Testimony of

Christopher Koch

President & CEO of the

World Shipping Council

Before the

House Committee on the Judiciary

on

International Liner Shipping Regulatory Policy and H.R. 1253

June 5, 2002

Summary and Outline of World Shipping Council Testimony

I. Introduction

Congress just recently concluded an intense four-year review and reform of the Shipping Act, which regulates international liner shipping. The Ocean Shipping Reform Act, which became effective in 1999, was developed by Congress with the support of shippers, ports, seagoing and shoreside maritime labor and carriers, and it is working well. H.R. 1253 would repeal that successful compromise and is not supported by America’s ports, maritime labor or carriers.

II. Current International Liner Shipping Regulation

No nation applies its national antitrust laws to international liner shipping, nor is there any need to do so (pp. 4-5). OSRA has fostered those industry characteristics that any effective economic regulatory system, however structured, should provide American commerce. Under the Shipping Act, as amended by OSRA, there are:

· No regulatory barriers to entry, and a wide array of carriers and competitive services from which to choose (pp. 6-9)

· Intense price competition, and commercial freedom for carriers and shippers to agree on mutually beneficial business arrangements (pp.6, 9-14)

· Ample capacity to handle normal trade flows, peak season or surge demand, and the long-term growth of demand (pp.14-17)

· High-quality service, including reliable ocean and intermodal transportation, and value-added logistics services (p. 18)

· Technological and organizational innovation, and adequate investment in the continuous improvement of transportation infrastructure (p. 17)

· An expert government agency, the Federal Maritime Commission, to handle any complaints or problems (pp 18-19)

· Regulatory policies that are internationally accepted and understood, so as to minimize international conflict of laws (pp 19-20)

· A sufficiently stable regulatory environment to encourage the high levels of capital investment required to meet the future needs of America’s trade (p.20).

III. The Value and Impact of the Industry’s Limited and Regulated Antitrust Immunity

The regulatory system for this international transportation business must be internationally accepted, and international comity must be respected. The Shipping Act does that (p. 21). The existing regime also addresses the unique structural features of the industry which include (p. 22-25):

· High fixed costs to operate a regularly scheduled service

· Relatively inelastic demand for services (meaning that rate reductions very rarely can increase the market demand for services)

· Significant mismatches in demand arising from chronic bi-directional trade imbalances (import and export volumes often differ widely) and significant fluctuations in demand

· Inelastic supply (carriers must maintain supply at consistent levels sufficient to meet peak demand, yet are very limited in their ability to rapidly “flex” supply because of their large fixed sunk costs and the nature of liner shipping which requires regular service and strings of vessels that call numerous different ports in a single voyage)

· “Lumpy” supply (capacity must be added or withdrawn in large units – namely entire strings of vessels, unlike a railroad which can add or subtract cars from a train based on variation in demand)

· No regulatory barriers to new entry or capacity expansion

· Distortive government subsidization of shipping and shipbuilding.

The Shipping Act does not provide carriers with unrestricted antitrust immunity, but a carefully constructed regulatory system with ample safeguards and protections (pp. 25-28). Under this system, carriers may operate under agreements filed and overseen by the Federal Maritime Commission that enable and promote operational cooperation and efficiency, and market discussions and diminished market volatility (pp. 27-31).

IV. Consequences of Repealing the Shipping Act’s Successful Regulatory System

H.R. 1253 proposes radical surgery on a regulatory system that Congress just reformed and that is working well. The Antitrust Division of the Justice Department has theoretical arguments for the benefits of antitrust law and has a preference for it being the agency to regulate the industry, rather that the Federal Maritime Commission; but, it has no facts showing defects in the results of the present system. The rationale for antitrust law -- namely low prices, innovative service, and efficient operations -- is completely fulfilled under the Shipping Act. Prices are so low that carriers are losing hundreds of millions of dollars. Service innovations and improvements are numerous and described in this statement, but continued improvement will require lines to make profits that can be reinvested. Operational efficiency and cost cutting have been a continuous quest for the industry; in fact, the industry uses its immunity extensively in efficiency enhancing operational agreements. It is noteworthy that one consequence of the carriers’ constant, intense pursuit for efficiency and lower costs -- lower trucking rates -- is the basis of the Teamsters’ erroneous complaint about the Act (p. 14). The Shipping Act is a proven, internationally accepted regulatory regime. There is no reason to believe that H.R.1253 would produce a superior system; in fact, if enacted, it would (pp. 32-36):

· Cause destructive competition, industry concentration, and fewer competitors

· Discourage investment and disrupt a reliable, efficient, and smoothly operating international transportation system, and

· Create a discordant, international regulatory dilemma.

Statement of the World Shipping Council

The World Shipping Council thanks the Members of the Committee for the opportunity to provide its views today on H.R. 1253, a bill to amend the Shipping Act of 1984, as amended.

I. Introduction

The World Shipping Council is a non-profit trade association of over forty international ocean carriers, established to address public policy issues of interest and importance to the international liner shipping industry. The Council’s members include the leading ocean liner companies from around the world -- carriers providing efficient, reliable, and low-cost ocean transportation for goods reaching billions of people. The members of the World Shipping Council are major participants in an industry that has invested over $150 billion in the vessels, equipment, and marine terminals that are in worldwide operation today. The industry generates over a million American jobs and over $38 billion of wages to American workers. The industry provides the knowledge and expertise that built, maintains, and continually expands a global transportation network that provides seamless door-to-door delivery service for almost any commodity moving in America’s foreign commerce. The Council’s member lines[1] include the full spectrum of carriers from large global lines to niche carriers, offering container, roll on-roll off, and car carrier service as well as a broad array of logistics services.

The existence of an efficient and innovative international shipping industry, operating under maritime regulations that enjoy broad international acceptance, is of critical importance to our member lines, to the international trading system as a whole, and to the American economy which benefits from the smooth flow of international commerce. Governments around the globe periodically undertake reviews of liner shipping regulatory policy. Those reviews, including those recently concluded by Australia, Canada, Japan, Korea and the United States, have all affirmed that limited antitrust immunity, subject to appropriate safeguards and regulatory oversight, remains the most effective and widely accepted regulatory regime for international liner shipping. That remains the case.

In particular, the liner shipping industry worked closely with the Congress, American shippers, the U.S. public port community, and American maritime and shoreside labor to develop the broad consensus that led to Congress’ passage of the Ocean Shipping Reform Act of 1998 (“OSRA”). OSRA was designed to achieve a dynamic balance – one that initiated important and far-reaching changes in the way liner shipping operates in U.S. international trades while preserving a stable, internationally accepted regulatory system. The agreement on which OSRA was based involved three foundational principles for reforming liner shipping regulation: (1) the ability of an ocean carrier and its customers to negotiate individual, confidential contracts of their choosing without a carrier conference or discussion agreement inhibiting the parties’ ability to agree; (2) the removal of the former U.S. regulatory requirements of public disclosure of contracts’ terms and “me too” requirements, which prevented carriers from tailoring contracts to particular shippers’ needs; and (3) continued limited, antitrust immunity for ocean carriers regulated by the Federal Maritime Commission.

Unlike industries such as aviation, trucking, rail service, telecommunications and public utilities, which have been subject to governmental entry and pricing restrictions, or enjoy government-sanctioned monopoly status, the liner shipping industry has always been characterized by free entry and abundant price and service competition. Consequently, the savings and efficiencies that resulted from the elimination of governmental restrictions and protection in these other industries cannot be obtained by repealing the limited antitrust immunity that applies in liner shipping. Indeed, the forces of supply and demand dominate the economics of liner shipping, and, in conjunction with the present maritime regulatory regime, ensure that the inefficiencies that have existed in those other regulated industries are not present in liner shipping.

II. Current International Liner Shipping Regulation

No country applies its national antitrust laws to international liner shipping.

Nor is there any need to. There is no shortage of competition, innovation, efficiency or investment. There are no government or regulatory barriers to entry that need to be removed. There are no route regulations to remove. There are no rate regulations to remove. There are no government monopolies to break up. There are no restrictions on marketing to be removed. There are no nationality investment requirements. There are no bottlenecks or chokeholds that warrant regulation. There are no significant “switching costs” to address. There are no captive customers to protect.

In 1999, the Shipping Act’s regulatory regime governing this industry underwent significant reform pursuant to the Ocean Shipping Reform Act (OSRA). That law took four years of Congressional effort to enact, and it achieved a hard-won, but broad, consensus among labor, port, shipper and carrier interests. That effort has been a success.

OSRA has fostered industry characteristics that any effective economic regulatory system, however structured, should provide American international trade. Specifically, in liner shipping today, one finds:

· No regulatory barriers to entry, and a wide array of carriers and competitive services from which to choose

· Intense price competition, and commercial freedom for carriers and shippers to agree on mutually beneficial business arrangements

· Ample capacity to handle normal trade flows, peak season or surge demand, and the long-term growth of demand

· High-quality service, including reliable ocean and intermodal transportation, and value-added logistics services

· Technological and organizational innovation, and adequate investment in the continuous improvement of transportation infrastructure

· An expert government agency, the Federal Maritime Commission, to handle any complaints or problems

· Regulatory policies that are internationally accepted and understood, so as to minimize international conflict of laws

· A sufficiently stable regulatory environment to encourage the high levels of capital investment required to meet the future needs of America’s trade.

