Congress Can’t Fix Supply Chains By Tying Down The Shipping Business

Congress has passed ocean shipping measures in response to a global pandemic, a massive surge in US import demand and snarled port traffic, and President Biden is poised to sign the bill into law. But supply chain congestion seems to be abating, goods demand is reverting to pre-pandemic levels, and a government report just found brisk competition among cargo lines. The Ocean Shipping Reform Act of 2022 now seems rushed and contains reforms that could end up making things worse. A lot will ride on how the Federal Maritime Commission’s (FMC
FMC
) implements the law.

The law contains two key elements:

First, it requires the FMC to investigate complaints about detention and demurrage charges, which are fines importers get hit with if they pick up their stuff late from the port once it’s dropped off. The commission would be tasked with making rules on what key actors in the shipping and logistics sector can and cannot do regarding how these charges are assessed.

Second, the Ocean Shipping Reform Act prohibits ocean carriers, marine terminal operators, and intermediaries from “unreasonably refusing” cargo space when available. It also prohibits unfair or unjustly discriminatory business practices—for instance, retaliation against an ocean carrier for a complaint made to the FMC about high prices.

The legislation aims to promote “growth and development of US exports through an ocean transportation system that is competitive, efficient, and economical.” Those are worthy goals, but the question is whether increased regulatory oversight can achieve them.

The good news here is that the FMC, an independent agency, will have a fair bit of leeway on how the legislation is administered. The commission just completed a report, “The Effects of COVID-19 on the U.S. International Ocean Transportation Supply Chain,” a two-year investigation involving hundreds or perhaps thousands of stakeholders (mostly virtual since it was done during the pandemic), interviews, emails, and presentations.

Issued on May 31 in the face of politicized calls for breaking up the shipping industry, the final report found that the current market for ocean liners in the trans-Pacific is not concentrated, and that trans-Atlantic trade is only minimally concentrated. In fact, the FMC found that the market for ocean services remains highly contestable.

The commission’s report recognized the disturbingly high ocean transport prices during the pandemic. Shipping rates for a 40-foot container went from $1,300 to $11,000 by September 2021. Meanwhile, members of Congress along with the Biden Administration were calling for a breakup of ocean carriers to lower shipping prices. But the commission concluded that those high prices were the product of market forces of supply and demand.

This series of events is important in economic policy history because it is a stark reminder of the importance of our independent government agencies. In times of crisis, policymakers are eager to be seen as responsive and often step into it. Independent agencies can take a dispassionate view and conduct rigorous analysis, which the American public deserves.

That is not to say the commission found all to be peachy in ocean shipping. The FMC expressed concern that certain ocean carriers were improperly assessing demurrage and detention charges. In fact, it slapped at least one carrier with a hefty fine in April 2022, and recently announced an agreement with Hapag-Lloyd, in which the ocean carrier will pay a $2 million civil penalty.

A major recommendation to come out of the report was that shippers and ocean carriers should enter into mutually enforceable and binding commercial service contracts. This is very similar to the spirit of 1998 legislation, which was focused on private contracts.

It appears that a number of importers and exporters have been negotiating contracts with ocean carriers that lack mutuality of understanding and obligation and are not enforceable. That probably still works well when the system is running smoothly, but apparently not so much in a crisis and when communication is lacking.

During Covid-19, import demand surged and, in turn, container shipments from Asia were at maximum capacity. A lot of ships came to our shores chock full of stuff, but America’s logistics supply chain was running in fits and starts. Port congestion ensued. “Everyone was mad,” one logistics spokesman told me.

Indeed, there was a lot to be mad about. For instance, US farmers trying to get their goods across the Pacific often got left in the lurch. Once the ports offloaded the containers, ships turned around as fast as possible to go back to Asia to get the next load. Before the pandemic, many of these ships making deliveries to Los Angeles and Long Beach would pick up agricultural exports in Oakland to take back to Asia. But during the crazy period, the incentives changed radically. Sometimes there wasn’t enough for a full load, or ships were so far behind from waiting at the earlier port that it was more profitable to get back to Asia, where even more US-bound containers were waiting. This left American farmers struggling to get their products to global markets.

Also, importers and exporters got hit with hefty fines, on top of the high tariffs that many were paying. People in the logistics industry often explain detention and demurrage fees with a car rental analogy: If you return your car late, you pay an extra charge because the next paying customer is waiting for that vehicle. Same idea at the port: If your delivered freight takes up space in the port, the next container can’t be unloaded. But COVID delays kept US importers from picking up their stuff. Fees piled on. Communication was poor. Frustration and anger ensued, followed by calls Congress members or the FMC.

It makes sense for lawmakers to focus on detention and demurrage charges and cargo space. But people looking at the data know that three of the largest US ports – Los Angeles, Long Beach and New York/New Jersey – are now outperforming their pre-pandemic norms and have been for awhile.

Fortunately, the final version heading to President Biden’s desk is largely about rulemaking, studies and reports, and appears to give the FMC elbow room to look at the facts before jumping to new restrictions and regulations.