The Container Shipping Slump, U.S. Exports, and the Role of the Federal Maritime Commission

The Container Shipping Slump, U.S. Exports, and the Role of the Federal Maritime Commission

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June 5, 2017
The Container Shipping Slump, U.S. Exports, and
the Role of the Federal Maritime Commission
The international container shipping market is currently
space on each other’s vessels. Thus, only VSAs are now
undergoing significant consolidation in response to slower
allowed among liner carriers providing service between
growth in world container trade. This development may be
Europe and North America.
problematic for some U.S. exporters and for the smooth
functioning of ports. Congress is considering legislation
Figure 1. U.S. International Container Trade
that could lead to greater competition among container ship
Loaded 20-Foot Equivalent Units (TEUs)
lines.
Background
Container shipping, also known as “liner” shipping, carries
most U.S. international trade and a growing proportion of
agricultural trade. The international container shipping
market, for decades, has had a persistent problem with
oversupply of shipping capacity. Maritime trading nations
generally have sought to develop and support their own
fleets of ships for national and economic security reasons
and/or to signify their nations’ development and global

presence. More recently, overcapacity has been exacerbated
Source: Maritime Administration, U.S. Waterborne Foreign Trade.
by larger ships that have come into service at a time when
trade growth has slowed (Figure 1).
While the general trend has been toward further
deregulation of the market, the United States and Asian
Since the 1800s, ship lines have formed cartels, known as
nations still allow RDAs among liner carriers. The most
“conferences,” to regulate rates and capacity on
prominent RDA involving U.S. trade is the Transpacific
international routes. The United States and other countries
Stabilization Agreement among 10 container carriers.
have given ship owners a certain amount of antitrust
RDAs must be nonbinding, so that each ship line is making
immunity to participate in conferences, but have also set
only a voluntary commitment to abide by the pricing terms
strict limits on the way conferences function. Although the
in the agreement. A carrier may ignore an agreement if it is
United States has generally favored competition among
in its interest to reach other rate and service terms with a
transportation carriers in recent years, allowing regulated
shipper. The nonbinding nature of the agreements is a key
antitrust immunity for ocean carriers recognizes the global
feature that has limited the carrier alliances’ ability to
nature of shipping and thus the difficulty of pursuing U.S.
influence the market.
policy preferences unilaterally. Agreements among carriers
are regulated by the Federal Maritime Commission (FMC),
VSAs or similar agreements about vessel space sharing,
an independent agency. The FMC has five commissioners
rather than RDAs that also set common rates, cover most
appointed by the President and confirmed by the Senate for
liner trade to and from the United States. All such
five-year terms, with no more than three from the same
agreements must be filed with the FMC, which solicits
political party.
public comment. A proposed agreement goes into effect in
45 days unless the FMC requests more information or
Congress began limiting cooperation among ship lines in
opposes it in federal district court.
1916. Since the 1980s, various deregulatory shipping acts
have reduced the market power of shipping alliances.
Shippers, in general, strongly oppose RDAs, but have been
Tariffs (official ocean rates) are no longer required to be
less concerned about VSAs. A bill approved by the House
filed with the FMC, but rather merely posted on a carrier’s
Transportation and Infrastructure Committee on May 24,
website, and ship lines are free to carry cargo at less than
2017, H.R. 2593, would disallow carriers from participating
the conference rate or not to belong to a conference. The
in both an RDA and VSA. The proposed change appears to
vast majority of containerized cargo is carried at contracted
reflect concern over recent consolidation activity among
rates specified in confidential agreements between carriers
liner carriers. A companion bill approved by the Senate
and importers and exporters (shippers) rather than at the
Commerce Committee, S. 1129, does not make this change.
posted rates. In 2008, the European Union disallowed
Industry Consolidation
agreements among carriers involving specific rates and
capacity quotas (called “rate discussion agreements,” or
Since the Great Recession in 2008 and 2009, the growth
RDAs), but continued to allow more general “vessel-
rate of U.S. container trade has slowed (Figure 1). The
sharing agreements” (VSAs), under which carriers reserve
slowdown may have caused the bankruptcy of two major
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The Container Shipping Slump, U.S. Exports, and the Role of the Federal Maritime Commission
carriers, while others have received financial assistance
This may not be a positive development for products with
from their home governments to cover their losses.
short shelf lives, even though these actions by carriers are
intended to reduce the cost of ocean transport. With less
The slowdown has also induced further VSAs and mergers
frequent sailings, a shipment that misses a ship’s departure
as carriers try to further rationalize their services. The
might have to be frozen to preserve it for the next available
number of container carriers serving U.S. international
sailing, significantly lowering its value.
trade will decline from 20 in 2015 to 13 in 2018, and the
number of VSAs will decline from four to three. At the
Effects of Port Congestion
same time, the largest carriers are gaining market power:
Figure 3 indicates that since the Great Recession, the
the market share of the top five carriers in U.S. foreign
slowdown in container trade has been most pronounced on
trade rose from 38% in 2002 to over 48% in 2016. The
the West Coast. East Coast ports recently surpassed West
Department of Justice’s Antitrust Division has opposed
Coast ports in the total number of containers handled. A
three VSAs recently approved by the FMC, expressing
labor-management dispute at West Coast ports in late 2014
concern about their competitive effects and likening the
and early 2015 may have influenced some cargo shift to
arrangements to mergers. The Antitrust Division stated that
other ports. Gulf Coast ports have been slowly increasing
some of the agreements’ provisions were overly broad and
volume and did not experience the same drop-off in cargo
could facilitate rate collusion.
during the Great Recession as the other coastal ports.
Enlargement of the Panama Canal in 2015, allowing ships
U.S. Exports
with three times the number of containers to sail through,
As Figure 1 indicates, the United States imports about
may be one factor influencing shifts in market share.
twice as much containerized cargo as it exports. This trade
imbalance is reflected in ocean freight rates as well. Export
Figure 3. U.S. Container Trade by Coastline
rates can be about half as much as import rates because
(TEUs)
U.S. exports are treated as the backhaul leg. While
exporters benefit from low freight rates, container carriers
provide services based mostly on the needs of importers
since it is the import leg that “drives the business.” U.S.
agricultural exporters, particularly in the Midwest, have
complained about the difficulty of obtaining containers for
export, because most imported containers are unloaded at
locations far from farms and meat processing plants. The
FMC has worked with the U.S. Department of Agriculture
to provide a weekly report on container availability.
A major development since the 1980s has been the sale of