The existing liner shipping regulatory regime is remarkably successful and is providing American commerce with excellent choice, service and value. Today a VCR can be transported from Hong Kong to the West Coast of the United States for 70 cents; a bottle of beer can be transported from Europe to North America for 3 cents; a pair of athletic shoes can be moved from Asia to North America for 40 cents. As global trade has flourished, expanding faster than our domestic economy, the liner industry has consistently provided a reliable, efficient global transportation network to handle America’s trade growth at lower per unit costs.

The efficiency of liner shipping has helped American exporters from every state develop and maintain markets around the world for a variety of commodities, ranging from paper and forest products, to pharmaceuticals, from fruits and vegetables to chemicals, from poultry and beef to cotton, and from machinery and automobile parts to frozen fish.

The industry has also provided American consumers and businesses with inexpensive access to a vast array of goods from around the world, including 75% of the apparel and 95% of the footwear worn in this country, food products and beverages from around the world, electronic goods and bicycles, furniture and household appliances, auto parts and tires, machinery and tools, marble and tile, computer equipment and copiers, flowers and kitchenware, coffee and beer, manufacturing components and supplies, and thousands of other goods. Last year, the liner shipping industry transported roughly $500 billion worth of American commerce, or $1.3 billion of goods per day, through U.S. ports. That represents roughly 4.8 million containers of export cargo, and 7.8 million containers of import cargo.

Although most Americans never stop to think about it, their homes are filled with an enormous array of products that liner shipping has transported from abroad at exceptionally competitive shipping rates. Last year, the cost of transporting all of these goods – all of America’s oceanborne liner imports, including industrial and non-consumer goods – was only $133 per American household. That’s an amazing bargain.

The benefits to American commerce of the existing regulatory regime are considerable .

1. No Regulatory Barriers to Entry and a Wide Array of Service Choices

Ocean carriers are able to offer international service without governmental restriction on entry. Compared to other modes of international transportation, such as aviation with its bilateral treaties and agreements that restrict air carriers as to where they can fly, how frequently, and how much capacity they can offer, liner shipping markets are impressively open and efficient. This freedom of market entry helps promote an extensive array of carrier services at competitive prices. New entrants and established incumbent carriers can expand and reconfigure their services as they believe the market warrants.

It is worth keeping in mind this comparison between the relative freedom of liner markets and the bilateral regimes and attendant restrictions of international aviation when considering what alternatives might result from a decision to repeal the industry’s limited antitrust immunity. Atomistic competition among individual lines, with the most efficient carriers being the “winners”, is neither the inevitable outcome of such a step, nor necessarily the most likely.

Free entry in liner shipping minimizes the risk that any carrier or group of carriers can dominate the market and impose above-market rates. Open trades help ensure that rates reflect the existing, and expected, market conditions of supply and demand. With no restrictions on new entrants or on the ability of incumbent carriers to adjust their capacity or service, as they deem appropriate, unmet demand for vessel space is at worst a rare and short-lived phenomenon at peak seasons.

Despite the continuing and rapid growth in demand for liner service, overcapacity is far more common in the industry than are space shortages.[2] Even in those rare instances where unforeseen economic circumstances result in a strong sellers’ market, new entry and/or expansion by incumbent lines provides the additional capacity needed to ensure adequate service. For example, when the Asian export boom to the United States produced unexpectedly high demand for vessel space and equipment during the trans-Pacific trade’s 1998 peak season, and demand that strained available vessel space, the dramatic entry by more than a half-dozen lines in 1999 eliminated the space shortage. Indeed, in 1999, there was an increase in capacity deployed in the Asia/North America route of more than 23 percent.[3] That strong capacity growth also reduced the upward pressure on rates. Furthermore, those new entrants have remained in the Asia/North America trade, and some lines that had virtually no presence in that trade prior to 1999 have announced plans to introduce enough new tonnage to make them leading carriers in the trade in but a few years.[4]

In spite of some industry consolidation, the liner industry is still far from concentrated. The shipping public has a wide array of carriers and variety of shipping services from which to choose. For example, only one carrier has a market share above 7.5 percent, and the top ten carriers combined account for only 57.5 percent of the total containerized cargo carried (exports and imports combined) in U.S. trades.

MARKET SHARE IN U.S. LINER TRADES (1st Quarter 2002)

Lines	TEUs carried Jan.–March 2002	Market Share	Combined Market Share
1.Maersk-Sealand	572,106	13.2%	13.2%
2. Evergreen	307,382	7.1%	20.3%
3. APL	280,932	6.5%	26.8%
4. Hanjin	264,420	6.1%	32.9%
5. Cosco	217,990	5.0%	37.9%
6.P&O Nedlloyd	186,405	4.3%	42.2%
7. Hyundai	171,274	3.9%	46.1%
8. OOCL	166,379	3.8%	49.9%
9. Yang Ming	164,828	3.8%	53.7%
10. MSC	164,382	3.8%	57.5%
All Lines (over 100)	4,340,611	100%	100%

(Source: JoC/PIERS)

In addition to the existing competition among ocean carriers, non-vessel-operating common carriers (NVOCCs) provide an additional element of price competition, and are gaining in market power. NVOCCs dominate the less-than-container-load business and are increasing their share of the full container load business. A recent FMC review of a random sample of service contracts showed that NVOCCs were parties to approximately 25 percent of the contracts filed with the Commission.[5] NVOCC’s control roughly 30 to 40% of the cargo moved. NVOCCs directly compete against ocean carriers for the business of proprietary shippers, creating another source of competition in addition to the intense competition among shipping lines, by purchasing space from ocean carriers on a “wholesale” basis and reselling the space to shippers on a “retail” basis.

Another important factor in making the existing open system even more competitive are the minimal “switching costs” involved in a shipper’s decision to move its business from one ocean carrier to another. Mercer Management, in its analysis of the industry, found that “100 percent of the shippers surveyed consider switching costs to be insignificant or zero” and that shippers “are ready to switch carriers without hesitation.”[6] As a practical matter, a shipper can easily move its cargo to the carrier offering the combination of rates and service that best fits the shipper’s current needs.

In short, the absence of regulatory barriers to entry, the large number of liner services available, and low switching costs, ensure an open trade in which shippers enjoy an abundance of competitive choices.

2. Market-Driven Price Competition and Freedom of Contract

Supply and demand play the determinative role in establishing liner shipping rates and promoting customer-responsive service. The evolution of traditional conferences into more flexible organizational forms in recent years, and the attendant dramatic increase in one-to-one contracting, have produced a more efficient and responsive negotiating process that results in business arrangements that are better tailored to the needs of individual shippers.

Past empirical studies of U.S. liner trades, even in the pre-OSRA environment, confirmed that market forces operate effectively in liner markets, producing competitive rates that are driven by supply and demand. An FMC study using quarterly rate data for the major commodities moving in eighteen U.S. trades between 1976 and 1988 found that fluctuations in the supply of and demand for liner shipping services were the basic cause of rate changes that occurred after implementation of the Shipping Act of 1984.[7]

A Federal Trade Commission staff report[8] produced by economists from the U.S. Department of Justice’s Antitrust Division and the Federal Trade Commission’s Bureau of Economics, was a subsequent econometric study using the same FMC data set. That study found no statistically significant relationship between freight rates and the market share of the conference serving the route -- demonstrating that conferences did not act as effective cartels. The authors further observed that “it is also possible that conferences provide some offsetting benefits, such as increased efficiency in providing a network of ocean transportation services.”

Two other findings from the FTC staff report’s analysis of U.S. trades are worthy of attention in light of current regulatory policy and industry practices.

· The level of freight rates is significantly lower on routes where conference members are free to negotiate directly with shippers.

· Increases in market concentration are associated with statistically significant, but economically small, increases in freight rates.

Today, as the FMC’s two-year study on OSRA’s impact makes clear, carriers and shippers enjoy full commercial freedom to negotiate freight rates and terms of service. According to the FMC’s study, service contracting has more than doubled since OSRA took effect, with reports that 80 percent or more of the cargo moves under contracts. And 98 percent of the contracts in the FMC’s sample study were individual, confidential contracts.

Thus, OSRA’s contract reforms have eliminated just the sort of conference and regulatory control over members’ ability to negotiate individual, confidential contracts that concerned the authors of the FTC study.

The other potential issue identified in the FTC study is that substantial market concentration, while currently not an issue in the industry, could increase freight rates. As discussed in Part IV of this testimony, if the Shipping Act’s limited antitrust immunity were repealed, destructive competition and market instability would, among other things, lead to rapid industry concentration and higher costs for shippers.

Any review of shipping trade publications will show that the liner industry is constantly focused on supply and demand interactions, and the economic pressures of highly competitive rates.

An examination of the change in average freight rates in the 20 years prior to the passage of OSRA in our two major East/West trades gives some sense of the chronic financial challenges that the liner industry faces.

Changes in average freight rates in US east-west trades 1978 – 1998[9]

	Current Dollars	Real Terms
Trans-Pacific - Eastbound	-32.1%	-72.1%
- Westbound	-20.8%	-67.5%
Trans-Atlantic - Westbound	-4.6%	-60.9%
- Eastbound	+18.2%	-51.5%

Similarly, a 1999 study of the major U.S. trades from 1985 – 1998 found that, with the exception of the eastbound trans-Atlantic trade, all of the major U.S. markets recorded losses, with rates declining approximately 25 percent (even before being adjusted for inflation) over the fourteen-year period. Carrier losses on the major trade lanes for 1998 alone were estimated to exceed $3 billion. [10]

During 1999 and 2000, trade conditions supported the carriers’ revenue recovery efforts. In 1999, the recovery mainly was assisted by the combination of a general rate increase in the eastbound trans-Pacific trades and a 13 percent increase in cargo volume, on top of the two previous years’ cumulative volume growth of over 33 percent. A strong recovery in the intra-Asia trades also contributed. In 2000, there were also improvements in the Europe-Asia-Europe trades and other routes.[11] Unfortunately, the recovery didn’t last long. By 2001, deteriorating international economic conditions, and especially the unpredicted slowdown of the U.S. trades, led to a sharp decline in international trade.

