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Blog Post | March 28, 2022

Shipping Cartels Are Spiraling Out Of Control. The Agency Set To Regulate Them Doesn’t See The Problem. 

Anti-MonopolyCongressional OversightCorporate CrackdownExecutive BranchIndependent Agencies
Shipping Cartels Are Spiraling Out Of Control. The Agency Set To Regulate Them Doesn’t See The Problem. 

In his State of the Union address this year, President Joe Biden announced a crackdown on the ocean carrier industry and its record high profits. Blaming the industry’s highly consolidated ocean cartels (2M, OCEAN Alliance, and THE Alliance) that control 80% of the global maritime shipping capacity, he proclaimed that “capitalism without competition isn’t capitalism.” 

The momentum for cracking down on large shipping cartels is building well beyond the walls of the White House. Congress is moving to start its own investigation and the discourse in the media has been critical of the industry for months now.

But one day before the SOTU, at the Trans-Pacific Maritime Conference (TPM22) in Long Beach, Federal Maritime Commission Chairman Daniel Maffei reaffirmed his belief that there is no current evidence tying anti-competitive shipping practices to skyrocketing freight rates. Directly contradicting Biden’s anti-cartel narrative, Maffei said “I wouldn’t ban or undo the alliances.” Commissioner Carl Bentzel also called the White House’s indictment of the ocean carrier industry a “scapegoat” for the current supply chain crisis. 

Maffei leads the Federal Maritime Commission (FMC), the primary regulator of maritime trade. It enforces the Shipping Act of 1984, which granted the shipping industry some immunity to antitrust laws.

The FMC has only about 100 full-time staff members and an operating budget that barely keeps the lights on. But there may be a more fundamental issue than the FMC’s resources: its willingness to regulate at all. The current slate of commissioners have advanced a laissez-faire approach toward the shipping industry which led to the heavy concentration Biden criticized in the first place.

FMC’s approval of vessel sharing agreements (VSAs) and rate discussing agreements (RDAs) played an essential role in creating the three shipping alliances that currently dominate maritime trade. These cooperative agreements to share crucial operations and fixed assets, such as vessels, help ocean carriers to surmount the industry’s high barriers to entry.

VSAs are contracts that allow alliance members to divide up cargo space aboard their ships. Sharing space aboard vessels enables shipping alliances to reduce their overhead costs by optimizing logistics across multiple shippers. Shipping cartels share massive ships the size of the Empire State Building to increase their profit margins per container shipped — think of the Ever Given, which got stuck in the Suez Canal. But loading and unloading these vessels require specialized cranes and docks, which most ports do not have, ensuring supply chain bottlenecks whenever there is a problem at any of the handful of ports suited to these behemoths.

And the benefits of a VSA are easy for industry to attain: Not once has the FMC denied a VSA. Unwillingness to bargain vigorously on the public’s behalf perpetuates the problems with cartelization. 

RDAs are agreements between ocean liners that establish standardized rates. Functionally, they are used by alliances to set rate and fee schedules across members. However, RDAs are also not legally binding, which theoretically gives each member the ability to undercut the others, thus maintaining a veneer of competition.

Shipping alliances were meant to minimize consumer costs and increase efficiency by helping carriers reach economies of scale, but consolidation has outgrown its benefits in this industry. Today’s alliances are not formed by small carriers struggling to survive, but by companies which already have massive market power. The FMC however, is holding course, continuing their laissez-faire approach even as the market has shifted dramatically.

An Anti-Regulatory Regulator

In 2002, when George Bush appointed Republican Commissioner Rebecca Dye (the longest tenured current commissioner), the top four ocean carriers controlled less than 30 percent of the market. Now, the top four carriers control nearly 60 percent of the market. In the long run, Commissioner Dye believes industry consolidation will continue until “only 6 to 8 main global shipping lines will remain.” There is no indication that the FMC would care to stop this projection. 

The FMC’s lackadaisical regulatory approach has not gone unnoticed by the rest of the federal government. Throughout the past decade, the FMC has butted heads with both the Department of Justice and Congress over how much enforcement is necessary. 

The Antitrust Division of the DOJ has consistently questioned the FMC’s ability to grant antitrust immunity to international shipping cartels. They contend that the FMC’s rubberstamping approach curtails the DOJ’s power to regulate shipping cartels. Despite receiving explicit pleas from the antitrust division to prohibit agreements establishing powerful cartels, the FMC has ignored their concerns.

In 2016, the DOJ presciently reminded the commission of the cyclical nature of the industry — “approving the current round of alliances now may be harmful in the long term,” acting assistant attorney general Renata Hesse wrote. Now, as shippers face an unforeseen seller’s market, Dye and Maffei’s cartel agreement approvals have only bolstered carriers’ ability to price-gouge.

One of the most stunning displays of the FMC’s obstinacy came in 2017 when DOJ antitrust enforcers raided the Box Club, a highly secretive industry meeting, and served subpoenas to the shipping cartel magnates. During the DOJ’s following two-year antitrust probe of global shipping price-fixing, there is no indication that then-FMC Chairman Michael Khouri helped with, or even commented on the investigation.

