission (''FMC''), and to keep them open for public inspection.
The 1916 Act, as amended, was subsequently replaced by the Shipping Act of 1984, the currently operative shipping statute. The 1984 Act continued essentially the same legislative scheme as the earlier one. It provides, in part, that certain types of carrier arrangements are exempt from otherwise applicable antitrust laws, but the agreements must be approved by, and the rates filed publicly with, the FMC. In October 1998, Congress amended the 1984 Act by adopting the Ocean Shipping Reform Act (''OSRA''), which enlarges the right of shippers and carriers to enter into private, confidential contracts at off-tariff rates; it provides greater protection of each carrier's right of independent action; and it continues antitrust immunity for collective actions by carriers under approved agreements.
PROPONENTS AND OPPONENTS
Proponents of the Hyde Bill include shippers, shipper associations, and the Antitrust Division of the U.S. Department of Justice. Representatives of shipper interests testified in favor of eliminating the exemption at an oversight hearing before the House Judiciary Committee in May 1999.(see footnote 8) In general, they argued that the removal of antitrust immunity was necessary to check apparently coordinated price increases like the one that occurred the previous year in connection with the Asian economic crisis.(see footnote 9) When rates and charges were publicly filed and deviations from published rates were prohibited, they said, shippers had the same access to rate information in the marketplace as carriers did. With the advent of private, confidential contracts, however, the shippers claimed that they were generally forbidden by contract from disclosing the terms of their confidential agreements with carriers to other shippers, while the carriers used the protection of antitrust immunity to pool information from the confidential contracts among themselves. The carriers' ability to exchange such information among themselves, argue the shippers, provides them with an unfair advantage in rate negotiations, artificially inflating carriage rates. Shipper representatives also argued that, since a relatively small proportion of ocean carriers are U.S.-owned, the principal beneficiaries of antitrust immunity are foreign interests.
Page 166 PREV PAGE TOP OF DOC
The Antitrust Division has long opposed antitrust immunity for ocean shipping. During the Judiciary Committee's oversight hearing, John M. Nannes, Deputy Assistant Attorney General, testified that antitrust immunity should be ended. The Division stated that the ocean shipping industry does not appear to be an exception to the general proposition that competition is the most effective way of providing consumers with the best products and services at the most affordable costs, and that the ocean shipping industry does not possess any unique characteristics that warrant departure from normal competition policy.
Opponents of the Hyde Bill include carrier interests and the Chairman of the FMC. In testimony before the House Judiciary Committee during its oversight hearings, liner company executives testified, in part, that continued antitrust immunity was necessary to help dampen fluctuations in unstable markets for ocean shipping services. They stated that the ability to discuss trade conditions and seek similar pricing strategies provides carriers with a means of justifying the large investments of capital necessary to maintain and expand capacity in an historically volatile industry. The executives added that the FMC has a broad array of powers to ensure that carriers do not abuse their antitrust exemption.
Chairman of the FMC Harold J. Creel, Jr. also testified in support of retaining antitrust immunity, though less vigorously than the carriers Noting that the laws of many nations govern the ocean shipping industry, he suggested that the need to maintain international comity and harmony is a compelling reason for taking a cautious approach to antitrust immunity. A representative of the American Association of Port Authorities testified that antitrust immunity remained necessary for port authorities to better plan the allocation and investment of funds for the development and operation of public port facilities. He opined that the existence of immunity did not represent a threat to competition at the port authority level since port authorities are public entities that act in the public interest and are accountable to the state legislatures that created them.
Page 167 PREV PAGE TOP OF DOC
RECOMMENDATION
The Antitrust Section does not believe that the ocean shipping industry has characteristics that are sufficiently unique to justify exemption from the antitrust laws. Especially with the advent of confidential contracts, and the resulting loss of transparency on the shipper side, continued immunity for carriers is likely to result in inflated carriage rates, the costs of which are ultimately borne by consumers. As in other industries, enhanced competition is likely to be the most effective way to respond to fluctuations in an unstable market. Collusion rarely yields benefits for consumers. As other countries strengthen their own antitrust laws and enforcement, moreover, international comity alone cannot justify the preservation of antitrust immunity.(see footnote 10)
The concerns raised by opponents of H.R. 3138 in support of their view that the antitrust exemption for ocean shipping should be maintained are not persuasive, and certainly are not unique to the ocean shipping industry. The arguments of opponents, and the Antitrust Section's views on each argument, include the following:
The industry is subject to regulatory oversight so the antitrust laws are not necessary.
— Many other industries, including airline transportation, trucking, telecommunications, and the defense industry, are also subject to extensive regulation. But the application of the antitrust laws to those industries has resulted in the usual benefits of competition: more choices for consumers, better products, and lower prices. There are no differences in ocean shipping that compel any different result.
Page 168 PREV PAGE TOP OF DOC
— Indeed, it has been suggested that H.R. 3138 was motivated in part by abuses in the Transpacific trades during 1998, and that those abuses are already subject to regulatory oversight. The failure of regulation either to prevent or correct those abuses is a classic illustration of the reasons that competition could benefit this industry.
— Indeed, it appears that the FMC has now closed its investigation into this incident without taking any enforcement action, which is yet another example of why competition works better than regulation—in this case, regulation has failed to correct abuses by industry.
In the absence of an antitrust exemption, the market would devolve into an oligopoly.
— Firms that enjoy an antitrust exemption can engage in oligopoly behavior with impunity. Eliminating antitrust exemptions is likely to minimize the risk of both overt collusion or oligopoly conduct, such as the recent conduct of ocean shippers.
There has been excess capacity in the industry, and the antitrust exemption has allowed carriers to avoid a ''highly destructive'' market with unstable rates and service.
— In other industries, customers and consumers typically benefit from over-capacity in the form of greater competition and lower prices.
— Moreover, immunized cartels, by their very nature, tend to cause higher prices and to attract additional (excess) capacity. The existence of excess capacity suggests that the market needs more competition, not less.
Page 169 PREV PAGE TOP OF DOC
An exemption is necessary to justify large capital investment in a volatile industry.
— Other industries—such as petroleum exploration and refining, construction, automobile manufacturing, and other heavy industries—also involve large capital expenditures and uncertain supply and demand conditions. But these industries all operate without any antitrust exemptions. It is difficult to understand why ocean shipping should be different.
An antitrust exemption is necessary to maintain a U.S. flag fleet.
— The reality is that there are virtually no U.S. flag ocean carriers today (or at least few, if any, ships owned by U.S. firms), so the exemption largely protects foreign ship owners, many of whose customers are U.S. firms that are paying higher prices than they would pay in a competitive market.
— Moreover, if there is a national interest in maintaining U.S. flag carriers, there are far more efficient, procompetitive ways to do so than by maintaining an antitrust exemption.
For all of these reasons, the ABA Section of Antitrust Law urges Congress to enact H.R. 3138 so ocean carriers will be forced to operate in a competitive market and so shippers and other customers can enjoy the benefits of that competition.
Mr. CANNON. Thank you.
Mr. Clancey, would you be so kind as to give us your ideas?
Page 170 PREV PAGE TOP OF DOC
STATEMENT OF JOHN CLANCEY, CHAIRMAN OF THE BOARD, MAERSK, INC.
Mr. CLANCEY. Thank you, Mr. Chairman.
This morning I am appearing before the committee in a dual capacity: on behalf of Maersk/Sea-Land, of course, but also on behalf of the Ocean Carrier Working Group. This is a coalition of international carriers, including 29 shipping lines, that serve the United States. Obviously, we have a different approach to H.R. 3138, and we do oppose it.
I would like to make clear, however, that we do not oppose what I believe the bill seeks to accomplish. My understanding of the antitrust laws is that they were designed to promote competition and encourage choices for consumers. The antitrust laws do this by placing restrictions on market forces that would otherwise produce undesirable results, results such as excessive concentration.
The antitrust exemption for lines of shipping serves the same function as antitrust laws. It preserves competition and custom of choice by tempering market forces that otherwise would be destructive to competition.
This industry, in many respects, is unique. It moves the world's merchandise from country to country, global in nature, but with every country throughout the world having its own rules, its own regulations, its own set of customs statutes, and a great deal of idiosyncracies.
Page 171 PREV PAGE TOP OF DOC
And every movement, every piece of business we handle goes from this country to another country, or from another country and back. And every country we serve has antitrust immunity.
Antitrust immunity enables us to not only discuss market conditions, but also to deal with issues resulting from the dynamic environment we operate in. And it has produced favorable economics for our customers.
What has antitrust immunity brought global shipping in the last 30 years? The question on the table is, why do we have antitrust immunity; is it necessary? The question could be asked another way. And that is, what has antitrust immunity done to the world commerce?
It has produced an enormous amount of innovation from containerization, double stacked, intermodal systems, investment—since 1978, $100 billion in ships, equipments and ports, throughout the world; faster transit times; significantly improved turnaround times, and almost a complete elimination of pilferage and loss.
But this is at what cost to the shipping public? Since 1978, in the Trans-Pacific, the east bound rates in real dollars have come down 72 percent; in current dollars, 37 percent. The oligopoly certainly was not working there.
For exports, in Trans-Pacific, the rates are down 67 percent. In the Atlantic, they are down 60 percent to the United States and 51 percent from the United States. Obviously, these trends do not bode well for the bottom line. And by any measure, the returns in this industry have not been attractive.
Page 172 PREV PAGE TOP OF DOC
OSRA was the result of a great deal of negotiation between ourselves and the customers who approached this. And what the customers wanted and where their focus was, was one issue, and that was confidential contracting, and the elimination of conferences and talking agreements to have any control over those negotiations.
The final compromise, which was a well thought one, a very thorough one, and also very delicate, has resulted in what our customers asked for and what our customers wanted.
Today, we are being told by our customers throughout the United States that they are satisfied with the results of this legislation. And OSRA is giving them what they wanted—confidentiality between ourselves and them, broad contracts, not just to one country, but to multiple countries throughout the world, elimination of transparency, elimination for all intensive purposes of any oversight by conferences and talking agreements.
I would like to briefly address two issues that we have encountered prior to the hearing in a lot of conversation about that. One argument is that since Maersk acquired Sea-Land, the company that I previously worked for, that there were no longer any U.S. interests benefitting from the antitrust exemption.
Although the U.S. carrier base is predominantly foreign-owned by foreign entities, the facts are that these vessels are controlled by U.S. entities, accrued by American civilians. And these crews have responded and will continue to respond to the needs of this country, in times of peace or during national emergency.
Page 173 PREV PAGE TOP OF DOC
And the new owners bring a commitment to this business that the prior owners simply did not have, for stock market evaluation purposes, predominantly.
And, interestingly, the transportation institute recently concluded a study of this issue. And I will just quote one statement that was in the report.
''Many of the globalization and commercialization transformations going on in the DOD industrial base hold promise of significant benefit for DOD, lower costs, greater performance, shorter system development and fielding cycles, more stable investment, and better interaction, both operationally and politically with our allies,'' the Honorable Jake S. Gansler, Under Secretary of Defense for Acquisition.
Maersk/Sea-Land is committed to the U.S. flag. We are committed to the American citizens that work for us. We are committed to our shoreside employees, and we are committed to our customers in this country.
Mr. CANNON. Mr. Clancey, your time has expired. You can certainly submit the rest of your statement for the record.
Mr. CLANCEY. Just on behalf of Maersk/Sea-Land, and the entire industry that I am speaking for, let me conclude that we ask the committee to look very carefully at the facts before proceeding.
Thank you.
Page 174 PREV PAGE TOP OF DOC
Mr. CANNON. Thank you, Mr. Clancey.
Mr. Rhein?
STATEMENT OF TIMOTHY RHEIN, CHAIRMAN, AMERICAN PRESIDENT LINES, LTD.
Mr. RHEIN. Good afternoon, Mr. Chairman, Ranking Member Conyers, and members of the committee.
I am Tim Rhein, Chairman of American President Lines Limited. We are a U.S. flag, U.S. labor, U.S. domiciled shipping company, with a long term commitment to the U.S. Department of Defense.
The international liner shipping industry is unique, characterized by huge capital investment and very high fixed costs and very low returns.
There are no barriers to entry into this business, no bi-lateral agreements, no trackage rights, no gates, no landing rights.
Our industry includes many commercial for-profit carriers. But it also includes carriers affiliated with State ownership, with industrial vertical integration policy, with shipyards, and even tax havens, and in some cases, foreign exchange goals, in a dollar-denominated business.
Page 175 PREV PAGE TOP OF DOC
Within this environment, it is essential that carriers be allowed to legally collaborate to minimize these various agendas, to minimize the destructive extremes of our business, and to minimize the predictable results of inherent structural overcapacity.
Structural overcapacity works like this. We operate a roundtrip business. Yet, all of our markets are essentially one way. And the service will usually include a mixture of strong markets in one direction and weak markets in another, particularly in returns. The ships, containers, and terminals do not shrink for the weaker markets in our services.
On top of that, we experienced tremendous swings, due to seasonality of freight movement. This inefficiency and waste is essentially fixed and mostly unavoidable.
At the same time, our customers demand service that is regularly scheduled, fast and frequent, on time and global, with sufficient capacity to handle their peak shipping volumes.
We gear our services to those needs, and have a difficult time reacting to short term swings in our markets, because of the highly integrated and widely spread transportation network we have put in place.
We cannot subdivide a ship, as you can a train. We cannot add or drop a flight on a few days notice. It takes 3 to 4 months and millions of dollars to move a string of ships to another trade.
Page 176 PREV PAGE TOP OF DOC
Regarding OSRA, this law allows broad, individual, and confidential contracts that can not be accessed by the ''me, too'' provisions of the previous act. This is what shippers wanted, and this is what they got.
The carriers wanted limited antitrust immunity with FMC oversight. Shippers, carriers, labor, and ports—all parties to the legislation—were satisfied with this compromise.
Also, carriers are restricted under OSRA from prohibited acts such as any collection action that discriminates against third party intermediaries or any restriction on negotiation of one-on-one confidential contracts.
The proper regulation is provided by the Federal Maritime Commission. It is based on the rationale that unrestricted competition, enforced by antitrust laws does not yield desirable results in certain industries.
Other industries that benefit from some form of limited antitrust immunity include railroads, airlines, and motor carriers. And there are many others outside of transportation, the most recent of which may be physicians in this country, on the docket for this afternoon, in front of this committee.
The common denominator is that all of these exceptions to the antitrust laws allow desirable results for the broad constituency, offset by defined regulation.
Our immunity is essentially limited. It is limited to discussing trade conditions. It is limited to forming alliances and encouraging rational price and service activities, and communicating this as a group to the various trades.
Page 177 PREV PAGE TOP OF DOC
We cannot act collectively. We cannot enforce target prices. And we cannot disclose confidential contract information. We have heard few complaints from shippers regarding OSRA. Our early forecasts and frequent updates on trade conditions and suggested prices are generally well received.
In fact, the timing and strength of our forecasts encouraged seven new container operators to enter the Trans-Pacific trade last year, pushing the number of carriers in this trade to over 25. Antitrust immunity has clearly not restricted competition in this trade. In fact, it has enhanced it.
In conclusion, this legislation would remove the foundation from a delicate legislative compromise. Furthermore, it does not address the issues raised by the third party intermediaries regarding contracting authority; nor does it address their discrimination issue, since OSRA clearly forbids group discrimination against these parties.
Finally, it does not address the issues raised by the Teamsters, since our limited immunity does not include group activity with trucking companies.
If Congress persists in unwinding OSRA, both carriers and shippers will suffer. Eventually, the for-profit carriers will disappear. And with them will go the leadership and innovation that led to containerization, intermodalism, double stacked trains, highly efficient ships and terminals.
Consolidation will occur. Oligopoly will result. Prices will soar, and services will deteriorate.
Page 178 PREV PAGE TOP OF DOC
The present international shipping system works very well for both shippers and carriers. Its costs represent, on average, only 2 percent of the value of the goods we carry.
Let us give the new law a chance to work. We should not tear it apart after less 1 year over issues that bear no relationship to antitrust immunity.
Thank you.
[The prepared statement of Mr. Clancey and Mr. Rhein follows:]
PREPARED STATEMENT OF JOHN CLANCEY, CHAIRMAN OF THE BOARD, MAERSK, INC. AND TIMOTHY RHEIN, CHAIRMAN, AMERICAN PRESIDENT LINES, LTD.
SUMMARY
Less than one year ago, on May 1, 1999, the Ocean Shipping Reform Act (OSRA) became effective. OSRA was the result of a four-year legislative process that ultimately embodied a broad-based and delicate compromise endorsed by shippers, carriers, ports, and labor. OSRA fundamentally restructured the market for containerized ocean transportation services by allowing shippers to enter into individualized, confidential service contracts with the carrier or carriers of their choice. OSRA also reaffirmed, as a central part of the compromise that led to its enactment, the limited antitrust exemption for ocean carriers that has existed in the United States since 1916. Consistent exemptions are recognized by all of our major trading partners. Shipper—i.e., consumer—response to OSRA has been overwhelmingly positive.
Page 179 PREV PAGE TOP OF DOC
The antitrust exemption granted to ocean carriers under the Shipping Act of 1984, as amended by OSRA, is a limited one. Immunity is granted only for those activities set forth in agreements filed with and effective under the regulations of the Federal Maritime Commission. In addition, carrier activities are subject to numerous express prohibitions, many of them based on, but more explicit and restrictive than, related antitrust principles. Moreover, OSRA substantially reduced the scope of the antitrust exemption by adding new restrictions on collective carrier activities. Most significantly, OSRA prohibited carrier agreements from placing restrictions on their members' right to enter into individual service contracts with shippers.
The limited antitrust exemption, accompanied by a rigorous and explicit set of regulatory requirements for carriers, has proven to be an appropriate and effective method for addressing the unique economics of the international liner shipping market. Liner service by definition consists of regular and frequent vessel sailings with sufficient capacity to handle peak cargo demands. By their nature, vessels cannot be broken into smaller units to adjust for changes in demand, resulting in constant capacity in both directions of a roundtrip voyage. Demand, however, varies by direction, by season, and by business cycle. The combination of fixed capacity geared to the heaviest leg of a voyage and uneven demand results in inherent overcapacity in liner shipping systems. Carriers compete vigorously for available cargo to fill the resulting empty vessel space in order to offset high fixed operating costs. Because of the artificially high level of capacity in the system, rates in low demand directions of a trade typically do not cover costs. Left unchecked, losses from such below-cost pricing would cause carriers to fail, resulting in excessive industry consolidation, loss of service to shippers, and higher rates.
Antitrust immunity provides a mechanism for tempering these destructive market forces through cooperative operational arrangements and pricing guideline mechanisms. The effect of these cooperative activities made possible by the antitrust exemption has been the maintenance and expansion of a highly efficient and competitive ocean transportation system. Freight rates in all of the major United States trades are significantly lower in real dollars—in many cases by half—than they were twenty years ago. Carrier profits, where they exist at all, average in the low single figures, clearly demonstrating that antitrust immunity has not resulted in above-market pricing. At the same time, service capacity and frequency have continued to expand to meet the growing demands of the nation's rapidly expanding international commerce. Today there are over 16,000 vessel calls to U.S. ports each year, moving two thirds of the country's international waterborne commerce measured by value.
Page 180 PREV PAGE TOP OF DOC
Repeal of the limited antitrust exemption would destroy the industry compromise embodied in OSRA and would threaten the future of the competitive, efficient, high quality, and reasonably priced ocean transportation system that exists today in the service of U.S. importers, exporters, and the entire international trade of the United States.
STATEMENT
I. Introduction
On behalf of our respective companies and the industry, we thank Chairman Hyde, Ranking Member Conyers, and the Committee for the opportunity to speak to you about the critically important issue of antitrust immunity in the liner shipping industry. This joint statement is submitted by Maersk-Sealand and APL both in their individual capacities and as representatives of the liner shipping industry. Thus, while we discuss certain aspects of our companies' operations that are specific to our organizations—such as our combined contractual commitment to provide over thirty vessels and related equipment to the United States in time of national emergency—our views are supported by the industry as a whole. The names of the twenty-nine carriers of the Ocean Carrier Working Group that join in this statement are listed in the attachment to our remarks.
The ocean shipping industry consists of several different parts. Liner shipping, which H.R. 3138 would affect, is that part of the industry that operates regularly scheduled services on a common carrier basis. Unlike so-called ''tramp'' carriers, which schedule voyages based on individual requests from shippers, liner carriers offer our services to the general public through pre-set and regular voyages on which we carry cargo for many different customers. We primarily carry cargo in shipping containers, which can be transferred to truck chassis or rail cars without first being unloaded. Although the liner shipping industry does not carry the greatest volume of cargo by tonnage, it carries approximately two thirds of the U.S. waterborne overseas trade as measured by value.(see footnote 11) Liner shipping is indispensable to the U.S. international trade in manufactured and high value goods.
Page 181 PREV PAGE TOP OF DOC
At the outset, we wish to be clear about our position. We individually and as an industry respectfully but unequivocally oppose H.R. 3138. Retention of limited antitrust immunity for ocean liner carriers, which has existed since 1916 and has been reaffirmed by Congress several times since, was a central part of the comprehensive reforms adopted in 1998 in the Ocean Shipping Reform Act (OSRA). We support the recent and significant OSRA compromise—including continuation of limited antitrust immunity—and we believe that enactment of H.R. 3138 would have a serious negative impact on ocean carriers, on the importers and exporters that use the ocean transportation services that we provide, and on the U.S. economy.
We recognize that the reasons why limited antitrust immunity is essential to the liner shipping industry are neither simple nor obvious. Having said that, the fact that the issues surrounding immunity are complicated does not make this an academic exercise. Quite to the contrary, it is our carefully considered view that passage of H.R. 3138 would do grave damage to many of the carriers currently serving the United States. Of perhaps larger concern to the Committee, we believe that repeal of the antitrust exemption would do the greatest harm to our customers—the U.S. importers and exporters that use ocean transportation—and to the U.S. economy as a whole. We hope to demonstrate to the Committee through this statement and through our oral presentation today why this aspect of the shipping regulation laws is so important, why it benefits U.S. consumers, and why it should not be changed.
The Chairman and others have raised a number of specific questions since H.R. 3138 was introduced, and we address those questions in some detail below. Before doing so, however, we discuss briefly the unique structure and current status of the liner shipping industry. In particular, we describe the unusual economic characteristics of this industry that continue to make limited antitrust immunity coupled with regulatory oversight the proper legal structure for liner shipping. We hope that this explanation will demonstrate to the Committee why repeal of the long-standing, limited antitrust exemption for ocean carriers would be bad for carriers, bad for importers and exporters, bad for international trade, and bad for the United States economy.
Page 182 PREV PAGE TOP OF DOC
II. The Antitrust Exemption Provided By The Shipping Act Is A Limited One.
Before turning to the economics and unique structure of the liner shipping industry, it is important to be clear about the scope of the antitrust exemption under which the industry operates. That exemption is a limited one. As we discuss later in this statement, the antitrust exemption is counterbalanced by an alternative regulatory regime that includes extensive agency oversight and absolute prohibitions on certain types of behavior.
In addition to the fact that the exemption has always been a limited one, the exemption was further limited by Congress when it passed OSRA in 1998. OSRA adopted significant new restrictions on group activities. Specifically, OSRA prohibited carrier agreements from placing restrictions on their members' ability to enter into individual service contracts with shippers. OSRA went further by prohibiting agreements from requiring their members even to acknowledge the existence, much less the terms, of their individual service contracts. The result of these limitations on agreement activities has been the virtual dismantling of the conference structure in the U.S. trades. Although the full impact of the OSRA changes has yet to be felt, the impact on conferences by itself constitutes a dramatic reduction in the scope of the antitrust exemption. The Federal Maritime Commission (''FMC'') has recently begun what will be a two-year study of the effects of OSRA. That study, once completed, will provide a comprehensive analysis of how OSRA has transformed the liner shipping marketplace.
III. The Liner Shipping Industry Is Characterized By Marginal Profits and Returns That Do Not Cover Capital Costs.
Page 183 PREV PAGE TOP OF DOC
In order to appreciate the role of the limited antitrust immunity applied to the liner shipping industry, it is necessary first to understand the fierce competition and low rates of return that characterize the industry.
For the specifics of the state of the liner industry, including the level of competition, rate trends, and capacity growth, we refer the Committee to the study submitted by Mercer Management Consulting, Inc., a consulting firm with many years of experience with transportation issues generally and the shipping industry in particular. Without repeating that study here, we draw your attention to a few of the more striking findings set forth in that paper.
In the United States trades, round-trip rates in the trades with Europe, Asia, and South America are lower today than they were twenty years ago. Moreover, despite unprecedented carrier cost reductions obtained through vessel sharing, technological innovation, and painful personnel reductions, liner shipping companies today continue to post operating returns that range from the negative numbers to something under four percent. With virtually no exceptions, those returns do not pay for the carriers' capital costs in this capital intensive industry. Despite some recent consolidations, the liner shipping industry remains highly fragmented and competitive: none of the top ten carriers has more than nine percent of world vessel capacity, and even the top twenty carriers combined account for only about half of world vessel capacity.
Put simply, liner shipping is a marginal business, and has been so for some time. Despite returns that, by any reasonable investment standard, are unacceptably low, the industry has consistently increased the volume, frequency, and quality of its service offerings. Shippers today have available to them more sailings—to more ports—on newer ships—at lower rates—than at any time in history. Therefore, whatever else may be said about the industry, it has not used its antitrust immunity to artificially increase rates or restrict service. In fact, just the opposite has occurred. By any measure, rates are down, and service continues to expand to meet the increasing demand driven by growing international trade. A brief look at the history and structure of the liner shipping industry provides useful answers to two related questions: (1) how an industry long plagued by marginal profitability has continued to meet the demands of international trade despite inadequate returns, and (2) why limited antitrust immunity remains essential today.
Page 184 PREV PAGE TOP OF DOC
IV. The Antitrust Exemption is Necessary To Counter Structural Overcapacity That Drives Rates To Non-Compensatory Levels.
As noted earlier, the antitrust exemption has been statutorily recognized in the United States since 1916. All of our international trading partners recognize the exemption. Despite drastic changes in shipping services in the last eighty years, the basic economic factors that make the liner shipping industry unique—and that require an alternative form of regulation—remain today.
The most fundamental economic fact of life in the liner industry is overcapacity—too many vessel slots chasing not enough cargo. This overcapacity is not caused by poor planning or incorrect market analysis. Instead, the overcapacity is structural. That is, it is inherent in the nature of ships and shipping services.
The first industry characteristic that must be recognized is that liner shipping is very capital intensive. A container vessel of 5,000 twenty-foot-equivalent (''TEU'') capacity costs about $60 million to build and $50,000 per day to operate. Maintaining a regular, weekly schedule on a given route requires that a number of vessels be committed to that service. For example, a weekly service in the trade between the U.S. east coast and Europe requires an absolute minimum of four vessels. That means a commitment of some $250 million in vessel assets alone, plus millions of dollars in shoreside terminal and intermodal infrastructure costs, just to get started. Thereafter, maintaining the service costs on the order of $1.5 million per week just for the necessary vessels. Again, once shoreside infrastructure and operating costs are factored in, the costs increase dramatically. It must be kept in mind that these figures are only for a bare-bones operation in one of the shortest major trade lanes. Global carriers maintain many such services simultaneously, with capital investments in the billions of dollars.
Page 185 PREV PAGE TOP OF DOC
Against this background of high capital costs, we look next at the unique supply and demand patterns under which the liner shipping market operates. On the supply side, vessel capacity must be sufficient to meet peak shipper demands for space. If it is not, our customers complain—loudly—and take their business elsewhere. Moreover, it requires a number of vessels—not just one—to support the type of regularly scheduled service that the international economy requires. Finally, in order to maintain the regular schedules that are the defining characteristic of liner services, vessels must sail on time whether they are full or not. Because of these multiple requirements of maintaining capacity sufficient to meet peak demand and regular sailing schedules, carriers physically cannot adjust capacity to match short or medium term changes in demand. In economists' terms, supply is both indivisible and inelastic. In layman's terms, you cannot break up a ship the way you can a freight train and send only part of it on a voyage, and you cannot cancel a voyage when the ship is not full.
Demand for ocean transportation, unlike the relatively fixed supply of vessel capacity, varies by season, by direction (import and export volumes often differ widely), and by business cycle (e.g., the Asian economic crisis). The result of the combination of inelastic supply (which must be maintained at a level adequate to meet peak demand) and highly variable demand is persistent, structural overcapacity in the industry.
It is the combination of this chronic, structural overcapacity with high fixed costs that makes traditional antitrust regulation inappropriate for the liner shipping industry. Unlike many other industries, liner shipping operates with high fixed costs—about 75% of our costs exist whether there is cargo on the ship or not—and low marginal costs. Because of this cost structure, carriers do not avoid significant costs when vessel space is empty. Instead, empty space represents a sunk cost that cannot be recovered. As a result, the natural and historic tendency of carriers facing empty space—which nearly always exists for the reasons discussed above, and which cannot be stored for later use—is to cut rates to fill space and help cover fixed costs. That practice results in marginal pricing that does not recover full costs.
Page 186 PREV PAGE TOP OF DOC
Left unchecked, the long-term result of marginal, non-compensatory pricing arising from structural overcapacity would be insolvency, business failures, and accelerated concentration of the industry. If the industry consolidates into a mere handful of carriers, causing monopoly or oligopoly conditions, history and economics teach us that rates will go up and service will go down. One look at the railroad industry today is enough to take that prediction out of the realm of the theoretical and into the realm of the nearly certain.
It is against this backdrop of structural overcapacity that antitrust immunity is so essential. If the spiral of non-compensatory rates, business failures, and consolidations that would otherwise result from demand-driven overcapacity is to be prevented, there must be a mechanism for tempering the intense pressure on carriers to lower prices below compensatory levels. Limited antitrust immunity allows carriers to discuss and agree on rate guidelines that moderate to some extent the tendency toward rates that do not cover full costs. Equally important, because of the inertia inherent in any group activity, rate agreements also have the effect of moderating the size and suddenness of rate increases. These group activities, therefore, although they do not fundamentally change the forces of supply and demand, do help to buffer the most extreme rate swings that would otherwise cripple the industry through destructive competition. In an industry where the line between survival and failure is razor thin, that buffer, subtle though it may be, is crucial to the maintenance of an industry capable of providing the level and variety of services that the international trading community has come to rely upon.
The relationship between structural overcapacity and destructive competition tending toward monopoly has been recognized since 1916 as the fundamental basis for the limited antitrust exemption for liner shipping. One of the more clear explanations of this complex relationship was offered by Senator Long during the debate on the Shipping Act of 1984. That statement is worth repeating:
Page 187 PREV PAGE TOP OF DOC
Briefly, however, I would like to outline some of the reasons why international liner shipping is different than other modes of transportation, and why therefore open competition as envisioned by full application of the antitrust laws will not work.
Open competition cannot be assured for any length of time.
As the Alexander Committee concluded almost 70 years ago, there is no happy medium between war and peace in ocean commerce when several lines engage in the same trade. Without conference agreements, one of two things would happen. The lines would either engage in rate wars which would mean the elimination of the weak and the survival of the stronger; or, to avoid a costly struggle, the foreign-flag carriers would attempt to consolidate through common ownership. Either result would create a monopoly which would be far more anticompetitive than any concerted activity that would arise from the open conference system. Thus even the theoretical benefits associated with open competition would be temporary. Afterward, the U.S. liner fleet, U.S. exporters and importers, the public, and our national security would pay the price.
Conferences and other agreements for economic cooperation are not confined to the lines engaging in the foreign commerce of the United States. They are universally used in the foreign trades of other countries as well as in our own. The merchants of other countries now enjoy the advantages of cooperative arrangements.
Making open and cutthroat competition possible among the lines serving the United States would place American exporters at a disadvantage in many markets compared with their foreign counterparts.
Page 188 PREV PAGE TOP OF DOC
In the event of the ''price-cutting'' envisioned by ''open competition,'' it would not be the efficient low-cost carriers who would survive. There are many State-controlled carriers in international shipping, and other merchant fleets are so heavily subsidized by their governments or so closely integrated with their governments' national policy objectives that their operations primarily serve their respective nation's economic, political, and military policies. Where this is the case, the carriers can afford to operate without regard to traditional profit-and-loss consideration.
In either event, their governments will intercede in the marketplace if they believe that their best interests are most served by the marketplace solution.
Unlike domestic surface transportation, demand for international liner transportation is inelastic. Thus the lower prices which competition theoretically brings will not generate more cargo in a trade.
In international ocean liner shipping, the route to reduced unit costs and cargo rates is the attainment of higher load factors. The ocean liner industry is characterized by a very high proportion (75 percent) of fixed costs. This is the reverse of most industries where only 25 percent of costs are fixed.
With this kind of cost structure, far greater benefits can be obtained from high vessel utilization than from increased competition generated by adding to the number of liner services operating in a trade. The latter increases the vessel tonnage operated without increasing the aggregate cargo tonnage available to be handled, thus increasing the cost of doing business.
Page 189 PREV PAGE TOP OF DOC
If it is to operate efficiently, the liner industry is far more dependent on the coordination of service than other forms of transport (efficiency equals ship capacity in reasonable relationship to the volume of cargo offered).
Cargo cannot move in or out of a trade in short-run response.
Ocean liner service differs from domestic common carriers since the unit in which service is produced (the ship) is much larger in relation to the available traffic volume than the units with which domestic carriers produce their service.
Not only is vessel capacity large in relation to total trade-route volume, it is especially so in relation to individual shipments. A containership may draw its cargo from several hundred shippers.
There are enormous capital and other constant costs in the liner industry. Today, a new containership costs over $100 million. Not only are the vast majority of the costs fixed, but a vessel voyage takes significantly longer than air transport movements. Thus, once the commitment to make a sailing is made, the asset is tied up for a longer period of time, and the need to keep utilization as high as possible increases.(see footnote 12)
In short, it is a fallacy, and a fallacy with potentially far-reaching negative repercussions for the entire U.S. economy, to equate the repeal of antitrust immunity with the usual benefits of open competition. Instead of resulting in lower prices and more choices, repeal of antitrust immunity would relatively quickly lead to higher prices and reduced services as the result of excess concentration. That situation would just as surely lead to demands for renewed regulation, and the process would come full circle.
Page 190 PREV PAGE TOP OF DOC
For anyone who doubts that excess concentration in a transportation sector results in less competition rather than more, and in higher rates and reduced services, one need only look to the domestic railroad industry for confirmation. The cascade of class I railroad mergers in recent years has resulted in duopoly or monopoly conditions for many rail shippers in the United States. In light of their new-found market power, railroads are now announcing that they intend to raise rates and reduce investments in capacity, despite concurrent admissions that they have more cargo than they can handle.(see footnote 13) Rail shippers, understandably, are becoming vocal in their opposition to such policies. If the liner shipping industry is driven to excess concentration through business failures and mergers caused by destructive competition fueled by the repeal of antitrust immunity, it can hardly be expected that the result will be any different than in the rail industry.
V. Government Support of Carrier Operations and Shipyards Exacerbates Existing Structural Instability.
The destabilizing structural overcapacity problem described above is exacerbated by the fact that the market for liner ocean shipping services is not—even absent antitrust immunity—a free market. A substantial number of national governments participate directly or indirectly in supporting liner carrier operations and in supporting shipyards that sell vessels at less than market cost. Through these supports for carrier operations and vessel construction, governments inject substantial non-market forces into the industry. The effect is that both the cost and the profit sides of some carriers' operations are skewed, resulting in marketplace behavior that pure competition would not support. As a result, the pressures that already exist from structural overcapacity, and that drive rates below compensatory levels, are multiplied by government supports.
Page 191 PREV PAGE TOP OF DOC
Again, unless counterbalanced by some level of carrier cooperation, these forces tend toward industry instability, and result in the spiral of bankruptcies, acquisitions, monopoly conditions, and service reductions and increased prices that no interested group desires. Moreover, as Senator Long pointed out fifteen years ago, it is not necessarily the most efficient carriers that would survive the resulting shakeouts and consolidations. To the contrary, the ''winners'' of such an attrition process—if winners is the correct term—would likely be simply the largest (and therefore best able to lose money the longest) or the most heavily subsidized carriers. Accordingly, even if one were of the general view that a substantial consolidation of the industry would be the desired outcome—a proposition for which we know of no support among either carriers or shippers—such a consolidation under the influence of the non-market forces that exist today through government support could not be said to be the result of ''competition'' in any positive sense.
VI. Antitrust Immunity Allows Carriers To Provide Greatly Expanded Services Through Vessel and Space Sharing Alliances.
The discussion above focuses on the ability of carriers under limited antitrust immunity to discuss and agree upon rate policies. There is a related carrier activity also made possible by antitrust immunity that provides enormous benefits to shippers and to the economy as a whole. That activity is the sharing of vessels and vessel capacity by carriers. These arrangements go variously by the names ''slot charter agreements,'' ''vessel sharing agreements,'' or ''alliances,'' depending on the precise nature of the cooperative structure. We will refer to these arrangements generically as ''alliances.'' Under the alliance mechanism, in which virtually every carrier participates in some trade, carriers use space on their competitors' vessels to carry cargo that they individually solicit and take responsibility for.