The following charts illustrate rate trends in various U.S. trades in the period from 1985 to 2000. They show an overall reduction of ocean transportation costs. The surge in 1999 and 2000 eastbound trans-Pacific cargo resulted in an upturn in rates in that trade due to high capacity utilization, but the unbalanced westbound direction of that trade (with poorer capacity utilization) saw rates fall. That is what one would expect from supply-demand dynamics.

(Rates not adjusted for inflation)

(Rates not adjusted for inflation)

These charts[12] show rates for ocean transportation in 2000 lower than they were 15 years ago, even without adjusting for inflation. The following chart[13] compares import and export rates in the major U.S. trades (not adjusted for inflation) with the consumer price index, a general measure of economy-wide inflation.

And when one looks at what has been happening to rates since 2000, it is clear that the historical downward trend continues. The current imbalance between the supply (available capacity) and demand for liner shipping has generated a deep decline in rates. Lines ordered new capacity based on the projected double-digit growth of U.S. container volumes. However, the value of U.S. liner imports actually declined slightly in 2001, and the already imbalanced, “backhaul” export trades grew by less than 3 percent, while available capacity grew by nearly 11 percent. Drewry consultants reported that in the main east/west trades carriers were reporting average decreases in freight rates of between 15 and 50 percent in 2001.[14]

In the trans-Pacific inbound trade, average revenue per forty-foot container in March of 2002 was approximately 24 percent below what the rate was in March 2001.

According to a semi-annual survey conducted by the U.S. Department of Agriculture, American shippers of agriculture goods have reported that they are able to obtain most of the service elements they are requesting in contract negotiations, and rates are so low that they are not an issue. Well over 90 percent of containerized agriculture shipments are moving under service contracts, as envisioned by OSRA.[15] Specifically, the USDA’s December 2001 report on “Agricultural Ocean Transportation Trends”[16] states that:

· “The rates for U.S. outbound dry containers, particularly westbound transpacific rates, are approaching historically low levels. Virtually all U.S. agricultural exporters are paying less for transportation than they were in early 2001 when rates were already perceived to be extraordinarily low.”

• “It is remarkable that commodities are reportedly moving in certain transpacific, westbound trades at $225 per 40-foot equivalent unit. Shippers appear increasingly concerned as to the continued viability of these trade lanes.”
• “Rates are so uniformly low, they are no longer the primary determining factor for carrier selection. There is a presumption that rates will hit "rock bottom," so, while agricultural shippers continue to keep an eye on the overall rates (the base rate plus the surcharges), carriers are now primarily selected according to service capabilities.”

In fact ocean freight rates in the major east-west trades were so low by the end of 2001 that the general manager of the Unaffiliated Shippers of America was quoted as saying: “If I were a shipping line, I would not accept some cargo. It’s not commercial.”[17]

There is no lack of intense competition in the liner industry.

Teamster Allegations

Before concluding this discussion of the marketplace, it is appropriate to address the International Brotherhood of Teamsters’ arguments against the limited antitrust immunity provide under the Shipping Act. Ocean carriers do not have antitrust immunity to collectively negotiate or set the rates they pay truckers or railroads[18]. The Teamsters, however, complain that ocean carriers are using antitrust immunity to agree to through rates (a rate that includes the ocean and inland transportation, such as between Shanghai and Chicago) with American importers and exporters that are too low, and then, as a way to deal with these low rates, don’t pay port truck drivers enough. It is true that port truck drivers are not highly compensated. It is simply not true that carriers’ limited antitrust immunity is the problem or results in carriers charging their customers too little or in mistreating truckers. The Teamsters’ allegations before this Committee two years ago were thoroughly reviewed by the Federal Maritime Commission, which found them to be without merit.[19] It is also worth noting the irony that the Justice Department, with no facts, today argues ocean carriers’ rates are too high, while at the same time the Teamsters argue that ocean carriers’ rates are too low. Ocean carriers’ rates are in fact too low and currently are resulting in large losses for the lines. But the problem is the imbalance in supply and demand, not antitrust immunity.

3. Ample Capacity to Meet Demand

There is today no international liner trade without adequate capacity to serve the trade’s needs. And because of the lack of barriers to entry and the industry’s confidence in today’s regulatory system, there is no market that will not see capacity added as market conditions warrant. As nations around the world have liberalized their trade policies, international cargo movements have increased dramatically, with the growth rates being even more rapid for cargo carried by the liner shipping industry. This has created a large demand for additional shipping capacity. The liner industry has succeeded in increasing its capacity to service this increase in demand.

	World Fleet Capacity (000 teu)	Annual Increase (000 teu)	Annual Percentage Increase
1999	4,335	303	7.5%
2000	4,799	464	10.7%
2001	5,311	512	10.7%
2002 forecast	6,105	794	15.0%

How the liner industry has increased the capabilities of its international transportation infrastructure to handle the 112% percent growth in the international liner trades in the last ten years is a story of quiet success. More to the point for purposes of this hearing, the regulatory system that fosters that achievement -- the Shipping Act of 1984 -- is an essential part of that success.

Worldwide, it has been estimated that over the last seven years (1995-2001) the liner industry has grown the capacity of the dedicated containership fleet on an average of about 12.3% per year. In the last three years (1999-2001), approximately 1.3 million TEUs of new capacity have been added[20], and the forecast for capacity to be delivered this year (which was ordered before the economic slump and September 11) indicates a larger increase.[21]

These large increases in capacity were all added by the industry to meet the remarkable rate of actual and projected growth of America’s foreign trade. Consider the example of the eastbound (U.S. imports) trans-Pacific trade, which is the largest trade in the world; it experienced the following recent double-digit year-to-year growth of container volumes:

.

YEAR	PERCENTAGE GROWTH OVER PREVIOUS YEAR[22]
1997	15.1 percent
1998	18.1 percent
1999	12.6 percent
2000	14.2 percent

At the Committee’s last hearing on this issue, there was discussion of the period in 1998 when trade growth was so rapid in the eastbound trans-Pacific trade that demand temporarily exceeded supply. The industry, in fact, committed to build the capacity that was projected necessary to handle America’s booming trade growth, adding 34 percent additional capacity in 1999 and 2000[23], and with the long lead times required for ship orders, receiving additional capacity in 2001 and 2002. Unfortunately, the economy suffered an unexpected slowdown and foreign oceanborne trade volumes exhibited virtually no growth. As a result, the industry has been struggling with the resulting overcapacity that it had committed to bring on line to serve the projected needs of the trade.

Even if one considers only the level of investment in new vessels represented by this capacity increase, the industry’s commitment to meeting the growing demand for ocean transportation services is impressive. But carrier investment in capacity goes well beyond the introduction of new vessels. It also includes investment in tens of thousands of standard 20-foot and 40-foot containers, as well as specialized equipment routinely provided by many lines, including flat rack, hard-top and open-top containers, 45-foot containers, reefer containers, high-cube containers, hangertainers (for apparel), and bulk containers. Carriers also operate inland container depots, container freight stations, and transloading facilities to allow their customers greater flexibility and efficiencies. Shippers require increasingly efficient terminal facilities and intermodal connections, adequate rail service, and on-line booking, documentation, tracking and payment services. These sorts of “capacity” are also crucial to ensuring an efficient ocean transportation system.

As discussed later in Part III of this testimony, the liner industry faces significant challenges in planning its investments to meet growing market demands, including long lead times in ordering and building new ships, “lumpy” supply additions, mismatches and fluctuations in demand, and the need for accurate trade growth forecasts of international markets.

One of the reasons that capacity has been added to meet the increasing transportation demands of the various trades is the flexibility carriers have to use their limited, regulated antitrust immunity to discuss a particular market’s needs. By sharing the costs and risks of the added assets, and by having the ability to discuss existing and projected demand and what rates the market conditions may support, orders for new capacity and the ability to meet market demands for expanded service are facilitated. Whether as a foundation for cooperative operational agreements, or as a foundation for conferences or other market discussion agreements that give a carrier better information to justify making new service or capacity decisions, limited, regulated antitrust immunity ensures that adequate capacity is made available to meet any market’s growing demand.

4. Innovation and Investment

As a service industry, liner shipping has demonstrated an impressive history of continuous technological and organizational innovation. From the initial containerization of international routes in the mid-1960s, through the development of cellular vessels, the implementation of intermodal service via dedicated stack trains, and the provision of increasingly sophisticated special equipment (such as temperature and humidity controlled reefer containers), to the latest efforts to establish on-line services, including the development of multi-carrier internet platforms, the industry continues to invest in technological innovations that increase efficiency, expand markets, and contribute to better management of resources.

Marine terminal automation, on-dock rail facilities at terminals to speed shipments by rail, and increasingly sophisticated tracking and tracing systems are examples of additional assets developed as part of liner companies’ on-going efforts to better serve their clients. Carriers are also establishing improved distribution operations, including programs that give total visibility to a customer’s cargo flow, that facilitate a shipper’s ability to mix international and domestic freight to build full truckload shipments, and that substantially minimize delivery costs. Cooperative supply chain reviews of customers’ operations are another service that can enable liner companies to add value, increase inventory visibility, produce measurable results, and reduce costs for shippers. This commitment to innovation pays off for the shipping public in faster, safer, and more transparent inventory flows.