Despite President Biden’s announcement of a joint crackdown initiative between the DOJ and FMC, it is unclear whether the commission will finally take guidance from the Justice Department’s rigorous antitrust enforcers. A July 2021 memorandum of understanding to share crucial information related to antitrust enforcement between the two agencies was a hopeful sign of necessary cooperation.

As the primary enforcer of antitrust law in ocean shipping, the FMC possesses far more information and expertise than the DOJ. Ocean alliances must give monthly monitoring reports to the commission, which are both confidential and exempt from FOIA law.  Therefore, the FMC’s analysis of anti-competitive practices remains unclear and unverifiable. 

The FMC can restrict the power of cartels if their agreements “produce unreasonable reduction in transportation service or unreasonable increase in transportation cost.” The commission rarely uses this power granted by section 6(g) of the Shipping Act. Freight rates jumped over 1,000 percent since January 2020 for shipments between the US and Asia, yet the current commission’s analysis still concludes that there is no evidence of anti-competitive behavior. With new pressure from the DOJ, the FMC could reverse its course and prosecute the supply chain crisis’s profiteers.

Now, Congress is stepping in to empower the FMC with the Ocean Shipping Reform Act (OSRA) of 2021. This will be the first major overhaul of the Shipping Act since the largely deregulatory and catastrophic Ocean Shipping Reform Act of 1998.

OSRA 2021 grants the commission the ability to prohibit or enforce fair detention and demurrage fees. Ocean carriers charge shippers when containers are stored at the port (demurrage) or not returned to the port (detention) within an allotted time. These fees are meant to encourage the movement of cargo, but due to severe port congestion, carriers are unreasonably profiting off of abusive fees that are of no fault to the shipper. The FMC is well aware of the excessive fees facing shippers from their plethora of fact-finding investigations. But despite promising shippers better protection against unjust fees, the FMC has done little to actually stop cartels’ profiteering off the supply chain crisis.

This is not the first time Congress has intervened to pressure the FMC into regulating big business. In 2017, Congress scrutinized the FMC’s approval of agreements that allowed ocean shipping alliances to jointly negotiate contract rates with tugboat operators. Effectively, the FMC was permitting shipping companies to jointly bully tugboats into lowering prices; tugboat operators had to accept worse terms or the cartels would find someone else who would. Longshoremen and dockworkers at marine terminals feared that the collective bargaining power of cartels would put unprecedented downward pressure on wages. The agreements would let ocean liners suppress revenue for domestic terminal services, which could then necessitate cost cutting. And one of the simplest ways to cut costs is to slash pay and lay off employees. The FMC, however, was unconcerned with the prospect of tipping the scales against workers.

In response to the outcry from labor, tugboat operators, and domestic terminal operators, Congress stepped in and passed the Federal Maritime Commission Authorization Act of 2017. It prohibited the FMC from approving agreements allowing carriers to jointly negotiate rates with domestic service providers. To increase oversight, the law also finally required the FMC to include industry-wide anti-competitive effects of cartels in its annual report to Congress.

Members of Congress are going straight for the jugular; cracking down on cartels directly. Representative Jim Costa (D-CA) introduced the Ocean Shipping Antitrust Enforcement Act the day of the SOTU. This bill would strip all antitrust immunity from ocean carriers. Despite the bill’s seemingly unprecedented potency, this isn’t the first time Congress has threatened shipping cartels’ monopoly power. The legislation expands upon the Free Market Antitrust Immunity Reform Act of 2001 that first put antitrust immunity on the chopping block. The bill failed to gain traction and then-FMC Chairman Harold Creel testified against the elimination of antitrust immunity. With similar views from Current Chairman Maffei that “alliances are the worst thing you can imagine, except for all the alternatives,” signs point to history repeating itself.

The Commissioners’ Ideologies

When Chairman Maffei first joined the FMC, four shipping alliances controlled 75 percent of the global market share. In 2016, Dye and Maffei approved the creation of both THE Alliance and OCEAN Alliance. This consolidated the industry further into three major alliances that control 95 percent of the Trans-Pacific market. Measured by the Herfindahl-Hirschman Index, a measurement of economic concentration, the transpacific market tipped into “high concentration”  for the first time. Corporate executives in THE Alliance have criminal charges for price-fixing, while OCEAN Alliance’s agreement allows the cartel to collectively control capacity — and therefore price — and share any information in relation to the trade. This happened with the full blessing of this obscure regulatory agency. 

Commissioner Dye, the aforementioned long-serving Republican, negotiated a crucial deregulatory aspect of the disastrous Ocean Shipping Reform Act of 1998: making rates and essential terms in service contracts confidential. Dye negotiated this while serving as the House Maritime Subcommittee Staff Director from 1995 to 2002. The law effectively scrapped small shippers protections from price-gouging and unreasonable fees. As Matt Stoller elaborates, the 1998 Act removed shipping’s public utility regulations and destabilized pricing by allowing carriers to “discriminate against smaller exporters or importers…retaliate against anyone who complained or used a competitor… price-gouge without anyone knowing about it, and antitrust enforcers and regulators basically had to stand aside.” 