Page 192 PREV PAGE TOP OF DOC
The importance of these alliances to the ocean transportation system and to the level of service available under that system cannot be overstated. There are currently over 100 alliance agreements on file with the FMC, and alliances are to a large degree the reason why shippers have so many service and carrier options available today. Instead of every carrier wishing to participate in a trade having to commit by itself all of the assets necessary to sustain a service, carriers can combine their assets with those of other carriers. Quite literally, this allows carriers to be in many more places at one time. That, in turn, fosters competition and provides shippers with exponentially more choices than they would otherwise have, at lower rates. In addition to allowing for more efficient use of vessel capacity, these alliances also provide a mechanism for coordinating port calls, thus reducing congestion and improving port and inland transportation efficiency. Without antitrust immunity, the legality of alliances would be called into serious question. Even if alliances were not per se banned under the antitrust laws—and many undoubtedly would be—the very real threat of litigation would as a practical matter mean that they would be virtually eliminated under H.R. 3138.
VII. Answers to Specific Questions.
Since the introduction of H.R. 3138, the Chairman and others have raised a number of specific questions relating to the need for the liner shipping antitrust exemption. To a large degree, the earlier discussion of the reasons why the exemption is necessary for a healthy ocean transportation system addresses these questions. In order to focus the debate and to be fully responsive to these specific questions, however, we address them individually.
1. The Issue of Antitrust Immunity Is Not One of Foreign Carriers Versus U.S. Shippers and Consumers.
Page 193 PREV PAGE TOP OF DOC
In light of recent foreign investment in shipping lines formerly owned by U.S. interests, the question has been posed as to whether antitrust immunity protects foreign carriers at the expense of U.S. shippers and consumers. The answer is, unequivocally, ''no.''
a. The Real Issue Is the Availability Of Adequate Transportation Service To Support U.S. International Trade, Not The Nationalities of Carriers. As has been demonstrated above, the antitrust immunity equation is not one in which a benefit for carriers, whatever the nationality of their investors, equals a detriment to shippers. Liner shipping is a vital service, and it exists solely because our customers need to move goods from one country to another. Without healthy carriers, shippers suffer; without healthy shippers, carriers suffer. Without healthy shippers and a healthy ocean transportation system, international trade and the entire U.S. economy suffer. This is not a zero-sum game, but it is one that everyone can lose.
Recognizing that the relationship between carriers and shippers is symbiotic, not antagonistic, and that the health of international trade rests on the vitality of both carriers and shippers, the real question is whether antitrust immunity results in better service, at better rates, than would be available in the absence of that immunity. As discussed above, it is demonstrably the case that the economic instability that is inherent in the industry because of structural overcapacity and government support would, absent antitrust immunity, lead to oligopoly or monopoly and higher rates for less service.
Viewed in this light, it makes no difference whether carriers providing international transportation to U.S. importers and exporters are financed with U.S. capital or with capital from another country. What does matter is that carriers operate in an environment that allows us to provide efficient, frequent, varied, and reasonably priced service to our customers. The ultimate beneficiary of a healthy international transportation services industry is international trade itself, and the international markets upon which a large segment of America's economic strength depends do not care who provides the money to build and run the ships—as long as the ships run. If we are to keep the ships running, we must be able to see some possibility of return on our investment. The collective activities that are possible under the antitrust exemption—and that are impossible without it—make the critical difference in this industry between survival and failure. Whether liner companies are financed by U.S. or overseas capital, repeal of limited antitrust immunity would be equally damaging, and the need for the limited antitrust exemption remains the same.
Page 194 PREV PAGE TOP OF DOC
b. Recent Mergers Have Strengthened U.S. Flag National Security Resources. There is perhaps implicit in the question regarding non-U.S. investment in formerly U.S.-owned shipping lines an assumption that foreign investment means the end of the U.S.-flag fleet. To the extent that such an assumption does exist, it is unfounded.
Both Maersk-Sealand and APL have in the past two years undergone mergers with non-U.S. companies. Neither of those mergers, however, has resulted in any loss of U.S. flag defense capability. The 35 vessels that were previously enrolled in the Voluntary Intermodal Sealift Agreement (''VISA''), a legally binding contractual commitment under which U.S. flag vessels can be called into service in times of national emergency, remain under that program today. Moreover, the VISA commitments that exist today post-merger are more robust than before. This is the case because, through contractual undertakings under which the U.S. government is a named beneficiary, the U.S.-owned companies that operate these vessels have access to the entire international intermodal, logistics, and communications networks of the merged companies. The result of these mergers, therefore, is a substantial net gain in defense capability for the benefit of our national security.
We also point out with respect to these merger activities that Maersk-Sealand and APL combined continue to employ directly over 5,000 people in the United States, plus over 1,400 American seafarers. In addition, of course, our U.S. and foreign-flag operations, combined with those of the other carriers that serve the U.S. international trades, generate tens of thousand of jobs for seamen, longshoremen, truck drivers, rail employees, and others. None of that has changed, nor will it change, as a result of a change in the nationality of our primary investors.
Page 195 PREV PAGE TOP OF DOC
2. Carrier Antitrust Immunity Has Not Harmed NVOs.
We are aware that the primary industry advocates of antitrust immunity repeal are certain non-vessel-operating common carriers (NVOs). At the outset, we wish to emphasize that NVOs, like other shippers, are our customers, and it doesn't make sense for us to alienate our customers. Based on what we hear in the market, NVOs generally, like other shippers, are happy with the current system, especially as deregulated by OSRA. In all candor, we believe that the claims that NVOs are somehow harmed by carrier antitrust immunity are attributable to a small but vocal minority of that community. In this regard we draw your attention to an article in the Journal of Commerce from January 26 of this year.(see footnote 14) That article reported that NVO participants at a transportation conference in California were happy with the current system, and that OSRA has improved their business prospects. That NVOs are doing well under the current system, and especially well after OSRA, is also indicated by the number of new NVO license and bond applications that have been filed with the FMC in the past year—over 250 of them.
Despite indications that the NVO community generally is responding favorably to the current system and the OSRA reforms, we know some individual NVOs have expressed concern. What we hear most often is that NVOs would like to be able to enter into service contracts with their customers, and that they would prefer not to publish tariffs. We point out that the issue of the ability of NVOs to sign service contracts with their customers was the subject of a specific amendment in the Senate during the OSRA debate. That amendment was the subject of a role call vote, in which the Senate voted 72 to 25 not to implement service contracting by NVOs.(see footnote 15) Thus, whatever the merits of the service contract issue, its proponents cannot claim that the issue did not receive specific and detailed consideration. Perhaps more relevant to the task at hand, the service contract and tariff publication issues simply have nothing to do with antitrust immunity, and they would not be addressed by enactment of H.R. 3138.
Page 196 PREV PAGE TOP OF DOC
Finally, we are aware of general allegations that carriers somehow use their antitrust immunity to discriminate against NVOs. What we have not heard is by what mechanism this alleged collective carrier action translates into discrimination. Without knowing what the precise concern is, it is impossible to address it. Having said that, we point out that the Shipping Act, as amended by OSRA, specifically and categorically prohibits any conference or any group of two or more common carriers from discriminating against shippers because of their status as ''ocean transportation intermediaries,'' a term that includes NVOs as well as freight forwarders. Violation of that provision gives rise not only to the possibility of substantial penalties imposed by the FMC, but also to the possibility of private reparations claims that can be brought directly by the NVO. In addition to damages, successful complainants in those actions are entitled to attorneys' fees. To the extent that any NVO believes that it has experienced discrimination as a result of collective carrier action, a legal remedy already exists. To the extent that discrimination complaints arise from NVO relationships with carriers in their individual capacities, which is what the Federal Maritime Commission indicated in its final order in Fact Finding Investigation No. 23, then of course there is no collective carrier action and no antitrust connection in any case.
3. Carrier Antitrust Immunity Remains The International Standard In Liner Shipping Regulation.
We have touched above on the fact that a limited antitrust exemption for the liner carrier industry is recognized by all of our major international trading partners. It has been suggested that that fact does not justify the policy in the United States if the policy is wrong. It is hard to argue with that logic, as far as it goes. However, our trading partners, like the U.S. Congress, have not adopted and maintained limited antitrust immunity for the better part of a century on a whim. They, like us, have come to the conclusion after serious consideration and long experience that there is a better way than through the traditional antitrust laws to regulate this most international of businesses. It would be destructive to the comity that exists among trading nations to unilaterally depart from this uniform international system.
Page 197 PREV PAGE TOP OF DOC
When we speak of international comity, we are of course on one level talking about regulatory consistency and the need to maintain good diplomatic and commercial relationships with our trading partners. There is another dimension to the need for international consistency in this area, however, and one that should be of more immediate practical concern to importers and exporters in this country. That dimension relates to dollars and cents, and the ability—especially of U.S. exporters—to compete in world markets. If the U.S. were to repeal antitrust immunity, and that repeal led, as we firmly believe it would, to reduced service at higher rates, then exporters in the United States would be at a competitive disadvantage vis-a-vis suppliers of the same products that operate in other countries—countries that have maintained a stable and affordable ocean transportation system.
Finally, it has been argued that the deliberations of the Organisation for Economic Cooperation and Development (OECD) represent a retreat from the recognition of antitrust immunity for liner shipping. In this regard we point out that the OECD is only a policy forum; it has no legislative or regulatory powers. In addition, the liner shipping competition proposal that will be discussed at an upcoming OECD workshop is merely a staff memorandum. Almost unanimously, the OECD countries that have commented on the staff memorandum have opposed its suggestion that antitrust immunity be repealed. Moreover, the governments of Japan and Australia have recently reviewed their competition policies with respect to liner shipping, and have retained the antitrust exemption. The European Union is nearing the end of the process of reissuing its regulation recognizing an antitrust exemption for carrier consortia. That regulation, in turn, specifically references and acknowledges the continued exemption for carrier conferences.
VIII. The Bill Would Create A Statute That Is Illogical.
Page 198 PREV PAGE TOP OF DOC
The regulatory scheme embodied in the Shipping Act consists of a core premise that, while the traditional antitrust laws are not appropriate to the liner shipping industry, immunity from those laws must be balanced with a substitute regulatory structure. The backbone of that alternative structure consists of: (i) agreement filing requirements and (ii) ''prohibited acts'' set forth in section 10 of the Act.
H.R. 3138 would do only one thing—remove agreements between or among ocean common carriers from the list of agreements granted antitrust immunity by the Shipping Act. The bill would not, however, repeal any of the agreement filing or prohibited acts provisions that exist only as a counter-balance to the existing antitrust immunity. Nor would it repeal any of the tariff publication or service contract filing requirements that similarly exist primarily as limits on the exercise of the limited antitrust exemption.
If the bill were enacted, therefore, carriers would be required to file any agreements that they entered into, even if such agreements did not implicate the antitrust laws. Under the Shipping Act, for example, an agreement to interchange shipping containers among lines is a ''cooperative working arrangement'' that requires that an agreement be filed. But with such filing granting no antitrust immunity, and there being no reason for the FMC to review such agreements, what would be the purpose of filing? The answer, of course, is that there would be none, but carriers failing to file would nevertheless be liable for penalties up to $25,000 per day. Similarly, given that monitoring of competition impacts is the primary basis for FMC filing of service contracts, what purpose would be served by such filing in the absence of antitrust immunity?
Page 199 PREV PAGE TOP OF DOC
The Shipping Act reflects a complex balance that is premised on the idea that, while antitrust regulation is inappropriate for liner shipping, the antitrust exemption requires a substitute regulatory regime. That substitute regime, consisting primarily of agreement filing requirements and specific prohibited acts, is meaningless except in the context of the antitrust exemption. To remove the antitrust exemption without addressing the complex regulatory regime that is its counterpart would result in a statute that is both burdensome and illogical. This, unfortunately, is precisely what H.R. 3138 would do.
IX. Conclusion.
Limited antitrust immunity for liner shipping has been the policy of the United States and its international trading partners for almost a century. Despite technological changes in the industry, the economic forces that require an alternative to traditional antitrust regulation remain the same today as they were in 1916, when the United States first created the statutory exemption.
In 1998, after a four-year debate that included much attention to the subject of antitrust immunity, Congress chose to maintain the basic antitrust exemption, while at the same time limiting further the ways that carriers could use it. The result was deregulatory legislation that balances increased reliance on market forces with a regulatory regime that protects the vitality of the nation's international transportation infrastructure. H.R. 3138 would destroy that balance, and would threaten the flow of U.S. international commerce to the detriment of U.S. importers, exporters, and consumers. We therefore respectfully oppose H.R. 3138, and we ask that the Committee take no further action on the bill.
Page 200 PREV PAGE TOP OF DOC
We appreciate the interest of the Chairman and the Committee in the vitally important ocean transportation industry, and we thank you for the opportunity to appear before you today.
OCEAN CARRIER WORKING GROUP
A.P. Moller-Maersk Sealand
American President Lines, Ltd.
Atlantic Container Line AB
Australia New Zealand Direct Line
China Ocean Shipping Company
Cho Yang Lines
CMA-CGM S.A.
DSR-Senator Lines
Evergreen Marine Corp. (Taiwan) Ltd.
Farrell Lines, Inc.
Hamburg Sudamerikanische Dampfschifffahrtsgesellschaft Eggert & Amsinck
Hanjin Shipping Co., Ltd.
Hapag-Lloyd Container Linie GmbH
Hyundai Merchant Marine Co., Ltd.
Kawasaki Kisen Kaisha, Ltd.
Lykes Lines Limited, LLC
Mediterranean Shipping Company S.A.
Mitsui O.S.K. Lines, Ltd.
National Shipping Company of Saudi Arabia
Page 201 PREV PAGE TOP OF DOC
Nippon Yusen Kaisha
Orient Overseas Container Line
P&O Nedlloyd Limited
Safbank Line Limited
Star Shipping A/S
Tropical Shipping & Construction Company, Limited
United Arab Shipping Company (S.A.G.)
Wallenius Wilhelmsen Lines AS
Yangming Marine Transport Corp.
Zim Israel Navigation Co., Ltd.
Mr. CANNON. Thank you, Mr. Rhein.
Mr. Welsh?
STATEMENT OF HUGH WELSH, DEPUTY GENERAL COUNSEL, THE PORT AUTHORITY OF NEW YORK AND NEW JERSEY
Mr. WELSH. Yes, thank you. I hope my contribution today will be brevity, if nothing else.
Many speakers have spoken and established their bona fides by referring to the number of members that they have, or the business contribution that they have made, or the level or the lack of level of profits in their industries.
Page 202 PREV PAGE TOP OF DOC
I represent the United States port industry. And there is no group that has a bigger investment and a bigger stake than the United States maritime industry. And the monies that we have invested in that industry are not foreign dollars, and we are not foreign corporations.
We are very much United States public agencies. And we have invested literally billions of dollars in the development of probably one of the finest marine terminal systems anywhere in the world.
And our position is that a healthy maritime industry protects that investment of public funds that we have made in those facilities, and that it is in the interest of the country that a strong and economically sound maritime industry be continued and be maintained.
No one can say that the United States port industry has not invested money and put its money where its mouth is. The numbers are set out in the prepared statement that I have submitted for the record.
But in brief, it should be noted that the United States port industry, in 1 year, would invest $1.5 billion dollars; and by the year 2001, over a 5-years period, will have invested $6.5 billion in investment in port facilities.
That investment has to be protected, and it has to be protected by maintaining a healthy maritime industry.
Page 203 PREV PAGE TOP OF DOC
I would ask the committee to focus on one important factor. And that is, the maritime industry has to be looked at as an industry. One faucet of that industry can not be separated from the others, because there is a symbiotic relationship.
If you do not have healthy carriers, you will not have healthy labor. You will not have healthy truckers. One is directly related to the other. And we are cognizant of the fact that this healthy industry has to be maintained.
At the present time, the United States shipping rates are being depressed, and the competition is continuing to depress them and put downward pressure.
We know this from our negotiations with ocean carriers. And we, in the public port business, can vouch for the competitiveness of ocean carriers, as well as the competitiveness of the United States port industry, itself.
The changes that took place in the Shipping Act of 1984 and the Ocean Shipping Reform Act have contributed to that competition. And I think a number of speakers have gone over that, and already spoken about the fact that the right of independent action among conferences has now been maintained, and the right to confidential contracts has been established, all resulting in continued downward pressure.
In sum, I would have to say, and I was somewhat surprised to hear, that the United States port industry was making a lot of money and reaping the benefits of the increased tonnage and increased container traffic. I do not know where that is.
Page 204 PREV PAGE TOP OF DOC
The simple fact of life is, in the North Atlantic, on the record, six out of ten ports are losing money, at the present time. And they are losing money on investments that have been made with the investment of United States dollars, public funds.
And I suggest that anything that further depresses the ability of the maritime industry to survive and to be financially successful will jeopardize the investment of public funds. And it is in everyone's interest that the maritime industry remain a viable economic industry, and an industry that has many faucets, including the ocean carrier industry.
I want to thank you for the opportunity of presenting the views of the American 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
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 American Association of Port Authorities is an association of more than 140 public port authorities in the United States and 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, divisions or agents of State and local government mandated by law to serve public purposes. Essentially, we are public agencies charged with responsibility to develop port facilities and facilities of commerce and toward that end have invested billions of dollars of public funds. As much or possibly more than any parties you will hear from today, we have an enormous financial stake of public funds in the future economic health of the maritime industry.
Page 205 PREV PAGE TOP OF DOC
H.R. 3138, which is being considered here today, would once again amend the Shipping Act, alter the compromises reached in producing the Ocean Shipping Reform Act, eliminate the antitrust immunity of ocean carriers under the Shipping Act and we believe be injurious to the maritime industry at a time when further adverse impact to the carrier's already precarious financial condition could cause irreparable harm. The American Association of Port Authorities is opposed to the passage of H.R. 3138 and believe that its consideration at this time is ill considered.
The Shipping Act of 1984 and the Ocean Shipping Reform Act of 1998 represent a number of compromises and accommodations which now have resulted in a body of legislation that has not been shown to be deficient. H.R. 3138 would upset a delicate balance that was established by the Ocean Shipping Reform Act (which has been in effect less than one year) and cause instability in an industry that can ill afford further erosion of its financial condition. We believe that no case has been made that would warrant such action.
It is not necessary to recount here in detail the long history of the regulation of and the concomitant antitrust immunity for ocean carriers. Essentially, however, antitrust immunity became a part of the Shipping Act in 1916 and has been a part of a comprehensive regulatory scheme controlling the industry since then. It was included in the Shipping Act of 1984 and was reviewed at length as part of the five year study mandated in Section 18 of that legislation. It was again debated in connection with the Ocean Shipping Reform Act of 1998 and this Committee heard testimony regarding it last year just a few days after the effective date of that Act. Now we are here again, less than one year later to discuss the issue yet again. There hardly has been enough time for anyone to identify abuses, real or imagined, that may have taken place under the current regulatory regime. The constant and repetitive review of this same issue only serves to create uncertainty about the future of an industry that serves the commercial interests of our country.
Page 206 PREV PAGE TOP OF DOC
It is in the interest of this country, the public port industry and the regions represented by public port authorities, that a strong and financially healthy maritime industry be maintained. Unfortunately, the ocean carrier business, and in fact the port business, is not extremely profitable. The secondary benefits provided in terms of jobs, tax revenues and related business, however, are vital to the economic well being of those regions in which ports are located.
Ocean shipping rates are currently depressed and competition has driven carriers to attempt to further reduce their costs through a number of innovations. A description of the economics of the ocean carrier business can be best left to the carriers themselves but we are acutely aware of the marginal economics of the industry. We in the public port business can also vouch for the fact that the ocean liner industry is extremely competitive, as is the port business itself.
The changes that took place as a result of the Shipping Act of 1984 and the Ocean Shipping Reform Act have contributed to this competition. The right of independent action has allowed flexibility for shippers to negotiate with individual carriers and deprived conferences of the discipline necessary to control pricing. The use of service contracts between shippers and carriers has become more common as evidenced by the large number of filings of such contracts with the Federal Maritime Commission. Shippers now have the advantage of negotiating confidential contracts. All of these changes in the law have increased the competition within the ocean carrier industry and applied downward pressure on ocean carriers' rates and profits.
Public port authorities are the public agencies which make our nation's ocean borne commerce possible. The facilities that we finance and develop work to the benefit of the carriers that use them and the shippers who ship through them. Whether a shipper is in Ohio, Illinois, North Dakota or some other state, the port facilities in New York, Houston, Los Angeles , New Orleans or other ports benefit them by making the efficient handling of their cargo possible. Shippers are the ultimate beneficiaries of the investment of public funds made by public port agencies. Without a financially healthy maritime industry, it will be impossible to finance and operate port facilities through which pass our nation's commerce.
Page 207 PREV PAGE TOP OF DOC
While H.R. 3138 does nothing that would directly affect the antitrust immunity of public port agencies, it could affect the financial condition of ports by impacting the users and tenants of marine terminal facilities. The United States port industry generates over 13.1 million jobs and $494.2 billion in personal income. The United States Maritime Administration compiles statistics relating to the maritime industry and those dealing with the port business are most interesting. Public port authorities are investing capital in port development at record levels. In 1997, ports invested $1.5 billion in the development of facilities of commerce. The nation's ports project capital expenditures through 2001 at $6.5 billion. Because of changes in the Water Resources Development Act in 1986, port authorities must now shoulder a substantial burden of the cost of dredging projects formerly paid by the federal government.
The enormous cost of providing these facilities that serve not only port regions but the nation as a whole, must be paid for from the revenues of the port authorities. Any actions that further financially cripple ocean carriers and hinder their ability to contribute to the revenue which supports these capital programs actually works against the interests of the country.
The criticism of the current law that we in the public port industry hear is not an allegation of market abuse by ocean carriers. Rather it is a contention by others that they too should have antitrust immunity. Non-vessel operating common carriers complain that they do not enjoy the antitrust immunity carriers enjoy. Now we read that independent truckers complain that antitrust laws prevent them from combining to negotiate with ocean carriers because they do not have antitrust immunity. While these complaints may be interesting topics of discussion, they do not justify still another change to the regulatory regime that is currently in place. The nation's interests and the interests of the public port authorities which have invested public funds to build and support the nation's ports will be ill served by any action that contributes to the demise of the maritime industry. With regard to the proposed changes to the Shipping Act of 1984 by H.R. 3138, you will probably hear many times the suggestion, ''if its not broke don't fix it''. I would prefer instead to urge when you consider this bill to remember a part of the Hippocratic Oath taken by physicians, ''First, do no harm.''
Page 208 PREV PAGE TOP OF DOC
We strongly urge that you do no harm by taking no further action on the bill. The American Association of Port Authorities appreciates the opportunity to present the views of our members, and we thank you for the opportunity to appear here today.
Mr. CANNON. Thank you Mr. Welsh.
Mr. Pecquex?
STATEMENT OF FRANK PECQUEX, EXECUTIVE SECRETARY TREASURER, MARITIME TRADES DEPARTMENT, AFL–CIO
Mr. PECQUEX. Thank you, Mr. Chairman, Mr. Conyers.
I am here today representing the Maritime Trades Department, AFL–CIO and its 30 affiliates, who number among their memberships over 100,000 longshoremen, merchant mariners and support personnel who are employed around the United States.
I would like to make three points that are contained in our statement. One, we believe that change is premature. The question of antitrust immunity for carriers has been debated several times by Congress, since it passed the 1916 Shipping Act.
At that time and during any major review of the 1916 act since then, legislators have recognized that special operating conditions exist within international shipping, and that ocean carriers need flexibility to develop some level of cooperation.
Page 209 PREV PAGE TOP OF DOC
During the statute's last two major rewrites in 1984 and 1998, Congress thoroughly analyzed the shipping industry. And in response to concerns that were raised, they made several modifications that narrowed the type of actions in which shipping companies could engage. Nevertheless, the principle of limited antitrust immunity was clearly reiterated each time.
Now less than a year following the implementation of the 1998 changes, legislation is being debated that would undermine the consensus that was developed to pass the 1998 act.
We believe that any legislative action on antitrust immunity is premature. It is our opinion that too little time has passed to determine whether any corrections are needed.
This is especially true when one considers that shipping rates, while developed under the protection of antitrust immunity by the carriers, are lower today than they were 15 years ago.
Furthermore, the Federal Maritime Commission has initiated a 2-year study to evaluate the outcome of the 1998 changes. This review, in our opinion, should be completed before any alterations to the Shipping Act are even contemplated.
As to the economic impact of H.R. 3138, elimination of antitrust immunity will have a destabilizing effect impact on the international liner shipping marketplace. The industry's chronic instability and general low profitability may have an undesired consequence: the consolidation of international shipping services into fewer companies offering more limited service than presently available.
Page 210 PREV PAGE TOP OF DOC
This likely outcome would have a negative impact on those companies that are striving to maintain American-flag participation in the Nation's international liner commerce.
In turn, the economic welfare of those American merchant mariners, longshoremen, and the support and office workers, employed by any affected U.S. or foreign shipping company with stateside operations would be undermined. And, sadly, shippers and consumers alike would suffer from the resulting decline in service.
The last point I would like to touch upon involves national security. The American maritime industry has a long tradition of playing a vital role in guaranteeing that the Nation's defense planners have sufficient strategic sealift capability to fulfill any mission in times of emergency.
Congress, itself, took action in 1996 to create the Maritime Security Program, which would make available both U.S.-flag ships and land side intermodal services to the U.S. Government for the movement of needed materials to overseas areas of operation.
For example, during the Persian Gulf Conflict, U.S. flag liner companies, which are the principal participants in the Maritime Security Program, carried 30 percent of all defense goods to the Middle East Theater.
Any significant curtailment of operations by U.S. flag carriers places in doubt the industry's ability to provide skilled citizen mariners needed to crew over 100 cargo ships that the U.S. Government maintains in varying states of readiness standby status for strategic sealift purposes.
Page 211 PREV PAGE TOP OF DOC
Any operational instability that surfaces would not just affect the current manpower pool, but it would also hurt the recruitment of new workers who are looking for long term opportunities in this industry.
For these reasons and those stated in our written statement, we would hope that the committee would not take any further action on this legislation.
Thank you.
[The prepared statement of Mr. Pecquex follows:]
PREPARED STATEMENT OF FRANK PECQUEX, EXECUTIVE SECRETARY TREASURER, MARITIME TRADES DEPARTMENT, AFL–CIO
Mr. Chairman, and members of the Committee, my name is Frank Pecquex. I am Executive Secretary/Treasurer of the Maritime Trades Department, AFL–CIO. The Maritime Trades Department is comprised of 30 international unions, representing over 7 million workers including hundreds of thousands directly employed in the United States marine transportation industry. Maritime labor appreciates the opportunity to appear before you today to discuss the important subject of antitrust immunity for ocean carriers under the Shipping Act of 1984, as amended by the Ocean Shipping Reform Act of 1998.
The MTD opposes H.R. 3138, the Free Market Antitrust Reform Act of 1999, which would repeal the limited antitrust immunity for ocean carriers that exists under current law. We believe that the bill, if enacted, would significantly destabilize this country's international ocean transportation industry, would result in a significant loss of jobs for American workers, and would impair U.S. national security. In order to understand the reasons for our position, some background is in order.
Page 212 PREV PAGE TOP OF DOC
When Congress began its deliberations on the legislation that became the Ocean Shipping Reform Act of 1998 (OSRA), we initially opposed the efforts to amend the Shipping Act of 1984. We believed, as we still do, that the 1984 Act represented a workable balance between market forces and stability in the liner shipping industry. As deliberations on OSRA proceeded, however, it became clear that certain deregulatory objectives could only be satisfied by legislative change. When that point was reached, labor actively entered the debate in order to ensure that our members' interests were protected.
In the end, OSRA was enacted as a compromise that addressed the most pressing concerns of carriers, shippers, ports, and labor. OSRA is a true compromise; no part of the industry got everything that it wanted. OSRA is a true compromise in another, perhaps more important, way as well. The OSRA amendments—like the 1984 Act that preceded them—sought and struck a practical and workable balance between market-based competition and necessary stability in our international ocean transportation system.
In striking a new balance, OSRA made substantial changes to the way that the market for ocean transportation operates. We were concerned at the time that those changes might have negative and disruptive effects on the industry, and we retain those concerns today. In particular, we are concerned that this further deregulation may accelerate consolidations among carriers, resulting in consolidation of services at fewer ports. Both of those results, if they come to pass, will harm the workers that we represent, as well as the broader U.S. economy and everyone whose economic well being depends on waterborne international trade. OSRA has been effective for only a little over a year, and it is therefore too soon to tell whether the marketplace changes that it has set in motion will go too far down the path of deregulation. What is clear, however, is that it is too soon to begin considering wholesale changes to OSRA. By removing antitrust immunity—a core piece of the OSRA compromise—H.R. 3138 would constitute such a wholesale change. That, we believe, is not in the best interests of our members, of importers and exporters, of ports, or of the U.S. economy as a whole.
Page 213 PREV PAGE TOP OF DOC
Proponents of H.R. 3138 have posed the fundamental question of why limited antitrust immunity should be continued for ocean carriers. Certainly such questions are fair and appropriate. It has also been suggested that if the question arose for the first time today, limited immunity would not be adopted for the industry. Respectfully, the fact is that the question is not being asked for the first time. Congress first addressed the question in 1916, and has maintained a consistent approach ever since—an approach that is not coincidentally consistent with the approach of all of our major trading partners. In answering the question, therefore, it is necessary to remember that we are not writing on a clean slate. The liner shipping industry has been regulated under an alternative to the antitrust laws, not because of some historical accident. Rather, Congress has repeatedly determined that the nature of the ocean shipping industry requires that the application of the antitrust laws in this instance would not support the critical objective of maintaining and expanding an ocean transportation system that is capable of providing stable, efficient, and reasonably priced service in support of our international trade.
Others testifying today can no doubt provide you with a more complete explanation of the role of antitrust immunity in the operation of international liner shipping. For our part, we are not overly concerned with the fine points of theoretical economics. Our concerns are more practical. From where we sit, the issue before the Committee today does not turn on whether, in a perfect world, antitrust laws are better than other forms of regulation. Instead, we are focused on whether further changes to the Shipping Act will strengthen or weaken the industry upon which our members depend for their livelihoods. Based on what we have seen in the past ten or fifteen years, costs have been squeezed out of the ocean carrier operations, and rates have fallen, to a point where the health of the entire system is in jeopardy. Although antitrust immunity has not prevented the industry from operating on the edge, it, along with the other aspects of the Shipping Act, has prevented it from going over.
Page 214 PREV PAGE TOP OF DOC
Our concern, which we believe is well founded, is that repeal of antitrust immunity would lead to accelerated consolidation in the industry. That trend would be accompanied by consolidation of carrier operations at fewer ports. These results threaten not only the seafaring jobs on which MTD members depend, but also the thousands of longshore and other land-based jobs that the industry supports, as well as the communities in our port areas. In addition to these very direct impacts on the workers that I am privileged to represent here today, the rapid consolidation of the industry that we believe would follow repeal of the antitrust exemption would result in less competition, not more. Given that we understand that the objective of the antitrust laws is to ensure fair competition, it would be ironic indeed if H.R. 3138 were adopted and produced just the opposite result.
We have heard the question asked, in light of the recent merger of Maersk and Sea-Land, whether there are any American interests left that benefit by antitrust immunity for ocean carriers. Speaking for U.S. citizen mariners that crew U.S.-flag ships, I can tell you in no uncertain terms that the American interest in a viable and stable ocean shipping industry is as strong as it ever was. We are hopeful that the U.S.-flag fleet will prosper and grow in the years ahead. Creating an atmosphere that discourages investment threatens the U.S.-flag fleet as much as it does the rest of the industry. H.R. 3138 would create that environment, and therefore, we must oppose it.
In addition to encouraging an unstable economic environment for the U.S.-flag commercial fleet, enactment of H.R. 3138 could very well have a negative effect on national security, a result that I do not believe would ever be the intention of the members of this committee. The continued existence of a privately owned, U.S.-flag merchant marine is vital to the Nation's military as well as its economic security. During times of national emergency, there is no completely reliable alternative to the U.S.-flag fleet of commercial ships and trained crews. Nearly 80 percent of the military dry cargo transported during the Persian Gulf conflict was carried on U.S.-flag ships, and over 30 percent was carried on commercial U.S.-flag ships as part of normal liner operations or under time charter to the Department of Defense (DOD). In case there is any question in anyone's mind as to who manned these vessels, all of the U.S.-flag ships utilized by DOD during the sealift operations were crewed by loyal American seafarers.
Page 215 PREV PAGE TOP OF DOC
The Persian Gulf War illustrated, as earlier conflicts had done, the importance of American-flag, American-crewed ships. To foster the continuance of a competitive U.S.-flag fleet, the 104th Congress enacted maritime revitalization legislation in the form of the Maritime Security Act. This statute established the Maritime Security Program (MSP), which ensures that a core U.S. merchant fleet and the trained U.S. citizen personnel needed to operate both active and reserve vessels, will be available to meet national security requirements for sealift capability. Participants in the MSP also provide intermodal shipping services/systems, including ships, cargo-carrying capacity, intermodal equipment, and related management services to DOD to support the emergency deployment and sustainment of U.S. military forces through the Voluntary Intermodal Sealift Agreement. There are currently 10 U.S.-flag carriers with MSP Operating Agreements for a total of 47 vessels. The vessels enrolled in the MSP include the most modern, highly automated and technologically advanced diesel-powered ships in the U.S.-flag fleet. The expertise of mariners working on board ships enrolled in the MSP will provide a direct match, or near match, with the skills needed to crew the newer Reduced Operating Status and prepositioning ships in the DOD organic fleet as well as the older steam-powered vessels in the Ready Reserve Force. Without the MSP fleet, the size of the acting seafaring labor pool would be substantially smaller and of a less advanced skill base and, as a result in a crisis, DOD would have difficulty in filling all of the manpower or crew billets.
U.S. maritime regulatory policy as affirmed by the 105th Congress in the enactment of the Ocean Shipping Reform Act complements both the congressional and defense efforts to sustain a core fleet of American-flag and American citizen crewed ships to meet the Nation's economic and defense security. Enactment of H.R. 3138 would financially weaken the U.S.-flag merchant fleet and thereby, would jeopardize the future viability of the U.S.-flag liner fleet and its crews. International shipping is a complex industry that must be appreciated for all of its contributions to the U.S. economy and national security. Chairman Hyde, Ranking Member Conyers, and members of the Committee, for all of the reasons stated here, we urge you not to take any further action on this bill.
Page 216 PREV PAGE TOP OF DOC
We very much appreciate the opportunity to present our views to you today.
Mr. CANNON. Thank you very much, Mr. Pecquex.
Mr. Smith?
STATEMENT OF DANIEL SMITH, SENIOR CONSULTANT, MERCER MANAGEMENT CONSULTING, INC.
Mr. SMITH. Mr. Chairman and Congressman Conyers, I appreciate the opportunity to appear today. Mercer Management Consulting is one of the world's largest management consulting firms. We are recognized for our expertise and insight in transportation.
The purpose of our statement and our appearance today is to provide the committee with our perspective on the characteristics and economics of the containership industry.
We have prepared an extensive written summary, which you have. So I will briefly cover our main points here.
First, container shipping is an efficient industry with unique economics. We have heard reference to that in other presentations.
Worldwide container trade is an enormous enterprise, in which shippers have enjoyed rising service standards and lower rates.
Page 217 PREV PAGE TOP OF DOC
Yet, ocean carriers have become increasingly vulnerable to the adverse financial impacts of high fixed cost, increasing capital requirements, and imbalanced trade.
The continuing need for high capital expenditures to satisfy shipper demands, coupled with the carriers' inability to return their cost of capital, poses a significant long-term threat to the health of the industry.
Second, efficient container shipping is essential to North American trade and prosperity. The thriving U.S. economy is increasingly dependent upon global ocean-borne trade. And containerized trade is the fastest growing and most valuable portion of that trade.
The vast majority of U.S. ocean-borne imports and exports of valuable commodities are moved by container. American businesses and consumers expect prompt and inexpensive access to the best imports from all over the world, and the container shipping industry delivers them.
American exporters rely on efficient transportation to compete in global markets, and the container shipping industry provides that efficiency.
Third, the container shipping industry is highly competitive. Industry fragmentation, the lack of barriers to entry, the lack of differentiation, low customer switching costs, and the countervailing power of major shippers all contribute to intense competition in container shipping.
Page 218 PREV PAGE TOP OF DOC
Mercer found little basis for concern over monopoly power or any ability of steamship lines to maintain rates above competitive levels.
There are over 500 active ocean carriers, and none of the top 10 has more than 9 percent of world vessel capacity. New and existing carriers can and do enter growing trades and markets with ease. Ocean carriers all produce the same basic services, and the very nature of the industry hampers any attempt to differentiate their products.
Our shipper surveys confirm that customers still choose ocean carriers based on price, and are always ready to switch carriers to obtain lower rates. Furthermore, the volume of traffic controlled by large shippers gives them significant countervailing power.