Organizational innovation has also been important. Carriers have established operationally integrated multi-trade alliances that provide shippers with:

· Broader service networks with more port calls

· Additional capacity

· More frequent service

· Shorter transit times, and

· Reduced waiting time and fewer transshipments.

By reducing each carrier’s share of the investment and risk involved in developing and expanding their service networks, such alliances reduce costs and improve efficiency. That in turn expands the options available to the lines’ customers, and helps reduce their overall transportation, distribution, and administrative costs.

5. High Quality Service

At present the liner industry not only provides the shipping public with a reliable and relatively inexpensive ocean transportation system complete with modern terminal services and intermodal links, it is continually working to improve that system. Such improvements include faster and more efficient vessels that allow reductions in per unit costs; modern, technologically advanced terminal handling systems and equipment; and a growing list of related logistics services.

Working with individual customers to meet special needs and reduce customer costs, carriers conduct supply chain reviews, address cargo consolidation and deconsolidation needs of shippers, provide dedicated customer service representation, develop contracts that combine multiple services, perform quality assurance inspections, and offer an assortment of other customized services.

For example, ocean carriers have developed considerable expertise in moving temperature and humidity sensitive goods. Their sales and marketing personnel can assist agricultural shippers, not only in operational matters such as how best to load cargo in a container, but in helping identify potential markets for their goods. The liner industry’s successful efforts to develop atmosphere-controlled refrigerated containers actually helped shippers develop some markets by providing technologically acceptable, and less expensive, ocean transportation for perishable commodities that previously could only be shipped by expensive air freight.

In a commercial environment dominated by individual contracting and characterized more and more by the use of business-to-business e-commerce systems, the services that lines offer are increasingly customized and involve greater participation in customers’ supply chain management efforts, involving both the physical movements and the attendant information flows.

Individually, lines are committing substantially more resources to develop and implement value-added logistics services of all kinds. These services allow carriers and their customers to reduce the time involved in packing, haulage, and consolidation of cargo prior to ocean shipping, and follow-on stripping and delivery in ways that sharply reduce lead-time, reduce inventories and associated costs, and increase customers’ net profits.

Collectively, members of the industry are developing multi-carrier electronic channels to make it easier for shippers to conduct business with multiple providers using common standards for core business transactions (such as booking, documentation, and tracking shipments).

6. Regulatory Expertise

International liner shipping is subject to oversight and regulation by the Federal Maritime Commission, which is responsible for identifying and, if needed, addressing any anti-competitive conditions or other problems that might arise in the industry. The FMC has well-tested procedures for acting on formal and informal complaints that may arise, and extensive authority to conduct investigations and take appropriate corrective action when warranted.

The Commission reviews all carrier agreements filed in the U.S. trades before they become effective, including detailed information forms that are submitted with proposed agreements. The Commission has an extensive monitoring program in place that covers all U.S. trades. Its monitoring program includes the review of conference and discussion agreement meeting minutes, and detailed quarterly economic reports filed by conferences and discussion agreements. Since the implementation of the Ocean Shipping Reform Act in mid-1999, that monitoring program has been supplemented by access to the Commission’s service contract database that includes the rates and terms of all service contracts filed with the Commission. The Commission also has the authority to issue information demands if it has concerns about agreement activities.

In addition to its agreement review and monitoring program, the Commission staff has developed its industry expertise by conducting or participating in several high-profile industry studies (including the five year review of the Shipping Act of 1984, the Advisory Commission on Conferences in Ocean Shipping Study, and the FMC’s recent OSRA Impact Study). It has also conducted a number of major fact finding investigations, and regular, informal, industry interview projects covering special topics.

7. Internationally Accepted Regulatory Policies

The United States and its trading partners have consistently recognized the special situation and characteristics of international liner shipping. Consequently, Congress created the successful regulatory regime under the Shipping Act, which includes, as one component, a limited exemption from our national antitrust laws, just as all our trading partners have done. In addition to Congress’ passage of OSRA, which became effective in 1999, in the last few years alone, a number of nations have conducted thorough reviews of their national liner shipping policies and have made what they considered appropriate adjustments to their maritime laws. For example:

· The Australian Parliament passed legislation in 2000 to amend Part X of the Trade Practices Act of 1974.

· The Canadian government has undertaken an extensive review of the Shipping Conferences Exemption Act and found that: “Conferences play an important role in Canada’s foreign trade, providing stability and reliability in shipping services for Canadian shippers, importers and exporters.”[24]

· Japan implemented amendments to its Marine Transportation Law.

· South Korea implemented amendments to its Marine Transport Act.

In every case, limited exemption from the national competition/antitrust laws has remained an essential feature of the revised regulatory regimes. In every case, proposals to repeal the industry’s limited antitrust immunity were rejected.

Indeed, even the most recent report by the OECD’s Transport Division staff on Competition Policy in Liner Shipping:

· “does not call into question the principle of limited anti-trust exemptions for operational agreements in liner shipping”[25] as H.R. 1253 does, and

· as to the limited antitrust immunity afforded to rate matters, commends the Ocean Shipping Reform Act in the United States and its principles as a model for other OECD member nations to use if an when they review their shipping regulatory laws, and states OSRA’s “principles represent a way out of the carrier/shipper impasse….They can, and are meant to, co-exist side-by-side with a regulatory regime that continues to extend anti-trust exemptions to price-fixing and rate discussions in the liner-shipping sector.”[26]

That is what Congress intended three years ago when it implemented OSRA. Congress succeeded, and its success should not be disturbed.

8. Relatively Stable Regulatory Environment

Many of the positive characteristics that have been discussed so far -- such as high quality service, ample capacity, and on-going technological innovation – depend on the ability and willingness of carriers to continue to make massive capital investments to expand and modernize their assets. That ability and willingness depends, in turn, on the lines’ expectations that they can, over the long term, achieve a reasonable level of profitability that would justify such large investments.

The industry has made huge investments in new terminals, equipment, information technology, and larger vessels to achieve economies of scale, developed alliances to take advantage of economies of scale and scope, and invested in new technologies that made possible significant cost savings. Those efficiency gains and cost reductions have been passed on to shippers in lower rates and improved service.

Forecasts of the growth of demand for liner shipping over the next decade are as impressive as they will be challenging to accommodate. One common estimate is that the amount of cargo being transported in liner shipping is likely to double by 2020, with the highest growth rates in the Far East, South Asia and South America. To keep pace with such an increase in demand, carriers will need to invest an estimated $100 billion in new vessels and containers alone. Expenses for additional maritime terminal capacity, efficiency-enhancing information technologies, and other related investments – such as enhanced security measures in the post-September 11 environment -- will have to be added as well.

Given the forecast trade growth, the cyclical nature of liner markets, and the problem of chronic trade flow imbalances, ocean carriers face significant and difficult challenges in their planning and investment decision making. It is in both carriers’ and shippers’ interests that the stability of the current regulatory environment under the Shipping Act not be undermined. If investments in new vessels, equipment, and marine terminal assets do not keep pace with growing demand, or if regulatory changes and uncertainty produce substantial industry concentration and an oligopoly market structure, the benefits of today’s commercial environment would be lost.

Under the current regulatory regime, shippers enjoy a wide choice of carriers continuously trying to improve service, and enjoy rates that trend down over the long-term. For such service and price stability to be maintained, it is important that carriers have sufficient confidence in the marketplace to continue making the high levels of capital investment needed to meet future demand. While carriers’ limited and regulated use of antitrust immunity can not overcome the forces of supply and demand, it does improve the lines’ market knowledge, increase carrier confidence, and provide increased market stability.

III. The Value and Impact of the Industry’s Limited and Regulated Antitrust Immunity

Today’s regulatory environment offers carriers and shippers each of the desired characteristics of a transportation system discussed above. However, the continuation of those beneficial conditions ultimately depends on a reasonable level of market stability and continued carrier investment and innovation to meet the growing and increasingly sophisticated demands being made on the system. The Shipping Act, as amended by OSRA, is internationally accepted and understood, and results in an efficient, highly competitive transportation network that is providing excellent service to the world’s expanding commerce. This recently validated and successful system should not be disrupted.

The Shipping Act’s regulatory regime with limited, regulated antitrust immunity should be analyzed in the context of the unique commercial environment in which the liner shipping industry operates. The inherently international nature of the industry requires a consistent, internationally accepted regulatory framework, which is what the Shipping Act of 1984, as amended by OSRA, provides.

1. International Comity

In this age of globalization, many companies have become transnational entities. That is, they operate plants, or sub-contract work to production facilities in a variety of countries. In such cases, the business unit operating in the firm’s home country is subject to the laws and regulations that apply there, and units operating in foreign countries are, in turn, subject to the relevant foreign statutes and regulations. Corporate headquarters needs to be aware of all the relevant regulations, foreign and domestic, but each separate operating unit is subject only to the national laws obtaining in its geographic location.