Dye remembers repealing protections for small shippers as, “One of the best days of my legislating life!” Commissioner Bentzel is also to thank for the shipwreck of international commerce we find ourselves in today; he was a key player in crafting OSRA 1998 during his time serving as Counsel for the Senate Committee on Commerce, Science, & Transportation. 

Notably, Dye is friends with former Secretary of Transportation Elaine Chao, wife to once and future Senate Majority Leader Mitch McConnell and daughter of a major ocean carrier founder. Chao has been described as the shipping industry’s back door to the Trump administration.

It is doubtful that Commissioner Dye will readily approve of legislation to increase the regulatory power of the FMC: “For anybody who tells you ‘we need more regulation,’ ‘we need to ask Congress to do this or that for us,’ be careful about the unintended consequences and remember the successes of deregulation,” she said at Agriculture Transportation Coalition in 2017. She also commented “I’ve never seen a regulation I liked.”

In addition to Maffei, Dye, and Bentzel, the commission also features Louis Sola, a fervent Trump supporter, Rick Scott appointee, and mega-yacht broker. Recently, Commissioner Sola has been quiet on the topic of increased investigation into shipping collusion, but did remark in 2019 that he preferred a less invasive approach. 

A glimmer of hope resides in the confirmation of Max Vekich in 2022, the first and only FMC commissioner to come from a labor background. Vekich has extensive experience both in organized labor and in maritime policy. He served in a number of roles with the International Longshore and Warehouse Union for 17 years and in the Pacific Maritime Association for 50 years. On the policy side, he served in Washington state’s House of Representatives and was appointed to the Governor’s Industry Safety Board. Vekich looks even better next to outgoing commissioner Michael Khouri, a longtime industry executive who was also very close with Chao and McConnell. While Vekich hedged his answers to questions about shipping monopolies during his confirmation hearings, his experience with labor gives him unique insight into how ocean liners conduct themselves and leverage their monopoly power.

If Biden hopes to crack down on the ocean shipping cartels, he needs to nominate commissioners who share his views. Appointing Vekich is a good first step to shift the agency’s pro-industry inclination. 

Biden could also have nominated another commissioner at the same time. Rebecca Dye was appointed to a term that expired in 2020, and while federal statute states that FMC commissioners are allowed to continue to serve for up to one additional year past their term’s expiration, Dye is well past this extension. Despite this, Dye has continued to act in her capacity as a commissioner, even testifying before Congress. As Dye notes in that testimony, her authority to head up a fact-finding mission on cargo delivery inefficiencies is granted by two orders with no deadline. Whether this is her sole rationale to remain on the commission beyond her federally stipulated term is unclear. Regardless, President Biden has the authority to replace her. 

However, President Biden recently nominated Dye to another term, locking in a strong advocate of hands-off “regulation” for the next five years.

Soon Biden will have the power to remove the Trump-appointed mega-yacht broker Sola, whose term ends in 2023, as does Chairman Maffei’s. Commissioner Betzler’s term will expire in 2024 prior to the election. However, the FMC is an independent bipartisan commission, which limits how much power Biden has in picking replacements. Legally, one party can control no more than three of the five seats. Democrats, by swapping in Vekich for McConnell’s pal Khouri, have their three in Vekich, Maffei, and Betzler. While Sola arrives at the chopping block next year, he would have to be replaced by Republicans. 

Given that it is plausible for the ongoing shipping crisis to last into 2024, the FMC could be made into an agency that does not cater to monopoly in time to take some meaningful action. It is possible that Sola could be replaced with a more pro-competition Republican. However, the most straightforward path is for Biden to replace Maffei and Betzler with anti-monopolist Democrats, who would then be able to run the commission from 2024 until the end of Vekich’s term.

What Comes Next

As the tide clearly turns against shipping monopolies, the FMC has not changed course. As the Department of Justice and the White House move aggressively to establish stricter oversight, FMC commissioners are still publicly demurring on whether or not such measures are worthwhile. This is hardly surprising, given the commission’s reluctance to regulate; it has been so lenient that at multiple points, other parts of the government have had to forcibly endow it with greater authority. Two separate House subcommittees have opened their own investigations into predatory shipping prices, clearly showing they do not trust the FMC to adequately do the job on its own.

Even more concerning is that any kind of course correction is unlikely with the existing set of commissioners. Two of them actively helped to create the landmark deregulatory legislation that has led to the problem. Three have publicly said that they doubt the need for additional investigation. One of them sold mega-yachts in Monaco. Vekich is promising, given his background, but even if he is amazing beyond anti-monopolists’ wildest dreams, he’s still heavily outvoted.

Still, the success of Biden’s reform agenda on supply chains may hinge on the FMC. Chairman Maffei commented on his relationship with the container shipping industry and its CEOs this past September: “I do prefer if the industry can come up with its own solutions.” It is high time for the FMC to stop outsourcing its job to cartel leaders and to start acting like a regulator. 

PHOTO CREDIT: “Cargo ship entering the Gatun Locks — Panama Canal Trip 10-10-10” by Corvair Owner is marked with CC BY-SA 2.0.

Anti-MonopolyCongressional OversightCorporate CrackdownExecutive BranchIndependent Agencies

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