Fourth, container shipping rates are driven by the market forces of supply and demand. Despite the past efforts of carriers to maintain profitable price levels, container freight rates have declined substantially over the last two decades.
Container shipping rates rise only when the market is strong, and they inevitably fall when the market is weak. When demand rises sharply in a seller's market, carriers can charge more as capacity becomes scarce. But when demand weakens in a buyer's market—and right now, we have buyer's markets in most of the major U.S. trades—carriers do cut rates and compete for the available cargo.
Fifth, profitability in the container shipping industry is low, with potentially serious consequences. If ocean carriers could restrict competition and keep rates high, we would expect to find excess industry profits. Instead, profits in the containership industry are slim, and most carriers are not making their cost of capital.
Page 219 PREV PAGE TOP OF DOC
Should those substandard returns persist, the repercussions are likely to be serious, including reduced capital investment, reduced capacity and service, flight of capital, and increased industry concentration. None of those outcomes are desirable, either for the shippers or for the Nation.
Sixth, NVOCCs have a growing role in containerized shipping. NVOCCs and other intermediaries are benefitting from the provisions of OSRA, and as Commissioner Creel mentioned, they are flourishing in the post-OSRA contracting environment. They already dominate the less than container load business, and are expanding into the full container load business.
Through the provision of customized services, NVOCCs have established an irreplaceable role as part of the container shipping industry.
Finally, container shipping lines have a legitimate need for operational cooperation, and both carriers and shippers benefit. Alliances have enabled carriers to reduce operating costs and increase their service while maintain competition. That is good for the carriers and good for the customers.
Operational or cooperation has been made possible, in part, by the ability of carriers to communicate in discussion agreements. The role and power of those discussion agreements, however, has been far more limited than that of the previous conferences, and OSRA further restricted their rate and service contract functions.
To the extent that shippers and carriers have successfully negotiated and filed thousands of service contracts since the implementation of OSRA, the use of the discussion agreements does appear to support the development of competitive service contracts.
Page 220 PREV PAGE TOP OF DOC
The facts and analysis behind these points are contained in Mercer's written statement. Thank you for your attention.
[The prepared statement of Mr. Smith follows:]
PREPARED STATEMENT OF DANIEL SMITH, SENIOR CONSULTANT, MERCER MANAGEMENT CONSULTING, INC.
EXECUTIVE SUMMARY
Mercer Management Consulting, Inc. (Mercer) is one of the world's largest management consulting firms and is widely recognized for its expertise and insights into the transportation business. The purpose of Mercer's statement today is to provide the Committee with our perspective on the current characteristics and economics of the container shipping industry as well as trends that are likely to impact the industry in the near term. The main points of our statement are summarized below.
I. Container shipping is an efficient industry with unique economics
Container shipping, or the transport of standardized, reusable containers on specialized vessels, has become the dominant method for ocean transport of non-bulk commodities. Worldwide containerized trade is an enormous enterprise, involving more than 500 carriers, 2,500 vessels, and 350 ports. Containerization has enabled shippers of commodities to enjoy continuously higher service standards and lower rates. At the same time, however, ocean carriers of containerized cargo have become more vulnerable to adverse financial impacts brought about by high fixed costs, increasing capital requirements to meet shipper demands, and the imbalanced economics of ''roundtrip'' container shipping.
Page 221 PREV PAGE TOP OF DOC
The ability of the container shipping industry to satisfy worldwide transportation demand depends on the capacity of ships, container fleets, terminals, and operating systems, resulting in relatively high capital costs for the industry. In order to meet this high level of capital investment, ocean carriers have worked strenuously to reduce operating costs; most of these reductions, however, has been passed on to customers in the form of lower real rates. The continuing requirement for significant capital expenditures, coupled with carriers' inability to earn their cost of capital, poses a significant long-term threat to the health of the industry.
Carriers operate on set round-trip schedules and most operating costs are fixed. The financial performance of ocean carriers thus depends on their ability to fill vessels with loaded, revenue-generating containers in both directions.
II. Efficient containerized shipping is critical to North American trade and prosperity
Ocean carriage accounts for a large portion of North American international trade, and container trade accounts for about two-thirds of total ocean trade by value. The thriving U.S. economy is increasingly dependent on global oceanborne trade. Efficient ocean shipping is a critical factor in the ability of U.S. and other North American firms to compete in global markets.
Containerized trade is the most valuable and fastest growing portion of North American oceanborne trade. The vast majority of U.S. and Canadian oceanborne imports and exports of valuable commodities move by container, including refrigerated agricultural products, machinery, electronic goods, and specialty chemicals.
Page 222 PREV PAGE TOP OF DOC
North American businesses and consumers expect access to a full range of imports from all over the world, delivered on time and at the lowest possible cost. The container shipping industry is the primary conveyance for most familiar imported products. On the export side, North American exporters rely on the frequent, efficient service provided by ocean carriers to serve highly competitive markets in a timely and efficient manner.
III. The container shipping industry is highly competitive
Typically, such factors as market concentration, barriers to entry, product differentiation, switching costs, and countervailing marker power are used to gauge the potential for ''monopoly power'' or other conditions in which rates or prices can be maintained above competitive levels. An examination of the container shipping industry's structure and business practices, however, reveals little basis for such concerns. Many different factors, including industry fragmentation, the lack of barriers to entry, the lack of differentiation, and low switching costs for and the countervailing power of customers, all contribute to the intense competitiveness of the industry.
The ocean carrier industry is highly fragmented by any measure. There are over 500 active ocean carriers and none of the top 10 international carriers has more than 9 percent of world vessel capacity. New and existing carriers can enter trades and markets with ease. The flood of new carriers in the transpacific market in 1998–2000 demonstrates the lack of any effective barriers to entry.
Ocean carriers are further constrained by the fact that all produce the same basic services, and the very nature of the industry hampers any attempt to differentiate service. Mercer's surveys of shippers confirm that customers still select ocean carriers primarily based on price and, given negligible switching costs, are always ready to switch carriers to obtain lower rates. Furthermore, the volume of traffic controlled by large shippers gives them significant countervailing power in the market for container shipping services.
Page 223 PREV PAGE TOP OF DOC
IV. Container shipping rates are driven by the market forces of supply and demand
Despite the past efforts of carriers to maintain profitable price levels, container freight rates have declined substantially over the past two decades. The reality is that container shipping rates are driven by market demand: they rise only when the market is strong and fall when the market is weak. When demand rises sharply, carriers can charge more as capacity becomes scarce in a 'seller's market.'' When demand weakens on a specific trade lane, however, carriers must reduce their rates to compete for less cargo in a ''buyer's market.'' The increased efficiency of container lines and intense competition have kept ocean freight rates low compared to the rising costs of other goods and services.
V. Profitability in the container shipping industry is low, with potentially serious consequences
If ocean carriers were able to operate as an oligopoly or otherwise restrict competition, we would expect to find excess profits in the industry (i.e., ''economic rents' above the level of profits required to attract capital and equity). Profits in the container shipping industry are slim, however, and current returns are often below the cost of capital.
Container shipping is essentially a commodity business. The intensely competitive nature of container shipping has caused the industry to incur poor financial returns, despite ongoing volume growth and extensive cost-reduction efforts.
Should substandard returns persist, the repercussions for the container shipping industry are likely to be serious, including reduced capital investment, reduced capacity and service, flight of capital, and increase industry concentration. None of these outcomes are desirable, either for shippers or the nation.
Page 224 PREV PAGE TOP OF DOC
VI. Global logistics trends are creating a growing role for intermediaries in ocean container shipping
Global logistics trends have created an intensely competitive environment: Customers demand shipping transportation that is increasingly ''better, faster, cheaper.'' Intermediaries, such as non-vessel operating common carriers (NVOCCs), are benefiting from these trends and are flourishing in the post-OSRA contracting environment.
Because carriers have focused primarily on ensuring the efficient handling of full container loads, they have created an opportunity for NVOCCs to assist shippers by efficiently consolidating and handling less-than-containerload (LCL) shipments. NVOCCs have successfully expanded in this role to dominate the LCL business and forge close relationships with customers and carriers alike. Through the provision of customized, value-added services, NVOCCs have become an irreplaceable part of the container shipping industry.
VII. Container shipping lines have a legitimate need for operational cooperation, and both carriers and shippers benefit from this cooperation
The nature of the container shipping business—notably its high fixed costs, interchangeable assets, and lack of service differentiation—creates significant opportunities to improve carrier economics and service through carrier cooperation. Alliances and other forms of operational cooperation have enabled carriers to reduce operating costs and increase their service offerings while maintaining competition. Indeed, the cost reductions achieved through operational cooperation have been crucial to carrier survival in this era of declining rates and substandard profitability. Both carriers and their customers have benefited as a result.
Page 225 PREV PAGE TOP OF DOC
Most large ocean carriers originally belonged to ''conferences' that collectively discussed rates and published tariffs. Starting in the 1970s, however, the strength of conferences began to fade. Consequently, a movement toward conference dissolution was accelerated by the Ocean Shipping Reform Act of 1998 (OSRA). In the early 1990s, conferences were first paralleled, then superseded by 'stabilization agreements' which have now evolved into ''discussion agreements.'' The role and power of discussion agreements in practice has been far more limited than that of the conferences at their peak, and OSRA has further restricted their functions with regard to rates and service contracts. As the use of individual service contracts has expanded, discussion agreements have issued ''Voluntary Service Guidelines' as a mechanism for encouraging a uniform way of doing business, updating adjustment factors for rates, and suggesting ''boilerplate'' language for contracts.
To the extent that shippers and carriers have successfully negotiated and filed thousands of service contracts since the implementation of OSRA in May 1999, the use of discussion agreements appears to support the process of proposing and negotiating competitive service contracts.
I. INTRODUCTION
Container shipping is an efficient industry with unique economics. Container shipping, or the transport of standardized, reusable containers on specialized vessels, has become the dominant method for ocean transport of non-bulk commodities. Containerization has enabled shippers of commodities to enjoy continuously higher service standards and lower rates. At the same time, however, ocean carriers have become more vulnerable to adverse financial impacts brought about by high fixed costs, increasing capital requirements to meet shipper demands, and the imbalanced economics of ''roundtrip'' container shipping.
Page 226 PREV PAGE TOP OF DOC
A. Study Background
Mercer Management Consulting, Inc. (Mercer) is one of the world's largest management consulting firms and is widely recognized for the quality of its strategic insights on value-creating and profitable business design. Since 1970, Mercer has continuously helped companies engaged in all aspects of maritime transportation and supply chains to achieve superior performance. Mercer has succeeded in this mission by applying fact-based knowledge and effective processes for corporate change to many important issues faced by domestic and international transportation enterprises. Mercer has unparalleled expertise and experience in combining the best thinking on growth and value creation with extensive knowledge of the distinctive challenges of the maritime industry. Further detail on Mercer's qualifications and experience are presented in Annex A.
The purpose of Mercer's statement is to provide the Committee with our perspective on the current characteristics and economics of the container shipping industry as well as trends that are likely to impact the industry in the near term. Mercer has previously testified before the U.S. House Committee the Judiciary on the status of the container shipping industry for the Oversight Hearing on the Anti-Trust Aspects of the Ocean Shipping Reform Act of 1998, as well as having testified on various aspects of transportation industry regulation before the Surface Transportation Board and U.S. House and Senate committees.
B. Overview of Container Shipping
Container shipping lines move cargo in standardized, reusable containers on specialized vessels. The containers are typically 20–45 foot steel or aluminum boxes. Standards for container size and configuration are set by the ISO in France, and the interchangeability created through these standards allows cargo in containers to move from origin to destination via a mixture of road, rail, and marine movements (''intermodal'' transportation).
Page 227 PREV PAGE TOP OF DOC
First introduced in the 1950s and expanded rapidly in the 1970s and 1980s, containerized shipping is now the dominant method for moving a broad spectrum of non-bulk commodities over the oceans. By allowing shipping lines to move cargo in large sealed containers with mechanized equipment, containerization has drastically reduced handling costs and cargo damage in comparison to prior piecemeal handling methods. Containers are sealed at origin and (unless opened for Customs inspection) and transported intact until finally unsealed and unloaded at destination. Once unloaded, empty containers must be repositioned at the carrier's cost to points of demand.
Worldwide containerized trade is an enormous enterprise, involving more than 500 carriers, 2,500 vessels, and 350 ports. Container shipping lines, also known as ''liner'' operators or carriers, offer scheduled service with multiple weekly arrivals and departures at major ports using specialized ''cellular'' ships that are loaded and unloaded with massive dockside cranes. These vessels operate on round trips over fixed routes; carriers typically offer several different services connecting major ports in North America with Europe, Asia, South America, and the rest of the world.
In terms of the size of the industry, the vessels serving it, etc., a key unit of measure is the TEU (twenty-foot equivalent unit), i.e., the equivalent in capacity or cargo volume of one standard container 20' long, 8' wide and 8' high. (Most North American containerized trade actually travels in forty-foot containers, each of which is roughly equal to two TEUs, but the TEU remains the standard of measurement).
Containerized trade volumes are typically expressed in TEUs. In 2000, for example, U.S. containerized imports are expected to total roughly 10.5 million TEUs, enough to cover the District of Columbia with a layer of twenty-foot containers.
Page 228 PREV PAGE TOP OF DOC
The capacity of container carrying ships is typically expressed in TEUs. A smaller, older vessel might be capable of carrying 1,500–3,000 TEUs, while a large new vessel would have a capacity of 5,000–7,000 TEUs.
Rates or costs are often expressed in dollars per TEU. For example, average rates from the U.S. East Coast to the East Coast of South America dropped from $2,165 per TEU in 1997 to $1,023 per TEU in 1999.
C. Industry Economics and Investment
1. Industry Capacity and Capital Investment
The ability of the container shipping industry to satisfy worldwide transportation demand depends on the capacity of ships, container fleets, terminals (ports), and operating systems. As worldwide trade continues to expand, the industry must add capacity to keep pace, resulting in relatively high capital costs:
Transoceanic container vessels are expensive assets. A typical new 5,500 TEU vessel costs roughly $55 million and requires 1–3 years of lead time between order and delivery. In the last two years alone, ocean carriers have ordered new vessels with nearly 1 million TEUs of capacity at a total cost of approximately $10 billion.
Standard (''dry'') marine containers cost approximately $1,000 per TEU ($1,000 for a twenty-foot container or $2,000 for a forty-foot container). Refrigerated containers to handle perishable foods and other products cost approximately $10,000 per TEU. Between 1996 and 2000, the industry will have added over 7 million TEUs of new containers to the world fleet, at a cost of about $11 billion.
Page 229 PREV PAGE TOP OF DOC
Carriers must continually invest in systems, terminals, etc. in addition to vessels and containers. Annual capital expenditures for large carriers can range from $350 million to more than $1 billion.
In order to meet this high level of capital investment, ocean carriers have worked strenuously to reduce operating costs; most of these reductions, however, has been passed on to customers in the form of lower real rates. To meet shipper demands, capital expenditure requirements will continue to increase for the foreseeable future, and coupled with carriers' inability to earn their cost of capital, such requirements pose a significant threat to the long-term health of the industry.
2. Fixed Costs and Roundtrip Economics
Carriers operate on set roundtrip schedules and most operating costs are fixed. Shippers demand frequent service between major ports, and roundtrip vessel capacity must be sufficient for the heaviest trade direction to avoid leaving cargo behind. The newest, largest vessels cost $40,000–$60,000 per day to operate, with cargo or without. As Exhibit 1 shows, the majority of vessel operating costs are fixed, time-based expenses that do not vary with the amount of cargo being carried.
67304a.eps
These very high fixed costs create substantial financial constraints. The financial performance of ocean carriers thus depends on their ability to fill vessels with loaded, revenue-generating containers in both directions.
Page 230 PREV PAGE TOP OF DOC
If movements of loaded containers are not at least roughly balanced, carriers must reposition empty containers to meet customer demand. For example, current imbalances in the trade between Asia and North America force carriers to move empty, non-revenue containers westbound from Canada and the U.S. to Asia in order to provide sufficient capacity for the heavy eastbound trade from Asia to North America.
Where demand in one direction is too low to fill vessels with revenue loads, intense carrier competition for the available traffic drives down rates below average costs and carrier economics suffer.
II. IMPORTANCE OF CONTAINER SHIPPING TO THE NORTH AMERICAN ECONOMY
Efficient containerized shipping is critical to North American trade and prosperity. Ocean carriage accounts for a large portion of North American international trade, and container trade accounts for about two-thirds of total ocean trade by value. Efficient ocean shipping is a critical factor in the ability of U.S. and other North American firms to compete in global markets.
A. North American Container Trade Growth
Containerized trade is the most valuable and fastest growing portion of North American oceanborne trade. Containerized trade accounted for about 121 million metric tons of U.S. oceanborne cargo in 1998, or about two-thirds of U.S. oceanborne trade by value. The average value of containerized cargo has doubled from $2,000 to $4,000 per metric ton since 1980. Worldwide, the aggregate value of containerized cargo is likely to exceed $2 trillion in 2000.
Page 231 PREV PAGE TOP OF DOC
The vast majority of U.S. and Canadian oceanborne imports and exports of valuable commodities move by container, including refrigerated agricultural products, machinery, electronic goods, and specialty chemicals. Exhibit 2 shows the overall historical and forecast growth of U.S. and Canadian containerized trade.
Containerized trade is expected to grow at 2–3 times the rate of dry bulk, tanker, or other general cargo, as shown in Exhibit 3.
Container vessels make more than 16,000 annual calls at over 20 U.S. ports, providing multiple daily and weekly arrivals and departures to give customers unparalleled service options.
67304b.eps
67304c.eps
1. Growth in Containerized Imports
North American businesses and consumers expect access to a full range of imports from all over the world, delivered on time and at the lowest possible cost. The container shipping industry is the primary conveyance for most familiar imported products.
Containerized ocean carriers are expected to deliver about 10.5 million TEUs of imports to American business and consumers this year. If brought in all at once, those containers would cover the entire District of Columbia to a depth of eight feet. These same carriers will bring in over 1 million TEUs to Canadian ports. Major North American import commodities include consumer goods, textiles, and electronics.
Page 232 PREV PAGE TOP OF DOC
2. Growth in Containerized Exports
North American exporters rely on the frequent, efficient service provided by ocean carriers to serve highly competitive markets in a timely and efficient manner. Container vessels will carry about 6.1 million TEUs of U.S. exports and 1.4 million TEUs of Canadian exports to world markets this year, ranging from the output of high-tech manufacturing to prosaic but vital commodities such as chemicals, wastepaper, and animal feeds.
B. Importance to North American economy
''As the world's leading maritime and trading nation, the United States relies on an efficient and effective Marine Transportation System to maintain its role as a global power.''—An Assessment of the U.S. Marine Transportation System, U.S. Department of Transportation, September 1999.
The thriving U.S. economy is increasingly dependent on global oceanborne trade. The current record of unprecedented continuous economic expansion is founded in part on the integration of American business into the global economy. That same economic expansion has created a booming demand for imported goods that can only be satisfied though containerized shipping. U.S. consumers demand access to the best that the world has to offer, at the lowest possible delivered cost.
''The Marine Transportation System provides American business with competitive access to suppliers and markets in an increasingly global economy.''—An Assessment of the U.S. Marine Transportation System, U.S. Department of Transportation, September 1999.
Page 233 PREV PAGE TOP OF DOC
U.S. businesses serve intensely competitive global markets that do not tolerate inefficiency. Those same businesses buy their raw materials and components from around the globe and cannot tolerate late deliveries or excess costs. Both the U.S. and Canada have invested heavily in port facilities and supported them with highways and railroads, all designed to move goods between ocean ports and the vast North American interior as quickly and efficiently as possible. This system, of which container shipping is a vital part, enables products such as American cotton and Canadian wood pulp to compete for supply contracts around the world and allows Japanese automakers to assemble cars efficiently in North American plants.
III. CONTAINER SHIPPING INDUSTRY STRUCTURE AND COMPETITION
The container shipping industry is highly competitive. Typically, such factors as market concentration, barriers to entry, product differentiation, switching costs, and countervailing marker power are used to gauge the potential for ''monopoly power'' or other conditions in which rates or prices can be maintained above competitive levels. An examination of the container shipping industry's structure and business practices, however, reveals little basis for such concerns. Many different factors, including industry fragmentation, lack of barriers to entry, lack of differentiation, low switching costs for and the countervailing power of customers, all contribute to the intense competitiveness of the industry.
A. Industry Fragmentation
The ocean carrier industry is highly fragmented by any measure. More than 500 active ocean carriers offer containerized service, ranging from global operators to regional and niche carriers. In aggregate, they operate more than 7,000 vessels, of which approximately 2,500 are specialized ''cellular'' containerships.
Page 234 PREV PAGE TOP OF DOC
One fundamental measure of how much market share a carrier commands is vessel capacity, measured in TEUs. As shown in Exhibit 4, none of the top 10 international carriers has more than 9 percent of world vessel capacity; together, these carriers account for only about one-third of world capacity. Even the top 20 carriers together account for only about half of world vessel capacity.
67304d.eps
B. Ease of Entry
With numerous carriers active in containerized shipping and a thriving market in vessel building and chartering, new and existing carriers can enter trades and markets with ease. Typical entry patterns include:
New carriers formed by well-capitalized industry veterans or as offshoots of existing firms (e.g., Trans-Pacific Lines)
Existing carriers expanding into new trades (e.g., Mediterranean Shipping Corp. entering the transpacific trade in 1999)
Formation of consortia or joint ventures (e.g., the planned joint service of China Shipping Group, CMA–CGM, and Kien Hung in the Asia/U.S. East Coast trade, starting in April 2000)
Service to new trades as part of an alliance (e.g., APL's Europe-Asia service as part of the New World Alliance)
Page 235 PREV PAGE TOP OF DOC
The lack of any effective barriers to entry is demonstrated by the flood of new carriers in the transpacific market in 1998–2000. The massive increase in eastbound Asian exports to the United States and tight capacity conditions among existing carriers naturally drove rates on this lane up, and a number of carriers quickly entered the trade. In 1999, new entrants added about 7 percent to transpacific capacity. The number and diversity of these entrants likewise illustrates the ease of entry.
Chilean line CSAV shifted its existing service between Asia and South America to call at Los Angeles in mid-1998.
CMA–CGM, a French carrier, extended its existing Europe-Asia service to serve the U.S. West Coast, in May of 1999.
Zim Israel added additional ships to service the U.S. Pacific Northwest directly and replace a slot-chartering agreement.
Fesco added a new service linking Hong Kong with the U.S. West Coast as an extension of its Russian Pacific service.
Trans-Pacific Lines, a new carrier, began service in 1999 and has announced significant capacity increases in 2000.
China Shipping Group, which previously operated mostly within Asia, also began transpacific service in 1999.
Page 236 PREV PAGE TOP OF DOC
Norasia began transpacific service on a small scale in early 1999 but added newer, larger, and faster vessels starting in July.
Wan Hai, a large intra-Asia regional carrier, has announce a new transpacific service to start in April 2000.
New entrants are attracted by growing volumes and the potential for increased rates and revenue. Low barriers to entry thus restrain the potential market power of existing carriers and constrains their ability to profit from tight capacity and excess demand.
C. Lack of Differentiation
Were ocean carriers able to differentiate their services such that Carrier A was no longer a ready substitute for Carrier B, it might be possible to maintain rates above competitive levels on a value-added basis. Ocean carriers, however, all provide the same basic services, and the very nature of the industry—standardized containers handled by similar vessels and terminals—hampers any attempt to differentiate service. Thus the industry is heavily ''commoditized,'' i.e., customers make decisions about which carrier to use solely on the basis of price.
In the 1970s and 1980s, conferences attempted with some success to differentiate themselves by creating an image of conference members as ''high service'' while independent, non-conference carriers were portrayed as ''cut rate.'' The emergence of well-organized and managed independents, however, quickly ended this differentiation. By 1996, customers no longer drew any distinction between conference and non-conference carriers and used them interchangeably. In recent years, carriers have attempted to increase value-added services to customers and otherwise distinguish their service offerings. These advances are quickly copied by the competition, however, and the industry playing field remains level.
Page 237 PREV PAGE TOP OF DOC
D. Low Switching Costs
If customers found it difficult or costly to switch from one ocean carrier to another, carriers assuredly would have more latitude in pricing. Mercer surveys of shippers, however, confirm that switching costs for customers are inconsequential. Since customers select ocean carriers primarily based on price, they are ready to switch carriers without hesitation in order to obtain lower rates.
70 percent of all shippers surveyed consider changing carriers at least every six months, and 45 percent consider changing carriers monthly.
100 percent of the shippers surveyed consider switching costs to be insignificant or zero.
E. Countervailing Power
Customers have considerable bargaining leverage in contract negotiations. Leading importers, exporters, and NVOCCs (Non-Vessel Owning Common Carriers acting as intermediaries) tender upwards of 100,000 TEUs each annually over multiple trade lanes. Coupled with the willingness to use several different ocean carriers and to switch between them at will, the volume of traffic controlled by large shippers gives them significant countervailing power in the market for container shipping services.
Ocean carriers operating with excess capacity (as is typical) continually seek large blocks of container cargo to fill their ships. Customers who can make long-term volume commitments find that carriers compete strenuously for their business. Under these circumstances, carriers are unable to sustain prices above market levels.
Page 238 PREV PAGE TOP OF DOC
IV. CHANGES IN OCEAN FREIGHT RATES
Container shipping rates are driven by the market forces of supply and demand. Despite the past efforts of carriers to maintain profitable price levels, container freight rates have declined substantially over the past two decades. The reality is that container shipping rates are driven by market demand: they rise only when the market is strong and fall when the market is weak. When demand rises sharply, carriers can charge more as capacity becomes scarce in a 'seller's market.'' When demand weakens on a specific trade lane, however, carriers must reduce their rates to compete for less cargo in a ''buyer's market.''
A. Long-Term Decline in Freight Rates
Rates depend on the value of the commodities being shipped and, depending on customer requirements, can include inland transportation, currency and fuel adjustment factors, and a wide range of specialized services. Rates can be set from port to port or between inland origin and inland destination.
The increased efficiency of container lines and intense competition have kept ocean freight rates low compared to the rising costs of other goods and services. As shown in Exhibit 5, most freight rates on major U.S. trades declined substantially from 1978 to 1998 in current dollars, and rates declined on all major trades in real dollars.
67304e.eps
Page 239 PREV PAGE TOP OF DOC
B. Supply and Demand on Major U.S. Trade Lanes
The supply of containerized shipping services on each trade lane is a function of vessel capacity, sailing speed, fleet deployment, and other related variables. Supply is almost universally greater than demand: vessels ordinarily sail less than completely full, and cargo is virtually never ''left on the dock.'' There is thus almost no unsatisfied demand, so demand in each trade is essentially the same as cargo volume. Carriers experience the supply/demand balance directly in the form of vessel utilization, i.e., the percentage of vessel capacity used for loaded, revenue-paying containers.
A review of supply and demand and its impact on vessel utilization on the major U.S. trade lanes demonstrates the relationship and the implications for carrier rates.
1. Supply and Demand on the Transpacific Trade Lane (United States to/from Asia)
Exhibit 6 shows the supply and demand history for the eastbound transpacific trade (U.S. imports from Asia). A close match between effective capacity and demand in 1990–1995 produced high levels of utilization, peaking at 91 percent in 1992. As carriers added new vessels in the late 1990s, however, capacity expanded significantly faster than demand. Utilization declined until the onset of the Asian financial crisis in 1997, when explosive eastbound trade growth in Asian exports began to narrow the gap. Utilization reached 80 percent in 1998. In 1999, entry by new carriers and expansion by existing carriers increased capacity, resulting once more in lower utilization.
67304f.eps
Page 240 PREV PAGE TOP OF DOC
Supply and demand patterns on the westbound transpacific trade lane (U.S. exports to Asia) problems have been very different as indicated in Exhibit 7. A relatively close match between supply and demand kept utilization high between 1990 and 1995. Starting in 1996, however, the growth of U.S. exports slowed but capacity kept on growing. The Asian financial crisis reduced U.S. exports to Asia at the same time capacity was increasing to handle Asian exports to the United States. The 1998–1999 increase in transpacific capacity noted above drove supply and demand still farther apart, and westbound transpacific vessel utilization has declined alarmingly.
67304g.eps
2. Supply and Demand on the Transatlantic Trade Lane (United States to/from Europe)
Exhibit 8 shows the supply and demand pattern for the transatlantic eastbound trade lane (U.S. exports to Europe). From 1990 through 1997, capacity stayed ahead of demand by a relatively stable margin, and utilization varied between 61 and 70 percent. In 1998, however, the entry of new carriers and vessels in the eastbound transatlantic coincided with a softening of demand, and utilization plummeted.
Supply and demand patterns for the transatlantic westbound trade lane (U.S. imports from Europe) is shown in Exhibit 9. In 1993–1994, tight vessel capacity narrowed the gap between supply and demand, yielding significantly higher utilization for those two years. Utilization fell back to normal levels as capacity started to increase in 1995.
Page 241 PREV PAGE TOP OF DOC
67304h.eps
C. Impact on Ocean Carrier Rates
Supply and demand are the fundamental determinants of ocean carrier rates. Rates rise when demand (cargo) equals or exceeds supply (vessel capacity) and fall when supply exceeds demand. Vessel utilization illustrates the linkage between supply and demand and rates. The industry typically operates at vessel utilization levels of 60–80 percent. Utilization levels above or below this range have profound implications for rate shifts.
When demand (cargo) nears or matches supply (capacity), customers are willing to pay higher rates for scarce capacity, creating a 'seller's market.'' With vessels running nearly full, carriers can raise rates without losing cargo. The ability of carriers to raise rates, however, is limited by the threat or reality of new entrants on a particular trade lane adding additional capacity.
When demand drops well below supply, carriers experience declining vessel utilization and the result is a ''buyer's market.'' As explained earlier, carriers must operate scheduled round trips, so they have very powerful incentives to cut rates and compete for the available cargo to cover their fixed costs. As carriers compete for less cargo, and particularly if new capacity is added at the same time, rates can plummet sharply.
A look at the historical record for transpacific and transatlantic rates vividly illustrates these points. In particular, it is abundantly clear that the market forces of supply and demand count for far more in determining rates than the collective rate-making power of conferences.
Page 242 PREV PAGE TOP OF DOC
1. Transpacific (U.S. to/from Asia) Rate History
Exhibit 10 displays the recent history of transpacific eastbound rates (U.S. imports from Asia ) and vessel utilization. The relationship is clear: rates rise during periods of high and increasing utilization and fall when utilization falls. The lag time is also apparent: rate changes lag utilization shifts by three to six months (1–2 quarters on the chart).
In the early 1990s, massive investments in new vessels began to create overcapacity in the transpacific trade lane. By late 1995, the trade felt the full impact of excess capacity and falling utilization. Independent, non-conference carriers offered low rates and conference members took ''independent action'' to follow. In some cases, conference carriers used their independent action rights to initiate the rate cuts. Rates fell dramatically. In all of 1998, average eastbound rates were well below the 1993 level.
67304j.eps
Eastbound utilization began to improve with the onset of the Asian financial crisis in 1997 and the explosive growth in U.S. imports from Asia. Carriers were able to increase rates beginning in late 1998, and by mid-1999 both utilization and rates had climbed back to levels last seen in 1995.
Recent experience with rates for the transpacific westbound lane (U.S. exports to Asia) is similar through 1995 (Exhibit 11). Rising utilization pushed rates up, and indeed in 1995, transpacific trade was nearly balanced. Then, a flood of new capacity drove down both utilization and rates in 1995–1996.
Page 243 PREV PAGE TOP OF DOC
The Asian financial crisis, which caused a significant weakening in the region's demand for U.S. exports, led to a collapse of westbound utilization and continued decline in rates. The westbound transpacific conference was powerless to sustain higher rates as members and non-members alike vigorously competed to fill their ships with the limited cargo available. As of early 2000, rates are still at historical lows, westbound vessels carry as many (or more) empty containers as loads, and the conference has closed its doors.
67304k.eps
2. Transatlantic (U.S. to/from Europe) Rate History
Rates for the eastbound transatlantic trade (U.S. exports to Europe) rose gradually from 1993 through 1996 in concert with slowly increasing utilization. As described above, however, softening demand and an influx of new capacity drove down utilization starting in 1997, and rates followed in a general decline. In the late 1990s, the eastbound transatlantic trade could be described as 'too many slots chasing too few containers,'' with inevitable repercussions for rates (Exhibit 12).
Rates for westbound transatlantic trade (U.S. imports from Europe) have declined as well, and for similar reasons (Exhibit 13). Declines in both eastbound and westbound rates have made it particularly difficult for transatlantic carriers to reach profitability.
67304l.eps
Page 244 PREV PAGE TOP OF DOC
67304m.eps
D. Rise of Service Contracts
Collective rate-making and the reliance on published tariffs is expected to dwindle to insignificance in the near future. As Exhibit 14 indicates, the share of cargo actually moving under tariff rates was declining even before passage of the Ocean Shipping Reform Act of 1998 (OSRA).
67304n.eps
The rate histories analyzed above demonstrate that collective rate-making via conferences has been ineffectual in the face of stronger market forces. Conference power began to erode in the 1970s and 1980s with the entry of large independent carriers and the frequent exercise of independent pricing action by conference members. As the combined market share of conference members dwindled in trade lane after trade lane, conferences became forums for exceptions rather than rules.
The introduction of time-volume rates (TVRs) or loyalty agreements (in which customers received lower rates in return for volume commitments) and conference service contracts (in which the conference members all offered the same contract rates) were the precursors for individual service contracts. Exhibit 15 shows the rise of TVRs and service contracts as replacements for tariffs.
67304o.eps
Page 245 PREV PAGE TOP OF DOC
V. CURRENT INDUSTRY PROFITABILITY
Profitability in the container shipping industry is low, with potentially serious consequences. If ocean carriers were able to operate as an oligopoly or otherwise restrict competition, we would expect to find excess profits in the industry (i.e., ''economic rents' above the level of profits required to attract capital and equity). Profits in the container shipping industry are slim, however, and current returns are often below the cost of capital.
A. Lack of Adequate Profits
The intensely competitive, commoditized nature of container shipping has caused the industry to incur poor financial returns, despite ongoing volume growth and extensive cost reduction efforts (Exhibit 16). Compared to a range of other transportation industries, ocean carriers' operating margins are small indeed (Exhibit 17).
67304p.eps
67304q.eps
Although direct comparisons are difficult due to the large number of international players as well as players with substantial other businesses, in general, ocean carriers have substandard returns on investment as well (Exhibit 18).
Page 246 PREV PAGE TOP OF DOC
67304r.eps
B. Impacts on the Industry of Substandard Returns
Should substandard returns persist, the repercussions for the container shipping industry are likely to be quite serious. It is not necessary to speculate, since there is ample precedent for the following adverse outcomes:
Reduced capital investment. Ordering new containerships at $55 million each for deployment 2–3 years in the future requires faith in the long-term financial viability of the trade. In 1997–1998, for example, eastbound capacity in the transpacific was tight in part because carriers were reserving capital investment and newer vessels for more profitable routes. A lack of capital investment by ocean carriers (not only in vessels but in terminals and new technologies) would adversely affect not only shippers but key U.S. infrastructure such as ports and inland transportation providers, reducing the efficiency and competitiveness of the entire supply chain.
Reduced capacity and service. Carriers can and do shift assets—vessels, in this case—from one trade lane to another. Carriers have demonstrated their willingness to leave even the largest trades or to reduce service frequency if financial returns are not adequate. Moreover, the various forms of alliances have made it easy to withdraw chartered or shared slots (unused vessel capacity) in unprofitable trades. The results of such actions on shippers include tighter capacity constraints and reduced levels and frequency of service.
Equally, shareholders and senior executives are now questioning the long-term attractiveness of the container shipping market. Some major container shipping firms have begun to diversify into other forms of shipping that are considered to be more profitable. The perception that the industry cannot generate shareholder value can only serve to intensify the flight of capital and further weaken a vital link supporting U.S. global trade competitiveness.
Page 247 PREV PAGE TOP OF DOC
Increased industry concentration. The container shipping industry has a long history of consolidation through merger and acquisition in the face of financial difficulties. Recent consolidation activity has been heavy in troubled trades such as the East Coast of South America and the Australia-New Zealand trade. Equally, poor returns have driven some lines, such as the United States Lines, Lykes Line, and Ivaran, into bankruptcy, further intensifying industry concentration. Such concentration, as in other transportation industries, would reduce the options for U.S. shippers of international cargoes as well as the flexibility of the overall U.S. transportation and supply network.
None of these outcomes, if extreme, are obviously desirable for shippers or the nation.
VI. IMPACT OF LOGISTICS TRENDS AND THE GROWTH OF INTERMEDIARIES
Global logistics trends are creating a growing role for intermediaries in ocean container shipping. Intermediaries, such as non-vessel operating common carriers (NVOCCs), are flourishing in the post-OSRA environment. They now dominate the less-than-containerload business and are increasing their share of control of cargo volume on all major North American trade lanes. NVOCCs function both as customers of and competitors with ocean carriers.
