Shipping, Ports, and the Federal Maritime Commission

Shipping, Ports, and the Federal Maritime Commission

June 11, 2021
Shipping, Ports, and the Federal Maritime Commission
Since summer 2020, U.S. overseas containerized trade has
carriers that engaged in price fixing without filing an
risen to record levels as the Coronavirus Disease 2019
agreement with the FMC.
(COVID-19) pandemic led households to spend less on
services such as vacation trips and restaurant meals and
Such agreements are part of a longstanding federally
more on imported goods. The demand surge has resulted in
authorized regime intended to address persistent
transport delays, higher freight rates, and increased tension
overcapacity in the shipping industry (notwithstanding the
between shippers and ocean carriers over ancillary fees and
recent capacity shortage). Maritime trading nations
the availability of containers. These controversies have
generally have sought to develop and support their own
drawn attention to the role of the Federal Maritime
fleets of ships for national and economic security reasons
Commission (FMC), a federal agency with jurisdiction over
and/or to signify their nation’s development and global
ports and ocean shipping.
presence. To counteract this phenomenon, since the late
1800s liner carriers have been allowed to form cartels,
Background
known as conferences, to control available capacity.
The FMC’s mission, essentially, is to protect U.S.
Carriers serving the United States have thus been given a
shippers—the owners of cargo being transported—from
certain amount of antitrust immunity, under the regulation
unfair practices of ocean carriers, freight consolidators, and
of the FMC, that is not available to most other businesses
port terminal operators. It was created by Congress in 1961.
(46 U.S.C. §40307). The intent is to prevent rate wars and
The five FMC commissioners are appointed by the
foster a more stable market for ocean shipping. Although
President and confirmed by the Senate for five-year terms,
the United States has generally favored competition among
with no more than three from the same political party. The
transportation carriers in recent years, allowing regulated
President designates one of the commissioners to serve as
antitrust immunity for ocean carriers recognizes the global
chair. The FMC has a staff of about 130, comprising
nature of shipping and thus the difficulty of pursuing U.S.
lawyers, tariff and transportation specialists, and
policy preferences unilaterally. Whether this antitrust
economists. It has an annual budget of about $30 million.
immunity unnecessarily boosts carrier market power
relative to shippers underlies other disputes between the
Before 1961, the functions now fulfilled by the FMC were
two parties. Some carriers, mainly Chinese, are owned or
handled by an agency that also was charged with promoting
otherwise substantially controlled by their governments.
a domestic merchant marine industry. Under that
The FMC determines which carriers have this characteristic
arrangement, U.S. exporters and importers often perceived
and monitors their rates and practices more closely.
that their interests were subjugated to the interests of U.S.
ship lines. The FMC was created as an independent agency,
Types of Liner Agreements
and responsibility for the domestic merchant marine
Congress began limiting conferences’ practices in 1916
industry was separated. It now rests with the Maritime
(P.L. 64-260). Beginning in the 1980s, various deregulatory
Administration in the U.S. Department of Transportation.
shipping acts have reduced the market power of shipping
alliances. Tariffs (official ocean rates) are no longer
The FMC is charged by law with protecting the interests of
required to be filed with the FMC, merely posted on a
U.S. shippers in international trade. It oversees the practices
carrier’s website or other publicly accessible venue. The
of U.S. ports and marine terminal operators, licenses U.S.
vast majority of containerized cargo is carried at contracted
ocean freight consolidators, and investigates claims by
rates specified in confidential agreements between carriers
U.S. liner carriers of unfair practices by their foreign
and importers and exporters rather than at the posted rates.
counterparts (46 U.S.C §42101-§42307). It also adjudicates
among industry segments, as in cases of rate or service
Carriers have traditionally effected their limited antitrust
disputes between freight consolidators and liner carriers. It
immunity by participating in two types of agreements with
may enforce its decisions by issuing fines and binding
one another: rate discussion agreements (RDAs) and vessel
orders, seeking court injunctions, awarding reparations,
sharing agreements (VSAs). The terms of RDAs must be
revoking licenses, and detaining vessels.
non-binding, so that each ocean carrier signing an RDA is
making only a voluntarily commitment to abide by the
Regulation of Liner Shipping
pricing terms laid out in the agreement. A carrier may
The FMC focuses mostly on liner shipping services, which
ignore an agreement if it is in its interest to reach other rate
typically operate vessels such as containerships and car
and service terms with a shipper. The non-binding nature of
carriers on scheduled routes between U.S. and foreign
the agreements is a key feature that has limited the carriers’
ports. It administers an antitrust regime specific to these
ability to fix prices.
types of ship lines. The FMC’s most recent major
enforcement action, in 2016, led to large fines against car
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Shipping, Ports, and the Federal Maritime Commission
In 2008, the European Union disallowed RDAs, but
terminal operating companies are owned by or otherwise
continued to allow VSAs, which allow carriers to move
closely affiliated with liner carriers so the carriers can
cargo aboard one another’s vessels and hence may reduce
ensure their vessels are handled promptly. Terminal
the pressure on each individual carrier to order new ships.
operating agreements must be filed with the FMC.
Thus, only VSAs are now allowed among liner carriers