Liner shipping, on the other hand, is a truly international industry. That is, its operations (the carriage of goods between different nations) are simultaneously subject to the maritime laws and regulations of two or more nations. As a result, it is necessary to the maintenance of an efficient ocean transportation system that conflicts between national regulatory regimes be minimized. Serious problems affecting international commerce could result if, for example, the United States sought to enforce a strict antitrust policy in its trades, while its trading partners adopted a regulatory regime that provided liner shipping with limited antitrust immunity. Because liner shipping operations are global in scope, the potential for conflict is not limited to bilateral differences in maritime policy.[27] This simultaneous application of potentially conflicting national competition policies is precisely why it remains essential to the smooth flow of international commerce to retain the existing, broadly based consensus on liner regulation.

2. International Liner Shipping Market

Liner shipping is characterized by a unique set of economic and political features which, taken together, can produce unstable cycles with respect to both rates and space availability. These characteristics include:

· High fixed costs to operate a regularly scheduled service

· Relatively inelastic demand for services (meaning that rate reductions very rarely can increase the market demand for services)[28]

· Significant mismatches in demand arising from chronic bi-directional trade imbalances (import and export volumes often differ widely) and significant fluctuations in demand

· Inelastic supply (carriers must maintain supply at consistent levels sufficient to meet peak demand, yet are very limited in their ability to rapidly “flex” supply because of their large fixed sunk costs and the nature of liner shipping which requires regular service and strings of vessels that call numerous different ports in a single voyage)

· “Lumpy” supply (capacity must be added or withdrawn in large units – namely entire strings of vessels, unlike a railroad which can add or subtract cars from a train based on variation in demand)

· No regulatory barriers to new entry or capacity expansion

· Distortive government subsidization of shipping and shipbuilding

While other industries may share with liner shipping one or even several of these characteristics, the combination of all of them is unique and produces an industry that is subject to chronic market instability.

The high fixed costs in providing a regularly scheduled international service,[29] and the fact that ocean carriers offering liner shipping services face inelastic yet variable demand, create special economic constraints. Since carriers’ variable costs are relatively small, their ability to adjust rapidly to decreases in demand in a trade by reducing supply is limited.

Furthermore, chronically imbalanced international trade flows make offering a profitable roundtrip service extremely difficult. Balanced trades, where outbound containers and inbound containers approximately match, are relatively rare in U.S. trades. On the “light” leg, empty containers must be shipped, with no revenue to the ocean carrier, back to be available for use by other shippers on the “heavy” leg. Nor is the equipment needed for outbound cargo (such as refrigerated containers for foodstuffs) likely to match the needs of inbound cargo (say auto parts). The existence of peak seasons also creates difficulties since carriers must maintain capacity and equipment adequate to meet peak season demand, even though utilization of that capacity and equipment drops off in non-peak periods.

As an example of the imbalances between capacity offered by the industry and the demand for such capacity, the following graph shows the dynamics of the trans-Pacific trade in 1998:

As one can see, capacity supply is relatively stable,[30] yet (1) the eastbound trade shows substantial seasonal variability – sometimes using all the capacity and sometimes not, and (2) the westbound trade shows chronic overcapacity because U.S. imports greatly exceed U.S. exports.

In such an unbalanced trade, a carrier will collect revenues from shippers moving export cargo and from shippers moving import cargo, and the sum of those rates will be the carrier’s total roundtrip revenue. However, carriers incur substantial costs, which are part of their total roundtrip costs, in addition to the cost involved in moving a shipper’s cargo – namely, the costs of repositioning empty equipment arising from the trade imbalances discussed above. In July and August of 1998 in the trans-Pacific trades shown above, approximately 40% of the containers in the trade had to be repositioned empty back to Asia in order to handle cargo moving eastbound, and all the expenses associated with the assets and the operations to do this were part of the carriers’ roundtrip market economics.

An analysis done in 2000 showed that ocean carriers spent $12.8 billion repositioning empty containers.[31] Roughly 20% of all containers moved globally are empty boxes.[32] Due to its trade imbalances, America’s leading “export” is empty containers that ocean carriers must reposition with no export cargo providing offsetting revenue.

Liner shipping markets are inherently unstable. The industry operates with heavy capital requirements and high fixed costs – about 75% of the industry’s costs exist whether there is cargo on the ship or not—and relatively low marginal costs. Carriers thus do not avoid significant costs when vessel space is empty. Instead, empty space represents a sunk cost that cannot be recovered. The resulting tendency for carriers facing the constant dilemma of empty space – which cannot be stored for later use – is to cut rates to fill space and help cover fixed costs. That leads to marginal pricing that does not recover full costs. Left unchecked, marginal, non-compensatory pricing arising from structural overcapacity would lead to insolvency, withdrawal of capacity, and service degeneration. Rates would subsequently increase, attracting new capacity, and the cycle would begin again. The existing regulatory system is necessary to avoid such destructive competition.

The lines’ high fixed costs of providing a scheduled service and limited ability to use rate reductions to increase shipper demand are further complicated by the need to offer levels of service that are sufficient to cover the directional, seasonal, and special equipment imbalances that so commonly exist.

A line’s commitment to providing a service that meets its customers’ demand for regular and timely service, in both directions, at all times of the year, as well as one that is adequate for the longer-term demands of growing markets explains why simply pulling a vessel or string of vessels out of a trade when supply temporarily exceeds demand is a challenge for a line. Many shippers’ businesses depend on their meeting tight “just in time” schedules. They expect, and their business operations are built around “conveyor belt” service. Regularity of sailings and adequate availability of equipment and space is crucial. In order to maintain the regular scheduled services that are the defining characteristics of the liner industry, vessels must sail on time, whether they are full or not. When making their annual business plans, and negotiating their transportation contracts, shippers expect their carriers to maintain reliable sailing schedules, fast transit times, and ample slot availability. Smoothly functioning supply chains depend on high levels of predictability and reliability in transportation and logistics services.

The flexibility to change capacity levels rapidly in response to transient demand changes is possible, but it is both difficult to do and requires great care in order to be responsive to shippers’ service needs. Rapid entry and exit from a trade would produce unacceptable instability in rates and service. Such efforts are best organized within the framework of existing carrier agreements.

In making decisions on how much capacity to put into a given trade, lines are also handicapped by the nature of their assets. There is a two to three year gap between the decision to purchase new vessels and their arrival in the trade. That means that new capacity being added cannot be precisely coordinated with increases in demand. This might be less of a problem if capacity could be added in discrete units. But capacity ordinarily can only be added in large, vessel string-sized “lumps.” Consequently, lines must purchase new vessels (which have lives of 25 years) in anticipation of uncertain trade growth and, bring in more tonnage to a trade than will initially be needed even if the growth forecasts are accurate. Without the ability to share information on the market and future capacity plans, the problem would be even greater than it often is.

Furthermore, carriers’ ability to avoid excess capacity, in spite of the problematic economics of the industry, is further hampered by nonmarket-driven tonnage. Liner shipping is affected by an extensive system of governmental subsidies that generate surplus tonnage worldwide. One element of this system, is the subsidization of domestic shipbuilding industries. As was stated in the Report of the Advisory Commission on Conferences in Ocean Shipping: “Shipbuilding subsidies mean that the problems of industry overcapacity will tend to be more lasting than otherwise, and less responsive to the economic incentives that drive surplus capacity from more conventional markets. This in turn implies that rate wars could be a persistent feature in even a deregulated ocean liner market.”[33] Recent press accounts indicate that competitive subsidization of shipbuilding may, in fact, be increasing. Given open trades and the highly competitive nature of the industry, the overcapacity generated by these subsidies further reduces rates and profits in the affected trades.

Taken together, these economic and political factors can and do produce chronic excess capacity in major trades. Through limited antitrust immunity, carriers can at least partially address the excess capacity problem by sharing assets via operational alliances and space sharing agreements, and by the exchange and discussion of key market information. And they can try, pursuant to applicable law, to mitigate the financial effects of the industry’s structural overcapacity by promoting rational pricing.

It is against this backdrop of structural overcapacity and its effects that governments around the world have affirmed that limited, regulated antitrust immunity is important. If the spiral of non-compensatory rates, business failures, and consolidation that would otherwise result from such overcapacity is to be prevented, there must be a mechanism for addressing the intense pressure on carriers to lower prices below compensatory levels. Limited antitrust immunity allows carriers to discuss and agree on rate levels or guidelines that moderate to some extent the tendency toward rates that do not fully cover costs. These group activities, although they do not overcome or change the forces of supply and demand, do help to buffer the most extreme rate swings that would otherwise harm the industry through destructive competition. In an industry where margins are as thin as in liner shipping, that buffer is crucial.

3. Regulated, Limited Immunity With Safeguards

Carriers’ use of antitrust immunity is limited both by the laws providing such immunity and by the nature of the markets in which they operate. The potent combination of free entry into the trades, the lack of “switching costs”, the persistence of overcapacity, the dominance of contract carriage conducted on a confidential basis between individual lines and shippers, and the existence of lines that are not parties to agreements, provide intense competition and strong market safeguards.

In addition, liner trades are already subject to active oversight by the Federal Maritime Commission, which has the authority to investigate and, if needed, apply remedial measures.