A. Impact of Global Logistics Trends on the Liner Shipping Environment
Global logistics trends have created an intensely competitive environment in which intermediaries are playing an increasingly critical role. Customers demand shipping transportation that is increasingly ''better, faster, cheaper.'' In terms of container shipping, ''better, faster, cheaper'' translates into a set of stringent customer demands for high-quality service:
Page 248 PREV PAGE TOP OF DOC
To provide ''better'' ocean transportation, carriers and intermediaries alike must offer global reach, e-commerce capabilities, and strong customer focus.
To provide ''faster'' transportation, carriers must invest in new vessels, new terminals, and new operating systems.
To provide ''cheaper'' transportation, carriers must continuously reduce expenses and compete strenuously for new business, while intermediaries exploit the cost-saving potential of shipment consolidation and increased bargaining leverage with carriers.
Because carriers have focused primarily on ensuring the efficient handling of full container loads, they have created an opportunity for intermediaries to assist shippers by efficiently consolidating and handling less-than-containerload (LCL) shipments. Intermediaries have successfully expanded in this role to dominate the LCL business and forge close relationships with customers and carriers alike. Through the provision of customized, value-added services, intermediaries have become an irreplaceable part of the container shipping industry.
B. Growth of Intermediaries
1. Overview
The Ocean Shipping Reform Act (OSRA) defines ocean transportation intermediaries (or OTIs) to include freight forwarders and non-vessel operating common carriers (NVOCCs). Freight forwarders typically provide minimal shipment conditions, documentation, etc. and rarely control carrier choice for large shippers. NVOCCs typically provide broader services and control carrier selection.
Page 249 PREV PAGE TOP OF DOC
NVOCCs buy slot capacity (unused vessel capacity) on a wholesale basis and also compete with carriers for retail customers. In their role as intermediaries, NVOCCs serve on the one hand as carriers for shippers: they take charge of the cargo, arrange all the details , and provide the customer with a bill of lading; on the other hand, NVOCCs act as customers for liner shipping companies, tendering full container loads of consolidated traffic under contract.
Expansion of NVOCCs has eclipsed much of freight forwarder activity; NVOCCs have grown to dominate the less-than-containerload (LCL) business and are now entering the market for full container loads. The number of NVOCCs in the United States has grown by 35 percent over the past five years: There are now an estimated 2,600 NVOCCs registered with the Federal Maritime Commission. Exhibit 19 lists the largest NVOCCs active in major North American trades.
67304s.eps
As this Exhibit suggests, the largest NVOCCs rank among the very largest ocean carrier customers and have substantial bargaining leverage in negotiations. Major NVOCCs are large enterprises with global coverage.
NVOCCs are flourishing in the post-OSRA competitive environment. One major freight forwarder and NVOCC described its fiscal 1999 performance as follows:
''While ocean outbound revenue from the U.S. as an indirect ocean carrier increased only slightly, net revenue increased by more than 10 percent. Lack of growth in revenue was a direct reflection of the erosion of ocean container rates in all of the major trade lanes. Growth in net revenue was due to our ability to buy ocean container spaces, either through service contracts or on the spot market at favorable rate levels.''—Fritz Companies, 1999 Annual Report
Page 250 PREV PAGE TOP OF DOC
By forming shippers' associations, some NVOCCs have increased their market presence and bargaining leverage. In 1998, three major NVOCCs—Direct Container Line, Brennan International, and Conterm Consolidation Services—formed the New American Consolidators Association (NACA). The rationale for this, as noted by the President of Brennan International, is that ''by combining our buying power with the carriers, we now have a single voice, which in turn has allowed us to attract more competitive rates.''—DCL Company Website
2. NVOCC Growth and Share
NVOCC cargo accounts for varying shares of total container trade. Some ocean carriers rely very little on NVOCCs, while others count on NVOCCs for 70–80 percent of their business. A typical pattern is for a carrier to enter a new trade carrying a very large proportion of NVOCC cargo, because the new carrier lacks extensive sales representation or customer loyalty. As the carrier's position in the trade matures and longer-term relationships are established, the proportion of NVOCC cargo typically declines.
As Exhibit 20 shows, NVOCCs have achieved a significant and growing share of the major trades. NVOCCs' share ranges from 3–4 percent of U.S. imports in the Americas trade (South America) to over 25 percent of the largest single trade, U.S. imports from the Pacific.
Exhibits 21 and 22 shows the range of NVOCC share of cargo for the transpacific trade in 1999; in nearly all cases, NVOCCs' shares are on the rise. Exhibit 23 and 24 demonstrate how NVOCCs' shares are increasing in the transatlantic trade as well. The end result is that NVOCCs are thus controlling more total container cargo than ever before—a trend that is likely to continue.
Page 251 PREV PAGE TOP OF DOC
67304t.eps
67304u.eps
67304v.eps
VII. THE NEED FOR INDUSTRY COOPERATION
Container shipping lines have a legitimate need to cooperate, and both carriers and shippers benefit from this cooperation. The nature of the container shipping business—notably its high fixed costs, interchangeable assets, and lack of service differentiation—creates significant opportunities to improve carrier economics and service through carrier cooperation. The various forms of operational cooperation described below enable carriers to reduce operating costs and increase their service offerings while maintaining competition. Indeed, the cost reductions achieved through operational cooperation have been crucial to carrier survival in this era of declining rates and substandard profitability. Both carriers and their customers have benefited as a result.
A. Alliances
1. Overview
The standardization of oceangoing containers and handing equipment allows one ocean carrier's containers to travel on another carrier's vessels without operating penalties. Carriers have long taken advantage of this capability to share, charter, or exchange unused vessel capacity ('slots') in selected trades. By sharing capacity, one carrier can still serve a market even if it is not using its own ships (or supplement its own vessels) while the other can offset the cost of excess capacity.
Page 252 PREV PAGE TOP OF DOC
Driven by the twin spurs of economic survival and customer service demands, many container lines have now formed alliances to share and coordinate vessel operations. Carrier anti-trust immunity has facilitated these arrangements by allowing the carriers to engage in wide-ranging discussions on operating matters.
The current era of liner alliances began in 1994, when American President Lines, Mitsui OSK Line, Orient Overseas Container Line, and Nedlloyd Lines formed the Global Alliance. The Global Alliance was quickly followed by the Grand Alliance (NYK Line, Hapag-Lloyd, Neptune Orient Line, and P&O Line) and Hanjin/Tricon (Hanjin Container Line, DSR-Senator, and Cho Yang Line). The Maersk/Sea-Land vessel sharing agreement was transformed into a worldwide alliance, and an unnamed alliance between ''K'' Line, Cosco, and Yang Ming Line soon became the fifth.
Alliance members continue to market their services competitively and aggressively against one another despite sharing vessel capacity. While customers appreciate the added service frequency, they continue to treat the alliance partners as separate, competing commercial entities. In some cases, alliances actually increase competitiveness on the commercial side, because individual alliance members are less differentiated, and thus must compete more strenuously on price.
2. Benefits
Alliances have been effective: As noted by the U.S. Department of Transportation, ''This practice [of alliances] enables vessels to travel at closer to maximum carrying capacity (thereby reducing the cost per container), allows steamship lines to deploy their vessels more efficiently, and increases the frequency of service that lines can offer their customers (because they have more slots available on more ships).'' Perhaps most importantly, carriers have used alliances as a means of entering and competing in new trades.
Page 253 PREV PAGE TOP OF DOC
Estimates of the overall monetary benefits of alliance membership range from $30 to $100 per container handled. Some industry leaders have credited alliances with the financial survival of carriers in an adverse environment.
From the shipper's point of view, the principal benefits of alliances are:
More frequent and faster service
Added capacity
Broader service coverage from each alliance member
Cost reductions passed on as rate reductions
A. Conferences and Discussion Agreements
Most large ocean carriers originally belonged to ''conferences' that collectively discussed rates and published tariffs. Conferences were generally organized around a specific trade and direction, so that one conference might cover U.S. exports to Japan, another Japanese exports to the United States, and a third Canadian exports to Japan.
From their roots in prior centuries, conferences evolved to suit emerging trade conditions and business practices. Starting with the emergence of high-service independent carriers in the 1970s, however, the strength of conferences began to fade. The Ocean Shipping Reform Act of 1998 (OSRA) has resulted in the dissolution of some conferences, and others are likely to dissolve or reduce their functions in the future. The remaining conferences have lost membership and influence. The Trans-Atlantic Conference Agreement, for example, now has only eight members, and those members only carry 50 percent of transatlantic trade.
Page 254 PREV PAGE TOP OF DOC
In the early 1990s, conferences were first paralleled, then superseded by 'stabilization agreements,'' whose initial focus was on trade stabilization and service capacity rather than on rate making. Some independent carriers who would not participate in collective rate-making would participate in trade stabilization discussions, and the stabilization agreements developed a broader membership than the conferences. Capacity stabilization efforts were generally abandoned as unworkable after 1995, and the stabilization agreements have evolved into ''discussion agreements.''
The role and power of the discussion agreements has in practice been far more limited than that of the conferences at their peak, and OSRA has further restricted their functions with regard to rates and service contracts. For example, discussion agreements do not provide for common tariff publication. Also unlike conferences, discussion agreements have no power to restrict the competitive initiatives of their members.
As the use of individual service contracts has expanded, discussion agreements have issued ''Voluntary Service Guidelines' as a mechanism for:
Encouraging a uniform (or at least compatible) way of doing business through service contracts
Updating various adjustment factors for rates
Suggesting wording for ''boilerplate'' sections of service contracts, confidentiality clauses, and other repetitive items
Page 255 PREV PAGE TOP OF DOC
To the extent that shippers and carriers have successfully negotiated and filed thousands of service contracts since the implementation of OSRA in May 1999, the use of discussion agreements appears to support the process of proposing and negotiating competitive service contracts.
ANNEX A. QUALIFICATIONS AND EXPERIENCE OF MERCER MANAGEMENT CONSULTING, INC.
Focus on Growth
For a quarter of a century, Mercer Management Consulting, Inc. (Mercer), has been helping senior executives of major corporations lead their organizations to growth and prosperity in the face of industry upheaval, marketplace change, and competitive realignment. Our in-depth, integrated knowledge of customers, competitive economics, and alignment enables us to formulate creative yet practical strategies for long-term business success.
Drawing on the combined talents of our more than 1,200-member international staff, we design our consulting teams to include the mix of functional expertise and industry knowledge best suited to each client's needs, while at the same time maintaining a general management perspective. Our reality-based approach to consulting consistently produces tangible, sustainable results for clients, helping them achieve their full growth potential, enhance their financial and operating performance, and maximize their shareholder value.
Mercer has pursued an aggressive strategy of international growth, reflecting the globalization of markets, the integration of regional economies, and the strategic requirements of leading commercial enterprises. Mercer maintains offices in Beijing, Boston, Buenos Aires, Chicago, Cleveland, Dallas, Hong Kong, Lisbon, London, Madrid, Mexico City, Montreal, Munich, New York, Paris, Pittsburgh, San Francisco, Toronto, Washington, D.C., and Zurich. The firm is a member of the Mercer Consulting Group, the global consulting organization of the Marsh & McLennan Companies family of professional service organizations, an association that provides under one corporate entity deep financial resources, office locations throughout the world, and an extensive network of specialized consulting experience and expertise that may be readily applied to a client's needs.
Page 256 PREV PAGE TOP OF DOC
Transportation Consulting
Mercer's Transportation Group, with a professional staff of more than 100 in Europe and North America, is one of the largest consultancies in the world, providing a broad range of assistance to transportation carriers and to the users and regulators of transportation services. Mercer is actively engaged in projects across the full range of the transportation sector, including liner shipping, bulk shipping, ports, aviation, rail, motor carrier, intermodal, and freight forwarding.
The Transportation Group also offers capabilities in international market research, evaluating new business opportunities, developing strategic plans and specific marketing plans, designing organizational structures to manage businesses, and implementing transportation services.
Mercer's transportation clients include national and regional governments on six continents as well as many of the world's largest ocean carriers, railroads, ports, motor carriers, leasing companies, and industrial and consumer manufacturing firms.
Maritime Practice
Since 1970, Mercer has continuously helped companies engaged in all aspects of maritime transportation and supply chains to achieve superior performance. Mercer has succeeded in this mission by applying fact-based knowledge and effective processes for corporate change to many important issues faced by domestic and international maritime transportation enterprises. Mercer's unparalleled expertise and experience in combining the best thinking for growth and value creation with extensive knowledge of the distinctive challenges of the maritime industry have created real value for our clients.
Page 257 PREV PAGE TOP OF DOC
In their assignments, Mercer's maritime specialists address all the key elements critical to industry success, from strategy development, marketing analysis, and organization issues to information systems development, regulatory policy planning, analyzing, and forecasting, international trade patterns, and the development and implementation of performance improvement plans.
67304w.eps
Mr. CANNON. Thank you, Mr. Smith. Unfortunately, we have another use for this room very shortly. And so unless there is a compelling reason for questions, I would remind the committee that we can submit written questions later.
And with that, this hearing is adjourned.
[Whereupon, at 1:20 p.m., the committee was adjourned.]
A P P E N D I X
Material Submitted for the Hearing Record
| Congress of the United States, |
| House of Representatives, |
| Committee on the Judiciary, |
| Washington, DC, February 28, 2000. |
Hon. HAROLD J. CREEL, JR., Chairman,
Page 258 PREV PAGE TOP OF DOC
Federal Maritime Commission,
Washington, DC.
DEAR MR. CREEL: Thank you for agreeing to appear before the Committee at our March 22, 2000 legislative hearing on H.R. 3138, the ''Free Market Antitrust Immunity Reform (FAIR) Act of 1999.'' I am sure your testimony will be very helpful to the Committee.
In preparation for that hearing. I would like to ask you to answer some written questions and to provide us with some documents that will help to lay the ground work for the hearing. Your answers will help us prepare, and they will be made a part of the hearing for the record. We will not release any of the requested documents without first consulting with you or your staff. Your prompt written response will further assist the Committee in its study of these issues.
Again, I want to thank you for agreeing to appear before the Committee. I look forward to working with you in the future.
Sincerely,
cc: Hon. John Conyers, Jr.
QUESTIONS FROM CHAIRMAN HYDE
Page 259 PREV PAGE TOP OF DOC
1. Fact Finding Investigation No. 23 (''the Won Report''), received by the Commission on January 13, 1999, documented numerous carrier abuses in the transpacific trade. Recently, the Commission voted to discontinue further investigation in response to the Won Report with only limited punishment for the practices that were documented in it. Please provide the Committee with an explanation of the actions taken by the Commission in response to the report. Please provide the Committee with all documents relating to the Commission's decision to discontinue further investigation.
2. The second report of the investigative officer following up on the Won Report indicates that the Commission sent out 64 letters asking for further information, but received only 4 responses. The Committee has heard reports that many of these parties may have been fearful of providing information to the Commission without having received a subpoena. Were subpoenas issued to those who did not respond? If not, why not'' If no subpoenas were issued, how do you think the failure to use your subpoena authority will affect future investigations?
3. If the parties who committed the actions described in the Won Report or other similar parties were engaged in the same or similar actions today, how would the Commission become aware of those actions? To what degree does the Commission monitor the minutes of the Transpacific Stabilization Agreement and its committees and other discussion agreements?
4. Does OSRA permit discussion agreements to adopt voluntary guidelines relating to service contracts? If so, are these guidelines filed with the Commission? If so, please provide the Committee with a copy of each set of guidelines that has been filed with the Commission to cover transactions occurring on or after the effective date for OSRA, May 1, 1999.
Page 260 PREV PAGE TOP OF DOC
5. Please provide the Committee with any information that the Commission has that indicates that, for transactions occurring after May 1, 1999, any discussion agreement has adopted any policy that discriminates against small- and medium-sized shippers, shippers' associations, non-vessel-owning, common carriers, or other ocean transportation intermediaries.
| Federal Maritime Commission, |
| Washington, DC, March 17, 2000. |
Hon. HENRY J. HYDE, Chairman,
Committee on the Judiciary,
House of Representatives, Washington, DC.
DEAR CHAIRMAN HYDE: In response to your request dated February 28, 2000, enclosed are the answers to your written questions and the accompanying documentation in anticipation of the up-coming hearing on H.R. 3138, the ''Free Market Antitrust Immunity Reform (FAIR) Act of 1999.'' Please note that the ''Second Report'' and voluntary guidelines are submitted on a confidential basis.
I look forward to appearing before the Committee on March 22, 2000. If you have any additional questions, please contact me.
Sincerely,
| Harold J. Creel, Jr., Chairman. |
Enclosure
Page 261 PREV PAGE TOP OF DOC
1. Fact Finding Investigation No. 23 (''the Won Report''), received by the Commission on January 13, 1999, documented numerous carrier abuses in the transpacific trade. Recently, the Commission voted to discontinue further investigation in response to the Won Report with only limited punishment for the practices that were documented in it. Please provide the Committee with an explanation for the actions taken by the Commission in response to the report. Please provide the Committee with all documents relating to the Commission's decision to discontinue further investigation.
First, let me note that, although the Won Report to the Commission was an important and substantial response to the complaints of carrier activities informally brought to the Commission's attention by press reports and numerous shippers during the peak shipping season of 1998, the Report itself was not the end of the proceeding and should not be equated with the whole of the proceeding. At its institution, we put a short fuse on the Fact Finding Investigation in order to conduct a timely examination of what were alleged to be inappropriate and possibly unlawful carrier responses to unanticipated and rare trade conditions: demand outstripping supply. The effort was undertaken to make both the carriers and affected shippers aware of the Commission's intention to pursue the allegations and to secure evidence of Shipping Act violations which would be necessary for any enforcement proceedings. Initiation of the Fact Finding Investigation and the publicly-released summary of the Won Report achieved the first of these objectives.
Although Commissioner Won's Report to the Commission described various carrier actions considered ''abusive'' by shippers, and was supported by voluminous carrier- and some shipper-provided documents, that documentation alone was insufficient to constitute conclusive evidence of carrier activities which violated the Shipping Act. That is why the Fact Finding Investigation was continued, with appointment of the Commission's Director of the Bureau of Enforcement as the new Investigative Officer.
Page 262 PREV PAGE TOP OF DOC
With respect to the hoped-for use of the fact finding as an evidentiary tool, however, shippers affected by the complained-of practices were reluctant to come forward, either publicly by testifying at hearings held across the country, or by supplying testamentary or other documents. Some shippers gave as a reason for their reluctance a fear of retaliation by carriers with which they necessarily have ongoing relations. Please understand that I am not criticizing or blaming shippers, many of whom appeared uncertain as to whether the carrier actions were legitimate, albeit cut-throat, marketplace decisions, or were in fact violations of statutes. Many shippers appear to have made a business decision, which we must respect, not to encourage or assist in FMC enforcement action, lest their business relationships with those carriers become strained or encumbered as a result. Some NVOCCs may have feared to come forward because they may have passed on the higher costs to their shippers in a manner not consistent with the 30-day notice requirements for rate increases. Whatever their reasons, the usefulness of the Fact Finding Investigation as a base from which the Commission could develop specific, prosecutable evidence of carrier wrongdoing was severely hampered.
This is not to say that no enforcement action occurred. The Commission instituted an adjudicatory proceeding concerning the 11opt out'' provision used in the 1998 ANERA service contracts, and directed the Bureau of Enforcement to pursue additional informal enforcement efforts, including those concerning apparent failures by ANERA to file minutes of meetings. The ''opt out'' proceeding addressed concerted activity among the carriers, specifically a conference practice which permitted carriers to claim entitlement to shippers' committed cargo on the one hand, but on the other hand, allowed the carriers to avoid the contracts' rates by ''opting out'' of those rates and imposing their higher tariff rates instead. That practice was found to be unlawful, not merely as exercised in a specific contract or by a specific carrier, but across the board, and will serve as precedent governing future carrier contracting activity. An ancillary and supporting part of the effort to secure the information necessary to assess the carriers' concerted activities—a penalty claim against carriers who had not fully supplied information on conference meetings—was settled.
Page 263 PREV PAGE TOP OF DOC
The Investigative Officer's ''Second Report and Recommendations,'' (''Second Report''), forwarded to the Commission on October 18, 1999, recommended discontinuance of the Fact Finding Investigation proceeding. The Second Report was considered by the Commission at its meeting on November 9, 1999 and this recommendation was adopted. However, despite what you may have read in the press, enforcement efforts continue. Cases relating to this controversy are still being pursued, as the Commission has authorized its enforcement staff to continue to follow up on leads. The fact that we issued a report at the end of the year to summarize our activities to date, and terminate the formal proceeding, does not indicate we are washing our hands of the issue. In addition to public requests for a report on our efforts to date, we needed to wrap up what we could prior to the December 31, 1999 retirement and departure of Commissioner Ming Hsu, whose vote had been an essential component of the Commission's decisions on these matters.
Some people, including Commissioner Won, have voiced disappointment with the outcome of the investigation as a whole. Particularly mentioned has been the focus of the Commission's enforcement efforts on individual carrier lapses. I share Commissioner Won's concern that the collective nature of the alleged wrongdoing was not more directly addressed. I would have preferred to look further into the degree to which the alleged carrier abuses were facilitated or enabled by their collective authority and activities. However, those matters would more likely have required examination under the then-more circumscribed standards of the 1984 Act's legislative history of Section 6 (g). There was obviously no consensus among what was then our body of four Commissioners to go further in that direction.
We take our enforcement responsibilities seriously at the FMC, but our general approach, which reflects the intent of OSRA, is that our primary objective is to achieve compliance and to clarify uncertainty as to legal issues, not to impose penalties for the sake of appearances or revenge.
Page 264 PREV PAGE TOP OF DOC
2. The second report of the investigative officer following up on the Won Report indicates that the Commission sent out 64 letters asking for further information, but received only 4 responses. The Committee has heard reports that many of these parties may have been fearful of providing information to the Commission without having received a subpoena. Were subpoenas issued to those who did not respond? If not, why not? If no subpoenas were issued, how do you think the failure to use your subpoena authority will affect future investigations?
The Commission's subpoena power was used extensively in Fact Finding Investigation No. 23. In addition to the testimony compelled, approximately 40,000 pages of documents relating to peak season pricing and space allocation were obtained. Approximately 20 subpoenas were issued to the conference, discussion agreement, individual carriers, and specific individuals. These subpoenas went to those who were alleged or appeared to be involved in activities in violation of the Act. With a single exception, the investigative officers chose not to issue subpoenas to the shippers who had complained of these activities, who appeared to be victims rather than participants or perpetrators of the abuses.
As reflected in the Won Report and indicated in our response to question one, there was strong shipper reluctance to assist the Commission's inquiries from the outset. Although seven shippers testified under oath, the remaining 23 of 30 shippers who were interviewed or provided documents in the initial phase of the investigation declined to testify. This strong shipper aversion to any visible participation in the investigation, moreover, never abated. As your question notes, the 64 follow-up letters sent to shippers identified through the examination of carrier-provided documents netted only four responses. Aside from the single exception noted, involving a shipper initially suspected of participating in possibly unlawful actions, no subpoenas were served on shippers.
Page 265 PREV PAGE TOP OF DOC
Although the response to the 64 letters, as well as the initial contacts, was disappointing, it was not inconsistent with the responses from shippers and other industry participants that the Commission has encountered in pursuing other matters, including those involving the Trans Atlantic Conference Agreement (''TACA'') and, upon occasion, Section 19 inquiries regarding restrictive foreign practices. Based on negative shipper reaction to receipt of subpoenas in prior investigations and the significant shipper reluctance, the Investigative Officer and staff concluded that shippers would not be amenable to subpoenas or consider them likely to deter or shield them from possible carrier retaliation for Commission enforcement actions based on their complaints (although such retaliation would be unlawful under the Shipping Act) it also has been suggested that many NVOCCs declined to come forward or respond to Commission requests for documents, because such documents might support Commission enforcement actions against themselves based on their own rate actions in response to carrier pressures.
In view of the vigorous use of the Commission's subpoena power to compel the production of information from the carriers and agreements in this proceeding, we do not anticipate any deleterious effects on future investigations as a result of the decision not to subpoena reluctant shippers.
3. If the parties who committed the actions described in the Won Report or other similar parties were engaged in the same or similar actions today, how would the Commission become aware of those actions? To what degree does the Commission monitor the minutes of the Transpacific Stabilization Agreement and its committees and other discussion agreements?
Page 266 PREV PAGE TOP OF DOC
If carriers were to engage in actions today similar to those of which shippers complained during the 1998 peak shipping season, the Commission would have available the same two basic sources that alerted us to the problems then—(1) shipper contacts with the staff and Commissioners, and (2) agreement minutes filed with the Commission. Once apprised of an emerging problem the Commission would—as it did in 1998—informally contact carriers, carrier organizations, shippers, and shipper organizations to determine the origins, extent, and impact of the problem. In addition, the service contract database which the Commission has created as part of the implementation of OSRA might facilitate our identification of the parameters of the problem. If analysis of the original complaints, filed documents, and/or subsequent informal contacts indicated that a serious problem existed, the Commission would consider the investigatory options available, such as a section 15 information demand order, a fact finding investigation, a show cause order, a formal Commission investigation, or even a suit for injunction pursuant to section 6 (g)—with an eye toward deterring the continuation of such activities, securing compliance with the Act, and applying enforcement measures.
Review of conference and discussion agreement minutes is an important part of the Commission's on-going oversight program, and will be discussed in more detail below. However, shipper contacts with, and complaints to the Commission (including informal contacts) remain an important barometer. This is especially so since agreement minutes are filed with the Commission 30 days following the meetings on which they report. This is true also because discussion agreement minutes, at least in the past, tended to reflect carrier discussions about general conditions, including the impact of crises (such as the 1998 supply/demand imbalance) on those conditions, rather than specific pricing responses. While the minutes of the conference agreement, which entered into and administered service contracts, were more likely to reflect specific activities that the membership might be taking with respect to vessel and equipment imbalances and contract situations, this group was not co-extensive with the discussion agreement membership. More importantly for the future, with the suspension or demise of conferences, the advent of confidential contracting and the shift to individual carrier service contracts, the extent to which discussion agreement minutes will reflect carriers' actions in response to crisis situations or developing trends is as yet unclear. There is, in short, no substitute for Commission contact with shippers when detailed information on the impact of carrier actions is needed.
Page 267 PREV PAGE TOP OF DOC
The Commission remains committed to an Open Door policy towards shippers, and shipper organizations, to encourage such contacts. In addition, through numerous speeches and meetings of individual Commissioners and senior FMC officials with shipper groups the Commission seeks to expand shipper awareness of the agency's consumer protection functions. The Commission has long had an office devoted to informal resolution of shipper complaints concerning carrier service, now recast as the Office of Consumer Complaints as part of the Commission's recent reorganization, which will also provide other forms of alternative dispute resolution for shippers.
Review and analysis of conference and discussion agreement meeting minutes is a key element, but only one of a number of elements, of the Commission's oversight program for carrier agreements. Conference and discussion agreements are required to file minutes of all meetings at which the parties are authorized to take final actions, including telephonic or personal polls of the membership. So, for example, in the case of TSA, the Office of Economics and Competition Analysis receives minutes from TSA Presidents level meetings (usually twice a year, sometimes more) Revenue Policy Committee meetings (approximately monthly), and owners' meetings (on an ad hoc basis). Those minutes are closely reviewed by Commission staff who frequently follow-up with telephone calls or fax requests to TSA's executive director for further detailed information or clarification on items discussed in the minutes, and to obtain copies of internal reports or other documents mentioned in the minutes.
In addition to providing meeting minutes, conferences and discussion agreements, including TSA, are also required to file, on a confidential basis, quarterly reports disclosing extensive economic and commercial data useful for Commission analysis of marketplace competition. In relatively rare instances, the Commission requires agreements to file additional information on specific subjects through information demands issued pursuant to Section 15, or as additional information required for review of agreements or amendments. These information demands sometimes produce leads on, or confirm evidence of, other problems, such as the existence of meetings for which the required minutes were not filed.
Page 268 PREV PAGE TOP OF DOC
In the case of TSA, Commission staff have also arranged to regularly receive copies of the weekly consolidated capacity and load factor information compiled from data provided to TSA by its member lines. Also, the TSA basic agreement provides that information on charter arrangements between and among TSA member lines will be provided on a quarterly basis. The Commission has also held periodic meetings with the executive director of the agreement and with member lines to discuss current and future agreement direction. Finally, TSA has, from time to time, been the subject of extensive information requests. This occurred most recently in May, 1999, when the Commission obtained several boxes of internal TSA memoranda as well as supply/demand forecasts and member line vessel deployment plans, in connection with review of an amendment to the TSA agreement.
All of these activities—analyzing meeting minutes; asking follow-up questions; reviewing quarterly reports, capacity and utilization data, and charter information; holding periodic meetings; and initiating extensive information requests—are part of the Commission's on-going oversight of TSA. That is, the information is regularly gathered and used to evaluate TSA's behavior, under section 6(g) of the 1984 Act as amended, to determine if TSA is likely to produce an unreasonable increase in rates or decrease in service. If and when 6(g) concerns arise, the Commission staff promptly brings its findings to the attention of the Commission for consideration and appropriate action.
4. Does OSRA permit discussion agreements to adopt voluntary guidelines relating to service contracts? If so, are these guidelines filed with the Commission? If so, please provide the Committee with a copy of each set of guidelines that has been filed with the Commission to cover transactions occurring on or after the effective date for OSRA, May 1, 1999.
Page 269 PREV PAGE TOP OF DOC
Yes. Section 5(c) of the Shipping Act states ''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 the members of the agreement to not follow these guidelines. These agreement guidelines shall be confidentially submitted to the Commission.''
To date, 12 agreements have filed voluntary guidelines with the Commission, including initial filings and revisions. Copies of these filings are enclosed. Also enclosed are the Trans-Atlantic Conference Agreement's model service contract rate matrices (developed to accord with European regulations), which may provide TACA carriers guidance in developing contracts, and were provided to the Commission in TACA's minutes.
All of these submissions are, by statute, confidential; however, the initial submission from the Transpacific Stabilization Agreement (dated April 30, 1999), was made public by that agreement's membership.
5. Please provide the Committee with any information that the Commission has that indicates that, for transactions occurring after May 1, 1999, any discussion agreement has adopted any policy that discriminates against small- and medium-sized shippers, shippers' associations, non-vessel -operating common carriers, or other transportation intermediaries.
We have no information that any discussion agreement has adopted any policy that unreasonably discriminates against shippers' associations or ocean transportation intermediaries based on their status. Such discrimination, if found to be unreasonable, would violate the sections 10(c)(7) and (8) prohibitions against carrier agreements discriminating unreasonably in their contracts based on shipper status.
Page 270 PREV PAGE TOP OF DOC
A number of carriers or agreements offer price discounts based on volume shipped, or set minimum volumes for contracts. Thus, shippers who move large volumes with a carrier may get a better deal than ''small shippers'' who ship just a few boxes, regardless of their status as intermediary shippers or proprietary owner shippers. However, these are normal marketplace practices which have long existed in this industry; we have heard no allegations that they violate the Shipping Act. Indeed, one of the central purposes of OSRA was to allow carriers to tailor individual service contract deals, placing greater reliance on the marketplace. This necessarily involves differentiating among shippers based on legitimate transportation criteria, such as volume and special service needs.
| Federal Maritime Commission, |
| Washington, DC, March 17, 2000. |
Hon. HENRY J. HYDE, Chairman,
Committee on the Judiciary,
House of Representatives, Washington, DC.
DEAR CHAIRMAN HYDE: In my March 17, 2000 answers to your written questions, there is a possibly misleading statement in my second answer pertaining to issuance of subpoenas. My answer states, in part:
. . . the 64 follow-up letters sent to shippers identified through the examination of carrier-provided documents netted only four responses.
To be more precise, the net response was 13, not four. There were only four responses that provided information that the investigative staff was able to pursue. Most responses indicated that the shippers had little or no problems obtaining space at contract rates. Thus, my earlier response to question 2 should have stated:
Page 271 PREV PAGE TOP OF DOC
. . . the 64 follow-up letters sent to shippers identified through the examination of carrier-provided documents netted 13 responses, only four of which provided potentially useful information.
I apologize for any confusion or inconvenience occasioned by our inadvertence. Please let me know if I can provide you with any additional information.
Sincerely,
| Harold J. Creel, Jr., Chairman. |
cc: The Honorable John Conyers
| Congress of the United States, |
| House of Representatives, |
| Committee on the Judiciary, |
| Washington, DC, June 26, 2000. |
Mr. ALAN BAER,
President and Chief Executive Officer,
Ocean World Lines, Inc.
New York, NY.
DEAR MR. BAER: I appreciate your appearing before the Committee on the Judiciary to testify at the legislative hearing on H.R. 3138, the ''Free Market Antitrust Immunity Reform (FAIR) Act of 1999'' on Wednesday, March 22, 2000.
Page 272 PREV PAGE TOP OF DOC
Members of the Committee have asked that you answer additional written questions for the record. I have attached a copy of the questions. I would appreciate your answering the questions in writing and returning your answers to the Committee for inclusion in the hearing record at your earliest convenience.
If the Committee can provide you with any additional information, please do not hesitate to have your staff contact Joseph Gibson by phone at (202) 225–3951 or by fax at (202) 225–7682. I appreciate your participation in our hearing.
Sincerely,
cc: Hon. John Conyers, Jr.
QUESTIONS FOR MR. BAER, MR. COLEMAN, AND MR. MACDONALD
Questions from Chairman Hyde
1. Speaking generally, what are the relative sizes of ocean transportation intermediaries and the carriers? When there is a commercial dispute between an intermediary and a carrier who has the most commercial power in the dispute? If there is litigation, who has the most resources with which to carry on that litigation?
2. Are you aware of any case in which the Federal Maritime Commission has severely punished any carrier based on allegations of discrimination or retaliation against intermediaries? For example, what about the transpacific investigation in 1998? What punishments did carriers receive in that investigation?
Page 273 PREV PAGE TOP OF DOC
3. If an intermediary made a complaint to the FMC about discrimination or retaliation, how much would it cost to litigate? Is that something that the typical intermediary could afford? What kind of treatment would have carriers given to those who have brought such claims? What kind of treatment has the FMC given to those who have brought such claims?
Questions from Mr. Coble
1. We have heard several allegations of discrimination. Isn't it true that section 10(c)(7) of the Shipping Act expressly prohibits any group of two or more carriers from discriminating against ocean transportation intermediaries? Isn't it also true that the Shipping Act allows any person to bring a claim for damages directly against a carrier or a carrier group, whether or not the FMC initiates an enforcement action?
2. We also hear claims that shippers did not cooperate with the FMC's investigation because they were afraid of ''retaliation.'' Are you aware that section 10(b)(3) of the Shipping Act expressly prohibits any carrier, either alone or in conjunction with anyone else, from retaliating against shippers? Are you also aware that shippers can recover double damages and attorney's fees by bringing a claim directly against the carrier?
3. Are you aware of any NVOCC that has brought an action against any carrier for discrimination or retaliation?
4. It is my understanding that NVOCCs are most interested in eliminating the tariff filing requirement and being able to enter into service contracts with their customers the way they can with vessel operating carriers. How would repealing the antitrust exemption for carriers have any effect on these issues?
Page 274 PREV PAGE TOP OF DOC
| Rodriguez O'Donnell, |
| Fuerst Gonzalez & Williams, |
| Attorneys and Counsellors at Law, |
| Washington, DC, October 4, 2000. |
Hon. HENRY J. HYDE, Chairman,
Committee on the Judiciary,
House of Representatives, Washington, DC.
Re: H.R. 3138, the ''Free Market Antitrust Immunity Reform Act of 1999''
DEAR CHAIRMAN HYDE: On behalf of our client, Mr. Alan E. Baer, President and CEO of Ocean World Lines, Inc., and Advisory Board Chairman of the Coalition for Fair Play in Ocean Shipping, we enclose Mr. Baer's responses to your letter of June 26, 2000. Mr. Baer's comments are in reply to the questions presented by you and Rep. Coble that supplement the Committee's legislation hearing on H.R. 3138. We ask that Mr. Baer's answers be included in the Committee Record and Report on H.R. 3138.
If you have any questions, please contact me directly at 202–973–2999 or Mr. Ashley Craig of our firm at 202–973–2981.
Very truly yours,
Cc: Alan E. Baer, OWL, Inc.
Page 275 PREV PAGE TOP OF DOC
ANSWERS TO CHAIRMAN HYDE'S QUESTIONS
1. In general, Ocean Transportation Intermediaries (''OTIs'')(see footnote 16), as defined by the Ocean Shipping Reform Act of 1998 and refers to the separate commercial activities of 1) non-vessel-operating common carriers (''NVOCCs'') and 2) ocean freight forwarders, vary in size from as few as a dozen employees to hundreds. For example, a typical 'small freight forwarder'' may operate out of only one (1) office and have between six (6) to ten (10) employees involved in export and import operations. Whereas, a larger OTI that is both a freight forwarder and NVOCC, as well as a licensed customs broker, may have several offices throughout the U.S. with a central office for management purposes, and maintain overseas branches. Further, the larger OTI will typically have agency relationships with foreign freight forwarders across the globe. This enables the OTI to provide ''global'' service to its shipper-clients. In the end, though, most OTIs—both forwarders and NVOCCs—are 'small businesses' that provide transportation and trade services to the majority of small and medium-sized business that fuel the American export and import economy.
