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Blog Post | January 4, 2022

Amidst a Record Supply Chain Crisis, What is the Federal Maritime Commission’s Capacity?

Executive BranchGovernment CapacityIndependent AgenciesTrade Policy
Amidst a Record Supply Chain Crisis,  What is the Federal Maritime Commission’s Capacity?

One tiny federal agency with 116 full-time employees and a $28.9 million dollar budget is in charge of regulating the global marine economy, which contributes $397 billion to the US GDP annually and accounts for 80 percent of goods shipped worldwide. That’s not just an apples and oranges discrepancy—that’s like an apple versus Apple. The budget for the military’s marching bands is fifteen times greater than the Federal Maritime Commission’s budget; the Marines alone have five times more musicians than the Commission has staff. 

Meanwhile, for months now, aerial views of America’s biggest ports have shown dozens of massive container ships backed up for miles, blotting the ocean as far as the eye can see. Billions of dollars of imported goods sit idly on the water for weeks, depreciating in value, while trucks face over 24-hour waits outside of port gates. The logjam is terrible for people’s health, too—the California Air Resource Board estimates that the sitting ships’ increased pollution is equivalent to adding an obscene 5.8 million cars and 100,000 big rig trucks to the area. The complex and interconnected web of the global supply chain is in a crisis that defies simple solutions. But addressing that crisis is made more difficult by decades-old deregulation of the ocean shipping industry, and the fact that a few powerful global entities are making billions of dollars from its continued dysfunction.

Three alliances of the nine biggest shipping container lines control 83 percent of the global shipping market and 95 percent of critical East-West trade lanes.They are on track to make an eye-watering $150 billion dollars in 2021—more than 25 times their 2019 profit. Terminal operators are also turning a profit, as most terminals are operated by U.S. subsidiaries of those same foreign container lines. It’s worth noting that the top 25 container lines are all foreign companies; the US’s largest container line, Matson, holds only a 0.3 percent share of the market. These three carrier-operator alliances are effectively holding the global supply chain hostage in order to milk as much money as they can from heightened demand and stifled supply. 

These alliances have no economic incentive to increase supply. Their incentive is to continue to reap windfall profits. Yet significant investment in supply is precisely what the public complaining about inflation and shortages requires, and what the industry’s regulator ought to be demanding on behalf of the people. And who is that regulator? The pea-sized Federal Maritime Commission, squashed under the industry’s gigantic mattress.

The Federal Maritime Commission is like David up against the shipping line Goliaths, if David voluntarily put down his slingshot and tied his hands behind his back. For being the only federal agency in charge of regulating a behemoth industry, the Commission is markedly anti-regulation. “I have never seen a regulation I liked,” said Commissioner Rebecca Dye, now in her nineteenth year at the agency. The Commission voluntarily embraced Trump’s 2017 “eliminate two existing regulations for every new regulation” Executive Order, and reviewed its own regulations for potential repeals. The Commission’s deregulatory spirit dates back more than two decades, to the passage of two laws: the Shipping Act of 1984, and the Ocean Shipping Reform Act of 1998. Both of these laws substantially lessened the Commission’s authority.

The Federal Maritime Commission’s regulatory authority stems from the handful of maritime laws that it enforces. (These include the Shipping Act of 1984 and the Ocean Shipping Reform Act of 1998, as well as Section 19 of the 1920 Merchant Marine Act, the Foreign Shipping Practices Act of 1988, and sections 2 and 3 of Public Law 89-777.) At the time of its founding in 1961, the Commission’s responsibilities were outlined by the Shipping Act of 1916, which granted the agency a lot of authority. 

Under the 1916 Act, it was mandatory for carriers to file all tariffs (official rates) and agreements with the Commission. The Commission would review and approve all agreements before they came into effect. Approved agreements were exempt from U.S. antitrust laws. To streamline what had become a time-consuming approval process, the Shipping Act of 1984 changed this procedure so that once agreements are filed with the Commission, they are automatically approved after 45 days unless the Commission moves to block them. Tariffs were also no longer required to be filed with the Commission, just published publicly. Then, the Ocean Shipping Reform Act of 1998 took industry autonomy several steps further.