U.S.-owned liner carriers to foreign companies. As there
Source: Maritime Administration, U.S. Waterborne Foreign Trade.
are now few U.S.-owned vessels in international liner
service, the FMC’s attention has been focused on protecting
Another factor could be port congestion and efficiency
U.S. shipper interests. The trend toward consolidation of
issues. Reshuffling of VSAs has required more
services by container carriers is not necessarily in the best
transshipment of containers by truck between terminals
interest of U.S. exporters of perishable goods such as
within ports. Larger ships, which are carrying about twice
chilled meat products, which are among the few high-value
the number of containers they did a decade ago, have
products the United States exports in containers in large
bunched cargo-handling activity. This has exacerbated
quantities to Asia.
inefficient truck gate operations at some ports, leaving long
lines of trucks waiting hours to enter the port. The FMC
The use of larger container ships, a reduction in the number
investigated this and a host of other issues impeding the
of carriers, greater sharing of vessels, and elimination of
smooth functioning of container ports. Its idea to establish a
ship calls at smaller ports have resulted in less frequent
nationwide portal containing key information related to port
sailings from the U.S. West Coast (Figure 2), the shortest
efficiency was rejected in a Senate committee markup
and most direct route to Asia.
earlier this year.
Figure 2. Container Ship Calls
However, comments by several Members during committee
markups of bills to reauthorize the FMC indicate that
further amendments related to international container
shipping could be forthcoming if the bills are taken up by
the House and the Senate.
John Frittelli, Specialist in Transportation Policy
IF10664

Source: Maritime Administration, Vessel Calls at U.S. Ports.
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The Container Shipping Slump, U.S. Exports, and the Role of the Federal Maritime Commission

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