Assuming that an intermediary is involved in commercial disputes with an ocean carrier, it is typical for the ocean carrier to maintain leverage over the OTI at all stages of the dispute. This is a general statement, but one that is based upon clearly apparent commercial realities in the international transportation industry. In brief, the ocean carrier is the ultimate 'service provider'' for the OTI—and the shipping public. Without the good will and cooperation of the ocean carrier, an intermediary is unable to provide total transportation services to the general shipping public. This is a reality because the ocean carrier is the entity that owns, operates and deploys the vessels in any given trade. As a result, the ocean carrier is able to command the most leverage in a commercial dispute—assuming that the intermediary desires to provide continued ocean service to its shipper-clients.
Page 276 PREV PAGE TOP OF DOC
As stated, most OTIs are small businesses. As a result, in litigation matters arising out of ocean transportation disputes, OTIs are inherently restrained by the economic limitations they face. This places OTIs at a disadvantage vis-a-vis the ocean carriers when OTIs are involved in litigation. Since ocean carriers are typically large multi-national corporations, they are better able to either employ outside counsel that is specialized in maritime and ocean transportation law or, as is the case for some companies, they have in-house counsel that is able to respond to Federal Maritime Commission (''FMC'') and other transportation complaints.
OTIs, in contrast, are generally unable to retain legal counsel for shipping disputes given the large costs involved in FMC litigation. Those OTIs that do retain counsel are usually constrained by the costs of litigation, which does have an impact on the OTI's decision to retain legal counsel and pursue formal complaints before the FMC.
2. The FMC conducted a formal fact-finding investigation (FMC Fact-Finding No. 23) during late 1998 through 1999.(see footnote 17) This investigation focused on allegations of carrier abuses in the inbound Pacific trades. The Committee heard detailed testimony both during the May 1999 oversight hearing and the March 2000 legislative hearing on H.R. 3138. In fact, the Committee received testimony from FMC Commissioner Delmond J.H. Won, who was the lead investigator during the fact-finding. The Committee also received the full report of Commissioner Won, as well as the publicly released summary on the findings of the investigation. I believe that the findings of the Won report provide insight into the anticompetitive behavior and activities of ocean carrier ''discussion agreements.''
Page 277 PREV PAGE TOP OF DOC
The FMC did not pursue enforcement actions against the Trans-Pacific Stabilization Agreement, the carrier ''discussion agreement'' that was the focal point of the investigation, but instead decided to pursue enforcement against the individual carriers. The end result was no true enforcement against the TSA, its member carriers, or any of the incidents that were well documented by Commissioner Won in his report on Fact Finding No. 23. The FMC ended its investigation and enforcement activities against the Pacific carriers by penalizing the now-defunct Asia-North America Eastbound Rate Agreement (ANERA) and its members a total of $55,000 for failure to file three (3) minutes of conference meetings.(see footnote 18)
In addition, we are aware of one OTI complaint filed with the FMC that alleges discriminatory conduct by an ocean carrier. See Cargo One, Inc. v. China Container Lines Company, Ltd., FMC Docket No. 99–24. This case involves alleged discriminatory actions by the China Ocean Shipping Company (''COSCO'') group, the P.R.C. state-owned controlled carrier, against Cargo One. The OTI, Cargo One, acting as a non-vessel operating common carrier, allegedly was denied space aboard COSCO vessels; was denied service contract rates that were negotiated between and agreed to by COSCO and Cargo One; and Cargo One's overseas agents were denied contracts rates that were valid between the line and Cargo One, the principal. It is my understanding that this matter is presently before the FMC Commissioners on an interlocutory appeal. If granted, it is my understanding that the Cargo One matter may be discontinued on a jurisdictional issue.
3. Typical OTI complaints brought before the FMC will involve legal fees that easily exceed $100,000.00. OTIs, given their small business status, are unable to afford such high-priced and complex litigation. Further, FMC litigation is generally regarded as a lengthy process that may continue for years. It is not uncommon for the litigation to last between four (4) to six (6) years. In the end, the current legal scheme for bringing complaints before the FMC strongly discourages OTIs, small and medium-sized shippers and shippers' associations from pursuing formal FMC actions.
Page 278 PREV PAGE TOP OF DOC
Another concern for OTIs that factors into a decision to bring a claim against an ocean carrier is possible retaliatory action by the carrier against the OTI. The ocean carrier, or the group of carriers that operate as a conference or in a ''discussion agreement'' in a given trade, is the primary 'service provider'' for the OTI. Without a service contract or other transportation program that provides rates and space aboard the carrier's vessels, the OTI is unable to market its services to the general shipping public. Thus, if a carrier decided to ''blacklist'' an OTI for any reason, including as a retaliatory measure for an FMC complaint against the carrier, that OTI's day-to-day ocean transportation business would be in jeopardy.
In addition, the Coalition for Fair Play in Ocean Shipping (''Coalition'') filed a petition with the FMC seeking an Order 15 action against the TSA and members of the TSA. The Coalition's request for issuance of a section 15 Order essentially asked the Commission to initiate and maintain monitoring and oversight of TSA members through most of the 1999 shipping season. Section 15 is solely an information-gathering authority: it allows the Commission to obtain information in aid of its responsibilities to administer and enforce the Shipping Act. In August, 1999, the FMC denied the Coalition's request. I am unaware of any further action taken by the FMC on the Coalition's petition and the agency has not allocated any additional resources or monitoring of the TSA or other carrier ''discussion agreements.''
In the end, FMC treatment of OTI and other shipper complaints that raise anticompetitive or discriminatory behavior of ocean carriers has not received the full attention of the agency under the new OSRA regulatory scheme.
ANSWERS TO MR. COBLE'S QUESTIONS
Page 279 PREV PAGE TOP OF DOC
1. Although section 10(c)(7) of the Shipping Act of 1984, as amended by OSRA, states that any group of two or more carriers is prohibited from discriminating against shippers' associations or OTIs, the statute is limited to carrier activities pursuant to a service contract. As the statute is presently worded, the so-called anti-discriminatory language does not extended to carrier activities under tariffs, which have become more important in terms of accessorial charges, e.g., bunker charges, free-time, equipment repositioning fees, which eventually impact the overall freight rates that are offered to OTIs. We have witnessed the carriers' use of accessorial charges on the Atlantic trades during the last year that have not been applied in a uniform manner. It is believed that large proprietary shippers were exempt from various accessorial charges, while OTIs and shippers' associations were subject to numerous tariff-related surcharges. Thus, despite the statutory prohibition of section 10(c)(7), carriers continue to discriminate under the OSRA regime against OTIs and other smaller shippers and shippers' associations.
In addition, there is some uncertainty as to the application of congressional intent to the anti-discriminatory provisions of the Shipping Act, as amended by OSRA, such as section 10(c)(7). The accompanying Senate Commerce Committee Report on S. 414, the implementing legislation for OSRA, states that the Shipping Act's anti-discriminatory provisions are to be applied in a flexible manner and that carriers be ''. . . [a]fforded the maximum flexibility to differentiate their service contract terms and conditions with respect to individual shippers and ocean transportation intermediaries . . . [t]he Committee directs the FMC . . . to focus the efforts of its limited enforcement recourses, with respect to common carrier service contracts, on the most egregious examples of unjust discrimination and undue or unreasonable preference . . .''(see footnote 19) Further, the Committee Report states that OTIs would need to establish carrier discrimination based on a particular class of shippers, such as the entire OTI industry, not simple one OTI.(see footnote 20) The Committee Report states, ''. . . [a]n example of such prohibited activity would include a clear pattern of unjustly discriminatory practices by a common carrier with respect to all shippers' association contracts.''(see footnote 21) This raises great concern in the minds of all OTIs and other shippers as to the force of the anti-discriminatory provisions of the Shipping Act, as amended by OSRA. Thus, the bar is set rather high for any shipper that is contemplating allegations of discriminatory behavior by an ocean carrier or group of ocean carriers.
Page 280 PREV PAGE TOP OF DOC
To complicate matters, during the Senate's consideration of S. 414, the legislation's Floor Manager, Sen. Hutchinson (R–TX), chairman of the Senate Subcommittee Surface Transportation and Merchant Marine, remarked that there was concern regarding the Committee Report language discussed above. However, the Committee Report language provides a further basis for the ocean carriers to discriminate at will against shippers of any size—including OTIs—without any tangible recourse before the FMC.
While the Shipping Act does provide any person with the avenue to bring a claim for damages against a carrier or group of carriers, the reality is clear that small shippers, and OTIs are unable to realistically pursue such actions before the FMC. This is due to a variety of factors, such as possible ''blacklisting'' of the shipper by ocean carriers, the targeting of the shipper by carrier ''discussion agreements,'' the refusal to offer competitive service contract rates, which results in OTIs being unable to provide valuable rates to the general shipping public, and the high price tag of FMC litigation. In addition, the FMC has shown that it is not willing to aggressively monitor and penalize ocean carriers for anticompetitive and discriminatory activities of ocean carriers.
2. In regards to this question, I refer to my prior answer to Question No. 1. I believe that the OSRA statutory language and the uncertainty surrounding the congressional intent of OSRA make it difficult for any shipper to bring a section 10(b)(3) claim against a carrier or a group of carriers. Further, assuming that the FMC finds in favor of the shipper in such a complaint, that does not translate into real business benefits for an OTI. Since FMC litigation is a prolonged process, as soon as a OTI brings a complaint before the FMC against an ocean carrier, it immediately becomes the subject of carrier scrutiny. During this time, the OTI must continue to discuss and, hopefully, negotiate with the same carrier that is the subject of the complaint, for service contract rates to offer the general shipping public. Realistically, this is not feasible. Again, this is an example of the advantage that ocean carriers hold over OTIs and other shippers both from a commercial and litigation perspective.
Page 281 PREV PAGE TOP OF DOC
I refer you to my answer to Mr. Hyde's Question No. 2.
4. This question states a common misperception of OTI concerns with ocean carrier antitrust immunity. Since OTIs, when acting as NVOCCs, are a shipper in relation to the underlying ocean common carrier that is providing the actual means of transportation of the cargo, and a carrier in relation to the owner of the cargo, the OTI has the same interest in seeing carrier antitrust immunity removed as would a large volume shipper, such as those that comprise the membership of the National Industrial Transportation League. In essence, the OTI would benefit from the elimination of carrier antitrust immunity because it would result in a more competitive and market-driven ocean transportation environment. OSRA was a further step in the direction of true deregulation, but removal of carrier antitrust immunity would provide for a truly deregulated ocean transportation scheme.
As it stands now, OSRA provides proprietary shippers with increased flexibility to discuss and enter into service contracts with ocean carriers (something with is not permitted for an OTI/NVOCC to do with a shipper-client), while retaining antitrust immunity for carriers to either fix rates in a formal conference environment or to exchange proprietary information on shippers, including OTIs, via carrier ''discussion agreements.'' In the end, OTIs have the same interest in seeing carrier ''discussion agreements' restrained as any other shipper. In fact, I believe that the argument can be made that OTIs are at more of a disadvantage than other types of shippers in terms of carrier use of their antitrust immunity. It is a commonly known fact that OTIs are looked upon as second class citizens by many ocean carriers. Thus, carriers are able to establish ''voluntary rate guidelines' through carrier discussion agreements that target OTIs over proprietary shippers. This occurred throughout the US-South American trades in 1999 and again in other trades through the 2000 shipping season.
Page 282 PREV PAGE TOP OF DOC
It is true that OTIs seek the authority under US shipping laws to enter into service contracts with shipper-clients, as well as the elimination of the statutory requirement to ''publish'' tariffs electronically. However, these reform objectives should not be lumped into the on-going dialogue on the role and purpose of carrier antitrust immunity. OTIs join with shippers of all types and around the globe in calling for the elimination of the century-old ocean carrier antitrust immunity. H.R. 3138 is supported by an industry-wide coalition of shippers of all shapes and sizes—fusing the OTI legislative agenda for further maritime reform with the antitrust immunity debate is merely a lobbying tactic employed by carrier interests.
| Congress of the United States, |
| House of Representatives, |
| Committee on the Judiciary, |
| Washington, DC, June 26, 2000. |
Mr. BOB COLEMAN, President,
TLR-Total Logistics Resource, Inc.,
Portland, OR.
DEAR MR. COLEMAN: I appreciate your appearing before the Committee on the Judiciary to testify at the legislative hearing on H.R. 3138, the ''Free Market Antitrust Immunity Reform (FAIR) Act of 1999'' on Wednesday, March 22, 2000.
Members of the Committee have asked that you answer additional written questions for the record. I have attached a copy of the questions. I would appreciate your answering the questions in writing and returning your answers to the Committee for inclusion in the hearing record at your earliest convenience.
Page 283 PREV PAGE TOP OF DOC
If the Committee can provide you with any additional information, please do not hesitate to have your staff contact Joseph Gibson by phone at (202) 225–3951 or by fax at (202) 225–7682. I appreciate your participation in our hearing.
Sincerely,
cc: Hon. John Conyers, Jr.
QUESTIONS FOR MR. BAER, MR. COLEMAN, AND MR. MACDONALD
Questions from Chairman Hyde
1. Speaking generally, what are the relative sizes of ocean transportation intermediaries and the carriers? When there is a commercial dispute between an intermediary and a carrier who has the most commercial power in the dispute? If there is litigation, who has the most resources with which to carry on that litigation?
2. Are you aware of any case in which the Federal Maritime Commission has severely punished any carrier based on allegations of discrimination or retaliation against intermediaries? For example, what about the transpacific investigation in 1998? What punishments did carriers receive in that investigation?
3. If an intermediary made a complaint to the FMC about discrimination or retaliation, how much would it cost to litigate? Is that something that the typical intermediary could afford? What kind of treatment would have carriers given to those who have brought such claims? What kind of treatment has the FMC given to those who have brought such claims?
Page 284 PREV PAGE TOP OF DOC
Questions from Mr. Coble
1. We have heard several allegations of discrimination. Isn't it true that section 10(c)(7) of the Shipping Act expressly prohibits any group of two or more carriers from discriminating against ocean transportation intermediaries? Isn't it also true that the Shipping Act allows any person to bring a claim for damages directly against a carrier or a carrier group, whether or not the FMC initiates an enforcement action?
2. We also hear claims that shippers did not cooperate with the FMC's investigation because they were afraid of ''retaliation.'' Are you aware that section 10(b)(3) of the Shipping Act expressly prohibits any carrier, either alone or in conjunction with anyone else, from retaliating against shippers? Are you also aware that shippers can recover double damages and attorney's fees by bringing a claim directly against the carrier?
3. Are you aware of any NVOCC that has brought an action against any carrier for discrimination or retaliation?
4. It is my understanding that NVOCCs are most interested in eliminating the tariff filing requirement and being able to enter into service contracts with their customers the way they can with vessel operating carriers. How would repealing the antitrust exemption for carriers have any effect on these issues?
ROBERT COLEMAN'S RESPONSE TO JUDICIARY COMMITTEE QUESTIONS
Page 285 PREV PAGE TOP OF DOC
A. Answers to Chairman Hyde's Questions
1. The difference in the relative size and commercial clout of the vessel operating the ocean carriers and ocean transportation intermediaries is vast. Carriers are multinational corporations, generally a division of an even much larger corporation with corporate residences in many countries. In many cases ''State'' owned or subsidized. Examples would be COSCO who is owned by the Chinese government. APL/NOL is partially owned by the government of Singapore, as well as reaping substantial US subsidies on a yearly basis.
These corporations typically operate not only vessels, but trucking companies, consolidators, warehouses, marine terminals, etc. and employ thousands. In contrast, ocean transportation intermediaries, particularly here in the United States, are much smaller organizations, with nowhere near the capitalization of the international common ocean carriers. Most ocean transportation intermediaries in this country are small businesses, easily fitting under the Small Business Administration's guidelines of a ''small business.'' Many are family owned business. A national survey done a few years ago, showed the average size of these companies to be 7–8 people. A medium sized OTI would be in the area of 4050 people.
Commercial disputes between ocean transportation intermediaries and the carriers are few and far between, frankly, because OTI's cannot afford to engage in a dispute with entities that are so large and control so much market share. The carrier has the financial ability to drive the OTI out of business or move the dispute to a location in the world that the OTI simply cannot afford pursue. If the OTI chooses to pursue action against a carrier, the greatest fear is the being ''blackballed'' by the carrier or cartel. If this happens the OTI is out of business.
Page 286 PREV PAGE TOP OF DOC
My OTI directly employs 17 staff members. With my limited staff and resources there is no way I can provide the necessary resources to litigate against any carrier, let along the government of China, Singapore or the US government.
While the individual ocean carriers are so much larger than OTI's, the OTI's must face an even more formidable entity—the ocean carrier Agreements which are made possible by the ocean carrier antitrust immunity afforded to them under the Ocean Shipping Reform Act. Using this antitrust immunity, the carriers can form entities such as the TransPacific Stabilization Agreement which comprise virtually all the container carriers moving across the Pacific. This only exacerbates the difference between in size, capitalization and market power between the individual OTI's (which do not have antitrust immunity, forcing each company to stand on its own two feet) and the aggregated economic power of the ocean carriers.
For these reasons there is frankly little, if any, litigation between OTI's and carriers. OTI's cannot afford to antagonize the ocean carriers who collectively control ocean transportation to and form the United States. Even if somehow the OTI could afford to bring a suit, it cannot challenge the entities upon whom it depends to provide vessels to move the OTI's cargo.
2. To, OTI's it appears that each time the FMC has had an opportunity to take actions against carriers, favorable to OTI's, they have failed to do so. In 1996, when shippers and OTI's complained about abuses in the TransAtlantic, the Commission undertook an investigation and turned the tables by publicly scrutinizing the shippers, but never publicly or formally questioning the carriers who actions were the basis of the initial complaint. Ultimately no action was taken against the TransAtlantic Carrier Agreement (TACA).
Page 287 PREV PAGE TOP OF DOC
In 1998, the FMC investigation of transPacific carriers showed they were requiring significant additional payments, outside the contract and tariff terms without the stationary mandated notice. The investigation of 1998 demonstrated two constants: First, it demonstrated that OTI's were afraid to submit information about carrier abuse to the FMC because of their fear of retaliation by the carriers.
Secondly, substantial abuses were uncovered even lacking a lot of direct testimony, yet knowing this and having the ability to levy very large monetary fines against the abusers, the FMC choose to take the easy way out and issued a slap on the wrist against the cartel for failure to keep good meeting notes. I believe the penalty issued for a couple of years of price gouging to the cartel was $70,000, which may not even be considered a line item for budget purposes by the cartel. A simple cost of doing business.
More recently, the FMC stepped forward to argue that Congress should refrain from cargo liability reform which no doubt delighted the carriers, but undermining long sought objective of shippers and the OTI's.
3. There are three reasons that intermediaries do not file complaints at the FMC about discrimination or retaliation.
a. The FMC record of taking action on behalf of NVOCCs complains against vessel operating carriers is hardly encouraging to the NVOCC. In 1997, the TWRA imposed a $250 surcharge on contracts signed by TWRA members with NVOCCs. This constituted blatant discrimination against NVOCCs as shippers. This issue was brought informally to the FMC, yet no action was taken. The FMC's historic action of this nature has been no action. They appear afraid to do so. If you look at the big picture, the FMC is really very much like a OTI. Even they know that with their limited staff and their budge restraints they are hard pressed to act against the group that they observe—namely carriers and cartels who are well funded, global in nature and connected, It is similar to major league baseball umpires taking action against major league baseball. It is not always prudent to take action against the group you are entrusted to observe, especially when the group is substantially larger than you are.
Page 288 PREV PAGE TOP OF DOC
b. As described above, the NVOCC depends upon availability of vessel operating carrier to accept the booking of the NVOCC. If there were true competition, the fact that one carrier was angry with an NVOCC would not pose a difficultly for the NVOCC, as there would be other carriers competing for that NVOCCs business. However as the carriers have antitrust immunity and share this type of information, the NVOCC will very likely face retaliation (generally in the form of ''lack of available space'') not only by an individual carrier but by all the other carriers in the trade who are participating in whatever agreement the carrier is a member of. So in trade such as the transPacific, virtually all the carriers are in the TSA, this means the NVOCC would face retaliation by virtually all the carriers in the trade.
c. The cost in terms of time and dollars. The NVOCCs are small organization. If an OTI pursued the complaint process with the FMC which is a form of litigation, the cost associated would be in the area of $50,000 to $100,000. Inmost cases this would exceed the annual net profit of an OTI. I am not aware of any OTI willing to spend several years profit to attempt to pursue this kind of action.
d. It is in fact very difficult to prove discriminating retaliation. The carrier can always say the have lack of space, different priorities. Also the service contracts typically call for very extensive notice periods for booking of cargo. While these are routinely disregarded in deference to commercial realties, a carrier seeking to retaliate against an NVOCC which has brought a complaint could strictly enforce that provision, leaving that NVOCC without a the ability to competitively book cargo.
B. Answers to Congressman Coble's Questions
Page 289 PREV PAGE TOP OF DOC
1. Yes it is true that the law as presently written does prohibit discrimination against shippers and transportation intermediaries. But we are less concerned about what the law says, then what the law means in our daily business. A provision in the Shipping Act prohibiting certain activity is meaningless unless is actually serves to prevent that activity from occurring. For the reasons described above, that activity does continue, namely NVOCCs are discriminated against, and continue to be. For the reasons described above, a small business simply does not have the resources to initiate litigation against a multinational ocean carrier conglomerate. Further, an NVOCC who initiates litigation against a ocean carrier risks losing the services of that ocean carrier, and possibly the services of other carriers who are also members of the same conferences or agreements. So litigation is not a realistic possibility.
2. As stated above, a provision of the Shipping Act which prohibits retaliation is meaningless unless it actually serves to accomplish the objective. The reasons shippers do not participate in the FMC investigations, because they recall the last two major FMC investigations. In 1997 the FMC investigated shipper allegations of inappropriate activities by ocean carriers operating under the TransAtlantic Carrier Agreement (TACA). Imagine the surprise of shippers who filed the complaint that the FMC attorneys would place people who brought the complaints, the shippers, on the stand in courthouses, in front of the carrier lawyers, and question them under oath. Meanwhile, the ocean carriers who were supposedly the subject of the investigation were never subject to public questioning, under oath or otherwise. So the fear is not just carrier retaliation, but a memory of the FMC's decision to prosecute the persons who brought the complaint, rather than the carriers. In the end the FMC took no action against TACA.
More recently the FMC investigated TransPacific carriers who demanded additional payments for loading containers during a period of space capacity shortage. The demands for supplemental payment were outside the tariff or the contract, and on less than the statutorily mandated 30 day notice. While we were encouraged by the report of the FMC Commissioner who investigated, the NVOCCs and we believe all shippers were disappointed that in the end, the Commission never took meaningful action against the carriers. They never ordered a refund of the extorted payments and took no meaningful action. As to whether we are aware that shippers can recover damages and fees by bringing a claim directly against the carrier, again, as stated repeatedly above, discrimination is difficult to prove, the carriers do not generally state in writing that they are intending to discriminate against intermediaries. And again, an NVO only survives if he can book cargo on a carrier. By suing the carrier, even if he could collect double damages, he essentially terminates the commercial relationship with that carrier.
Page 290 PREV PAGE TOP OF DOC
3. These are the reasons why NVOCCs do not bring actions against carriers for discrimination or retaliation. But if the antitrust immunity were revoked and if the carriers did compete and could not share proprietary information, could not talk about specific NVOCC customers, I believe NVOCCs would bring actions to defend their Shipping Act rights.
4. NVOCCs certainly are interested in eliminating the tariff filing requirement in order enter into confidential-rate service contracts with their customers, just the way that vessel operating carriers may do. We seek a level playing field. Unfortunately, the ocean carriers vigorously oppose this.
We also seek a level playing field on antitrust immunity. Ocean carriers have antitrust immunity and NVOCCs do not. Perhaps if NVOCCs were granted antitrust immunity, then NVOCCs would not seek the elimination of ocean carrier antitrust immunity. Either both should have antitrust immunity, or neither should have antitrust immunity. Antitrust immunity, like tariff filing, is a question of establishing a level playing field for all providers of transportation services to the shipping public.
| Congress of the United States, |
| House of Representatives, |
| Committee on the Judiciary, |
| Washington, DC, June 26, 2000. |
Mr. BILL MACDONALD, President,
KMJ International, Inc.,
Page 291 PREV PAGE TOP OF DOC
Edmonds, WA.
DEAR MR. MACDONALD: I appreciate your appearing before the Committee on the Judiciary to testify at the legislative hearing on H.R. 3138, the ''Free Market Antitrust Immunity Reform (FAIR) Act of 1999'' on Wednesday, March 22, 2000.
Members of the Committee have asked that you answer additional written questions for the record. I have attached a copy of the questions. I would appreciate your answering the questions in writing and returning your answers to the Committee for inclusion in the hearing record at your earliest convenience.
If the Committee can provide you with any additional information, please do not hesitate to have your staff contact Joseph Gibson by phone at (202) 225–3951 or by fax at (202) 225–7682. I appreciate your participation in our hearing.
Sincerely,
cc: Hon. John Conyers, Jr.
QUESTIONS FOR MR. BAER, MR. COLEMAN, AND MR. MACDONALD
Questions from Chairman Hyde
1. Speaking generally, what are the relative sizes of ocean transportation intermediaries and the carriers? When there is a commercial dispute between an intermediary and a carrier who has the most commercial power in the dispute? If there is litigation, who has the most resources with which to carry on that litigation?
Page 292 PREV PAGE TOP OF DOC
2. Are you aware of any case in which the Federal Maritime Commission has severely punished any carrier based on allegations of discrimination or retaliation against intermediaries? For example, what about the transpacific investigation in 1998? What punishments did carriers receive in that investigation?
3. If an intermediary made a complaint to the FMC about discrimination or retaliation, how much would it cost to litigate? Is that something that the typical intermediary could afford? What kind of treatment would have carriers given to those who have brought such claims? What kind of treatment has the FMC given to those who have brought such claims?
Questions from Mr. Coble
1. We have heard several allegations of discrimination. Isn't it true that section 10(c)(7) of the Shipping Act expressly prohibits any group of two or more carriers from discriminating against ocean transportation intermediaries? Isn't it also true that the Shipping Act allows any person to bring a claim for damages directly against a carrier or a carrier group, whether or not the FMC initiates an enforcement action?
2. We also hear claims that shippers did not cooperate with the FMC's investigation because they were afraid of ''retaliation.'' Are you aware that section 10(b)(3) of the Shipping Act expressly prohibits any carrier, either alone or in conjunction with anyone else, from retaliating against shippers? Are you also aware that shippers can recover double damages and attorney's fees by bringing a claim directly against the carrier?
Page 293 PREV PAGE TOP OF DOC
3. Are you aware of any NVOCC that has brought an action against any carrier for discrimination or retaliation?
4. It is my understanding that NVOCCs are most interested in eliminating the tariff filing requirement and being able to enter into service contracts with their customers the way they can with vessel operating carriers. How would repealing the antitrust exemption for carriers have any effect on these issues?
| KMJ International, Inc., |
| Edmonds, WA, September 27, 2000. |
Hon. HENRY J. HYDE, Chairman,
Committee on the Judiciary,
House of Representatives, Washington, DC.
DEAR SIR: I apologize for the delay in replying to your request for additional answers related to my testimony on H.R. 3138, the ''Free Market Antitrust Immunity Reform (FAIR) Act of 1999. 1 hope it is not too late to submit the following answers.
I have reviewed the questions. Your questions relate only to intermediaries, and I am not qualified to answer your questions to them.
The first part of Mr. Coble's question 1 also relates to intermediaries. The second part relates to the Shipping Act and that is correct, if my understanding of the Act is correct. I have not, however, heard of any PNASA members attempting to bring claim for damages as individual shippers. However, our next general meeting is in October, and I will ask the members to advise if they have any such experience of this nature. If so, I will be glad to send in additional information on this part of question 1.
Page 294 PREV PAGE TOP OF DOC
Mr. Coble's question 2 asks about shipper's fear of retaliation if they cooperate with FMC investigations. I have no first hand knowledge of any of the PNASA shippers being asked to cooperate with FMC investigations, but again, I will check for this at our next meeting and advise if I learn of any such instances. I should note, however, that PNASA, as an organization, has some ''bargaining power'' with the carriers, and as a group, I have not seen any retaliation against our organization. We are aware that the Shipping Act prohibits retaliation and allows for damages and attorney's fees, but as a group, have not had, to date, a need to file a claim for retaliation or try to collect damages and/or fees.
Questions 3 and 4 relate to NVOCC's and I am not qualified to answer those questions.
I would like to thank you again for the opportunity to testify at your hearings on H.R. 3138 on behalf of the Pacific Northwest Asia Shippers Association. I hope I was able to present our case in a clear and concise manner, useful to your committee. We do believe that Antitrust Immunity for the carriers should be eliminated and give us a chance to have a level playing field. I sincerely hope this legislation will pass, if not this year, then next year, and if there is any further way we can be of assistance, please feel free to call on us.
Sincerely yours,
| Congress of the United States, |
| House of Representatives, |
| Committee on the Judiciary, |
| Washington, DC, June 26, 2000. |
Page 295 PREV PAGE TOP OF DOC
Ms. JANET MCDAVID,
Hogan & Hartson, L.P., Washington, DC.
DEAR MS. MCDAVID: I appreciate your appearing before the Committee on the Judiciary to testify at the legislative hearing on H.R. 3138, the ''Free Market Antitrust Immunity Reform (FAIR) Act of 1999'' on Wednesday, March 22, 2000.
Members of the Committee have asked that you answer additional written questions for the record. I have attached a copy of the questions. I would appreciate your answering the questions in writing and returning your answers to the Committee for inclusion in the hearing record at your earliest convenience.
If the Committee can provide you with any additional information, please do not hesitate to have your staff contact Joseph Gibson by phone at (202) 225–3951 or by fax at (202) 225–7682. I appreciate your participation in our hearing.
Sincerely,
cc: Hon. John Conyers, Jr.
QUESTIONS FOR MS. MCDAVID
Questions from Chairman Hyde
Page 296 PREV PAGE TOP OF DOC
1. Describe the process by which the Antitrust Section developed the position that you presented to the Committee. Is that the normal process provided by your governing rules?
2. It is often argued that we should not change our antitrust immunity for shipping because our trading partners have not changed theirs. Do you have any knowledge of any recent actions by our trading partners to curtail antitrust immunity? If so, what were these actions?
Questions from Mr. Coble
1. Are the views that you offered at the hearing the views of the American Bar Association?
2. Does your testimony reflect the views of the members of the Antitrust Section of the ABA?
3. Is there also a dissenting view from the ABA that you could make available for the record?
Questions from Mr. Vitter
1. How many people participated in the creation and approval of the statement that you presented to the Committee?
Page 297 PREV PAGE TOP OF DOC
2. Was there at some point in the creation of the statement a dissenting view that was removed?
3. Do you have a copy of that dissent that you could provide for the Committee?
Enclosed please find the responses of the American Bar Association Section of Antitrust Law (''Antitrust Section''), to the questions posed regarding the Antitrust Section's report on the Free Market Antitrust Immunity Reform Act of 1999 (''Hyde Bill''), H.R. 3138. As you know, the Antitrust Section supports both the Hyde Bill and the elimination of the antitrust exemption for the ocean shipping industry, as explained in detail in the Section's report, which is available at: http://www.abanet.org/antitrust/hyde—shpping—bill—report—Feb—2000.doc. We very much appreciate the opportunity to comment on the pending legislation and welcome any additional questions.
For your background, the Antitrust Section is the largest association of competition lawyers in the world with over 9,000 members. Our mission is to help our members, the bar, and the international business community understand the significance of the antitrust and competition laws. One of the primary ways in which this mission is carried out is through the activities of the various Section committees. The Section is composed of numerous committees that focus on different subsections of antitrust law, including practice skills, litigation, industry-specific subjects and substantive legal areas. Headed by Chairs and Vice-Chairs with experience in the subject matter of each committee, the committees are responsible for planning and directing activities within their specialty, including serving as the primary drafters of all written work within their areas of expertise. The Committee Chairs report to the Antitrust Section Council, the governing body of the Section, which is like a board of directors. The Council has the authority to act for the Section in any way, including adopting Section positions and the submission of any report and recommendation reflecting these positions. Council adoption of any position is done only after extensive debate and a majority vote.
Page 298 PREV PAGE TOP OF DOC
The Antitrust Section reviewed the Hyde Bill in accordance with usual Section procedure and adopted its position after careful thought and extensive debate. The views presented in the Section report are presented only on behalf of the Section. They have not been approved by the House of Delegates or the Board of Governors of the ABA and should not be construed as representing the policy of the ABA.
As a general rule, the Antitrust Section disfavors antitrust exemptions directed at specific industry categories or conduct. The antitrust laws are designed to provide general standards of conduct for the operation of our free enterprise system. Special exemptions from these standards rarely are justified: they often are not necessary to eliminate the risk of antitrust liability for procompetitive conduct, and the goals for such protection often can be achieved in a manner consistent with established antitrust principles and enforcement policy. The Antitrust Section—consistent with its opposition to other antitrust exemptions(see footnote 22)—strongly endorses the introduction of competition in ocean shipping to develop competitive and efficient markets and to benefit consumers.
Best regards.
Very truly yours,
cc: Joseph H. Gibson, Esq.
QUESTIONS FOR MS. MCDAVID
Page 299 PREV PAGE TOP OF DOC
A. Questions from Chairman Hyde.
1. Describe the process by which the Antitrust Section developed the position that you presented to the Committee. Is that the normal process provided by your governing rules?
Answer. The Section reviewed the bill in accordance with its usual processes. After I determined that the Antitrust Section should, if possible, comment on H.R. 3138, 1 referred the matter to the appropriate substantive committee within the Section, in this case the Transportation Industry Committee. I asked the Chair of that committee, Jim Dick, if his committee would prepare a draft report for submission to the Council. It is my understanding that Mr. Dick then asked a committee member, John Holloway, to prepare an initial draft. When Mr. Holloway's draft was completed, Mr. Dick revised it and circulated the revised draft to the Vice Chairs of the committee. The Vice Chairs concurred in the revised draft, and it was then forwarded to me. I then submitted the revised draft to the Council (i.e. the Section's Board of Directors), which considered it. The revised draft described the key arguments for and against the bill, but took no position on the bill. The Council determined that the Section should take a position on the bill, so it referred the draft back to the Transportation Industry Committee to propose a Section position. Mr. Dick and the other officers of the committee further revised the Report to reflect the view of the committee's leadership that the Section should support the bill. The latest version of the Report was then sent back to me. I edited the report further, gave the Transportation Industry Committee leadership an opportunity to comment on the edited version, and submitted it to the Council, which unanimously approved the report. A single member of the committee (Mr. Holloway), who is neither Chair nor a Vice Chair of the Committee and whose clients are directly and adversely affected by the bill, prepared a dissent. No Chair or Vice Chair of the committee joined in the dissent. I circulated both the majority Report of the committee and the dissent to the Section's Council for consideration. The Council unanimously rejected the dissent and adopted the majority position, which is reflected in the Report.
Page 300 PREV PAGE TOP OF DOC
2. It is often argued that we should not change our antitrust immunity for shipping because our trading partners have not changed theirs. Do you have any knowledge of any recent actions by our trading partners to curtail antitrust immunity? If so, what were these actions?
As noted in the testimony of Deputy Assistant Attorney General John M. Nannes, ''[F]oreign governments have made a pronounced shift to embrace free-market competition and to adopt and apply antitrust laws.'' Statement of John M. Nannes before the House Judiciary Committee, March 22, 2000, at 12. The European Union, for example, now prohibits so-called ocean carrier ''discussion agreements.'' The Competition Directorate of the European Commission enforced that prohibition in 1999 when it announced its opposition to the ''North Atlantic Agreement'' of carriers providing fixed container service between the United States and Europe, on the ground that the Agreement constituted an unlawful ''discussion agreement.'' On May 15, 2000, the European Commission fined fifteen shipping lines almost 7 million Euros for agreeing not to offer discounts from their published tariffs, ruling that the agreement constituted an infringement of Article 81 (1) of the EC Treaty, did not fall within the block exemption for liner conferences, and was not capable of individual exemption under Article 81(3). EU Fines 15 Firms in Liner Conference Pact, Antitrust & Trade Regulation Rep. (BNA) No. 1959, at 502 (May 19, 2000). It is also our understanding that legislation is pending in Canada that would ultimately terminate antitrust immunity for ocean carriers. As noted in the testimony of Alan E. Baer, Chairman of the Advisory Committee of the Coalition for Fair Play in Ocean Shipping, the Organization for Economic Co-Operation and Development (OECD) also is reviewing the continued validity of antitrust immunity in the shipping industry. The OECD's Maritime Transport Committee proposed a working paper that recommended the elimination of antitrust immunity. Statement of Alan E. Baer, Chairman of the Advisory Committee of the Coalition for Fair Play in Ocean Shipping, before the House Judiciary Committee, March 22, 2000, at 11–12. This paper was discussed at an OECD maritime transport workshop on regulatory reform in international maritime transport, May 25–26, 2000. OECD Will Pursue Discussions on Maritime Transport Exemption, Antitrust & Trade Reg. Rep. (BNA) No. 1961, at 560 (June 2, 2000).
