Remarks of Commissioner Dye, International Bar Association, Annual Conference 2018

FMC Commissioner Rebecca Dye
International Bar Association Annual Conference
Rome, Italy
October 8, 2018

It is a pleasure to be here this afternoon to discuss the Federal Maritime Commission’s approach to enforcing competition in the United States liner trades, and to explain why the Shipping Act does not shield liner companies from competition enforcement. Rather, it adds value to the global ocean freight delivery system.

In that regard, my remarks today will focus on the Federal Maritime Commission’s review, evaluation and monitoring of strategic alliances.

I’ll do that by addressing three questions:

• How does the FMC analyze alliance agreements under the Shipping Act of 1984 as amended by the Ocean Shipping Reform Act of 1998?
• What requirements and processes are involved in that analysis?
• How does the FMC monitor the behavior of alliances after the agreements are in effect?

In 1995, I was Maritime Subcommittee Staff Director on the House Transportation Committee in the U.S. House of Representatives. My job was to develop and enact legislation in accordance with our member’s policy positions.

With respect to Shipping Act reform in particular, my highest priority was to develop and enact legislation that would increase competition in liner shipping in U.S. trades.

My view was that retaining a limited carrier exemption from the antitrust laws would not preclude a dramatic, effective increase in liner competition.

At the time, the heart of U.S. shippers’ discontent with the Shipping Act of 1984 was that it supported what was known as the “conference system.”

As many of you remember, liner companies joined together in rate conferences to propose collective rate increases.

In addition, liner conferences had the legal authority to collectively regulate their members’ freight rates.

In those days, service contract rates – like tariff rates — were, by law, publicly available.

Which made it relatively easy for rate conferences to keep track of what their members were charging.

It also allowed foreign competitors of U.S. exporters to see their freight rates, causing U.S. agricultural exporters, for example, to lose sales for pennies on the dollar.

By the way, ending rate transparency’s negative impact on U.S. exports ultimately became the most persuasive argument for members of the United States Congress to support the Ocean Shipping Reform Act amendments.

So, what American shippers wanted from any new legislation was:

• To preclude conference members from agreeing on freight rates and regulating member lines’ rates;
• To prevent the contracts that they negotiated with their preferred carriers from being subject to conference review; and
• To have their negotiated service contract rates and terms remain confidential.

If it could be successfully enacted into law, repeal of Shipping Act’s antitrust law exemption may have been the obvious way to achieve those goals.

But outright repeal of the exemption was sure to attract fierce opposition. And not just from lines that were conference members.

Public port authorities, marine terminal operators, and longshore labor did not, for different reasons, support deregulation or reform.

Fortunately, there was an alternative approach by which shippers could obtain the enhanced competition we wanted – even while allowing carriers to maintain a residual, limited antitrust exemption from mainstream U.S. antitrust laws.

But not immunity from competition enforcement!

Reform legislation could directly restrict conference rate authority and the ability to regulate member lines’ individual service contracts.

In addition, making service contract rates and terms of service confidential would reinforce that restriction.

I discussed this alternate approach that I favored with attorneys at the Department of Justice’s Antitrust Division – and they agreed to support it. One of the best days of my legislating life!

The Department of Justice’s support was a major factor in the enactment of the Ocean Shipping Reform Act.

Implementing restrictions on conference rate authority, and making service contracts confidential undercut liner companies’ efforts to achieve above market rates.

And that proved to be the case even after “rate discussion agreements” replaced traditional conferences.

The long years of failed general rate increase efforts, and the recent disbanding of the Transpacific Stabilization Agreement – the central rate discussion agreement in the US/Asia trade – is a clear example.

In early February, the TSA ended its 29-year history – declaring that the “organization’s mission is no longer viable.”

There was still a good deal of legislative give-and-take involved in getting the Ocean Shipping Reform Act enacted into law in 1998.

But, in the end, the new rate authority restrictions, and the implementation of confidential one-to-one service contracts, succeeded in boosting competition in the U.S. liner trades.

What’s more, the EC’s Directorate-General for Competition promptly adopted a nearly identical approach.

They did so by declaring that the conference block exemption only applied to tariff rates – not service contracting. But, by then, carrier tariffs were already being eliminated as a pricing tool by the expanding use of service contracts.

So, well before it began its review of the conference block exemption in 2003, DG-Comp had ensured that conferences in EU trades could not restrict the availability of individual, confidential service contracts.

Thus, the Ocean Shipping Reform Act’s guiding principles went global – in the major East/West trades and the many North/South trades that originated in the US or Europe.

Today, although the EU approach to liner competition and the US approach are not identical, there is a substantial degree of de facto harmonization.

So, with that brief history as background, I’ll now turn to how the Commission ensures that shipping lines in general, and alliance members in particular continue to compete.

The Shipping Act’s protections are divided into two sections that have their grounding in antitrust principles.

Together they provide a balance that offsets the Act’s grant of limited exemption from antitrust laws.

They are:

Section 10 of the Shipping Act of 1984, which enumerates an extensive list of explicit prohibitions grounded in antitrust principles, such as unfair or unjust discriminatory practices, unreasonable refusal to deal (including boycotts), offering or paying deferred rebates, and others.

And Section 6 of the Shipping Act, which contains the Federal Maritime Commission’s flagship competition law enforcement authority.

Section 6 deals with filed agreements among common carriers in the foreign trades, including strategic alliance agreements.

Section 6 also contains the Commission’s authority to seek an injunction to stop substantially anticompetitive agreements.