The 1998 Act allowed carriers and shippers to negotiate confidential contracts for the first time. These agreements are still filed with the Commission, but their terms are otherwise secret. The importance of publicly reported tariffs rapidly diminished, now that prices can be negotiated and set in private. And through all this, carriers retained their antitrust immunity. This deregulatory push was in the name of “competition” and the “marketplace,” but its effect was to crush smaller competitors and encourage monopolistic alliances, while preventing public scrutiny and most antitrust intervention in the industry.

Over the past two decades, every sector of the ocean shipping industry has consolidated. Not only do three alliances of nine carriers now control 83 percent of container ship capacity, but three Chinese manufacturers produce 83 percent of all new containers, and five companies control 82 percent of container leasing. Smaller ports have suffered as the big carriers buy bigger ships; a capital-intensive strategy for cutting costs that excludes smaller carriers, and forces costly adaptations upon ports. 

Larger ships initially provided greater efficiency and cost-savings for carriers, but now, with many mega-ships larger than the Empire State Building, their increasing diseconomies of scale read as a monopolistic tool to force the industry to operate on their terms. This is why we see megaships stuck for days at port; they’re not profitable to sail unless they’re entirely full, and it takes a long time to load and empty them. Meanwhile, ocean carriers and marine terminal operators can charge demurrage and detention fees to the shippers, intermediaries and truckers when things get behind schedule. 

Where the Commission Comes In

All of that explains why importers, exporters, intermediaries, and truckers have repeatedly asked the Commission to become more involved, while carriers and terminal operators have argued that the Commission lacks authority to do so. Such a dispute broke out over the Commission’s 2020 interpretive rule clarifying what constitutes reasonable demurrage and detention fees. The Commission’s commentary on this rule and the controversy it generated illuminates how the Commission perceives its own role and authority. 

While the Commission acknowledged that “one purpose of the Shipping Act is to minimize government intervention,” it countered that that “does not mean that the Commission may abandon its duty to prevent unreasonable practices.” So while the laws the Commission is in charge of administering expressly put limits on its power, the Commission still has regulatory responsibilities it must fulfill. While the Commission claims that it “prefers commercial solutions to demurrage and detention problems,” the Commission’s investigation found that “commercial solutions are only adequate from the perspective of ocean carriers and marine terminal operators.” In other words, when left to their own “free market” devices, carriers and operators bulldozed the other industry parties, forcing a reluctant Commission to intervene.

By the 2010s, the ocean supply chain’s vulnerability and inefficiencies were already visible. The Commission’s response, spearheaded by Commissioner Rebecca Dye, was to bring together various industry stakeholders in conversation. The 2017 Report of this “Supply Chain Innovation Teams initiative” offers further insight into the Commission’s view of its responsibilities and, perhaps, capacity. Dye reports that industry participants “indicated that they had little appetite for governmental prescriptions or requirements,” and adds that “from the outset, the Commission recognized that additional government regulations were not the answer.” It is alarming to see a regulatory agency renege its chief function. The Commission decided to serve instead as “a catalyst for stakeholder-identified commercial solutions” (emphasis in original). Is this decision evidence of corporate capture, or the result of an agency whose resources are dwarfed by its mandate, still striving to make an impact? 

Whatever the cause of the Commission’s reluctance to advance regulation, it appears that both the White House and a bipartisan coalition of lawmakers see regulation as the best path out of our current quagmire. While the Commission’s response to the supply chain crisis continues to emphasize “commercial solutions,” and includes the creation of a new National Shipper Advisory Committee, convening major shippers like Walmart, Tyson Foods, Amazon and DuPont to advise the Commission on ocean shipping policy, Congress is looking to the proposed Ocean Shipping Reform Act of 2021 for answers. The House of Representatives agreed to suspend the usual rules (which they do for noncontroversial bills) and passed the Ocean Shipping Reform Act of 2021 in a bipartisan 364-60 vote on December 8. The bill has already been sent to the Senate, read twice, and referred to committee. 

The 2021 Act would give the Federal Maritime Commission more authority to crack down on bad practices by carriers and terminal operators, including discriminating and retailiating against shippers, making false certifications, and imposing unreasonable demurrage and detention fees. It would leave to the Commission’s discretion whether and when it is reasonable for carriers to refuse US agricultural exports when it is more profitable to send empty containers back to China.