Stated simply, international liner shipping does not operate with unrestricted antitrust immunity. International liner shipping operates with limited antitrust immunity accompanied by a plethora of pro-competitive regulatory requirements administered by a federal government agency well versed in liner shipping. Under the Shipping Act of 1984, as amended by OSRA, shipping lines:

· May not operate under an agreement with other lines except in accordance with the terms of an agreement which has been filed and reviewed by the FMC

· May not operate under an agreement with other lines if that agreement has been rejected, disapproved or cancelled by the FMC

· May not operate under an agreement that unreasonably increases rates or decreases service

· May not engage in unjust or unfair or predatory practices

· May not retaliate against any shipper

· May not restrict members of an agreement from entering into individual, confidential service contracts with shippers

· May not require a member of an agreement to disclose the terms of its individual service contracts

· May not drive competitors out of a trade

· May not impose any unreasonable prejudice or disadvantage with respect to any port or any person due to the person’s status as a shippers’ association or ocean transportation intermediary

· May not allocate shippers

· May not offer or pay deferred rebates

· May not unreasonably refuse to deal or negotiate

· May not engage in any predatory practice

· Have no antitrust immunity to negotiate rates or services provided to them by trucking or rail carriers.

There are many other provisions in the Shipping Act regulating shipping activities and transactions. In short, shipping lines are regulated by an expert government agency in a manner that ensures competition, promotes commercial freedom, allows for limited but valuable carrier cooperation in the marketplace, and is understood and accepted internationally.

Before concluding the discussion of the FMC and the Shipping Act’s regulatory safeguards, it is appropriate to briefly comment on criticisms that some in the freight forwarding and NVOCC community have made against ocean carriers – namely, that carriers use their limited antitrust immunity to injure small U.S. importers and exporters, and that they have discriminated against NVOCCs as a class.

As an initial matter, it is simply illogical that ocean carriers would try to impair the ability of shippers of any size, large or small, from being competitive and successful in their markets. The more a customer succeeds, the more business the carrier may get, and carriers are looking for business wherever they can find it.

Specifically, some NVOCCs have alleged that ocean carriers in the trans-Pacific trade have agreed to unjustly discriminate against NVOCCs on rates. A petition was very recently filed at the FMC with such allegations. In light of the petition, some comments are in order. First, NVOCC’s are a successful growing part of the marketplace. Many NVOs are larger companies than ocean carriers and their financial earnings are generally superior to ocean carriers’. Some of the most intense competition is big NVOCCs against smaller NVOCCs. Second, the carrier agreement in question -- the Transpacific Stabilization Agreement -- has flatly and unequivocally denied the allegations in this petition. Third, the petition contains not a single fact in support of the allegation, nor identifies a single NVOCC or party with an alleged injury. Third, notwithstanding the above, the carrier agreement has offered to provide a neutral mediator, at its expense, for any NVOCC that has a complaint. Fourth, if the petitioners would present the FMC with actual facts that demonstrate that what they say is true, the carriers would be guilty of violating the Shipping Act, and the existing law provides ample penalties and remedies. Finally, to the predictable dodge of “we can’t provide facts because we’re afraid of carrier retaliation”, one should consider that, in addition to the fact that even ocean carriers should receive the due process of law: it would be illegal under the Shipping Act for carriers to retaliate; it is illogical that ocean carriers could or would “retaliate” against NVOCCs who control 30 to 40 percent of the market; NVOCCs don’t give their business to one carrier and the second a carrier tried to “retaliate”, it would lose that business to a competitor; and, to the extent there is “retaliation” in the market, it is common for NVOCCs to be the ones who retaliate or “punish” carriers by “cutting them off” and denying them cargo if the carrier does not provide acceptable terms. That leverage possessed is powerful and is frequently used, and is one of the reasons the market is so intensely competitive and rates are so low.

4. Uses and Benefits of Immunity

Carriers use their limited and regulated antitrust immunity to establish and maintain two general types of agreements:

· Agreements that primarily involve a cooperative sharing of operating assets such as ships and equipment, and

· Trade-lane agreements with pricing authority (conferences and discussion agreements)

(A) Asset Sharing Agreements

Asset-sharing agreements produce operating efficiencies and reduce costs. They have allowed participating lines to expand their service networks, reduce operating costs, optimize capital investment, and reduce risk. They have also made it easier for carriers to enter new trades by sharing space with other lines rather than having to incur 100 percent of the costs and risks of developing their own string of ships in a service. The benefits to shippers of such expanded and flexible networks are well recognized. Multi-trade alliances also offer an alternative to greater industry concentration via merger and acquisition. Such alliances demonstrate a clear positive benefit of carrier antitrust immunity. That immunity has allowed carriers to undertake the detailed discussions necessary to establish, operate, and periodically revise these efficiency-enhancing agreements.

It is helpful to consider how carriers’ use of limited and regulated antitrust immunity, working together with today’s system of free entry, has produced such a highly responsive set of service improvements around the world. Decisions to expand service cannot be made in isolation from confidence in what revenues can be generated from that capacity in the marketplace and what costs will be incurred. This confidence is often based on the ability of carriers to work under agreements that have price discussion authority. To illustrate how today’s regulatory system has allowed and promoted carriers’ ability to easily and efficiently offer new capacity and competition in the marketplace, consider the following examples since 1995 of several World Shipping Council carriers’ use of antitrust immunity to join with other carriers in capacity sharing agreements and thereby enter into new trades:

· APL entered the United States-Northern Europe trade, the United States-Mediterranean trade, the United States-Central America trade, the United States- South America trade, a number of intra-Asia trades, the Asia-Middle East trade, and the Asia-Mediterranean trade.

· COSCO, Evergreen, the Malaysia International Shipping Corporation and K Line in February 2001 announced a joint entry into the Northern Europe-Indian Subcontinent trade.

· Hapag-Lloyd entered the United States East Coast-Mediterranean trade, the Mediterranean-Far East trade, the North Europe-East Coast South America trade, the Asia-Caribbean trade, and the United States East Coast-South America East Coast trade.

· Evergreen entered the United States East Coast-East Coast of South America trade and the Asia-Australia trade.

· K Line entered the United States East Coast-North Europe trade, the U.S. Gulf Coast-North Europe trade, the United State-Mediterranean trade, and the all water Asia-United States East Coast trade.

· Maersk-Sealand entered the Europe-South Africa trade and the Europe -Caribbean trade.

· Mitsui O.S.K. Line entered the Europe-United States East Coast and Gulf Coast trades, began direct service between various Chinese and United States ports, and entered a number of United States-Mexico/Central America/Caribbean trades.

· NYK entered the Canada-North Europe trade, the United States-North Europe trade, the United States-West Coast of South America trade, the Korea-Middle East trade and several intra-Asia trades.

· OOCL entered the United States-Mediterranean trade, the Asia-Mediterranean trade, the Europe-Mexico trade, and the United Kingdom/Germany to Russia trade

· P&O Nedlloyd entered the trans-Pacific trade, the Asia-United States East Coast trade, the Europe-Canada trade, the United States East Coast-East Coast of South America trade, the United States Gulf Coast –East Coast of South America trade, the Mexico-Europe trade, the Mexico-Asia trade and the Mercosul trade.

· Yangming entered the Southeast Asia-Australia trade, the trans-Atlantic trade, the Far East-New Zealand trade, the Far East-South Africa-South America trade, the North Europe-Mediterranean trade, and the Asia-United States East Coast trade via the Mediterranean.

This small sampling of examples of carriers using the current system of limited antitrust immunity to the benefit of improved, more efficient service and entry into new trades is far from exhaustive. Furthermore, it does not even attempt to show the numerous ways carriers have operated with limited antitrust immunity to expand and improve services to trades they were already serving, with more direct services, more and faster vessel strings, and better transit times to core port pairs. It is illustrative, however, of the existing regulatory system’s clear and demonstrable record of providing excellent, constantly improving service to meet the needs of global commerce. Continuation of that record would be threatened by enactment of H.R. 1253.

(B) Trade Lane Agreements

OSRA’s service contracting reforms have produced a shift away from conference contracts to one-to-one business arrangements between shippers and their preferred carriers. The development of more flexible and innovative contracting and a gradual growth of multi-trade contracts have accompanied that shift.

If the new, looser agreements that have evolved out of traditional conferences no longer regulate their members’ service contracts, what do they do? And how does what they do contribute to greater market and service stability?

Trade-lane agreements may engage in:

· Collecting, exchanging, and discussing market information (such as supply and demand forecasts, anticipated growth rates, current utilization levels, and relevant government policies affecting service),

· Developing and proposing standardized surcharges (such as bunker charges, currency adjustment charges, and terminal handling charges),

· Discussing and proposing common approaches to pricing to the extent permitted by law (such as common tariffs, recommended prices, proposals for general rate increases and peak season charges), and

· Conducting dialogues with national shippers’ councils and government agencies.

Allowing the lines to develop a collective perspective on emerging market opportunities and problems raises the members’ level of confidence in the accuracy and completeness of market information and thereby their confidence in making tactical pricing decisions and strategic capital investment decisions.

(C) Carrier Agreements Are Not “Cartels”

As mentioned earlier, the forces of supply and demand and the restrictions of existing regulatory requirements limit the extent to which carrier agreements can affect prices. To operate as an effective pricing cartel, trade-wide liner agreements would need to accomplish four central tasks:

· Predict and prevent the provision of new capacity by non-members

· Restrict the total capacity made available to the market

· Establish each member’s capacity quota, and

· Detect and prevent independent pricing and contracting decisions by members.

Carrier agreements are not doing this. Market conditions and existing regulatory limitations on immunity prevent cartelization. First, open trades, free of regulatory restrictions on new or expanded capacity, ensure the unobstructed entry of new capacity in response to increased demand.

Second, the sharing of supply/demand forecasts and utilization information provides agreement members with improved market information. Carrier agreements do not involve capacity restriction programs that artificially limit capacity in a way that would distort the market. And no such program would escape the close regulatory scrutiny to which liner shipping is subject.