Proposed alliance agreements, once they are filed with the Commission, are published to allow for public comment, and closely analyzed by our professional staff under what is known informally known as “The 6(g) Standard” after the relevant section of our organic statute.

As enacted, Section 6(g) provides that:

“If, at any time after the filing or effective date of an agreement, the Commission determines that the agreement is likely, by a reduction in competition, to produce an unreasonable reduction in transportation service or an unreasonable increase in transportation cost, it may, after notice to the person filing the agreement, seek appropriate injunctive relief under subsection (h).”

Subsection (h) allows the Commission to bring suit to enjoin the agreement in the U.S. District Court for the District of Columbia.

But, Section 6(g) of the Shipping Act is very similar to section 7 of the Clayton Act of 1914, a central part of US antitrust law that prohibits mergers and acquisitions “the effect of [which] may be substantially to lessen competition, or tend to create a monopoly.”

Along those lines, our review of the agreements filed with us – including strategic operational alliance agreements – employs the same type of analysis that the Department of Justice and the Federal Trade Commission conduct under the Horizontal Merger Guidelines and the Antitrust Guidelines for Collaboration among Competitors.

As our colleagues at the Justice Department have noted:
“Congress expressly gave the [Federal Maritime] Commission authority to protect the public from agreements that will result in an unreasonable increase in price or reduction in service. This charge parallels the goals of the antitrust laws: to protect the public from a reduction in competition caused by agreements that unreasonably increase market power, that is, the power to increase price or reduce output.”

That commonality of purpose and approach is why I describe the Commission not as a traditional regulatory agency, but as a competition law enforcement agency — one with exceptional expertise in the structure and performance of liner shipping and marine terminal operations.

In evaluating potential anticompetitive effects, we pay close attention to any potential for increased market concentration. Our approach is familiar to any competition attorney or official:

• Defining the relevant product and geographic market;
• Examining likely changes in market share and concentration ratios, including the assessment of market concentration using the Herfindahl-Hirchman Index;
• Determining whether or not there are barriers to entry;
• Assessing the number and strength of competitors, the state of the industry, and the agreement parties’ performance history; and
• Considering the likely consequences of any organizational and operational changes under the proposed agreement.

The Federal Maritime Commission also considers the likelihood of beneficial effects that the agreement likely would produce – the benefits it would provide to shippers and any efficiencies it would introduce.

Just as important — during the agreement review process, we also identify agreements that, because of their importance to U.S. liner shipping markets, the Commission should monitor on an on-going basis.

Given their importance, the Big Three strategic alliances are among the agreements that we closely monitor.

That process includes two meetings with the alliance parties each year – typically one face-to-face and the other by conference call.

We also require each alliance to provide us with minutes from their executive committee meetings.

And finally each alliance is required to provide us data on services, capacity, blank sailings, liftings (from which we calculate market share), vessel utilization and average revenue — for 9 US trades.

The data is subject to statistical analyses of, for example, changes in average revenue.

So, even after the initial review of new agreements or amendments, we keep a close eye on the alliances. And, so far, no red flags.

Because the topic at hand is large carrier alliances and mergers — I want to emphasize a distinction that has been central to the Commission’s assessments of the Big Three alliances – 2M, OCEAN and THE Alliance.

2M includes Maersk and MSC and has a market share, based on capacity, of 32% globally – and roughly 31% in US-based trades.

OCEAN Alliance is COSCO Group (including OOCL), CMA CGM, and Evergreen – with a global market share of 29.5% and 33% for U.S. trades.

And THE Alliance – including Ocean Network Express, Hapag-Lloyd and Yang Ming –at 16.7% globally, and 23% in U.S. trades.

The distinction I want to emphasize is the one between operational consolidation and market concentration.

In the trade press, one often sees alliances described using the general term “consolidation.”

Using the term “consolidation” for alliances can obscure the fact that “consolidating” participating lines’ vessel operations, but not their marketing and pricing, has very different consequences from “consolidating” the lines into one indivisible company.

Because mergers and acquisitions eliminate a competitive rival, they increase market concentration – a potential concern for future anticompetitive market behavior.

But when an alliance is established – rate competition continues among its members. There are just as many sellers of vessel space as there were before. Thus, there is no increase in market concentration.

To the extent that alliances provide an alternative to mergers and acquisitions – or to a line declaring bankruptcy – they are a valuable option that is provided for under the Shipping Act.

As things stand today, the shift from four to three strategic alliances has not increased market concentration in U.S. trades.

And the Federal Maritime Commission, specialized in the global ocean freight delivery system, adds value by enforcing competition and insisting that, under the Shipping Act, there remains a place for beneficial agreements in U.S. liner trades.

As for the prospects for greater operational consolidation – and, perhaps, greater market concentration – in the liner industry, I’m afraid that, given the current political and economic climate, further consolidation is more likely than not.

In the longer run, industry experts like Lars Jensen, a Maersk alumnus and now CEO of SeaIntelligence Consulting, have speculated that when liner concentration reaches its end point – that is, when competition standards on concentration run up against the increased concentration that is seen as necessary for improved liner profitability – only 6 to 8 main global shipping lines will remain.

Today, according to Alphaliner’s September monthly report, we have seven lines with global market shares of 5% or more – running from Maersk at 17.9% to Evergreen with 5.2%.
Together those seven represent over three-quarters of the global market for liner vessel slots.

So, if Mr. Jensen’s forecast does prove accurate, it may happen sooner than even he envisioned in his book entitled “Liner Shipping 2025.”

Thank you for your kind attention.