The White House, meanwhile, has directed the Federal Maritime Commission to “​​use all of the tools at its disposal to ensure free and fair competition.” This includes the Commission’s unique ability to intervene on antitrust issues: “while the alliances between the carriers receive statutory immunity from antitrust laws, the FMC can challenge those agreements if they ‘produce an unreasonable reduction in transportation service or an unreasonable increase in transportation cost or … substantially lessen competition.’” 

In reality, though the Commission has labored to avoid stepping on industry toes, it has substantial authority to enforce antitrust laws when shipping agreements—the confidential agreements that only the Commission gets to read—reduce competition and damage supply chain resilience. An encouraging sign that the Commission recognizes its antitrust capacity comes in the form of a Memorandum of Understanding with the Department of Justice’s Antitrust Division this summer, committing the two agencies to cooperate on “the enforcement of antitrust and other laws related to the Industry.” 

While the Federal Maritime Commission’s singular discretion when it comes to challenging shipping agreements for antitrust violations may be its sharpest tool, it has a broad mandate to monitor all parties in the US-international ocean shipping industry to ensure “just and reasonable practices.” It is also the Commission’s job to facilitate “alternative dispute resolution” when problems crop up between parties, and to seek remedies when necessary. The Commission has the authority to conduct investigations and hold legal proceedings overseen by the Commission’s Administrative Law Judges, and prosecuted by its Bureau of Enforcement. Yet despite audible discontent within the industry, the Commission has found that “few private parties have filed complaints seeking reparations,” in part because shippers and truckers fear retaliation. While the Commission is taking steps to minimize barriers to private party complaints, the prohibitive cost of retaliation is indicative of the container lines’ tight grip on the industry. 

Fully tapping into these powers, old and new, to take a more leading role in resolving the international supply chain crisis, will almost certainly require that the Commission receive a bigger budget and more staff. Like many federal agencies, the number of Commission employees has been waning when it should be waxing. In 1998, the Federal Maritime Commission had 139 full-time employees. By 2006, the Commission had 121 full-time employees, and by 2020, only 111. Likewise, accounting for inflation, its budget has essentially remained flat over the past decade, rising nominally from $24 million in 2012 to $27.4 million in 2020. 

In contrast, the transport volume of ocean trade has steadily increased over the past thirty years, from 4 billion tons annually in 1990 to over 10 billion tons in 2020. Likewise, the world’s fleet of merchant ships has doubled in size since 1990, even while the US share of the global fleet has shrunk from 16.9 percent in 1960 to 2.7 percent in 1990 to only 0.4 percent in 2019. As it is both the Federal Maritime Commission’s responsibility to support the development of a US liner fleet, and to combat unfair practices by foreign carriers, the Commission’s responsibility for regulating a growing industry has increased even as its capacity has shrunk. 

The Commission monitors an ever-growing number of rates, agreements, alliances and disputes in the international shipping industry. Per its annual report, in 2020 the Commission was continuously monitoring over 300 cooperative agreements, and received 45,164 new service contracts and 779,884 contract amendments. The Commission accepted 375 new and 273 amended ocean transportation intermediary (OTI) applications, and 285 OTI licenses were revoked or surrendered. Through the Commission’s informal conflict resolution program, it resolved 241 ombud matters, and responded to 1,730 queries from the public (a 52 percent increase from 2019). If the Commission is to take on additional enforcement responsibilities, it should bring on more staff to avoid information overload. 

While the Commission’s leaders do not set their own budget, they can help to influence funding levels by highlighting these gaps. In recent years, however, their requests have been seemingly inadequate to fill them. In its 2022 budget request, the Commission set a goal of 128 employees, only a modest increase over current staffing levels. Commission leadership can also work directly with the Office of Personnel Management (OPM) to streamline its hiring processes to ensure its budget, at whatever level, is put to efficient use onboarding new staff. A majority of the Commission’s positions fall under the General Schedule, meaning that hiring for them involves a number of procedures that can slow the process. The Commission should consider requesting hiring flexibilities from OPM to expedite this process, in addition to exploring ways to improve recruitment.

 If the Commission’s current leadership proves unwilling to rise to the challenge, Biden has the opportunity to fill two of five Commissioner seats. His challenge will be to find a labor-minded Republican (as the agency requires partisan balance) to enact the bold regulatory agenda that the moment demands. Elsewhere in the agency, the bright side of hiring amidst the supply chain crisis would be that new Commission employees may be less invested in preserving the status quo.