Page 301 PREV PAGE TOP OF DOC
B. Questions from Mr. Coble.
1. Are the views that you offered at the hearing the views of the American Bar Association?
Answer. No. As stated in footnote I of the Report, the views I offered at the hearing and the views in the Report were presented only on behalf of the Section of Antitrust Law. They were not approved by the House of Delegates or the Board of Governors of the ABA and should not be construed as representing the policy of the ABA. The Report and testimony represent the position of the Section of Antitrust Law, which is the largest association of competition lawyers in the world.
2. Does your testimony reflect the views of the members of the Antitrust Section of the ABA?
Answer. My testimony and the Report reflect the views of the Antitrust Section of the ABA, as developed by the Section's leadership and approved unanimously by its Council. There are approximately 9,000 individual members of the Antitrust Section, some of whom undoubtedly entertain differing views. However, the process used here to develop the Section's position is the process used for all Section's policy positions.
3. Is there also a dissenting view from the ABA that you could make available for the record?
Page 302 PREV PAGE TOP OF DOC
Answer. There is no dissenting view from the ABA. The views expressed in John Holloway's dissent came to a different conclusion than the Section's final report. However, the Section's Council unanimously rejected that position. Mr. Holloway's views are no more than the position of a single member of the Section, which the Section's policy-making body chose not to adopt. Mr. Holloway's differing views were published, along with the official Section Report, in the Spring 2000 issue of The Transportation Antitrust Update, the newsletter of the Transportation Industry Committee. I enclose a copy of the dissent.
C. Questions from Mr. Vitter.
1. How many people participated in the creation and approval of the statement that you presented to the Committee?
Answer. The 30 Antitrust Section participants included the Chair and 2 Vice Chairs of the Transportation Industry Committee, 1 member of the Transportation Industry Committee (Mr. Holloway), 15 members of the Council, officers of the Section, and myself. Only one of those 30 people urged a position in opposition to the bill.
2. Was there at some point in the creation of the statement a dissenting view that was removed?
Answer. The comments of Section member John Holloway were attached as an appendix to the Report when it was presented to the Council, the governing body of the Antitrust Section. The Council unanimously rejected Mr. Holloway's proposed position and, therefore, we decided not to submit the appendix along with the Report because it did not reflect the views of the Section, as determined by the Council.
Page 303 PREV PAGE TOP OF DOC
3. Do you have a copy of that dissent that you could provide for the Committee?
Answer. I enclose a copy of Mr. Holloway's comments. See Answer to Mr. Coble's Question No. 3 above.
APPENDIX A—DISSENT
The Shipping Act of 1984 was intended to accomplish several objectives. The House Report on the 1984 Act stated that the American economy generated the largest single portion of the world's ocean cargoes and that the size of this market, coupled with the United States' free trade philosophy, ''made [US] routes the most accessible and lucrative.'' H. R. Rep. No. 98–53, at 5–6 (1984) reprinted in 1984 U.S.C.C.A.N. 172–72. ''As newcomers crowded into the U. S. trades many of these routes became heavily overtonnaged; that is, ship capacity far outran the demand. This overtonnage contributed to a growing instability of rates and services, which produced numerous complaints from shippers and operators alike.'' Id.
The House Report also noted that both the Carter and Reagan administrations had emphasized the need for ''a safe and efficient U.S. flag merchant fleet to support U.S. commerce and to adequately meet our shipping needs during times of national emergency [ ] and to foster a regulatory environment in which U. S. flag liner operators are not placed at a competitive disadvantage, vis-a-vis their foreign-flag competitors.'' Id. at 175.
The 1984 Act was therefore intended to remedy problems resulting from chronic overcapacity of tonnage on U. S. trade routes and to preserve a safe and efficient U. S. flag merchant fleet.
Page 304 PREV PAGE TOP OF DOC
In 1984 Congress viewed antitrust immunity for ocean common carriers as part of the solution—not the problem. The Committee ''expressed concern about undo extension of antitrust principles into the regulation of international maritime transportation and unequal treatment between US flag and foreign-flag carriers. Events subsequent to 1961 have confirmed those concerns. Antitrust standards rather than commercial maritime standards have had a disproportionate weight in processing maritime agreements in the foreign commerce of the United States.'' H. R. Rep. No. 98–53 at 9 (1984) reprinted in 1984 U.S.C.C.A.N. 174. Indeed, the 1984 Act strengthened antitrust immunity for ocean common carriers.
On July 31, 1997, the Senate Committee on Commerce, Science and Transportation issued a report on the proposed Ocean Shipping Reform Act. S. Rep. No. 414 (1997). The report noted that ''the international nature of the industry has been characterized by chronic conditions of carrier overcapacity. The primary cause of liner shipping overcapacity is the presence of international policies designed to promote national-flag carriers and also to ensure strong shipbuilding capacity in the interest of national security and employment.'' Id. at 1–2. The Senate report noted further that ''historically, ocean shipping liner companies attempted to combat the ocean shipping overcapacity that had developed into 'rate wars' by establishing shipping conferences to coordinate their practices in pricing policies.'' Id. at 2. The report recognized a tension between the contention of the ocean common carrier conferences ''that an unrestricted market would result in a highly destructive market and rapidly devolve into a market oligopoly'' and concerns by large volume shippers that ''the transparency of the U. S. system disadvantages U. S. shippers with respect to their foreign competitors in third markets.'' Id. at 3–4. NVOCCs ''wanted the right to enter into service contracts with shippers as carriers to help them compete with ocean carriers.'' Id. 3. The Senate report concluded that the ''reported bill attempts to compromise the positions and interests of those who support complete deregulation of ocean shipping and those who support the status quo.'' Id. The OSRA left in place the exemption from antitrust laws.
Page 305 PREV PAGE TOP OF DOC
Regulation of ocean common carriage from enactment of the 1916 Act through to enactment of the Ocean Shipping Reform Act of 1998, has provided antitrust immunity coupled with measures intended to provide market transparency and regulatory oversight. This approach has apparently provided relative rate and tonnage stability in U. S. trade routes, avoided an economic oligopoly in the ocean shipping industry, and has permitted survival of a U. S. nag merchant fleet.
The testimony of Mark H. Kadar, Vice President of Mercer Management Consulting, Inc., presented to the House Judiciary Committee on May 5, 1999, confirmed the current existence of many of the same market conditions that led to the strengthening of ocean common carrier antitrust immunity in the 1984 Act. This testimony indicates that ocean common carriage is a highly competitive, costly, and risky business enterprise. Representatives of two ocean carriers predicted that the proposed legislation would destabilize the industry. The Chairman of the FMC testified that the antitrust exemption should be kept to preserve international comity.
Congress should—but has not—assessed the unintended consequences of the proposed legislation. It is uncertain whether the legislation will cause the ocean shipping industry to devolve into an oligopoly dominated by foreign vessel owners whether the legislation will lead to market conditions that make it impossible for a U. S. flag merchant fleet to survive—whether the legislation will lead to vessel undercapacity that may have a negative influence on international trade—whether the legislation will lead ultimately to vast and possibly destructive fluctuations in shipping rates or overall higher rates and whether the legislation will harm national security by causing the closure of U.S. shipyards.
Page 306 PREV PAGE TOP OF DOC
Unfortunately, the testimony provided in favor of the Bill did not address these concerns in any substantive way. It appears from the testimony that the legislation was prompted largely by alleged abuses by ocean common carriers in the transpacific trades during the holiday season in 1998. Many, if not all, of these alleged abuses are already subject to FMC oversight and enforcement actions. Furthermore, a fundamental shift in regulations should not be prompted by anecdotal evidence of isolated episodic misconduct by ocean carriers. This is particularly true if, as the Committee on Merchant Marine and Fisheries reported in 1984, ''antitrust standards rather than commercial maritime standards have had a disproportionate weight in processing maritime agreements in foreign commerce of the United States.'' H. R. Rep. No. 98–53, at 9 (1984) reprinted in 1984 U.S.C.C.A.N. 174.
The testimony provided by the Department of Justice also failed to provide any substantive basis for its conclusions. The Department of Justice concluded, for example, that it ''believes'' 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.'' The Department of Justice did not provide or cite any evidence for its belief.
In my view, Congress should not enact new ocean shipping laws until the industry has had time to adjust to the new regulatory environment created by the Ocean Shipping Reform Act. Once Congress is in a position to gauge the effect of the OSRA on ocean shipping, then Congress will be in a position to assess and study whether it makes sense to withdraw antitrust immunity. At this point, however, based on the information available, it is premature to enact new legislation.
Page 307 PREV PAGE TOP OF DOC
| Congress of the United States, |
| House of Representatives, |
| Committee on the Judiciary, |
| Washington, DC, June 26, 2000. |
Mr. JOHN CLANCEY, Chairman of the Board,
Maersk Inc., Charlotte, NC.
DEAR MR. CLANCEY: I appreciate your appearing before the Committee on the Judiciary to testify at the legislative hearing on H.R. 3138, the ''Free Market Antitrust Immunity Reform (FAIR) Act of 1999'' on Wednesday, March 22, 2000.
Members of the Committee have asked that you answer additional written questions for the record. I have attached a copy of the questions. I would appreciate your answering the questions in writing and returning your answers to the Committee for inclusion in the hearing record at your earliest convenience.
If the Committee can provide you with any additional information, please do not hesitate to have your staff contact Joseph Gibson by phone at (202) 225–3951 or by fax at (202) 225–7682. I appreciate your participation in our hearing.
Sincerely,
Page 308 PREV PAGE TOP OF DOC
cc: Hon. John Conyers, Jr.
QUESTIONS FOR MR. CLANCEY
Questions from Chairman Hyde
1. A longstanding argument for the carriers' antitrust immunity has been that it is essential for the survival of the U.S.-flag merchant marine. Yet even under the protection of antitrust immunity, the U.S.-flag merchant marine has all but disappeared with foreign companies owning essentially all the U.S.-flag liner fleets. Would elimination of antitrust immunity reverse this trend and allow for the emergence of new American owned U.S.-flag carriers? Would elimination of antitrust immunity protect the U.S. shipping public—i.e., U.S. consumers and U.S. export industries—from the joint price setting for transportation by foreign owned companies?
2. The foreign companies that own the ships previously operated by American owned companies—which now control the ocean transportation services available to U.S. exporters—are tied by their corporate structure and boards of directors to other foreign companies. Those companies are often in direct competition with U.S. companies and industries that produce the same product. As U.S. companies compete in the world market with those foreign companies, should we be concerned that U.S. access to the world market is now controlled by foreign companies who can operate price fixing cartels immune from U.S. antitrust laws? How do we know that the foreign owned carriers will not use antitrust immunity to give an advantage to their corporate affiliates who compete with American companies in other products?
Page 309 PREV PAGE TOP OF DOC
3. The European Union has imposed rules of competition limiting collective carrier pricing. For example, the E.U. does not allow conferences to set a price for inland transportation in Europe, whereas the U.S. does allow this within the U.S. The E.U. restrictions apply to collective activity of all carriers, both U.S.-flag and foreign flag. If the EU could apply its rule of competition, why shouldn't the U.S. do the same?
4. I believe that you would argue that antitrust immunity is necessary to provide stability in the pricing of ocean transportation services for the benefit of U.S. shippers. Yet under our system of antitrust immunity, rates have fluctuated dramatically. Many carriers have gone out of business or been acquired by other larger carriers. Do you believe that antitrust immunity has resulted in stability? How does the stability or instability in the U.S. liner trade compare with the stability or instability found in other industries which are subject to U.S. antitrust laws?
5. Ocean liner companies are typically large multinational corporations. By contrast, U.S. ocean transportation intermediaries are typically smaller companies. The intermediaries are both customers and competitors of the multinational carriers. Should existing carrier antitrust immunity be limited so as to prevent the carriers from jointly fixing transportation rates, compensation, and other terms relating to U.S. transportation intermediaries whom they compete against?
Question from Mr. Vitter
1. Before the merger of Maersk and Sealand, Sealand was the largest participant in the Voluntary Intermodal Sealift Agreement (VISA) program. This program makes vessels and other transportation assets available to the United States military in times of war. How has the merger affected your company's defense commitment to the United States?
Page 310 PREV PAGE TOP OF DOC
Questions from Mr. Vitter and Rothman
1. Is antitrust immunity for ocean carriers a worldwide practice?
2. Are the rates and terms discussed in carrier discussion agreements followed uniformly by the agreement members?
3. If antitrust immunity were eliminated in the United States, what do you believe would happen?
4. How would the elimination of antitrust immunity affect U.S.-flag capacity and jobs held by American citizens?
RESPONSES OF JOHN CLANCEY TO QUESTIONS FROM THE COMMITTEE
Questions from Chairman Hyde
1. A longstanding argument for the carriers' antitrust immunity has been that it is essential for the survival of the U.S.-flag merchant marine. Yet even under the protection of antitrust immunity, the U.S.-flag merchant marine has all but disappeared with foreign companies owning essentially all the U.S.-flag fleets. Would elimination of antitrust immunity reverse this trend and allow for the emergence of new American owned U.S.-flag carriers? Would elimination of antitrust immunity protect the U.S. shipping public—i.e., U.S. consumers and U.S. export industries—from the joint price setting for transportation by foreign owned companies?
Page 311 PREV PAGE TOP OF DOC
Let me reiterate a view that I expressed at the hearing. The lack of U.S. investor support for international shipping stems primarily from the historically low rates of return throughout the industry. Even judged against long term investment goals, the shipping business is a difficult one, and U.S. capital markets have simply allocated assets elsewhere. Secondly, the issue is not the nationality of our investors. The real issue is whether the United States maintains the current policy that supports the ocean transportation infrastructure necessary to serve our foreign commerce and to maintain our national defense capabilities, or whether we undermine that policy. Repeal of the antitrust exemption would make shipping investments more uncertain and would not encourage new investment in U.S. based shipping companies.
From a broader perspective, including the effects on U.S. importers and exporters in addition to the effects on U.S. flag vessel operations, repeal of antitrust immunity would adversely affect the availability and diversity of ocean transportation services. The current regulatory regime supports an efficient ocean transportation system that fosters international trade and allows U.S. shippers to buy and sell goods throughout the world. There is no reason to tamper with that successful system.
2. The foreign companies that own the ships previously operated by American owned companies—which now control the ocean transportation services available to U.S. exporters—are tied by their corporate structure and boards of directors to other foreign companies. Those companies are often in direct competition with U.S. companies and industries that produce the same product. As U.S. companies compete in the world market with those foreign companies, should we be concerned that U.S. access to the world market is now controlled by foreign companies who can operate price fixing cartels immune from U.S. antitrust laws? How do we know that the foreign owned carriers will not use antitrust immunity to give an advantage to their corporate affiliates who compete with American companies in other products?
Page 312 PREV PAGE TOP OF DOC
Inasmuch as the sort of activity that is described in the question would be unilateral (i.e., a single carrier favoring its affiliate), the antitrust exemption would not come into play in such an arrangement. To the extent that the antitrust exemption has any bearing in these circumstances, it would appear that it would discourage rather than encourage the behavior described. This is so because the antitrust exemption makes possible carrier alliances that greatly multiply the competitive service options available to any given shipper. By supporting this competitive diversity of service options, the exemption in practice circumscribes the possibility that a carrier could provide to an affiliate terms and conditions that a competitor of that affiliate could not obtain from a competing carrier.
3. The European Union has imposed rules of competition limiting collective carrier pricing. For example, the E.U. does not allow conferences to set a price for inland transportation in Europe, whereas the U.S. does allow this within the U.S. The E.U. restrictions apply to collective activity of all carriers, both U.S.-flag and foreign flag. If the EU could apply its rule of competition, why shouldn't the U.S. do the same?
The European Commission's approach to competition policy in liner shipping is fundamentally consistent with the policies of the United States and other major trading nations. As with every jurisdiction involved with shipping, the E.U.'s laws differ to some extent in their details from the laws of other jurisdictions. The basic point, however, is that E.U. law recognizes liner shipping as unique and has a specific antitrust exemption applicable to it. The application of this E.U. ''block exemption'' to joint inland service discussions is unsettled. The legal issue of whether the E.U. regulation that embodies the block exemption for liner shipping services covers inland pricing activities is currently the subject of litigation. Whatever the outcome of the European litigation, I believe that the current U.S. policy is the correct one. Many of the services offered by modern liner carriers are seamless ''through'' or ''intermodal'' services involving land as well as ocean transportation. Because of the integrated nature of these services, the ocean and inland legs of the services are most logically regulated under a consistent regime, which the Shipping Act does. The U.S. Congress considered thoroughly this issue and in 1984 affirmed that the U.S. exemption should encompass inland services. Our customers require a through bill of lading because it represents the most cost effective, convenient way for carriers to meet their needs.
Page 313 PREV PAGE TOP OF DOC
4. I believe that you would argue that antitrust immunity is necessary to provide stability in the pricing of ocean transportation services for the benefit of U.S. shippers. Yet under our system of antitrust immunity, rates have fluctuated dramatically. Many carriers have gone out of business or been acquired by other larger carriers. Do you believe that antitrust immunity has resulted in stability? How does the stability or instability in the U.S. liner trade compare with the stability or instability found in other industries which are subject to U.S. antitrust laws?
The antitrust exemption has encouraged stability in the industry in a manner that has resulted in continuity of high quality services at reasonable and predictable rates. Stability, in the sense that I use the term with respect to ocean shipping, does not mean that rates and services do not vary over time. Of course they do, and the fact that they do is one of the indicators that this industry obeys the usual laws of the marketplace. The stability that I am talking about is the stability of positive results for shippers. Specifically, despite the fact that international trade volumes are expanding to record levels, and despite the fact that many trade lanes are severely imbalanced, carriers continue to meet the challenge of providing adequate vessel and inland capacity to keep the nation's foreign commerce flowing smoothly. Without the ability to coordinate services and discuss rational responses to the marketplace, this level of service could not be sustained, and importers and exporters—as well as the economy as a whole—would suffer. Finally, consolidation has naturally occurred in the industry. The fact of the matter is, however, that without antitrust immunity consolidation would have been accelerated and there would have been fewer carriers in the U.S. international liner trades.
5. ocean liner companies are typically large multinational corporations. By contrast, U.S. ocean transportation intermediaries are typically smaller companies. The intermediaries are both customers and competitors of the multinational carriers. Should existing carrier antitrust immunity be limited so as to prevent the carriers from jointly fixing transportation rates, compensation, and other terms relating to U.S. transportation intermediaries whom they compete against?
Page 314 PREV PAGE TOP OF DOC
Because of the way that the ocean transportation markets work, I believe it is practically impossible to have one rule for carrier cooperation with respect to proprietary shippers and another with respect to intermediaries (in this case NVOCCs). This is the case because, although service contracts are often negotiated individually, carriers, either on their own or working within approved agreements, tend to analyze rates, terms and conditions based on broader market segments. To the extent that guidelines may be set by carrier agreements, they are likely to have relevance to multiple shippers within a given market, without regard to whether those shippers are proprietary shippers or NVOs. Thus, if carriers were prohibited from discussions vis a vis NVOs, it would be very difficult if not impossible for carriers to demonstrate compliance with the law, because they would be placed in the position of proving that they have not applied their general market discussions to this class of shipper. Moreover, such a scheme would essentially amount to a requirement that carriers treat NVOCCs differently from other shippers, a requirement that would be in direct conflict with existing provisions of the Shipping Act.
Going beyond the practical difficulties of having different regulations for different sectors of the market, prohibiting carriers from joint activities with respect to NVOCCs would in fact work to the disadvantage of NVOCCs. NVOCCs rely entirely upon vessel operating carriers physically to provide the services that NVOCCs sell to their customers. If carriers were prohibited from taking any joint actions regarding NVOCCs, services provided by the vessel operators would likely become less regular and less predictable. Since these are the same services that the NVOCCs offer to their customers, the NVOCCs would have a less attractive service to sell, and their businesses would suffer accordingly.
Page 315 PREV PAGE TOP OF DOC
The growing number of individual confidential service contracts demonstrates the effectiveness of OSRA. This has resulted in different terms, conditions, and rates for many shippers even though they may be similarly situated. This trend also includes intermediaries.
QUESTION FROM MR. VITTER
Before the merger of Maersk and Sealand, Sealand was the largest participant in the Voluntary Intermodal Sealift Agreement (VISA) program. This program makes vessels and other transportation assets available to the United States military in times of war. How has the merger affected your company's defense commitment to the United States?
As I testified at the Committee's March 22, 2000 hearing, the acquisition of Sealand has not reduced the number of vessels committed to the VISA. They're all U.S.-flag and those ships employ the same number of American seafarers crewing the vessel. The creation of Maersk Sealand has, however, resulted in a substantial increase in the global intermodal transportation and port infrastructure capacity, logistics capability, and communications and cargo tracking services. Maersk Sealand brings a strong commitment to the VISA program. I therefore firmly believe that the United States military and our country's defense program have benefited from the merger.
QUESTIONS FROM MR. VITTER AND MR. ROTHMAN
1. Is antitrust immunity for ocean carriers a worldwide practice?
Page 316 PREV PAGE TOP OF DOC
Yes. Although the antitrust exemptions recognized by various jurisdictions differ somewhat in their details, all of the United States' major trading partners provide liner shipping with exemptions from their standard competition laws.
2. Are the rates and terms discussed in carrier discussion agreements followed uniformly by the agreement members?
Obviously given the carriers, right to enter into individual, confidential service contracts, and the inability of agreements to require the disclosure of the terms of such contracts, it is difficult for carriers to determine the extent to which other members of agreements to which they belong may be following voluntary guidelines. The Federal Maritime Commission, which receives and reviews all voluntary guidelines and service contracts, however, has indicated in its June 2000 Interim Status Report on OSRA ''that overall carrier compliance with [voluntary service contract guidelines] has been limited. . . .'' FMC Report at 33.
3. If antitrust immunity were eliminated in the United States, what do you believe would happen?
If the antitrust exemption were repealed in the United States, we would expect the following negative consequences:
a. Increased volatility in rates, coupled with an unwillingness of carriers and shippers to enter into long-term service contracts at fixed rates. This in turn would cause uncertainty and potential business disruptions to U.S. importers and exporters. Exporters in particular may lose international business because they are unable to offer competitive bids due to transportation cost uncertainties.
Page 317 PREV PAGE TOP OF DOC
b. Shortly following repeal we would expect below cost pricing in certain trades, followed by carrier failures or departures from the U.S. trades, loss of stable and regular service, and accelerated consolidation.
c. Importers and exporters would no longer benefit from the efficiencies created by carrier alliances operating under the exemption. Frequency and geographic diversity of service would suffer, and rates long term would likely be both more volatile and on average higher than today.
In short, without antitrust immunity it would be extremely difficult for carriers to maintain a significant (U.S.-flag) presence in the United States.
4. How would the elimination of antitrust immunity affect U.S.-flag capacity and jobs held by American citizens?
By destabilizing the industry and threatening long term capital investment, repeal of the antitrust exemption would place additional economic strain on all carriers, whose operations already provide returns on investment substantially below other transportation sectors. That strain would be felt by operators of U.S. flag vessels as well as operators of foreign vessels. With higher costs associated with the U.S. flag being mostly fixed, however, the net effect on U.S. flag operations is likely to be more severe. That would jeopardize not only the long term existence of the militarily essential U.S. flag fleet, but would negatively impact the U.S. seamen and officers that man those vessels. More broadly, a less efficient, stable, and reliable ocean transportation system would negatively affect the productivity and competitiveness of U.S. importers and exporters in international markets.
Page 318 PREV PAGE TOP OF DOC
| Congress of the United States, |
| House of Representatives, |
| Committee on the Judiciary, |
| Washington, DC, June 26, 2000. |
Mr. TIMOTHY RHEIN, Chairman,
American President Lines, Limited,
Oakland, CA.
DEAR MR. RHEIN: I appreciate your appearing before the Committee on the Judiciary to testify at the legislative hearing on H.R. 3138, the ''Free Market Antitrust Immunity Reform (FAIR) Act of 1999'' on Wednesday, March 22, 2000.
Members of the Committee have asked that you answer additional written questions for the record. I have attached a copy of the questions. I would appreciate your answering the questions in writing and returning your answers to the Committee for inclusion in the hearing record at your earliest convenience.
If the Committee can provide you with any additional information, please do not hesitate to have your staff contact Joseph Gibson by phone at (202) 225–3951 or by fax at (202) 225–7682. I appreciate your participation in our hearing.
Sincerely,
cc: Hon. John Conyers, Jr.
QUESTIONS FOR MR. RHEIN
Questions from Chairman Hyde
1. A longstanding argument for the carriers' antitrust immunity has been that it is essential for the survival of the U.S.-flag merchant marine. Yet even under the protection of antitrust immunity, the U.S.-flag merchant marine has all but disappeared with foreign companies owning essentially all the U.S.-flag liner fleets. Would elimination of antitrust immunity reverse this trend and allow for the emergence of new American owned U.S.-flag carriers? Would elimination of antitrust immunity protect the U.S. shipping public—i.e., U.S. consumers and U.S. export industries—from the joint price setting for transportation by foreign owned companies?
2. The foreign companies that own the ships previously operated by American owned companies—which now control the ocean transportation services available to U.S. exporters—are tied by their corporate structure and boards of directors to other foreign companies. Those companies are often in direct competition with U.S. companies and industries that produce the same product. As U.S. companies compete in the world market with those foreign companies, should we be concerned that U.S. access to the world market is now controlled by foreign companies who can operate price fixing cartels immune from U.S. antitrust laws? How do we know that the foreign owned carriers will not use antitrust immunity to give an advantage to their corporate affiliates who compete with American companies in other products?
Page 320 PREV PAGE TOP OF DOC
3. The European Union has imposed rules of competition limiting collective carrier pricing. For example, the E.U. does not allow conferences to set a price for inland transportation in Europe, whereas the U.S. does allow this within the U.S. The E.U. restrictions apply to collective activity of all carriers, both U.S.-flag and foreign flag. If the EU could apply its rule of competition, why shouldn't the U.S. do the same?
4. I believe that you would argue that antitrust immunity is necessary to provide stability in the pricing of ocean transportation services for the benefit of U.S. shippers. Yet under our system of antitrust immunity, rates have fluctuated dramatically. Many carriers have gone out of business or been acquired by other larger carriers. Do you believe that antitrust immunity has resulted in stability? How does the stability or instability in the U.S. liner trade compare with the stability or instability found in other industries which are subject to U.S. antitrust laws?
5. Ocean liner companies are typically large multinational corporations. By contrast, U.S. ocean transportation intermediaries are typically smaller companies. The intermediaries are both customers and competitors of the multinational carriers. Should existing carrier antitrust immunity be limited so as to prevent the carriers from jointly fixing transportation rates, compensation, and other terms relating to U.S. transportation intermediaries whom they compete against?
Questions from Mr. Vitter and Rothman
1. Is antitrust immunity for ocean carriers a worldwide practice?
Page 321 PREV PAGE TOP OF DOC
2. Are the rates and terms discussed in carrier discussion agreements followed uniformly by the agreement members?
3. If antitrust immunity were eliminated in the United States, what do you believe would happen?
4. How would the elimination of antitrust immunity affect U.S.-flag capacity and jobs held by American citizens?
| APL Limited, |
| Washington, DC, August 28, 2000. |
JOSEPH GIBSON, Esq.,
Committee on the Judiciary,
House of Representatives, Washington, DC.
DEAR MR. GIBSON: Pursuant to the House Judiciary Committee's March 22 hearing on the FAIR Act please find attached APL's answers to the supplemental questions recently posed to Tim Rhein by some Members of the committee. Please do not hesitate to contact me if you have any questions regarding the attached.
Sincerely
| Lawrence E. Cosgriff, Vice President, |
| Government Affairs. |
Page 322 PREV PAGE TOP OF DOC
Cc:
Tim Rhein, Chairman American President Lines, Ltd.
John Butler, Esq., Shea and Gardner
RESPONSES OF JIM RHEIN TO QUESTIONS FROM THE COMMITTEE
Questions from Chairman Hyde
1. A longstanding argument for the carriers' antitrust immunity has been that it is essential for the survival of the U.S.-flag merchant marine. Yet even under the protection of antitrust immunity, the U.S.-flag merchant marine has all but disappeared with foreign companies owning essentially all the U.S.-flag fleets. Would elimination of antitrust immunity reverse this trend and allow for the emergence of new American owned U.S.-flag carriers? Would elimination of antitrust immunity protect the U.S. shipping public—i.e., U.S. consumers and U.S. export industries—from the joint price setting for transportation by foreign owned companies?
Let me reiterate a view that I expressed at the hearing. The lack of U.S. investor support for international shipping stems primarily from the historically low rates of return throughout the industry. Even judged against long term investment goals, the shipping business is a difficult one, and U.S. capital markets have simply allocated assets elsewhere. Secondly, the issue is not the nationality of our investors. The real issue is whether the United States maintains the current policy that supports the ocean transportation infrastructure necessary to serve our foreign commerce and to maintain our national defense capabilities, or whether we undermine that policy. Repeal of the antitrust exemption would make shipping investments more uncertain and would not encourage new investment in U.S. based shipping companies.
Page 323 PREV PAGE TOP OF DOC
From a broader perspective, including the effects on U.S. importers and exporters in addition to the effects on U.S. flag vessel operations, repeal of antitrust immunity would adversely affect the availability and diversity of ocean transportation services. The current regulatory regime supports an efficient ocean transportation system that fosters international trade and allows U.S. shippers to buy and sell goods throughout the world. There is no reason to tamper with that successful system.
2. The foreign companies that own the ships previously operated by American owned companies—which now control the ocean transportation services available to U.S. exporters—are tied by their corporate structure and boards of directors to other foreign companies. Those companies are often in direct competition with U.S. companies and industries that produce the same product. As U.S. companies compete in the world market with those foreign companies, should we be concerned that U.S. access to the world market is now controlled by foreign companies who can operate price fixing cartels immune from U.S. antitrust laws? How do we know that the foreign owned carriers will not use antitrust immunity to give an advantage to their corporate affiliates who compete with American companies in other products?
Inasmuch as the sort of activity that is described in the question would be unilateral (i.e., a single carrier favoring its affiliate), the antitrust exemption would not come into play in such an arrangement. To the extent that the antitrust exemption has any bearing in these circumstances, it would appear that it would discourage rather than encourage the behavior described. This is so because the antitrust exemption makes possible carrier alliances that greatly multiply the competitive service options available to any given shipper. By supporting this competitive diversity of service options, the exemption in practice circumscribes the possibility that a carrier could provide to an affiliate terms and conditions that a competitor of that affiliate could not obtain from a competing carrier.
Page 324 PREV PAGE TOP OF DOC
3. The European Union has imposed rules of competition limiting collective carrier pricing. For example, the E.U. does not allow conferences to set a price for inland transportation in Europe, whereas the U.S. does allow this within the U.S. The E.U. restrictions apply to collective activity of all carriers, both U.S.-flag and foreign flag. If the EU could apply its rule of competition, why shouldn't the U.S. do the same?
The European Commission's approach to competition policy in liner shipping is fundamentally consistent with the policies of the United States and other major trading nations. As with every jurisdiction involved with shipping, the E.U.'s laws differ to some extent in their details from the laws of other jurisdictions. The basic point, however, is that E.U. law recognizes liner shipping as unique and has a specific antitrust exemption applicable to it. The application of this E.U. ''block exemption'' to joint inland service discussions is unsettled. The legal issue of whether the E.U. regulation that embodies the block exemption for liner shipping services covers inland pricing activities is currently the subject of litigation. Whatever the outcome of the European litigation, I believe that the current U.S. policy is the correct one. Many of the services offered by modem liner carriers are seamless ''through'' or ''intermodal'' services involving land as well as ocean transportation. Because of the integrated nature of these services, the ocean and inland legs of the services are most logically regulated under a consistent regime, which the Shipping Act does. The U.S. Congress considered thoroughly this issue and in 1984 affirmed that the U.S. exemption should encompass inland services. Our customers require a through bill of lading because it represents the most cost effective, convenient way for carriers to meet their needs.
4. I believe that you would argue that antitrust immunity is necessary to provide stability in the pricing of ocean transportation services for the benefit of U.S. shippers. Yet under our system of antitrust immunity, rates have fluctuated dramatically. Many carriers have gone out of business or been acquired by other larger carriers. Do you believe that antitrust immunity has resulted in stability? How does the stability or instability in the U.S. liner trade compare with the stability or instability found in other industries which are subject to U.S. antitrust laws?
Page 325 PREV PAGE TOP OF DOC
The antitrust exemption has encouraged stability in the industry in a manner that has resulted in continuity of high quality services at reasonable and predictable rates. Stability, in the sense that I use the term with respect to ocean shipping, does not mean that rates and services do not vary over time. Of course they do, and the fact that they do is one of the indicators that this industry obeys the usual laws of the marketplace. The stability that I am talking about is the stability of positive results for shippers. Specifically, despite the fact that international trade volumes are expanding to record levels, and despite the fact that many trade lanes are severely imbalanced, carriers continue to meet the challenge of providing adequate vessel and inland capacity to keep the nation's foreign commerce flowing smoothly. Without the ability to coordinate services and discuss rational responses to the marketplace, this level of service could not be sustained, and importers and exporters—as well as the economy as a whole—would suffer. Finally, consolidation has naturally occurred in the industry. The fact of the matter is, however, that without antitrust immunity consolidation would have been accelerated and there would have been fewer carriers in the U.S. international liner trades.
5. ocean liner companies are typically large multinational corporations. By contrast, U.S. ocean transportation intermediaries are typically smaller companies. The intermediaries are both customers and competitors of the multinational carriers. Should existing carrier antitrust immunity be limited so as to prevent the carriers from jointly fixing transportation rates, compensation, and other terms relating to U.S. transportation intermediaries whom they compete against?
Because of the way that the ocean transportation markets work, I believe it is practically impossible to have one rule for carrier cooperation with respect to proprietary shippers and another with respect to intermediaries (in this case NVOCCs). This is the case because, although service contracts are often negotiated individually, carriers, either on their own or working within approved agreements, tend to analyze rates, terms and conditions based on broader market segments. To the extent that guidelines may be set by carrier agreements, they are likely to have relevance to multiple shippers within a given market, without regard to whether those shippers are proprietary shippers or NVOs. Thus, if carriers were prohibited from discussions vis a vis NVOs, it would be very difficult if not impossible for carriers to demonstrate compliance with the law, because they would be placed in the position of proving that they have not applied their general market discussions to this class of shipper. Moreover, such a scheme would essentially amount to a requirement that carriers treat NVOCCs differently from other shippers, a requirement that would be in direct conflict with existing provisions of the Shipping Act.
Page 326 PREV PAGE TOP OF DOC
Going beyond the practical difficulties of having different regulations for different sectors of the market, prohibiting carriers from joint activities with respect to NVOCCs would in fact work to the disadvantage of NVOCCs. NVOCCs rely entirely upon vessel operating carriers physically to provide the services that NVOCCs sell to their customers. If carriers were prohibited from taking any joint actions regarding NVOCCs, services provided by the vessel operators would likely become less regular and less predictable. Since these are the same services that the NVOCCs offer to their customers, the NVOCCs would have a less attractive service to sell, and their businesses would suffer accordingly.
The growing number of individual confidential service contracts demonstrates the effectiveness of OSRA. This has resulted in different terms, conditions, and rates for many shippers even though they may be similarly situated. This trend also includes intermediaries.
Question from Mr. Vitter
Before the merger of Maersk and Sealand, Sealand was the largest participant in the Voluntary Intermodal Sealift Agreement (VISA) program. This program makes vessels and other transportation assets available to the United States military in times of war. How has the merger affected your company's defense commitment to the United States?
As I testified at the Committee's March 22, 2000 hearing, the acquisition of Sealand has not reduced the number of vessels committed to the VISA. They're all U.S.-flag and those ships employ the same number of American seafarers crewing the vessel. The creation of Maersk Sealand has, however, resulted in a substantial increase in the global intermodal transportation and port infrastructure capacity, logistics capability, and communications and cargo tracking services. Maersk Sealand brings a strong commitment to the VISA program. I therefore firmly believe that the United States military and our country's defense program have benefited from the merger.
Page 327 PREV PAGE TOP OF DOC
Questions from Mr. Vitter and Mr. Rothman
1. Is antitrust immunity for ocean carriers a worldwide practice?
Yes. Although the antitrust exemptions recognized by various jurisdictions differ somewhat in their details, all of the United States' major trading partners provide liner shipping with exemptions from their standard competition laws.