Third, there are no agreements that establish trade-wide capacity quotas for member lines, and regulatory officials have stated that, absent clear and convincing justification, they would not allow such capacity restriction programs.

Fourth, and very importantly, OSRA prohibits carrier agreements from restricting members’ right to contract as they wish with shippers. This freedom of contracting, and the environment dominated by confidential one-to-one business arrangements to which it gives rise, ensures keen competition.

Fifth, as stated above, the existing shipping laws contain a plethora of protections.

Carrier agreements, even those with relatively high market share, are not, and cannot be, cartels. Any review of actual market conditions, rates and profit levels conclusively will demonstrate that calling carrier agreements “cartels” is empty rhetoric. Such agreements do, however, create important benefits for carriers and shippers alike.

(D) Benefits of Carrier Agreements

First, the exchange and discussion of market information is itself important to the development of better market information and forecasts, and more rational approaches to market pricing as well as strengthening business confidence.

Second, a carrier agreement can, subject to existing market conditions, help improve planning, encourage better capacity utilization, and diminish rate volatility. Although a minority of the cargo moves under the tariff in many conferences today, the tariff acts as a benchmark for collective and individual rate-setting by the agreement members for the remaining cargo and thus helps to provide stability for the trade. In trades that have discussion agreements rather than conferences, voluntary guidelines serve a similar function.

Third, such agreements can and do produce standards for certain surcharges that are needed to address fluctuating cost variables, such as currencies or fuel costs. Such agreements can provide a market standard for contracting season cycles, and allow carriers to communicate to shippers, in advance, expectations about supply and demand and about future rates for planning purposes.

Fourth, by improving the quality of their supply and demand forecasts, producing accurate and timely reports on utilization levels, and sharing other commercial information, agreement members can help avoid exaggerated rate fluctuations in the face of supply/demand imbalances.

Fifth, such information exchange can also assist member lines to identify and respond promptly to impending increases in demand for capacity and equipment.

Liner markets are driven by supply and demand conditions. Any efforts by carriers to avoid panic pricing or better appreciate market facts and opportunities are still subject to market forces and the regulatory prohibitions against unreasonable rate increases and the list of prohibited activities discussed earlier. The benefits to carriers – better market information and marginal improvements in revenue results – are more than matched by benefits to the shipping public. Today’s existing practical and well-accepted regulatory system avoids the negative consequences of conflicting maritime regulations and chronic price and service instability, and encourages adequate private investment in the greater capacity and new technologies needed to meet future market demand.

(E) Rebutting the Argument that the System Only Benefits “Foreigners”

Some critics of the Shipping Act have alleged that, since ocean carriers like Sea-Land, APL, Lykes and Farrell are now owned by non-U.S. companies, the law only benefits “foreigners” and is therefore somehow defective. A little thought will show otherwise.

First, the liner industry generates more than one million American jobs and $38 billion in wages to American workers. One can’t affect the industry without affecting that.

Second, U.S. owned liner companies were sold because the industry is so competitive that U.S. companies were not rewarded by investors or Wall Street for being in the business. I can tell you from personal experience, for example, that CSX sold Sea-Land – not because it wasn’t an excellent, innovative, well-run or efficient company – but because the industry’s returns were judged consistently inadequate and CSX stock suffered as a result of its investment in the industry. In short, the sales of these lines only confirm how intensely competitive the industry is, not that American consumers are in any way being adversely affected by the Shipping Act.

Third, the overwhelming majority of the U.S.-flag vessels in the international liner industry are used and financially supported by carriers that are not U.S. owned companies. My personal opinion is that is very important for this country to have a merchant fleet; the government continues to consider how to have more effective maritime promotional policies, which is an issue beyond both the scope of this hearing and the World Shipping Council’s activities. But, one thing is certain: Subjecting an already intensely competitive industry to destructive competition by repealing the Shipping Act would certainly do nothing to encourage vessels being placed under the more expensive U.S. flag.

There is a fourth and final point I’d like to make in this regard. We have each Member of the Committee a booklet, entitled “Partners in America’s Trade”, briefly explaining the substantial contribution liner shipping makes to the American economy and the efficient movement of America’s exports and imports. With the industry struggling to make adequate financial returns, and especially with our own U.S. laws failing to attract American capital to this business, the continued presence and investment of foreign capital in the industry which transports America’s international commerce is critically important, not something that should be disparaged or discouraged. It is entirely appropriate for the Shipping Act to be designed to ensure robust competition, innovation, efficiency and an appropriate level of regulatory oversight. But it is also important that the regulatory regime be mindful of the need for invested capital to be sufficiently profitable to not only remain invested, but to grow, so that the future needs of America’s expanding foreign commerce can be met as well as today’s.

IV. Consequences of Repealing the Shipping Act’s Successful Regulatory System

A review of international liner shipping shows not only that it is a unique international business, but also that it is currently operating in highly competitive markets with all the desired characteristics set forth in Section II of this testimony. The Shipping Act of 1984, as amended by OSRA, which includes as one element limited, regulated antitrust immunity, is a major reason for this success. If one were to compare, for example, the U.S. domestic aviation industry, or the international aviation industry under bilateral agreements, with international liner shipping, there would be no question that liner shipping is a more competitive, more flexible and less concentrated industry. If one were to compare any nation’s rail transportation system with liner shipping, there would be no doubt about which transportation mode provides shippers with greater competition and choice.

Antitrust regulation is one form of government regulation intended to provide competitive, efficient markets. It is not the only form of government regulation, nor necessarily the most effective at achieving this. It will not produce results superior to the existing, well established and internationally accepted form of liner shipping regulation in operation today.

The assumption that repealing antitrust immunity would have no negative effects on the current open, multilateral, non-restrictive regime, but would simply facilitate increased competition and lower rates, is ill-founded. It is worth recalling, at the outset of any discussion about revamping the Shipping Act, that:

· Today’s regulatory system is well understood, internationally accepted, and working well. It produces excellent results for shippers and nations concerned about the efficient movement of international trade, and it provides sufficient clarity and certainty for carriers.

· Not all nations share a common approach to competition policy.

· Some nations view liner shipping as a strategic national industry deserving of direct and/or indirect governmental support.

· Many nations play a central role in both international trade and the provision of liner shipping services, and appropriate consideration of their views on shipping policies is important.

· Even nations that apply antitrust/competition measures relatively strictly in their domestic economies, have recently reaffirmed that international liner shipping is a unique industry that is best regulated by providing limited antitrust immunity accompanied by government oversight rather than by applying domestic antitrust laws.

There are several consequences that could be expected to follow from a repeal of the current regulatory regime. It would produce destructive competition in an industry that is already fiercely competitive and suffering from inadequate returns on investment. It would result in poorer service and fewer service choices, at likely higher post-consolidation rates. It would invite other nations to respond by applying their own, different, national shipping laws to the business. And, finally, it is likely to produce a shortfall of private investment in transportation infrastructure, with predictable negative long-term consequences for international trade, including:

· Reduced technological and organizational innovation

· Additional infrastructure bottlenecks

· Slower growth of industry productivity

· Impaired system-wide efficiency, and

· Slower trade growth.

In short, the net effect would be significantly negative.

Repeal of the Shipping Act’s limited antitrust immunity would be virtually certain to result in incompatible national maritime policies and conflicts of law. Such conflicts would result in inconsistent and incompatible enforcement of laws, the probable use of national “blocking statutes” to prevent effective enforcement of antitrust laws, severe regulatory and business instability and uncertainty, and the possibility of other nations’ enacting counterveiling measures. For the Justice Department to dismiss such concerns is simply naïve.

Many nations have firmly established national policies to support and promote their merchant fleets. These fleets operate in an exceptionally competitive international market today. To believe that such nations would welcome a destabilized market that could put their merchant fleets’ economic future at risk would be unrealistic in the extreme. There are several potential responses that those nations could offer, none of which would result in a superior regulatory environment to that which exists today, or as uniform an international approach as exists today. For example:

· Nations could refuse to apply antitrust law, leading to uneven, uncertain, and incompatible regulation of an international business.

· Nations could apply significantly different competition laws to this international business and enforce their laws in inconsistent ways.

· Nations could impose anticompetitive regulatory requirements on the trade to increase stability. Such measures could include reversing the recently won ability in OSRA to have confidential contracts, and replacing the commercial freedom of today with regulated, public, government enforced contracts.

· Nations could embrace bilateral maritime agreements, such as those that exist in international aviation, which restrict and regulate market access.

· Nations could seek to establish trade allocation regimes to stabilize markets and protect their national fleets.

· Nations could increase market distorting subsidies and supports for their merchant fleets, so that marketplace “winners” would not be decided on the merits of superior efficiency and service, but on governments’ willingness to expend resources or provide preferential treatment for their fleets.

For those nations that do not have a large national merchant fleet, like the United States, their satisfaction with liner shipping markets depends on having a sufficiently large number of competitors in their trades to ensure that the lack of a substantial national fleet has no significant adverse effect on their commerce. In the destabilizing, destructive competition and industry concentration that would follow a repeal of limited, regulated antitrust immunity, such nations may become uncomfortable as the transportation of their commerce would be subject to fewer and fewer carriers.

As a consequence, H.R. 1253’s radical surgery on the Shipping Act would not only disrupt a reliable, efficient smoothly operating international transportation system, but it could transform international shipping from an effective facilitator of international trade to a discordant foreign relations dilemma.