The proposed Ocean Shipping Act of 2021 would provide the Federal Maritime Commission with a moderate increase in funding, from $29.6 million in 2021 to $32.6 million in 2022 and $35.8 million in 2023. But overall, the 2021 Act bestows more new requirements upon the Commission than new powers. Increasing an already skeptical agency’s obligations without substantially increasing their resources is an effort destined to fall short. Many snarls in the supply chain web remain outside of the Commission’s purview and go unaddressed by the bill, from the chassis shortage to the comparatively limited operating hours of American ports, leaving its impact unknown. 

Still, the Act has potential to curtail the carrier cartels’ stranglehold on the industry, if the Commission rises to the enforcement challenge. Among other things, the Act would require the Commission to report annually to Congress on anticompetitive, nonreciprocal, or otherwise concerning trade practices by carriers. The Commission would also be required to publish records online of carriers and terminal operators who have made false certifications, and what penalties the Commission imposed on them. Carriers and operators would now have to certify any demurrage and detention fees they charge shippers with the Commission beforehand, to ensure that they’re legally compliant. 

One of the most significant powers the proposed legislation would provide emerges from a requirement that the Federal Maritime Commission seek public comment on whether the supply chain crisis is bad enough to necessitate a temporary Emergency Order. If the Commissioners unanimously approve an Emergency Order, the Commission will be authorized to require any carrier or terminal operator to share any and all relevant information on cargo “throughput and availability” with relevant shippers and rail and motor carriers. 

Considering, as the White House put it, that current laws “do not require even basic transparency in this sector,” an Emergency Order of this kind could promote a radical shift in information-sharing practices in an otherwise opaque industry. It’s not a short-term fix in and of itself, but an important long-term investment. If the government could make economically significant data visible, and incentivize the creation of a standard information system with common language for industry parties to communicate with each other, that would go a long way towards mitigating future versions of this crisis. Industry stakeholders have previously expressed the desire for “greater visibility of critical information” across the transportation system to the Federal Maritime Commission, but whether the gun-shy Commission would vote in support of an Emergency Order and take the lead in enforcing the exchange of information is unclear. 

Looking Forward

The Federal Maritime Commission’s stated mission is to “ensure a competitive and reliable international ocean transportation supply system.” At the moment, it is hard to think of two less accurate adjectives for the current system than “competitive” and “reliable.” Yet this crisis could be seized by the Commission as an opportunity to secure the staffing and budget it needs to employ its full range of tools. The Commission could further expand its muscle through collaboration with other government agencies, including the DOJ Antitrust Division and the FTC and DOC as they begin to address supply chain issues in the retail and manufacturing industries. 

A reinvigorated Federal Maritime Commission would be better equipped to tackle problems beyond the immediate supply chain crisis as well. Commissioner Dye has spoken approvingly of how “most innovation in supply chain management is not revolutionary but rather incremental.” Indeed, one should tinker with vast and complex systems like the international ocean shipping system with caution, given the supply chain’s evident vulnerability to cascading effects. Yet we are in a historic moment in which incremental innovation is simply insufficient to prevent global climate catastrophe, in no small part due to the industrial developments—including international ocean trade—of the past 150 years. If the shipping industry were a country, it would be the sixth largest polluter in the world, emitting more greenhouse gases annually than Germany and Canada. Not only does the supply chain need an intervention to ensure that parties can’t profit from its dysfunction, but the industry as a whole needs to grapple with its outsized carbon footprint. These interconnected issues require a regulatory agency committed to acting at full capacity, and to multisolving.

With the passage of the $1 trillion infrastructure bill this November comes unprecedented money for transportation innovation, including $17 billion earmarked for American ports. That money is an opportunity for revolutionary, not incremental change, as every transportation sector reckons with the moral and financial imperative of decarbonization. At the same time, the UN is poised to proceed with a $5 billion decarbonization fund for ocean shipping, paid for entirely by the industry with the industry’s approval, to get large numbers of zero-carbon ships on the water by 2030. The Federal Maritime Commission should actively support these and further developments, as its mission to foster supply chain integrity and protect the public from unfair practices can only be fulfilled long-term through definitive action to mitigate climate change. The future viability of international ocean trade and the planet and public’s health hangs in the balance. 

LBTC Port of Long Beach” by National Renewable Energy Lab is licensed under CC BY-NC-ND 2.0

Executive BranchGovernment CapacityIndependent AgenciesTrade Policy

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