2. Are the rates and terms discussed in carrier discussion agreements followed uniformly by the agreement members?
Obviously given the carriers' right to enter into individual, confidential service contracts, and the inability of agreements to require the disclosure of the terms of such contracts, it is difficult for carriers to determine the extent to which other members of agreements to which they belong may be following voluntary guidelines. The Federal Maritime Commission, which receives and reviews all voluntary guidelines and service contracts, however, has indicated in its June 2000 Interim Status Report on OSRA ''that overall carrier compliance with [voluntary service contract guidelines] has been limited. . . .'' FMC Report at 33.
3. If antitrust immunity were eliminated in the United States, what do you believe would happen?
If the antitrust exemption were repealed in the United States, we would expect the following negative consequences:
Page 328 PREV PAGE TOP OF DOC
a. Increased volatility in rates, coupled with an unwillingness of carriers and shippers to enter into long-term service contracts at fixed rates. This in turn would cause uncertainty and potential business disruptions to U.S. importers and exporters. Exporters in particular may lose international business because they are unable to offer competitive bids due to transportation cost uncertainties.
b. Shortly following repeal we would expect below cost pricing in certain trades, followed by carrier failures or departures from the U.S. trades, loss of stable and regular service, and accelerated consolidation.
c. Importers and exporters would no longer benefit from the efficiencies created by carrier alliances operating under the exemption. Frequency and geographic diversity of service would suffer, and rates long term would likely be both more volatile and on average higher than today.
In short, without antitrust immunity it would be extremely difficult for carriers to maintain a significant (U.S.-flag) presence in the United States.
4. How would the elimination of antitrust immunity affect U.S.-flag capacity and jobs held by American citizens?
By destabilizing the industry and threatening long term capital investment, repeal of the antitrust exemption would place additional economic strain on all carriers, whose operations already provide returns on investment substantially below other transportation sectors. That strain would be felt by operators of U.S. flag vessels as well as operators of foreign vessels. With higher costs associated with the U.S. flag being mostly fixed, however, the net effect on U.S. flag operations is likely to be more severe. That would jeopardize not only the long term existence of the militarily essential U.S. flag fleet, but would negatively impact the U.S. seamen and officers that man those vessels. More broadly, a less efficient, stable, and reliable ocean transportation system would negatively affect the productivity and competitiveness of U.S. importers and exporters in international markets.
Page 329 PREV PAGE TOP OF DOC
| Congress of the United States, |
| Washington, DC, May 23, 2000. |
END ANTITRUST IMMUNITY FOR FOREIGNERS AT THE EXPENSE OF AMERICANS; COSPONSOR H.R. 3138, THE FAIR ACT
DEAR COLLEAGUE: Almost all of the goods that we import arrive in the United States on a ship. Almost all of these ships are now owned by foreigners. Yet under a 1916 law, these foreign ship owners have antitrust immunity to fix prices at the expense of American consumers. Congress originally intended this law to protect American ship owners, but there are almost none left. Clearly, the justification for this provision has long since passed.
For that reason, we are supporting H.R. 3138, the ''Free Market Antitrust Immunity Reform (FAIR) Act of 1999,'' which would repeal the ship owners' antitrust immunity. The FAIR Act has broad support from a wide variety of business, labor, agricultural, and legal groups, including the following:
We urge you to join us in ending this outdated policy and return ocean shipping to a free market that benefits American consumers. To learn more, read Chairman Hyde's introductory speech at http://www.house.gov/judiciary/hyde1018.htm, and see the Judiciary Committee website, under witness statements, full committee, March 22, 2000, for testimony from the Committee's hearing on the bill. To cosponsor, call Joseph Gibson of the Judiciary Committee staff at 5–3951.
Page 330 PREV PAGE TOP OF DOC
Sincerely,
| Henry J. Hyde |
| Asa Hutchinson. |
PREPARED STATEMENT OF AGRICULTURE OCEAN TRANSPORTATION COALITION
POSITION ON THE FREE MARKET ANTITRUST IMMUNITY REFORM ACT OF 1999
HR 3138
The Agriculture Ocean Transportation Coalition has, since its founding in 1987, sought the elimination of ocean carrier antitrust immunity. The AgOTC believes that antitrust immunity and the conference system it fosters, is contrary to the needs and interests of U.S. agriculture and the U.S. economy generally. As Congressman Hyde's legislation, HR 3138, The Free Market Antitrust Immunity Reform Act (FAIR) of 1999, would eliminate carrier antitrust immunity, the AgOTC endorses it.
The AgOTC is a national coalition of U.S. agriculture exporters and importers, and represents thousands of small, medium and large U.S. ag companies. Since 1987 the AgOTC has represented U.S. agricultural interests on transportation issues before Congress, the Federal Maritime Commission, Department of Agriculture, Department of Transportation, etc. According to the Journal of Commerce, the AgOTC is ''the voice of agricultural exporters in U.S. transportation policy.''
Page 331 PREV PAGE TOP OF DOC
Since 1916, ocean carriers have been granted by Congress immunity from U.S. antitrust laws. This allows them to collectively discuss and establish prices for ocean transportation, control cargo capacity, and literally, according to the Shipping Act, eliminate competition in international ocean transportation. Agriculture shippers have, through long experience, concluded that carrier antitrust immunity places them at a severe disadvantage when negotiating for ocean transportation. In all other modes of transportation of goods, carriers (truck, rail, air) are bound by U.S. antitrust laws, and must compete with one another for business. Ag shippers would like to see the same healthy competition in ocean shipping.
IMPACT ON U.S. AGRICULTURE
U.S. agriculture depends upon ocean shipping to deliver products into the foreign marketplaces. The cost of transportation and the quality of service often determines whether our products will be purchased by foreign buyers, or whether those buyers will turn to other sources of raw or processed foods and fiber.
By USDA's own assessment, ocean carrier antitrust immunity has a negative impact on U.S. agriculture exporters by reducing competition and increasing transportation costs for U.S. agriculture. This impact is particularly injurious to smaller packers, growers and processors who do not have as much negotiating clout with the ocean carriers.
Antitrust immunity permits companies which should be competitors to share information, which in turn allows them to control the marketplace in a way which would otherwise violate U.S. antitrust laws. The U.S. antitrust laws apply to all U.S. industry and are increasingly being adopted as rules of competition in the European Community and elsewhere around the world. In fact, a position paper has been recently tabled by the Organization of Economic & Community Development (OECD) proposing the elimination of ocean carrier antitrust immunity. Further, the European Union has taken steps to restrict collective rate making by ocean carriers. It is ironic that the U.S., which pioneered the concept of antitrust laws, now lags behind the European Union in the application of antitrust principles to ocean commerce.
Page 332 PREV PAGE TOP OF DOC
Utilizing the grant of antitrust immunity under the Shipping Act, ocean carriers collectively share information, and establish mechanisms to control ocean transportation rates and reduce available carrier capacity. This has had a detrimental impact on the competitiveness of U.S. agriculture in international markets. Instead of negotiating with multiple competing service providers, the U.S. agriculture exporter is often faced with a cartel which sets rates and contract policies. A major study assessed the impact of antitrust immunity and on U.S. agriculture. It found that as a result of the antitrust immunity, the ocean freight rates for U.S. ag exporters are on the average 11% higher than they would be otherwise.
In fact, this is a logical consequence—why else would ocean carriers seek to retain antitrust immunity if it does not increase their revenues? But at what cost? Higher transportation costs translate into higher prices for U.S. consumers of imported products. For U.S. export products, such as agriculture, exporters must compete with many foreign sources (Australia, Central America, etc.). This increased cost can mean the difference between winning or losing a sale.
When the ocean carriers can collectively push up the cost of transportation, the obvious result is that less cargo moves. This in turn, means less cargo hauled by truck and transiting our ports.
SOME RATES ARE LOW AT PRESENT
Some, with short memories, would point out that at least in the transPacific export (westbound) trades today, ocean freight rates are at historically low levels. Thus, they would suggest that antitrust immunity has not resulted in higher freight rates. This would be a false conclusion. Ocean shipping is a cyclical industry and only those with short memories do not recall that the same carriers in this same transPacific trade have utilized antitrust immunity to impose draconian rate increases which have caused significant loss of sales for U.S. exporters. In this trade, through the conference structure, dramatic surcharges were imposed, capacity reduced, and by joint carrier agreement, the carriers declined to serve certain hay and alfalfa exporters, thus locking them out of foreign markets. It took Congressional intervention to force the carriers to relent. Such collective abusive treatment of U.S. exporters would not have been possible without the antitrust immunity.
Page 333 PREV PAGE TOP OF DOC
It is the AgOTC's position that market forces should prevail: if demand for ocean transportation increases versus supply of space, then increased prices are justified. Supply and demand fluctuate and thus freight rates should fluctuate as well. But experience has shown that the conference structure hinders the normal decrease in rates as demand drops, while exacerbating any increases that would otherwise be justified by market demand. But if the supply is manipulated by carriers, or if the carriers collectively agree to increase rates even when unjustified by demand, then antitrust immunity has a severely detrimental impact on U.S. exporters. For example, between U.S. and South America, the carriers have just recently jointly agreed to impose a $1000 per container rate increases.
With the decline in the number of ocean carriers, including the consolidation resulting from the foreign acquisition of the U.S. flag international fleet, it becomes easier and even more likely that the few remaining carriers will act collectively to control pricing. Thus, the specter of continued antitrust immunity for carriers is even more daunting for the future.
FOREIGN INTEREST BENEFIT
And who benefits? At this point, virtually all containerized cargo is carried on ships owned by foreign steamship lines. Is it truly in the interest of the U.S. economy to render U.S. exports less competitive and U.S. consumer products more expensive in order to subsidize foreign steamship companies?
The Ocean Shipping Reform Act of 1998 (OSRA) has provided the possibility of increased competition among ocean carriers by permitting a shipper and a carrier to maintain contract shipping rates as confidential. However, the retention of antitrust immunity undermines competitive possibilities offered by OSRA. This is evident when, utilizing the antitrust immunity, the carriers can and do collectively agree upon additional fees to be charged (for example ''peak season surcharges') and on service contract policies that limit confidential contracting as a truly competitive tool, by agreeing upon uniform service terms, initiation and termination dates, and other fees and policies.
Page 334 PREV PAGE TOP OF DOC
Whether this collusive activity is called a ''cartel'' or something seemingly more benign such as a 'talking agreement'', it would constitute a violation of civil and criminal antitrust laws but for the unique immunity provided to these foreign steamship lines on which U.S. importers and exporters are dependent. The sharing of this information results in rates being higher, or at least not as responsive to market demands. It means that the ocean carriers are not as flexible as other transportation providers in developing mutually beneficial relationships with shipper.
ANTITRUST IMMUNITY DOES NOT PROVIDE STABILITY
An argument has been raised that the antitrust immunity is necessary to provide stability in ocean trades. History proves otherwise. Antitrust immunity has existed since 1916, and the U.S. flag fleet has over that time, withered and virtually disappeared. Foreign companies now own our fleet. Freight rates have fluctuated up and down, particularly when manipulated by conferences. Numerous ocean carriers have gone out of business. There are now fewer competing carriers than ever before. Clearly antitrust immunity has not protected the U.S. flag merchant marine, nor has it provided stability in the trades. Meanwhile it is costing U.S. producers, manufacturers, packers and growers a share of foreign markets.
ANTITRUST IMMUNITY NOT NECESSARY
It should be noted that elimination of antitrust immunity would still allow ocean carriers to engage in efficiency enhancing activities. They, like any other business could form joint ventures. Vessel sharing, slot chartering and other efforts to increase efficiency would still be possible, even if ocean carrier antitrust immunity were eliminated.
Page 335 PREV PAGE TOP OF DOC
In contrast to carrier antitrust immunity, AgOTC believes that taxpayers and the public benefit from the antitrust immunity presently accorded to port authorities. The AgOTC believes it should be maintained, as HR 3138 would do.
CONCLUSION
The AgOTC strongly supports the elimination of antitrust trust immunity for ocean carriers and passage of the FAIR Act.
| American Association of Port Authorities, |
| Alexandria, VA, April 24, 2000. |
Hon. HENRY J. HYDE,
House of Representatives, Washington, DC.
DEAR REPRESENTATIVE HYDE: The American Association of Port Authorities (AAPA) opposes H.R. 3138 (Hyde, R–IL), the Free Market Antitrust Immunity Reform (FAIR) Act, currently before the Judiciary Committee. The legislation would unravel a long and hard-fought compromise reached by shippers, carriers, labor interests and ports in the development of the Ocean Shipping Reform Act of 1998 (OSRA) by eliminating the limited antitrust immunity of ocean carriers.
Founded in 1912, AAPA represents virtually all major public port authorities and agencies in the Western Hemisphere. This letter represents the views of our U.S. delegation members. AAPA members are public entities mandated by law to serve public purposes, primarily the facilitation of waterborne commerce and the consequent generation of local and regional economic growth.
Page 336 PREV PAGE TOP OF DOC
International trade has been the impetus for public investment in our nation's ports and related infrastructure, which has led to the generation of significant national economic benefits, as well as to local and regional economies. In 1996 the port industry, port users and capital expenditures generated 11.7 million jobs nationwide, $131 billion in federal taxes, $440 billion in income, $47 billion in state and local taxes, nearly $1.4 trillion in sales, and $666 billion to the GDP. Since 1946, U.S. public ports have invested almost $20 billion in port facilities, and capital expenditures through 2003 are projected to be $9.1 billion.
At the Judiciary Committee's March 22 hearing on H.R. 3138, AAPA testified that enactment of H.R. 3138 would be injurious to the maritime industry at a time when further adverse impact to the carriers' already precarious financial condition could cause irreparable harm and could put the significant investments made by public port agencies at risk. OSRA has only been in effect for one year (since May 1, 1999) and should be given a chance to work before any other significant changes are made. We urge the Judiciary Committee not to act on H.R. 3138. Thank you for your consideration of our views on this important issue.
Sincerely,
| Kurt J. Nagle, President. |
PREPARED STATEMENT OF AMERICAN COTTON SHIPPERS ASSOCIATION
The American Cotton Shippers Association supports the enactment of the Free Market Antitrust Immunity Reform Act and urges the Judiciary Committee to report this consumer/shipper market oriented legislation favorably for early consideration and enactment by the House of Representatives.
Page 337 PREV PAGE TOP OF DOC
INTEREST OF ACSA
ACSA was founded in 1924 and is composed of primary buyers, mill service agents, merchants, shippers, and exporters of raw cotton who are members of four federated associations located in sixteen states throughout the cotton belt:
Atlantic Cotton Association (AL, FL, GA, NC, SC, & VA)
Southern Cotton Association (AR, LA, MS, MO, & TN)
Texas Cotton Association (OK & TX)
Western Cotton Shippers Association (AZ, CA, & NM)
ACSA member firms handle over 80% of the U.S. cotton sold in domestic and export markets. In 1999–2000, domestic mills will consume 10.5 million bales and 7 million bales will be shipped to foreign mills. Because of their involvement in the sale and shipment of cotton, ACSA members are directly impacted by any action of the Congress that improves their ability to ship the product of America's cotton producers at competitive freight rates. Therefore, our interest is manifest in the proposal before the Judiciary Committee since the sound and effective deregulation of the shipping industry is in the best interests of our members and our producer and export customers.
FREE COMPETITION IS BENEFICIAL TO US PRODUCERS & EXPORTERS
HR 3138, the Free Market Antitrust Immunity Reform (FAIR) Act of 1999, would strip ocean carriers and their conferences of antitrust immunity and in doing so continue the progress made in recent years of giving ocean carriers the right to take independent action thereby encouraging the development of contract rates between shipper and carrier. The maintenance of the antitrust immunity is a legacy of the inefficiency of a bygone era of cartels no longer enjoyed in other modes of transportation which penalizes efficient ocean carriers and deprives US exporters of the cost effective rate structures necessary to move products in a highly competitive world market place.
Page 338 PREV PAGE TOP OF DOC
FOREIGN CARRIERS PRIMARY BENEFICARIES OF IMMUNITY
The primary beneficiaries of the antitrust immunity are foreign ocean carriers. In his November 1999 Chicago speech, shortly after he introduced this much needed legislation, Chairman Hyde noted that:
''. . . this summer, the last major American carrier, Sea-Land, announced the sale of its international operations to Maersk, a Danish company. Also, this summer, Crowley, a smaller American carrier, announced its intention to sell its South American business to a foreign carrier. These are just the last in a long series of such sales. As a practical matter, there are no major global American-owned carriers left. That raises the question: who exactly are we protecting with this immunity? It allows foreign carriers to charge higher prices which are passed on to American consumers when they buy imports. It is hard for me to see a policy justification for that result. (emphasis added)
The practice of using the looser regulatory framework of discussion agreements, rather than traditional conferences, continues to spread. Discussion agreements continue to capture larger and larger shares of the market. In some trades, they have nearly 100% of the market. To my mind, it is arguable whether these types of agreements as they have developed were even contemplated by Congress.
While the rates that these discussion agreements set are supposedly 'voluntary,' most of the discussion agreement members seem to follow them when they are dealing with small and medium sized shippers. To my knowledge, it is not the norm for any such shipper to get a rate that is less than the 'voluntary' rate. For this year's shipping season—after the advent of the new Act—the Transpacific Stabilization Agreement announced 'voluntary' rate increases of $900 per container. Just last week, the TSA announced that it would seek 'voluntary' rate increases of 10% to 15% for next year. All of this has occurred at a time when available space in that trade has increased.
Page 339 PREV PAGE TOP OF DOC
Now it may well be that these rates are what the market will bear. But if it is, there is no need for antitrust immunity for joint rate setting, even on a 'voluntary' nature. The market would deliver these rates any way. However, another possibility is that these rate increases are more than the market would bear and that they would not stick in a free market. If that is the case, then we have an antitrust immunity that benefits the foreign-owned carriers at the direct expense of the American shipper and consumer. Again, I have to ask: who benefits?''
''Finally, one argument that has always been made in favor of antitrust immunity is that all of our trading partners have antitrust immunity for their carriers, so we must have it also. On its face, that is unpersuasive. Their having a bad policy does not justify our having one.''
CONGRESS CAN ASSIST ALL SHIPPERS IN SECURING COMPETITIVE & TRANSPARENT RATES THROUGH REPEAL OF OCEAN CARRIER ANTITRUST IMMUNITY
As Chairman Hyde has noted, if ocean carriers continue to enjoy antitrust immunity shippers will be denied competitive rates since the newly evolving system of discussion agreements results in the fixing of rates. Further, the non-discussion agreement carriers peg their rates at levels close to those of the agreement members. Unlike surface transportation, where there is real rate competition for cargo between rail and truck carriers, ocean carriers have no competition for low density agricultural cargoes such as cotton. Their antitrust immunity permits carriers to legally engage in the most injurious of all discriminatory practices—price fixing. Therefore, we urge the Judiciary Committee to repeal this predatory privilege and allow carriers to engage in pricing practices that truly reflect the reality of the market and not the artifices created by the discussion agreement system. Unless this essential reform is adopted, the shippers who provide the business to the carriers will continue to be price takers in a system that subordinates our interest to those of the carriers.
Page 340 PREV PAGE TOP OF DOC
Further, it is imperative that we return to a system of rate transparency wherein rates are published and made immediately available to competing carriers and shippers. Prior to the recent round of reforms we at least had rate transparency. Confidential contracts have deprived the small and medium sized shipper of this essential competitive knowledge of price discovery for freight rates. Now we have a system where carriers can meet and suggest minimum rate structures which soon are incorporated into confidential contracts. The customers or consumer of the service who provide the revenue by paying the freight only know the terms and conditions of their own contract. Would the Congress allow such a system for other modes of transportation? We think not! Is such a system fair? Of course it is not fair; it is patently discriminatory and would not be tolerated in any other marketplace.
The protective policies for ocean carriers must end. World trade has changed significantly and it is time we terminate the special privileges we now grant mostly to foreign carriers.
| American Institute for |
| Shippers' Associations, Inc., |
| Washington, DC, March 17, 2000. |
Hon. HENRY J. HYDE, Chairman,
Committee on the Judiciary,
House of Representatives, Washington, DC.
Page 341 PREV PAGE TOP OF DOC
Re: H.R. 3138; ''Free Market Antitrust Immunity Reform (FAIR) Act''
DEAR CHAIRMAN HYDE: As Executive Director of the American Institute for Shippers' Associations, Inc. (''AISA''), the nation's oldest and largest trade association representing the not-for-profit shippers' association industry, I would like to express AISA's support for your bill, H.R. 3138, the ''Free Market Antitrust Immunity Reform (FAIR) Act.'' A representative of AISA testified at the May 5, 1999 hearing held by the Judiciary Committee on the antitrust ramifications of the Ocean Shipping Reform Act of 1998. As AISA testified at that time, the shippers' association industry has historically supported the antitrust immunity enjoyed by the ocean carrier industry because it promoted stability and non-discriminatory access to international shipping services and foreign markets. However, as a result of enactment of the Ocean Shipping Reform Act of 1998 (OSRA), AISA has modified its historic position. We now support a repeal or modification of the antitrust immunity enjoyed by the shipping industry. OSRA as enacted is incompatible with a continued blanket antitrust exemption, because it eliminates the rate transparency and non-discriminatory common carriage protections for small to medium-sized shippers that has historically been the quid pro quo for the industry's antitrust exemption. As enacted, OSRA has created an unbalanced discriminatory marketplace that increases the potentially harmful anticompetitive abuses that are always inherent in an exemption from the antitrust laws. A copy of AISA's testimony at the May 5, 1999 hearing is enclosed. We respectfully request that you include it in the record of the upcoming March 22, 2000, hearing held on H.R. 3138.
Since testifying before the Judiciary Committee last May, the major remaining U.S. flag lines that were instrumental in supporting the enactment of OSRA and the continued antitrust exemption for the liner industry have either become foreign-owned or have greatly reduced their presence in the U.S. international trades. Under these circumstances, repeal of the antitrust exemption is also warranted since there is no longer any compelling need to protect U.S. carriers from the enforcement of the U.S. antitrust laws when providing international ocean transportation services. As the recent OPEC oil price increases demonstrate, U.S. consumers ultimately suffer when foreign interests engage in antitrust-exempt cartel activity to control supply and prices in the international marketplace.
Page 342 PREV PAGE TOP OF DOC
AISA supports the purpose of H.R. 3138. At the same time, AISA recognizes that elimination of the antitrust exemption for the ocean shipping industry does raise issues of international comity with U.S. trading partners who may not support a repeal of the antitrust exemption at this time. AISA submits that H.R. 3138 will force other industrial nations to also re-examine the antitrust exemption for the industry. In this context, AISA respectfully suggests that the bill might be amended to direct the Administration to commence bi-lateral and multi-lateral negotiations with the major U.S. trading partners such as the EU, and within multi-lateral trade organizations such as the OECD and WTO, to develop a common policy on phasing out the antitrust exemption, either on a bi-lateral or global trade lane basis.
AISA looks forward to working with you and the Judiciary Committee staff in fine-tuning provisions of the bill. Please contact the undersigned should you have any questions or comments concerning AISA's position.
Sincerely,
| Glenn R. Cella, Executive Director. |
Enclosure
PREPARED STATEMENT OF ANDREW M. DANAS, ASSISTANT GENERAL COUNSEL, AMERICAN INSTITUTE FOR SHIPPERS' ASSOCIATIONS, INC.
Mr. Chairman Hyde and Distinguished Members of the Judiciary Committee:
Page 343 PREV PAGE TOP OF DOC
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.
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.
Page 344 PREV PAGE TOP OF DOC
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.
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.
Page 345 PREV PAGE TOP OF DOC
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.
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.
Page 346 PREV PAGE TOP OF DOC
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.
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 discrimination—and abuse—was occurring in an industry in which Congress said the normal rules of competition did not have to exist.
Page 347 PREV PAGE TOP OF DOC
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.
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.
Page 348 PREV PAGE TOP OF DOC
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.
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:
Page 349 PREV PAGE TOP OF DOC
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—
(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.
Page 350 PREV PAGE TOP OF DOC
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.
PREPARED STATEMENT OF THE AMERICAN MARITIME CONGRESS
The American Maritime Congress is an educational and research group representing U.S.-flag vessel operating companies in the international and domestic trades. The following statement for the record regarding H.R. 3138, the Free Market Antitrust Immunity Reform Act of 1999, expresses the common view of AMC's members and is not in any way intended to detract from or attenuate comments filed individually by them.
Page 351 PREV PAGE TOP OF DOC
AMC submits that retaining the limited antitrust immunity provided for ocean carriers under the Shipping Act of 1984, as amended by the Ocean Shipping Reform Act of 1998 (OSRA), is highly beneficial to the economy and security of the United States. We believe that repeal of this immunity is unwarranted, and therefore we must respectfully oppose H.R. 3138.
First, the limited antitrust immunity afforded to ocean carriers under current law is the only practical means to temper the destructive market forces that would otherwise impair access for U.S. shippers and consumers to efficient, reliable oceanborne transportation. Providing a degree of antitrust immunity for ocean carriers has been United States policy since 1916. The majority of maritime trading nations around the world who have chosen to address the subject have adopted similar policies, because providing limited antitrust immunity to ocean carriers has proven to be the only effective way of addressing the unique economics of the international liner shipping market. Without the limited degree of immunity provided under U.S. law, below-cost pricing driven by intense competition would cause carriers to fail and lead to excessive industry consolidation, loss of service to shippers and, ultimately, higher rates.
Second, the limited degree of immunity provided under OSRA was the result of a hard-won compromise between the myriad of interested parties with a stake in the maritime transportation industry. OSRA, implemented less than one year ago, narrowed the scope of carrier antitrust immunity to only those activities set forth in agreements filed with the Federal Maritime Commission. The law added new restrictions on collective carrier activities, and prohibits carrier agreements from placing restrictions on their members' right to enter into individual service contracts with shippers. While numerous early assessments of OSRA by federal agencies, shippers and carriers have reported that the law is working as intended by Congress, no evidence has been provided that OSRA and the antitrust immunity it provides have had a negative effect on the U.S. maritime industry. In fact, freight rates for all the major U.S. trades are significantly lower in real terms—as much as half—compared to twenty years ago.
Page 352 PREV PAGE TOP OF DOC
Third, moving the United States away from limited antitrust immunity—a policy accepted worldwide, time-tested and proven in addressing the unique nature of the ocean transportation industry—would have a disastrous effect on the United States as a maritime trading nation. American companies would have sharply reduced access to ocean transportation, and American ports would lose business, as carriers sought out transshipment points in Canada, Mexico and the Bahamas to avoid becoming entangled in a U.S. regulatory scheme out of step with the rest of the world. Most importantly, eliminating the limited antitrust immunity for ocean carriers could make it impossible for U.S.-flag carriers to compete in the world marketplace. The loss of the U.S.-flag fleet would be devastating to our national security and economy. The U.S.-flag fleet and the U.S.-citizen merchant mariners who serve it are an irreplaceable national security asset.
In light of these concerns, AMC respectfully submits that H.R. 3138 would threaten the stability of the U.S.-flag maritime industry, and therefore the nation's security, and would also have serious, though unintended, consequences for the nation's economy. AMC therefore, respectfully opposes H.R. 3138 and asks that the Committee take no further action on the bill.
| Chemical Manufacturers Association, |
| Arlington, VA, March 13, 2000. |
Hon. HENRY J. HYDE, Chairman,
Committee on the Judiciary,
Page 353 PREV PAGE TOP OF DOC
House of Representatives, Washington, DC.
DEAR MR. CHAIRMAN: The Chemical Manufactures Association (CMA) has long supported changes to the ocean carrier conference system. The member companies of CMA were disappointed that the Ocean Shipping Reform Act of 1998 (P.L. 105–258) did not provide for the termination of the antitrust exemption for ocean carriers. We strongly applaud your efforts to rectify this situation.
The member companies of CMA represent over ninety percent of the productive capacity for basic industrial chemicals in the United States. Additionally, the chemical industry is the largest exporting sector of the domestic economy. Therefore, ocean shipping with reasonable freight rates and high quality service is very important for our industry.
We appreciate the time and energy the Judiciary Committee is spending on investigating whether ocean carriers should retain their antitrust exemption. Further, we support the passage of H.R. 3138, the ''Free Market Antitrust Immunity Reform Act'' and urge its passage.
If CMA can be of additional assistance please contact me or Mr. Gary Griffith, Legislative Representative for Transportation, at (703) 741–5914.
Sincerely,
| Frederick L. Webber, President and CEO. |
Page 354 PREV PAGE TOP OF DOC
| International Longshore & |
| Warehouse Union, |
| San Francisco, CA, March 20, 2000. |
Hon. HENRY J. HYDE, Chairman,
Committee on the Judiciary,
House of Representatives, Washington, DC.
DEAR CHAIRMAN HYDE: Here we go again. Less than one year after the landmark Ocean Shipping Reform Act (OSRA) became effective, the Judiciary Committee is holding a hearing on legislation to undo the delicate compromise that led to the passage of OSRA. H.R.3138, the ''Free Market Antitrust Reform Act of 1999'', would repeal limited anti-trust immunity for ocean carriers. Retention of anti-trust immunity is a key component of OSRA and recognized by most interested parties in the maritime industry as necessary to bring a reasonable level of stability to international trade.
Longshore workers are particularly interested in the development of marine terminals and port expansion and improvement projects such as the Port of Oakland's Vision 2000 plan. Repeal of limited anti-trust immunity would create the kind of instability that places such job-creating investments in jeopardy because the investment risks dramatically increase.
The ILWU reluctantly supported the passage of OSRA because some—not all—of our objectives were met. We would not have supported OSRA if we expected parts of this compromise to unravel. We strongly urge the Committee to reject H.R.3138, and would appreciate this letter being submitted for the record.
Page 355 PREV PAGE TOP OF DOC
Sincerely,
| Brian McWilliams, President. |
| National Grain and Feed Association, |
| Washington, DC, March 24, 2000. |
Hon. HENRY J. HYDE, Chairman,
Committee on the Judiciary,
House of Representatives, Washington, DC.
Re: Free Market Antitrust Immunity Reform Act
DEAR CHAIRMAN HYDE: The National Grain and Feed Association (NGFA) commends you for introducing, and holding a hearing on, the Free Market Antitrust Immunity Reform Act, H.R. 3138. We urge your colleagues to lend support to this important and needed reform.
The NGFA consists of about 1,000 grain, feed, processing and grain-related companies that operate 5,000 facilities that store, handle, merchandise, mill, process and export more than two-thirds of all U.S. grains and oilseeds. About 70 percent of NGFA member firms are small businesses—country elevators and feed mills. Also affiliated with the NGFA are 36 state and regional grain and feed associations. Our members include exporters that use ocean vessels for shipping bulk grain as well as container shipments for specialty grains and food products. Likewise, our membership includes users of grain and grain products that export their products (poultry, turkey, pork and beef) in container vessels.
Page 356 PREV PAGE TOP OF DOC
It is NGFA's firm belief that the nation's antitrust laws should be applied equally to all industries. Ensuring competition will benefit exporters, importers, consumers and ultimately the ocean vessel community. Protectionism, whether through antitrust immunity or other anticompetitive laws such as the antiquated Jones Act, have not helped the U.S.-flag fleet. Indeed, the evidence overwhelmingly supports the opposite conclusion: special deals for U.S.-flag carriers have contributed to their decline.
We appreciate your efforts to restore a competitive environment to ocean shipping. As always, please contact David Barrett or me if we can be of further assistance.
Sincerely,
| Kendell W. Keith, President. |
PREPARED STATEMENT OF TRANSPORTATION INTERMEDIARIES ASSOCIATION
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: NVOCCs, international forwarders, property brokers, domestic freight forwarders, air forwarders, intermodal marketing companies, perishable commodity brokers, and logistics management companies.
TIA, though its management of the American International Freight Association (AIFA), serves as 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 75 countries without national associations, including more than 40,000 freight forwarders and NVOCCs worldwide.
Page 357 PREV PAGE TOP OF DOC
TIA also will serve as an official observer to the U.S. delegation in the upcoming Organization for Economic Cooperation & Development (OECD) meetings in Paris.
The over 700 companies of TIA are fiercely independent businesses that fully support deregulation and competitive markets. TIA members, made up of small businesses who move over $5 billion in freight annually, believe an open, competitive marketplace is the key to success in all transportation modal industries. That is why TIA strongly supports Chairman Hyde's legislation, the Free Market Anti-Trust Immunity Reform Act (H.R. 3138).
This legislation would continue efforts by Congress to deregulate the entire transportation industry. Since deregulation began in the transportation industry in 1980, it 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.
Passage of the Ocean Shipping Reform Act (OSRA) last year was a positive step in deregulating the ocean shipping industry. The legislation at one time provided an opportunity for all parties in the ocean shipping industry to enter into confidential contracts and lessen the burdens on tariff filing. Unfortunately, when the bill reached the Senate floor last May, provisions giving NVOCC's equal footing with the rest of the ocean shipping community were removed. This was done at the request of organized labor because of their belief that NVOCC's would take away labor jobs if given equal footing with the rest of the shipping community.
During House consideration of OSRA last year, TIA was an active proponent of completely deregulating the ocean shipping industry. We expressed to the House our concerns on the effect the legislation would have on ocean transportation intermediaries by not extending the benefits and freedoms of economic deregulation to intermediaries. The OSRA does not allow NVOCC's to enter into confidential service contracts like other shippers and still requires NVOCC's to file tariffs—something other shippers do not have to do.
Page 358 PREV PAGE TOP OF DOC
Chairman Hyde, TIA applauds you for hearing our concerns and working with the ocean transportation intermediary community to correct some of the injustices of OSRA to the transportation intermediary industry.
As you know, OSRA did not make any substantive changes from the Shipping Act of 1984 concerning ocean carriers' anti-trust immunity. But events over the past year have called into question the future of this immunity. Several carriers participating in discussion agreements and conferences using anti-trust immunity have unilaterally raised service contract rates and added several other surcharges during the 1998 fall 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.
The Federal Maritime Commission (FMC) conducted an investigation into this discriminatory behavior. Unfortunately, the final report from the FMC found only minor violations from one carrier with little or no punishment levied. TIA was willing to work with the FMC during the investigation to uncover several example of discriminatory behavior. After reviewing its final report and punishments levied, however, TIA has come to the conclusion that the FMC is not able to adequately protect the rights of NVOCC's from these discriminatory practices.
Therefore, TIA strongly endorses Chairman Hyde's legislation to remove ocean carriers anti-trust immunity. In a free and open market there should be no need for the carriers to enjoy such immunity. TIA looks forward to working with the Chairman Hyde and the rest of the Judiciary Committee in enacting legislation that promotes an free, competitive market that protects both large and small players from any action that would hinder the free market.
Page 359 PREV PAGE TOP OF DOC
| Tucker Company, |
| Cherry Hill, NJ, April 10, 2000. |
Hon. HENRY J. HYDE, Chairman,
Committee on the Judiciary,
House of Representatives, Washington, DC.
Subject: April 12, 2000 Antitrust Hearing
DEAR CHAIRMAN HYDE: Tucker Company forwarded testimony for your March 22, 2000 hearing on H.R. 3138, The ''Free Market Antitrust Immunity Reform (FAIR) Act of 1999.''
That testimony was strongly in favor of the repeal of any antitrust immunity for ocean carriers. Obviously, I would like to repeat that testimony here.
In addition, antitrust immunity in the motor carrier sphere, currently with the classification committees should be done away with.
Finally, the antitrust immunity and monopoly favors awarded to our railroads have been and will continue to be an atrocity to customer service and competitive market interest.
Page 360 PREV PAGE TOP OF DOC
It will get worse until it is reversed. Certainly, government policy should work to prohibit any further mergers or consolidations of the already anti-free market, anti-competitive, anti-customer service railroad sphere.
The history of antitrust immunity, though clothed in many worthy sounding cover-ups, is simply anti supply-demand mechanism favors awarded to the sellers of transportation service in their desire to ''get over'' on the customers.
It should be noted that the suppliers in any market are the big spending lobbyists. The customers of a market are not focused primarily on that market. Thus, shippers tend to spend very few dollars on freight matters in the state and federal capitals.
Invariably, the buyers (demand) side gets disadvantaged by this intentionally unlevel playing field. And, invariably, small and medium businesses both end users and intermediaries, who are needed to service small and medium buyers, are disadvantaged as well.
The end result is varyingly degrees of dysfunctional market mechanisms favoring the biggest players and especially the sellers.
The country really deserves to get back to competitive, vigorous supply and demand, level playing fields for all, both big and small, market economics. That's where it gets really good for everyone.
Tucker Company greatly appreciates your committee's vision.
Page 361 PREV PAGE TOP OF DOC
Very truly yours,
| William J. Tucker, CTB, President. |
PREPARED STATEMENT OF J. A. TUCKER COMPANY
Tucker Company is a 39 year old, Surface Transportation Board licensed Motor Carrier Broker. We provide a range of third party freight logistics services to our shipper and carrier clients. However, we are focused so heavily on trucking brokerage and have been for 3 generations that we consider Tucker Company to be one of the country's experts at third party freight service and of the many subtle, finer points of the freight ''market mechanism''.