providing service between Europe and North America. In
The FMC licenses and requires bonds of ocean freight
2018, Congress forbade carriers from simultaneously
forwarders, which are businesses that do not own vessels,
participating in a RDA and VSA if doing so reduced
but typically consolidate the cargo of smaller shippers in
competition (46 U.S.C. §41104(a)(13)). VSAs or similar
order to obtain more competitive rates from ocean carriers.
agreements, commonly called “alliances,” rather than
RDAs, cover most liner trade to and from the United States.
Port Congestion and Pier Diem Charges
In May 2020, the FMC issued a rule (85 Federal Register
Whether RDAs or VSAs, the participating carriers must file
29638) clarifying just and reasonable practices for ocean
their agreements with the FMC, which solicits public
carriers charging daily fees for use of containers. Liner
comment. A proposed agreement goes into effect in 45 days
carriers own or lease almost all the containers used by
unless the FMC requests more information or opposes it in
shippers. To maximize container use and port storage space,
federal court. Shippers are seeking a statutory change that
carriers charge a daily fee to shippers who fail to pick up
would allow them to participate in these court proceedings.
containers promptly. For example, an importer may have
three to five “free” days to pick up an incoming container at
In 2016, a downturn in global trade induced further VSAs
the port before demurrage is charged. Similarly, an importer
and some mergers as carriers tried to rationalize their
faces a detention charge if it fails to unload a container and
services. One major foreign carrier went bankrupt. At an
return the empty box to the port within a given time period.
April 2016 congressional hearing, one U.S. exporter, Tyson
Shippers complain that they often exceed the “free days”
Foods, urged the FMC to undertake a more thorough review
due to factors beyond their control, such as congestion that
of what it called “mega-carrier alliances,” stating that these
delays truck trips into and out of the port.
arrangements complicate port operations because containers
have to be trucked between different port terminals when
Congestion at the “landside gates” of port terminals, where
the carriers exchange vessel space. In 2019, the top carrier
trucks enter and exit to drop off and pick up containers, has
serving the U.S. market had a market share of 13% and the
been a persistent issue at some container ports. The FMC
top 10 carried 88% of U.S. overseas container traffic.
held a series of forums at ports around the country in 2014
examining the causes and proposed solutions to truck gate
Small U.S.-Owned Liner Fleet
congestion, and later issued a report summarizing its
Since the 1980s, almost all U.S.-owned liner carriers have
findings. However, the FMC’s ability to affect the situation
been sold to foreign companies. This development is
for the benefit of U.S. shippers appears limited. The agency
significant to the FMC’s mission because one of the four
does not have jurisdiction over port management and labor
statutory purposes of U.S. regulation of international ocean
relations. This means it does not oversee such matters as the
shipping is to “encourage the development of an
operating hours of U.S. container terminals, which are
economically sound and efficient liner fleet of vessels of
typically much shorter than those of terminals abroad.
the United States capable of meeting national security
needs” (46 U.S.C. §40101(3)). Sea-Land, the American
Container Supply Shortages
company associated with the start of commercial container
Two FMC commissioners recently reminded liner carriers
shipping in 1956, is now owned by Maersk, a Danish line.
about their “common carrier obligation,” under which they
American President Lines was sold to a Singapore line,
may not “unreasonably refuse to deal or negotiate” (46
which in turn was acquired by the French liner company
U.S.C. §41104(a)(10)). This reminder followed complaints
CMA CGM. Smaller U.S. liner carriers were also sold to
by exporters of low-value agricultural goods that ocean
foreign companies.
carriers are not supplying them with enough empty
containers to ship their goods. The exporters are seeking
The fourth listed statutory goal of U.S. regulation of
FMC’s assistance in obtaining firmer commitments from
international ocean shipping is to “promote the growth and
carriers regarding container supply. Because the United
development of United States exports through competitive
States imports more containerized goods than it exports, the
and efficient ocean transportation and by placing greater
ocean rates for exports are much lower than for imports. In
reliance on the marketplace” (46 U.S.C. §40101(4)). When
the number of days it takes for a U.S. exporter to load a
reauthorizing the FMC in 2021, Congress created a 24-
container and for the purchaser of the goods in Asia to
member shipper advisory committee equally composed of
unload the container, a carrier could return the container
U.S. importers and exporters to advise the FMC on
empty to Asia and have the container start earning the much
“policies relating to the competitiveness, reliability,
higher Asia-to-United States freight revenue. This may be a
integrity, and fairness of the international ocean freight
consideration when container supply becomes tight. Factory
delivery system” (P.L. 116-283, §8604).
closures and the sudden downturn of container trade in
spring 2020 due to the COVID-19 pandemic reduced the
Related Areas of Industry Oversight
manufacturing of new containers. More recently, volume
To counteract the negotiating power of carrier alliances,
surges at ports and inland rail yards have slowed the
port terminal operators also have some immunity to discuss
circulatory flow of containers from importers to exporters.
rates on a region-wide basis (46 U.S.C. §40301(b)). Many
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Shipping, Ports, and the Federal Maritime Commission

IF11852
John Frittelli, Specialist in Transportation Policy

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