Jae C. Hong/AP Photo
Container ships are docked at the Port of Long Beach in California, January 11, 2022.
President Biden will target the ocean shipping cartel in tomorrow night’s State of the Union address, outlining new steps to crack down on suspected anti-competitive behavior priced into the cost of every transported good, which has led to astronomical profits for the industry.
The steps include an executive action to commence investigations into ocean shipping excess profit-taking, and a legislative recommendation to bolster the Ocean Shipping Reform Act now working its way through Congress by taking away the industry’s antitrust exemption for so-called “ocean shipping alliances.”
The executive action results from a joint agreement between the Federal Maritime Commission (FMC), the main regulator of ocean carriers, and the Antitrust Division of the Justice Department. Under the arrangement, the Antitrust Division will essentially act as the FMC’s counsel in investigating conduct in the industry, providing the lawyer-power for what would otherwise be an impossible task for an understaffed and under-resourced agency.
A fact sheet from the White House states that “DOJ will provide the FMC with the support of attorneys and economists from the Antitrust Division for enforcement of violations of the Shipping Act and related laws.” Though the FMC’s authority has been weakened by decades of deregulation, under the original Shipping Act of 1916 the agency can initiate a 6(g) investigation into anti-competitive violations in ocean carrier contracts that disadvantage importers or exporters. But as an agency with a minuscule $30 million budget going up against powerful ocean shipping companies, such a probe would simply not be feasible without DOJ’s support.
Under the agreement, the FMC will reciprocate with its own knowledge-sharing for any Sherman or Clayton Act violations that DOJ might take up against the shipping companies. The reciprocal arrangement came out of a memorandum of understanding last July to collaborate on antitrust issues, which grew out of the White House’s executive order on promoting competition in the economy.
The FMC has already taken action on auditing ocean carriers, based on complaints from cargo owners. But getting the resources to use 6(g) authority is a big deal. Just the initiation of a 6(g) investigation would be so novel for an industry that has enjoyed a light regulatory touch that it could lead to voluntary reforms to its practices.
The ocean shipping industry is dominated by three alliances—2M, Ocean Alliance, and THE Alliance—which control, according to the Organisation for Economic Co-operation and Development (OECD), 80 percent of all global container ship capacity and 95 percent of east-west trade routes. That first figure, 80 percent, is up from 30 percent as recently as 2011.
Under current law, the alliances merely submit notification to the FMC of the intention to cartelize, which the FMC duly records in a ministerial fashion. That’s because the industry has an antitrust exemption to engage in such alliances, dating back to the original 1916 legislation. The exemption made some sense in the past, allowing alliances to ensure an exporter had the ability to use one of several carriers to get its goods transported. But that antitrust immunity was paired with common carrier rules and rate-setting authority that gave every shipper the ability to move goods at the same price.
The ocean shipping industry is dominated by three alliances, which control 80 percent of all global container ship capacity and 95 percent of east-west trade routes.
Deregulation in the 1980s and 1990s, along with an expansion of the antitrust immunity, eliminated price transparency and common-carrier obligations, allowing ocean carriers to enter into secret agreements that favored some cargo owners over others. This provided the opportunity for ocean carriers to ramp up profits significantly during the pandemic.
Spot rates for freight shipping zoomed up tenfold from the beginning of 2020 to September 2021 and generally have stayed there. Ocean shippers also charged fees to cargo owners who failed to move their goods off ports despite having no ability to get to the containers currently piled up at the ports.
This led to a bonanza of $190 billion in profits for the industry in 2021, a figure that’s five times higher than the entire period from 2010 to 2020, combined. Operating margins on average from the major carriers jumped from 3.7 percent to 56 percent. The White House fact sheet ties these record profits to the deregulation and the ocean shippers’ resulting ability to cartelize.
The Ocean Shipping Reform Act (OSRA), which passed the House last December with 364 votes and which could pass Congress in a competitiveness bill being negotiated now, targeted this price-setting by re-regulating the industry. It would bolster the FMC’s investigative authorities and allow it to impose minimum service standards on shipping contracts that third parties could use to challenge the terms being offered. The bill would also require ocean carriers to accept cargo if it can be loaded into their containers, rather than returning to Asia with empties.
Not surprisingly, the shipping industry has been lobbying hard against the bill.
In his State of the Union address, President Biden will ask Congress to build on OSRA, which he has endorsed, by calling for “reforms that address the current antitrust immunity for ocean shipping alliances.” Stripping the blanket antitrust exemption would enable the FMC to subject any alliances to the test of whether they operate in the public interest. That, combined with the 6(g) investigations, would at least to some degree challenge whether the alliances are anti-competitive.
At least some congressional lawmakers who are pushing OSRA have also been in consultation with the White House on the antitrust measure, and have shown interest in it.
For its part, the White House is clearly interested in any action, whether legislative or executive, that would attack the rise in inflation that has significantly damaged President Biden’s poll standing. Its fact sheet cites research from the Kansas City Federal Reserve and the European Central Bank showing that increased costs from just ocean freight prices have had a tangible impact on inflation, on the order of about a 1 percent increase in consumer prices.
There are other potential anti-inflationary actions that the White House could take, including marching in to extinguish patents on exorbitantly priced prescription drugs. The White House’s interest in promoting competition has also been directed at reducing inflation. This focus on ocean shipping is a natural for this, since you have a concentrated cartel where increased costs flow into every consumer good that gets shipped. Competition policy will be a major part of the State of the Union address.
In another notable part of the economic preview of the speech, the president will announce a one-year process for the Centers for Medicare & Medicaid Services to finalize a rule on minimum staffing ratios for federally funded nursing homes, while increasing penalties on misconduct. The pandemic exposed several particularly grisly practices in the nursing home industry. The minimum staffing rule, which will go through a public comment period, would target the strategy of some industry actors, particularly those tied to private equity firms, that buy up nursing homes and radically slash staffing to increase profits.