As such, we know OSRA to be a dysfunctional market. It disadvantages American business shippers and especially small business relative to large domestic and, of course, all foreign competitors. It disadvantages American ocean freight intermediaries, NVOCCs, almost out of existence.
From the amount of extraneous debate and spin inside the beltway and in the trade media, all amounting to putting bandaids on cancer, we feel compelled to speak out in an attempt to hasten the country's realization that OSRA needs major reforming as soon as possible. The country's exports, balance of trade, small business competitiveness and commercial power in the future are irreparably crippled until we do.
Some disturbing aspects of OSRA and the awkwardly regulated marketplace it is spawning are:
1. The market participants do not get to define the market mechanism and players as they see fit.
Page 362 PREV PAGE TOP OF DOC
2. Shippers associations are not an answer. They are creatures of regulated markets. They are clumsy, unstable ''clubs'' trying to combine freight for lower rates. In free, open, competitive markets it is doubtful they move even 1% of the freight. They never will be substitutes for natural market intermediaries such as brokers in trucking, IMCs in intermodal rail and NVOCCs in ocean freight. It's not even close.
3. American and foreign ocean freight forwarders do route their shipper-customers' ocean freight. At first blush they may appear to be a natural substitute for the shipper's need for ocean freight routing intermediaries. They are not. Their focus is documentation, ''contacts'' at foreign ports, financial, communications, foreign commodity duties and regulations, etc.; not effective consolidations of freight. In unregulated markets they reach out to NVOCCs. The ''mix'' of their customers' freight at any given time usually has no compatibility for consolidation benefits. Usually their customers, when invoiced for ocean freight by the forwarder, are invoiced at or near ''retail'' prices. Not even close to consolidator's ''wholesale'' pricing.
4. Due to #2.and #3, above, until NVOCCs are given open entry to serve ocean shippers without phony restrictions and insurance thresholds, the ocean market will have an almost zero effective intermediary dimension. Not even close. And that's ruinous for any effective market mechanism.
5. Under OSRA NVOCC activity will go on in every other country in the world but the U. S. This will put American exporters at a great disadvantage vis a vis every other global exporter. America already has massive balance of trade problems. OSRA will worsen them dramatically.
Page 363 PREV PAGE TOP OF DOC
6. The sector of the U. S. industry to be hurt the most will be the small and medium sized firms; hundreds of thousands of firms. The 500 or so largest shippers can, by virtue of their large ocean freight volumes, negotiate fairly well without NVOCCs and normal antitrust. But even for the largest firms, having access to the NVOCC's volumes and specialties often gains another small competitive edge on his foreign competitor. They provide one more option or bail out even to the largest shipper.
7. Antitrust immunity is, of course, a government favor only granted to the sellers of a market. Why? So that, by communicating with their competitor suppliers, they can ''get over'' on their customers with price, service, practices, etc. which they could never accomplish in a natural, competitive market. It also lets them put maximum pressure on their competitors to ''stay in line''; that is to restrict competition.
8. Since no American ship lines remain in (99%? of) global trade, our OSRA showers these antitrust immunity favors on foreign lines to use against American ocean shippers! Americans may be big hearted but stupid is something to which we should really not strive. For us to be subsidizing foreign counties' economies the way we do is charitable but we surely know most foreign countries consciously structure their industry and trade to be intensely nationalistic (predatory?). Where is the line between benign generosity and dumb or disaster? OSRA doesn't even care. It hands foreign ship lines and governments blank American checks.
9. Longshoreman union labor, along with foreign ship lines and America's largest shippers, was one of the 3 major bargainers that got OSRA defined. Already some union piers and terminals are quietly embargoing truckers who are sent in to pick up or deliver ocean freight. The ruse is a long series of steps to fill out an application for an ID card to serve that pier. A driver has to get his picture taken, fill out application(s), have his equipment inspected, take a small test, pay for much of this process with cash . . . etc. It is not uncommon to spend a day or more at this before he gets to load or unload a shipment. Most drivers, of course, having lost a day's earnings, leave in disgust without a shipment. Economically they have to. There is one less nonunion trucker willing and able to serve that pier. This just started in the past few months. Any correlation? Does the bear live in the woods?
Page 364 PREV PAGE TOP OF DOC
10. Along with #9 above, the real reason organized labor would only agree to an OSRA bill which crippled NVOCCs was that before OSRA NVOCCs consolidated freight AND STUFFED HUGE QUANTITIES OF CONTAINERS for ocean ships. The union could not win their old, 50 mile radius restriction in Congress or in the Courts. OSRA, by crippling NVOCCs nets labor the same effect. They will stuff a much larger percentage of ocean containers. They never did it well or as cheaply as the free market NVOCCs did, but now they should start to handle probably at least as much as the 50 mile rule would have given them.
11. The specific regulations that, in an OSRA market, cripple NVOCCs are the requirements for them to ''publish'' their prices in the open market place under government control. This while all other parties are given privity of contract freedom to negotiate anything they care to and keep pricing secret. The high bonds and heavy government fines for violating regulatory rules further inhibits them. It certainly nets out to almost no freedom of entry into the market for new and small players. That open entry is the hallmark of a deregulated market. OSRA is consciously designed to not be an open, natural, deregulated market, though its architects get to call it that, of course.
12. My firm serves 100s of shippers in domestic, Canadian and Mexican surface freight. As commerce becomes increasingly global I must become a more global supplier to them. At the same time, their usage of me as a 3rd party logistics supplier is trending in the direction of their wanting to give me more of their logistics business. If I cannot enter the ocean freight intermediary service market because of the artificial, OSRA thresholds, I not only lose the potential growth with this and my other existing customers that ocean freight would bring, but I may soon be displaced in some of my accounts by a large NVOCC type competitor who can do ocean as well as my type of surface freight brokerage. So, going forward, the restrictions to entry in ocean freight threaten my existing business base.
Page 365 PREV PAGE TOP OF DOC
I don't mean to be demeaning of the architects of OSRA. Other than the foreign ship interests who can't be faulted for not turning down the lush gifts they obtained, the architects were not freight market business people and didn't have a clue about some of the dysfunction they were building into OSRA. I think we can assume they still think it is almost right. At least they keep telling us that, don't they? I'm sure to the outsider markets look easy to construct. Not even close.
In truth, the result we now know as OSRA should be called the Longshoreman Union Relief Act (LURA) and/or the Foreign Shipline Lush, Lush Subsidy Act (FSL,LSA) and/or the American Ocean Freight Intermediary Emasculation Act (AOFIEA) and/or the American Negative Balance of Trade Ruinous Escalation Act (ANBTREA) and/or the American Small Business Sell Competitively Globally? Forget It Act (ASBSCG?FIA). . . .
It should never be called an ocean deregulation act. All the spin inside the beltway, even if combined, cannot make OSRA a ''reformed'' or deregulated market. Not even close.
It is what it is; a desperate compromise which compromises disastrously the chance for any healthy market mechanism. It thus compromises America's ability to be the global player it must be for the good of the world, and certainly for the good of America's economy and future.
It must be fixed as soon as possible not after we see if it works.
Page 366 PREV PAGE TOP OF DOC
Isn't it realistic to think we have to get as real as we possibly can about global business and market realities if we want to lead the world? Or even if we want only to economically survive in it? Why aren't our talented, brilliant business organizations with their great, free market, competitive track record tracing back to our Yankee Traders roots free to design an OSRA that works for them?
Antitrust immunity for the foreign ship lines is not the only fatal flaw in OSRA. It may be the straw that breaks this poor camel's back. It is certainly one of the biggest disappointments of OSRA.
I pray our testimony may be heard. Tucker Company is at your service in whatever way we can be to assist in this reform.
PREPARED STATEMENT OF U.S. CARRIERS
The undersigned American shipping companies (the ''U.S. Carriers'')(see footnote 23) appreciate the opportunity to offer their views on H.R. 3138, the ''Free Market Antitrust Immunity Reform (FAIR) Act of 1999.'' H.R. 3138 would impose domestic American competition rules on the international shipping industry by repealing the antitrust exemption for ocean common carriers in U.S. foreign trade.
As set forth below, the U.S. Carriers oppose H.R. 3138. Important amendments to U.S. competition rules governing the international shipping industry—the Shipping Act of 1984 (the ''Shipping Act'') as amended by the Ocean Shipping Reform Act of 1998 (''OSRA'')—became effective less than one year ago. Congress approved these amendments after more than three years of review. Repeal of the antitrust exemption—the substance of H.R. 3138—was initially proposed and quickly rejected during that process. OSRA instead brought shipping competition rules into closer alignment with the competition rules applied to other domestic and international transportation industries, and with the shipping competition rules applied by most of our foreign trading partners. OSRA has sharpened competition in international shipping and improved shipper-carrier relationships. No evidence of harm occurring since the effectiveness of OSRA justifies further amendments at this time.
Page 367 PREV PAGE TOP OF DOC
Further, the FAIR proposal fails to recognize many complex aspects of the international shipping industry. In theory, the international shipping market can function and should be regulated like any domestic market; in reality, the market is international (not domestic), involves transportation services (which normally are specially regulated), and is grossly distorted by government subsidies and other policies. In theory, American antitrust laws are clear, definite and fully enforceable against all market participants, U.S. and foreign; in reality, Shipping Act competition rules are more transparent, promote pro-competitive joint ventures, and protect American carrier interests better than domestic antitrust laws. In theory, American interests would not be harmed if international shipping were populated entirely by firms not required to earn their capital costs. In reality, such an outcome, the likely result of enactment of H.R. 3138, would cost American jobs and place American economic and security interests at serious risk.
Accordingly, the U.S. Carriers respectfully suggest that American interests—carriers and shippers; trade, economic and national security policy—are best served by allowing the newly amended Shipping Act to work rather than to further amend it at this time.
DISCUSSION
1. Less than One Year After OSRA, Further Shipping Act Amendments Are Not Justified
OSRA was the culmination of a lengthy and careful review of competition policy in the international shipping industry. The legislative debate that produced in OSRA began in January 1995 with an aggressive campaign by shippers to amend the Shipping Act. Among the stated goals were an end to tariff filing, a mandatory right of independent action on service contracts, and repeal of the antitrust exemption. Following a February 1995 oversight hearing before the House Transportation and Infrastructure (T&I) Committee, interested parties entered into discussions on a possible legislative compromise. Agreement was reached in June 1995, and following markup in the T&I Committee, a bill that ultimately became OSRA was approved in the House.(see footnote 24)
Page 368 PREV PAGE TOP OF DOC
Senate consideration of the legislation took longer. A hearing was held on November 1, 1995 in the Senate Commerce Committee in which concerns were raised as to the likely impact of the House-passed bill on ports.(see footnote 25) While serious discussions among staff and interested parties took place throughout 1995 and 1996, no resolution was reached in the Senate before the end of the 104th Congress. The Senate took up the issue in the following Congress, and in late 1997, a concerted effort was made to report a bill out of the Commerce Committee. Although that effort failed, agreement was reached in 1998 among all industry participants who favored greater flexibility for carriers and shippers to enter into contracts. That agreement formed the basis for OSRA, which was enacted in October 1998(see footnote 26) and became effective in May 1999.
OSRA included more than two dozen substantive Shipping Act amendments which produced sweeping, fundamental changes to ocean shipping competition rules. A new purpose was declared—
to promote the growth and development of United States exports through competitive and efficient ocean transportation and by placing a greater reliance on the marketplace.
46 U.S.C. app. §1701(4). A mandatory right of independent action on service contracts was created, (46 U.S.C. app. §1704(c)), which, coupled with the private filing of certain contract terms (46 U.S.C. app. §1707(c)), provides carriers and shippers a free and guaranteed right to enter into confidential service contracts. Requirements associated with tariff transportation were updated (e.g., 46 U.S.C. app. §1707(a)(2) (electronic publication)), and licensing/bonding regulations applicable to freight forwarders and non-vessel operating common carriers were rationalized.
Page 369 PREV PAGE TOP OF DOC
Importantly, OSRA also clarified certain Shipping Act terms that prohibit anticompetitive activities. It provided new, clearer and more sensible definitions for illegal ''deferred rebates'' and ''loyalty contracts.'' 46 U.S.C. app. §1702(9), (13). It clarified prohibitions against unlawful predation and unreasonable refusals to deal (46 U.S.C. app. §1709(b)(6) and (b)(10)), as well as prohibitions applicable to government-controlled carriers. 46 U.S.C. app. §1708(b), (d). These changes complement other Shipping Act provisions, left largely unchanged, which spell out fully the anticompetitive activities prohibited in the international shipping business. E.g., 46 U.S.C. app. §1709(b)(1)(fraud), (4), (8), (9), (unjust discrimination/unreasonable preference); §1709(c)(1) (group boycott), (3) (group predation), etc.
In short, the Shipping Act as amended by OSRA now provides a fully up-to-date, comprehensive list of competition rules that Congress intended would promote ''competitive and efficient ocean transportation'' through ''greater reliance on the marketplace.'' To reopen the statute now suggests that Congress made a terrible mistake in adopting OSRA just over a year ago. Yet by all accounts, experience under OSRA has been very favorable. Tens of thousands of individual service contracts now move most of the traffic, with terms better tailored to the needs of each customer. Few or no complaints have been heard about shipping rates or service.
Two reasons for pursuing H.R. 3138 have been suggested. One concerns complaints by ocean transportation intermediaries, either that they were the perceived victims of unjust discrimination in the Transpacific trade during the pre-OSRA, 1998 heavy season, or that they are unhappy with their treatment under OSRA. The short answer here is that even assuming unfair activities occurred prior to May 1999 (which the involved carriers have vigorously denied), those activities were fully investigated and potentially redressable through a Federal Maritime Commission (''FMC'') proceeding.(see footnote 27) But such activities cannot form the basis for further amending the Shipping Act. And in any event, H.R. 3138 would not change the legal treatment of intermediaries.
Page 370 PREV PAGE TOP OF DOC
The other reason suggested for reopening the Shipping Act at this time is the 1998 sale of American President Lines, and the recent sales of the international services of Sea-Land Service and the South American service of Crowley American Transport, to carriers headquartered outside the United States. These transactions, while significant, have not eliminated American carrier interest (as this Statement demonstrates) in a workable and universal competition policy for the international liner shipping industry. Moreover, reopening the issue on that basis suggests that the Shipping Act, as amended by OSRA, is defective on the merits, that in form and substance, and considering all relevant factors, the Shipping Act's competition rules are inferior to U.S. domestic antitrust laws. The U.S. Carriers strongly dispute that notion, for the reasons outlined below.
2. Shipping Act Competition Rules Promote Transparency, Efficiency and Equal Treatment
The form of the competition rules set forth in the Shipping Act—fairly detailed proscriptions tailored to specific aspects of the industry—is clearly preferable to the brief and general terms of the Sherman Act. The entire thrust of lawmaking for a global economy has been to press for greater transparency and certainty, virtues which domestic antitrust laws do not share with the Shipping Act. Indeed, one of the leading agenda items for World Trade Organization discussions is to harmonize and bring greater transparency to competition rules applicable to international trade.(see footnote 28) It would be ironic for the United States to repeal transparent competition rules for the quintessential international business—shipping—and replace them with general domestic competition rules that are largely judge-made and attorney-implemented.
Page 371 PREV PAGE TOP OF DOC
Another area where the Shipping Act's transparency and certainty are preferable to domestic antitrust law is in fostering efficiency-enhancing, pro-competitive joint ventures. Hundreds of millions of dollars in shipping costs have been saved through vessel sharing arrangements and other joint operating agreements. Regional carriers in parallel or end-to-end trades have entered into agreements allowing them to offer joint service contacts to shippers. Such agreements allow smaller carriers to compete more effectively with global carriers by offering shippers multi-trade service contracts or enhanced service in a given trade. Under the Shipping Act, such agreements are presumptively lawful, filed at the FMC and automatically effective unless the FMC, applying its expert judgment, raises concerns. Once the agreements become effective, they can be implemented with the legal confidence and certainty that is an essential prerequisite to undertaking the risk involved in combining multi-million dollar operations and/or sales functions.
In contrast, almost 110 years after the enactment of the Sherman Act, the antitrust enforcement agencies have finally produced a set of proposed guidelines for evaluating joint ventures in industries governed by domestic antitrust rules.(see footnote 29) The ultimate fate of these guidelines is uncertain. Even if approved, however, the guidelines will not provide adequate safe-harbor treatment for pro-competitive shipping joint ventures considering the complex, international character of the industry. Indeed, the very effort to produce these guidelines demonstrates that, unlike Shipping Act procedures, the procedural treatment of pro-competitive joint ventures under current domestic antitrust law is not satisfactory.
While there have been many failures in U.S. maritime policy harming U.S. carriers, the competition law applicable to international shipping is one area where American law does not discriminate against American carriers and in favor of their foreign competitors.(see footnote 30) All carriers serving U.S. trades must comply with the transparent requirements of the Shipping Act, and U.S. carriers have the same legal and practical ability as foreign carriers to engage in the permitted cooperative activities.
Page 372 PREV PAGE TOP OF DOC
American carriers and American companies, however, have generally faced disproportionate enforcement under U.S. antitrust laws. This is due in large part to the expense and practical difficulty of prosecuting complex, hard-to-prove claims against defendants located overseas. Moreover, extraterritorial jurisdictional issues and so-called ''blocking statutes'' can insulate foreign antitrust defendants in ways not available to U.S.-based defendants.(see footnote 31) The countries that have enacted these blocking statutes are for the most part developed economies with mature legal systems. If the United States encounters problems in enforcing its antitrust laws against companies located in these industrialized countries, fair and effective enforcement of U.S. antitrust laws against companies and individuals located in countries without such established legal systems is much more doubtful. Simply, if Shipping Act competition rules are replaced by general U.S. antitrust laws, U.S. carriers will bear an unfair burden as foreign carriers avoid effective antitrust enforcement.
3. Shipping Act Competition Rules Mirror the Competition Rules in Other Transportation Industries and are Appropriate for the International Shipping Industry
H.R. 3138 not only calls into question the form of the Shipping Act and whether specific and tailored competition rules are preferable to the general antitrust laws for regulating the international shipping industry. It more fundamentally second-guesses the substance of OSRA, suggesting that American interests would be better served if the limited freedoms retained by carriers under the Shipping Act were eliminated entirely. This assertion fails to recognize: (1) the Shipping Act, as amended by OSRA, is very similar to competition rules applied in other U.S. and foreign transportation industries; (2) that OSRA, while not repealing carriers' ability to form conferences, drastically curtailed the ability of conferences to affect the market; and (3) that because massive government subsidies and other factors virtually preclude carriers from earning sustained acceptable financial returns, further intensifying the competitive environment will accelerate industry consolidation, with the survivors unlikely to be profit-motivated carriers. These were among the issues considered during the deliberations that resulted in OSRA.
Page 373 PREV PAGE TOP OF DOC
a. Transportation Regulation
The U.S. government separately regulates most transportation industries, and therefore exempts those industries from application of domestic American antitrust laws. The Surface Transportation Board (''STB'') has jurisdiction over rail and motor carriers in both domestic and international transportation. 49 U.S.C. §10501(a); 49 U.S.C. §13501. The STB's comprehensive remedies over rail rate and other issues ''are exclusive and preempt the remedies provided under Federal or State Law.'' Id. Likewise, where motor carrier rate agreements are approved by the STB, ''the antitrust laws . . . do not apply to parties and other persons with respect to making or carrying out the agreement.'' 49 U.S.C. §13703(a)(6). Further, motor carriers may enter into agreements to pool or divide traffic, services or earnings so long as the STB approves the agreement. 49 U.S.C. §14302(a). If the agreement is approved, the participating carriers are ''exempt from the antitrust laws and from all other law, including State and municipal law'' (49 U.S.C. §14302(f)) as necessary to allow the arrangement to be performed.
Thus, the precedent for separate transportation regulation apart from the antitrust laws is well settled even in domestic cargo transportation industries. To depart from that precedent in an international transportation industry makes no sense. No international body regulates competition in international transportation industries. Whatever competition laws a country chooses to apply must be acceptable to its foreign trading partners, as each trading partner has an equal claim to regulate. International comity on this issue is essential to the functioning of the international trade and transportation system.
Page 374 PREV PAGE TOP OF DOC
American law accepts this basic truth in the arena of international aviation, where a far more restrictive regulatory regime involving bilateral agreements regulating entry, capacity, pricing, etc.,—and granting an antitrust exemption—applies. 49 U.S.C. §41309(a). This fact bears emphasizing. Unlike international aviation—the industry most like international shipping—no government regulates entry, capacity or pricing in international shipping. Instead, the American government and foreign governments have long accepted the competition rules for international shipping enacted in the Shipping Act. To reject that approach, by adopting H.R. 3138, threatens international comity for this industry, and is inconsistent with the treatment given by U.S. and foreign governments to other transportation industries.
b. OSRA's Effect on Carrier Pricing
Changes to the Shipping Act resulting from OSRA brought regulation of the international shipping industry into much closer regulatory alignment with the domestic rail and truck industries following their deregulation in 1980. The 1980 legislation deregulating the rail industry and the trucking industry did not outlaw ''rate bureaus'' or apply the antitrust laws to those industries. Instead, they made more subtle changes that had very pro-competitive effects, brought about without disrupting the existing market environment.
Bringing effective and pro-competitive—yet non-disruptive and incremental—improvements to international shipping regulations was likewise the basic framework for OSRA and a guiding principle for the Members who worked on the legislation. OSRA did not outlaw carrier cooperation, but it drastically reduced the power of collective carrier action through conferences. Prior to OSRA, conferences had greater power to impact the market due to their legal ability to control service contracts, and because of the transparency of conference and individual carrier tariff rates. Within months of OSRA's effectiveness, however, most of the conferences on major trade lanes not only became ineffective, but had disbanded entirely.
Page 375 PREV PAGE TOP OF DOC
OSRA accomplished this by taking away the conferences' ability to prohibit individual carrier service contracts, which has become the most common way of doing business. It also permitted confidential pricing, which took away carriers' ability to police the agreements they make. As a result, while carriers can continue to set rates and service contract guidelines collectively, compliance with the guidelines can neither be monitored nor enforced. Hence, while it remains to be seen whether this limited authority will have any meaningful impact on the market, the notion that carriers have, or post-OSRA will retain, substantial market dominance through the conference system is clearly wrong.
3. Shipping is a Highly Distorted Market
Congress must also consider the likely impact of taking away the very constrained authority that remains to carriers in light of the structure and economics of the international ocean shipping industry. Viewed from the perspective of financial performance, the liner ocean shipping industry is hyper-competitive. Despite consistently higher demand growth rates—rates that would indicate very favorable financial prospects in most industries—many liner shipping companies fail to earn their capital costs.(see footnote 32) Liner carrier operating margins are less than half those of truck and air parcel industries, less than one-third the margins of port or terminal operators, and one-fifth the margins of railroads.(see footnote 33) While total liner revenues are significant—about $20 billion annually in U.S. container trades(see footnote 34)—the equity value of all liner carriers is not significant.(see footnote 35)
Page 376 PREV PAGE TOP OF DOC
Several explanations are typically advanced as to why financial performance in the shipping industry is so poor. At bottom the best explanation focuses on the basic supply-demand equation. As demand for containership service has increased, the supply of containership capacity has increased faster. This chronic oversupply of vessel capacity thoroughly explains the poor financial performance of the liner shipping industry.(see footnote 36) The oversupply results in part from structural problems—one-way traffic caused by huge trade imbalances. Moreover, tremendous productivity gains arising from the much larger, faster ships and continuous shoreside handling improvements have dramatically boosted supply.(see footnote 37) Most important from a policy standpoint, however, is the overcapacity resulting from massive government subsidies paid to build and operate ships. Ships are routinely ordered and built not because there is (or is likely to be) unmet market demand for transportation services, but because (mostly foreign) governments want to provide continued employment for their shipyards. A carrier may not need the vessels, but realizing they will be built anyway, will order them and accept any government tax or financial support that may be available.
A recent and ongoing study by the European Commission provides a reasonable framework for estimating the magnitude of shipbuilding subsidies.(see footnote 38) The European Union, which by law pays a direct subsidy of 9% to its shipbuilders, is reviewing its legal options to address the much higher subsidies given particularly by South Korea. The EC study included nine actual container ship orders of varying sizes (five 3,400 TEU, two 3,500 TEU, and two 6,800 TEU), comparing for each a ''calculated building price'' (a constructed market price) and a ''reported order price'' (what the actual prices are reported to be). The difference is the amount of subsidy on each ship. The total prices paid for the nine ships is reported to be US$403 million, while the total calculated building price is US$560.4 million. The subsidy amount of US$157.4 million is about 28% of the calculated building price. Assuming that this level of subsidy translates directly into excess vessel capacity,(see footnote 39) a total of 10,528 excess TEU's are included in just this set of orders, equal to about three (the two 3,500 TEU ships and one 3,400 TEU ship) of the nine ships ordered.
Page 377 PREV PAGE TOP OF DOC
Translate these figures across the entire industry and an overall picture emerges of gross overcapacity even considering the effects only of the direct shipbuilding subsidies, and disregarding indirect tax or other subsidies which may also induce overcapacity. To put it more simply, about 2,500 containerships occupy a worldwide shipping market that in a ''free market'' would only include perhaps 1,800–2,000 containerships.
Those who operate ships—the carriers—are forced to deal with this huge, chronic, government-induced overhang of supply. Because of subsidies, the quantity of services the carriers have to sell—their inventory—is not set by the market, but is artificially inflated. To insist that the carriers now be regulated under domestic antitrust laws as if they operate in a normal market is to invite disinvestment in the shipping industry by normal profit-oriented firms. As a leading business text puts it:
Competition in an industry continually works to drive down the rate of return on invested capital toward the competitive floor rate of return, or the return that would be earned by the economist's ''perfectly competitive'' industry. This competitive floor, or ''free market'' return, is approximated by the yield on long-term government securities adjusted upward by the risk of capital loss. Investors will not tolerate returns below this rate in the long run because of their alternative of investing in other industries, and firms habitually earning less than this return will eventually go out of business.
Michael Porter, ''Competitive Strategy,'' The Free Press (1980) at 5. Because of government subsidies and resulting overcapacity, earnings in the liner shipping industry are already below the competitive floor rate of return.
Page 378 PREV PAGE TOP OF DOC
The U.S. Carriers would be happy to compete to earn a ''free market'' return in a free market environment. It is not, however, a free market environment out of which the carriers must sell. It is instead a market saturated with subsidy-induced overcapacity. The specialized competition rules set forth in the Shipping Act, administered by an expert government agency, have provided the carriers very limited ability to offset to some extent the effects of the overcapacity. While the basic forces of supply and demand prevail and continually force down average rate levels, the limited cooperation permitted under the Shipping Act, further diluted by OSRA, may allow carriers to cushion the blow and maintain a modicum of stability. Without this authority, carrier financial returns would deteriorate even further. This would accelerate industry consolidation (which, of course, would ultimately produce a less competitive regime than currently exists). The surviving carriers would not likely be American or even profit-motivated, and would have no particular reason to support American trade or security interests.
Finally, given a level playing field and a genuinely free market environment, the U.S. Carriers believe they would not only survive, but recapture a significant share of the U.S. liner trade market. American carriers generally have proven themselves to be innovative and customer-responsive industry leaders, having converted a centuries-old port-to-port breakbulk industry into a dynamic and complex network business with a continuously improving cost and service paradigm. Costs for executive and administrative staff are generally lower in the United States than in relevant foreign headquarters. But financial returns have been inadequate for the reasons outlined above, and particularly for Americans because American carriers face tax and other disadvantages vis-a-vis their foreign competitors.(see footnote 40) As a general rule, however, the Shipping Act has allowed U.S. carriers to operate on a relatively level playing field insofar as competition rules are concerned. The same could not be said if domestic antitrust laws are applied to the shipping industry, as would result from the enactment of H.R. 3138.
Page 379 PREV PAGE TOP OF DOC
CONCLUSION
The U.S. Carriers respectfully urge the Members of this Committee to honor the decision made by this Congress in October 1998 when it enacted OSRA. No reason for revisiting the issue has been presented. Considerable harm could be done to important American interests if Congress were to take action on this legislation without carefully considering the many extremely complex issues it raises.
Respectfully Submitted,
| Michael G. Roberts |
| Thompson Coburn LLP |
| On behalf of the Carriers listed in Attachment 1 |
ATTACHMENT 1
Crowley Maritime Corporation
155 Grand Avenue
Oakland, CA 94612
Farrell Lines Inc.
1 Whitehall Street
New York, NY 10004
Tropical Shipping Co., Inc.
4 East Port Road
Riviera Beach, FL 33404
Page 380 PREV PAGE TOP OF DOC
Seaboard Marine
8050 N.W. 79th Avenue
Miami, FL 33166
Central Gulf Lines, Inc.
650 Poydras Stret
New Orleans, LA 70130
Waterman Steamship Corporation
One Whitehall Street
20th Floor
New York, NY 10004
(Footnote 1 return)
In the Atlantic, the present carrier conference is the Trans-Atlantic Conference Agreement (''TACA''). FMC No. 202–011375–051, 4th Edition. There are currently 7 members of TACA. The total number of non-conference lines in the Atlantic, as of this date, is approximately 12. Both TACA and non-conference lines applied the $250 USD ''container repositioning'' surcharge to shipments from Europe to the U.S. in September, 1999.
(Footnote 2 return)
The FMC conducts an annual review of active liner operators in all trades. The Commission standard for defining ''major carrier'' is control of at least 1% of the volume in a given trade. The above-referenced listing of ''major'' carriers uses the FMC standard as of December, 1999.
(Footnote 3 return)
Note: China Shipping Container Line Company, Ltd. is not COSCO Container Lines, but a separate corporate entity providing EB/WB container service in the Pacific trades. China Shipping Container Co. is registered under the P.R.C.-flag and is said to be under the control and influence of the Ministry of Communications, Water Transport Division, P.R.C., the same governmental body that controls COSCO.
(Footnote 4 return)
See Journal of Commerce, at A6 (Apr. 5, 1999).
(Footnote 5 return)
See Bill Mongelluzzo, ''Shipping lines raise container rates by $400 from Asia to U.S,'' Journal of Commerce, at A1 (Sept. 12, 1999).
(Footnote 6 return)
These views are presented only on behalf of the Section of Antitrust Law (''Antitrust Section'') of the American Bar Association (''ABA''). They have not been approved by the House of Delegates or the Board of Governors of the ABA and should not be construed as representing the policy of the ABA.
(Footnote 7 return)
See, e.g., Reports of the Antitrust Section on the Quality Health-Care Coalition Act of 1999, Antitrust Health Care Advancement Act of 1997, the Television Improvement Act of 1997, the Major League Baseball Antitrust Reform Act of 1997, the Curt Flood Act of 1997, and the Major League Baseball Antitrust Reform Act of 1995 (all available at http://www.abanet.org/antitrust).
(Footnote 8 return)
Copies of all statements at the oversight hearing before the House Judiciary Committee can be found at the Committee's web site: http://www.house.gov/judiciary.
(Footnote 9 return)
FMC Commissioner Delmond Won testified about the collusive agreements reached by carriers during that period, which led to ''lock step'' uniformly higher prices for shippers because the ''centralized information exchange system provides a forum in which all members could take advantage of the unusual market conditions in a coordinated manner.''
(Footnote 10 return)
The bill preserves antitrust immunity for marine terminal operators, which are largely public port authorities.
(Footnote 11 return)
U.S. Department of Transportation, An Assessment of The U.S. Marine Transportation System, A Report to Congress, p. 13–14 (September 1999).
(Footnote 12 return)
129 Cong. Rec. S 1485–86 (daily ed. February 22, 1983)(statement of Sen. Long).
(Footnote 13 return)
Lawrence H. Kaufman, CSX Chairman Sees ''a Seller's Market'', Journal of Commerce, Jan. 31., 2000, at 1.
(Footnote 14 return)
Bill Mongelluzzo, NVOCCs Adjusting to OSRA Changes, Journal of Commerce, Jan. 26, 2000.
(Footnote 15 return)
144 Cong. Rec. S. 3311 (daily ed. April 21, 1998).
(Footnote 16 return)
See 46 U.S.C. app. 1701 §3(17) et seq.
(Footnote 17 return)
See Federal Maritime Commission Fact Finding Investigation No. 23—Ocean Common Carrier Practices in the Transpacific Trades, Nov. 1998.
(Footnote 18 return)
See Federal Maritime Commission Fact Finding Investigation No. 23—Ocean Carrier Practices in the Transpacific Trades, Order Discontinuing Proceeding, Dec. 29, 1999.
(Footnote 19 return)
See S. Rept. 105–61, 105th Cong. 1st Sess., July 31, 1997 at pp. 28–29.
(Footnote 20 return)
Id. at p. 28.
(Footnote 21 return)
Id.
(Footnote 22 return)
See, e.g., Reports of the Antitrust Section on the Quality Health-Care Coalition Act of 1999, Antitrust Health Care Advancement Act of 1997, the Television Improvement Act of 1997, the Major League Baseball Antitrust Reform Act of 1997, the Curt Flood Act of 1997, and the Major League Baseball Antitrust Reform Act of 1995 (all available at http://www.abanet.org/antitrust).
(Footnote 23 return)
The carriers participating in this Statement are shown on Attachment 1.
(Footnote 24 return)
H.R. 2149, 10th Cong., 1st Sess. (1995) (passed House on May 1, 1996).
(Footnote 25 return)
S. Hrg. 455, 104th Congress, 1st Sess. (1995).
(Footnote 26 return)
Public Law No. 105–258, 1998 U.S.C.C.A.N. (112 Stat.) 1902 (codified as amended in scattered sections of 46 U.S.C. app.).
(Footnote 27 return)
FMC Fact Finding Investigation No. 23.
(Footnote 28 return)
About the WTO: Basics: Principles of the trading system (visited March 16, 2000) <http://nnn.wto.org/wto/about/facts2.htm>.
(Footnote 29 return)
Request for Views on Draft Antitrust Guidelines for Collaboration among Competitors, 64 Fed. Reg. 54,484 (1999).
(Footnote 30 return)
As discussed below, key U.S. tax and regulatory laws are unfavorable to U.S. based carriers.
(Footnote 31 return)
Countries that have enacted blocking statutes in response to the attempted extraterritorial application of U.S. laws include: Canada, Australia, France, the United Kingdom, the Netherlands, Italy, Germany, Belgium, Norway, Sweden and South Africa. RESTATEMENT (THIRD) OF THE FOREIGN RELATIONS LAW OF THE UNITED STATES, §442, reporter's note 4 (1987 & Supp. 1999).
(Footnote 32 return)
Statement of Mark H. Kadar, Mercer Management Consulting, Inc., at the Oversight Hearing on the Antitrust Aspects of the Ocean Shipping Reform Act of 1998 (''Kadar'') at I–2.
(Footnote 33 return)
Id. at II–6.
(Footnote 34 return)
This assumes average revenue of $1,200 per TEU on about 16 million TEU's in U.S. imports and exports annually.
(Footnote 35 return)
It is very difficult to determine the equity value of liner shipping companies, in part because many of the major participants are government-controlled or closely held. However, a very rough estimate of the equity value of liner carriers serving U.S. trades can be drawn from the $800 million announced price for the purchase of Sea-Land Services' international services by Maersk Line. In 1998, Sea-Land handled about 9% of U.S. import/export container traffic. As Sea-Land had substantial non-U.S. services, this suggests that the equity value for all liner operators with respect to their U.S. services is substantially less than $10 billion.
(Footnote 36 return)
As an investment banker expert in the maritime industry put it—''Just as the first three 'rules' of real estate investing are 'Location, Location, Location,' the first three rules for maritime investing are 'Supply, Supply, Supply'.''
(Footnote 37 return)
According to one study, labor productivity in one deep sea containership sector improved at an average annual rate of almost 8% over the past three decades, four times the productivity growth rate of the average American business. ''Full Speed Ahead—A Report on America's Domestic Fleet,'' Maritime Cabotage Task Force, March 1997.
(Footnote 38 return)
''Report from the Commission to the Council on the Situation in World Shipbuilding,'' Com (1999) 474 final (Brussels, 13.10.1999).
(Footnote 39 return)
Subsidy is undoubtedly the determinative factor in some but not all ship orders. For those orders which would be placed with or without the subsidy, the subsidy causes no excess capacity. For those orders which would not be placed absent the subsidy, the amount of excess capacity induced by the subsidy equals 100% of that ship, not just the subsidy amount. Hence, in estimating the total effect of subsidies on the market, and absent a subjective ship-by-ship evaluation, it is reasonable to assume that subsidies translate dollars-for-TEU into excess vessel capacity.
(Footnote 40 return)
U.S. carriers have strongly endorsed legislation to eliminate commercial shipbuilding subsidies and to equalize U.S. and foreign income tax and other burdens. Congress has failed to approve any of this legislation, however.