Modern liner shipping has been the engine driving our global economy, a key factor in making today’s economic globalization possible. The recently enacted Ocean Shipping Reform Act already addressed the need for any changes. The current system is working well and both shippers and carriers are reasonably happy with the current regulatory regime and results. Accordingly, a regulatory Hippocratic oath should be observed: First, do no harm.

V. Conclusion

A sound analysis of liner shipping must recognize that the guiding purpose of whatever regulatory system is applied to the industry must be to produce an efficient, effective and innovative transportation infrastructure for the movement of international trade. There is no question that the liner industry has invested in and built such an infrastructure and has accommodated the enormous growth in international trade very well. It has succeeded to such an extent that the liner industry has been called “the heart of the global economy”.[34]

There is also no question that competition in this industry is fierce and that the financial returns in international liner shipping have been poor. Nor is there any question that to maintain and continue building the transportation infrastructure capable of handling this decade’s forecasted doubling of cargo movements, carriers will be required to invest huge sums of additional capital. Where will that investment come from if markets are further destabilized and the industry’s financial returns are further weakened?

The most important international shipping challenge facing carriers and shippers alike in the coming years is not the existing regulatory structure for liner shipping. That structure is working well. The biggest challenges are addressing the strains, bottlenecks and inefficiencies in the landside transportation infrastructure, and, even more importantly, working with the United States government to design an international transportation system that is more secure against the threat of terrorism. Significant cost savings and improved efficiencies will not be found by changing today’s liner shipping regulatory system.

The Ocean Shipping Reform Act was the product of many years of effort involving all stakeholders, including shippers, carriers, ports, and labor. The Act, which has been in place for only three years, provided a comprehensive and thorough examination and reform of the international liner shipping regulatory system. One piece of that system is a limited and regulated antitrust immunity, accompanied by a coherent regulatory regime, overseen by the Federal Maritime Commission, that is internationally accepted, understood and successful. We respectfully submit that the Act is working well and does not require any amendment. We further submit that H.R. 1253 would fail to achieve any meaningful economic benefits for the shipping public, the U.S. public port community, American maritime labor or carriers, but would jeopardize the considerable benefits that America’s international trade now enjoys under the present system.

We appreciate the opportunity to provide this testimony and look forward to assisting the Committee with any questions it may have on the international liner shipping regulatory system.

Attachment A

Member Companies of the World Shipping Council

APL

A.P. Moller-Maersk Sealand

(including Safmarine)

Atlantic Container Line (ACL)

CP Ships

(including Canada Maritime, CAST, Lykes Lines, Contship Containerlines, TMM Lines, and ANZDL)

China Ocean Shipping Company (COSCO)

China Shipping Group

CMA-CGM Group

Compania Sud-Americana de Vapores (CSAV)

Crowley Maritime Corporation

Evergreen Marine Corporation

(including Lloyd Triestino)

Gearbulk Ltd.

Great White Fleet

Hamburg Sud

(including Columbus Line and Alianca)

Hanjin Shipping Company

Hapag-Lloyd Container Line

HUAL

Hyundai Merchant Marine Company

Italia Line

Kawasaki Kisen Kaisha Ltd. (K Line)

Malaysia International Shipping Corporation (MISC)

Mediterranean Shipping Company

Mitsui O.S.K. Lines

NYK Line

Orient Overseas Container Line, Ltd. (OOCL)

P&O Nedlloyd Limited

(including Farrell Lines)

Torm Lines

United Arab Shipping Company

Wan Hai Lines Ltd.

Wallenius Wilhelmsen Lines

Yangming Marine Transport Corporation

Zim Israel Navigation Company

---

[1] A list of the World Shipping Council’s member companies is provided as Attachment A. Pursuant to the Rules of the House, the World Shipping Council states that it has received no federal grant or contract which is relevant to this testimony.

[2] See, for example, the supply, demand and capacity utilization data provided in the March 22, 2000 Mercer Management Study in “Hearing on the Free Market Antitrust Immunity Reform Act of 1999”. Pages 17 through 20 of that study contain figures for the major U.S. trades.

[3] Drewry Container Market Quarterly, September 2000, p. 15.

[4] For example, Containerization International’s November 2000 issue noted that the president of China Shipping Group has stated his intention of growing its container line, China Shipping Container Line, into one of the top five carriers in as many years. The CI article points out that CSCL had expanded it slot capacity 70 percent in the previous 12 months, and would likely double its fleet over the next two years. Today, CSCL ranks number 15 in total cargo carried in U.S. trades. Similarly, Sinotrans announced last week that it will launch its first string of containerships in the trans-Pacific beginning in late June. Journal of Commerce, May 28, 2002.

[5] FMC OSRA Impact Final Report, September 2001, p. 18.

[6] Statement of Mercer Management Consulting, Inc. before the U.S. House Committee on the Judiciary, Hearings on the Free Market Antitrust Immunity Reform Act of 1999, March 22, 2000, p.16.

[7] Section 18 Report on the Shipping Act of 1984, Federal Maritime Commission, September 1989.

[8] Clyde, Paul S. and Reitzes , James D., “The Effectiveness of Collusion Under Antitrust Immunity,” Bureau of Economics Staff Report, Federal Trade Commission, December, 1995. The study expands on work that began when the authors were DOJ and FTC staff serving with the Advisory Commission on Conferences in Ocean Shipping.

[9]Drewry Container Market Outlook, October 1999, page 103.

[10] Paul F. Richardson Associates, Inc. “Pricing Dilemma in the Global Container Industry”, May 5, 1999, pages 9- 15.

[11] For additional details see Containerization International, October 2000, “On the Mend,” pages 53 – 57.

[12] Source: Paul F. Richardson Associates (2001)

[13] Id. The three major U.S. trades are the trans-Pacific, the trans-Atlantic and the East Coast United States-East Coast South America.

[14] The Drewry Container Market Quarterly, March 2002, page 1.

[15] “Service Over Rates: With freight rates at historic lows, US agriculture exporters are demanding – and receiving – expanded service terms from ocean carriers,” JoC Weekly, February 11 – 17, 2002, pages 30 - 31.

[16] Agricultural Marketing Service, “Agricultural Ocean Transportation Transportation Trends,” December 2001, at www. ams.usda.gov/tmd/AgOTT/December%202001/Dec2001_content.htm.

[17] “Carriers’ Winter of Discontent,” JoC Week, December 10 – 16, 2001, p 19.

[18] Section 10(c)(4) of the Shipping Act of 1984, as amended (46 App. U.S.C. 1709(c)(4)).

[19] FMC’s OSRA Report, September 2001, p. 41-42. The Teamster’s complaint that U.S. labor laws make it difficult to organize independent owner-operator truckers is beyond the scope or competence of the shipping or antitrust laws.

[20] These capacity numbers, while substantial, do not convey the full impact of the new vessels placed into service. In fact, each new vessel is employed many times over in the course of a year. For example, in the trans-Pacific trades a vessel in a string of 5 ships makes approximately 10.4 roundtrip voyages per year. Thus, one new 5,000 TEU vessel deployed in the trans-Pacific adds roughly 52,000 TEUs of new annual carrying capacity in each direction, or 104,000 TEUs of new annual capacity for the roundtrip.

[21] Drewry Container Market Quarterly, March 2002, p. 39 (Table 3.9).

[22] Drewry Container Market Quarterly, June 2001, p. 47.

[23] Drewry Container Market Quarterly, March 2002, p.64 (Table 5.2).

[24] Canadian Transport Ministry Press Release, March 1, 2001.

[25] “Competition Policy in Liner Shipping”, OECD Division of Transport, Final Report, April 2002, p.78.

[26] Id. at p. 80.

[27] Vessel services generally call at multiple countries, not just two. It is not uncommon for a single service string to call in seven or more countries, serving literally thousands of point-to-point service offerings. As just one example, NYK Line operates a service to and from the U.S. East Coast that provides direct services to Taiwan, the Peoples’ Republic of China, Thailand, Singapore, Sri Lanka, Italy, Canada and Saudi Arabia. The regulatory exposure faced by ocean carriers is not merely bi-national, but global.

[28] In the case of most commodities, industry rate reductions do not induce additional volumes and associated revenues. In the case of VCRs shipped from Hong Kong to the United States, for example, if carriers provided free ocean transportation, that would change the cost to the VCR consumer by less than a dollar (assuming the entire reduction were passed on, which is questionable), hardly enough to stimulate VCR sales.

[29] A typical 5,000 TEU container vessel costs approximately $60 to $65 million. A carrier must have a number of containers for each vessel container space, with their costs ranging from approximately $2,000 to $30,000 each depending on the characteristics of the container. According to the Mercer Study, a carrier’s operating costs range from approximately $40,000 to over $50,000 per day per ship. The minimum number of ships needed to provide a regular service will vary on the trade (four in the trans-Atlantic, five in the trans-Pacific, nine in the Asia-Europe trade). In addition, carriers must incur substantial marine terminal, shoreside and overhead expenses.

[30] Because of the trade’s substantial economic losses in 1998, some carriers withdrew some capacity from the trans-Pacific that year.

[31] Lloyd’s List, May 15, 2000, quoting Drewry Shipping Consultants

[32] Id. In an example of another unbalanced trade, in the trans-Atlantic between October 1999 and September 2000, carriers had to reposition 534,000 TEUs of empty boxes from the United States to Northern Europe. See Dynamar Liner Trades Review, p.5 (January 2001).

[33] ACCOS Report , page 69.

[34] New Yorker, December 11, 2000.