U.S. GOVERNMENT PRINTING OFFICE

WASHINGTON : 

For sale by the Superintendent of Documents, U.S. Government Printing Office

Internet: bookstore.gpo.gov Phone: toll free (866) 512–1800; DC area (202) 512–1800

Fax: (202) 512–2250 Mail: Stop SSOP, Washington, DC 20402–0001

80–030 PDF 2002

FREE MARKET ANTITRUST IMMUNITY REFORM

(FAIR) ACT OF 2001

HEARING

BEFORE THE

COMMITTEE ON THE JUDICIARY

HOUSE OF REPRESENTATIVES

ONE HUNDRED SEVENTH CONGRESS

SECOND SESSION

ON

H.R. 1253

JUNE 5, 2002

Serial No. 88

Printed for the use of the Committee on the Judiciary

(

Available via the World Wide Web: http://www.house.gov/judiciary

(II)

COMMITTEE ON THE JUDICIARY

F. JAMES SENSENBRENNER, JR., WISCONSIN, Chairman

HENRY J. HYDE, Illinois

GEORGE W. GEKAS, Pennsylvania

HOWARD COBLE, North Carolina

LAMAR SMITH, Texas

ELTON GALLEGLY, California

BOB GOODLATTE, Virginia

STEVE CHABOT, Ohio

BOB BARR, Georgia

WILLIAM L. JENKINS, Tennessee

CHRIS CANNON, Utah

LINDSEY O. GRAHAM, South Carolina

SPENCER BACHUS, Alabama

JOHN N. HOSTETTLER, Indiana

MARK GREEN, Wisconsin

RIC KELLER, Florida

DARRELL E. ISSA, California

MELISSA A. HART, Pennsylvania

JEFF FLAKE, Arizona

MIKE PENCE, Indiana

J. RANDY FORBES, Virginia

JOHN CONYERS, JR., MICHIGAN

BARNEY FRANK, Massachusetts

HOWARD L. BERMAN, California

RICK BOUCHER, Virginia

JERROLD NADLER, New York

ROBERT C. SCOTT, Virginia

MELVIN L. WATT, North Carolina

ZOE LOFGREN, California

SHEILA JACKSON LEE, Texas

MAXINE WATERS, California

MARTIN T. MEEHAN, Massachusetts

WILLIAM D. DELAHUNT, Massachusetts

ROBERT WEXLER, Florida

TAMMY BALDWIN, Wisconsin

ANTHONY D. WEINER, New York

ADAM B. SCHIFF, California

PHILIP G. KIKO, Chief of Staff-General Counsel

PERRY H. APELBAUM, Minority Chief Counsel

(III)

C O N T E N T S

JUNE 5, 2002

OPENING STATEMENT

Page

The Honorable F. James Sensenbrenner, Jr., a Representative in Congress

From the State of Wisconsin, and Chairman, Committee on the Judiciary ... 1

WITNESSES

Mr. Charles A. James, Assistant Attorney General for Antitrust, U.S. Department of Justice

Oral Testimony ..................................................................................................... 3

Prepared Statement ............................................................................................. 4

Mr. James P. Hoffa, General President, International Brotherhood of Teamsters

Oral Testimony ..................................................................................................... 7

Prepared Statement ............................................................................................. 9

Mr. Robert Coleman, Chairman, Pacific Coast Council of Customs Brokers

and Freight Forwarders Association

Oral Testimony ..................................................................................................... 14

Prepared Statement ............................................................................................. 16

Mr. Christopher Koch, President and CEO, World Shipping Council

Oral Testimony ..................................................................................................... 23

Prepared Statement ............................................................................................. 25

APPENDIX

STATEMENTS SUBMITTED FOR THE HEARING RECORD

The Honorable F. James Sensenbrenner, Jr., a Representative in Congress

From the State of Wisconsin, and Chairman, Committee on the Judiciary ... 67

The Honorable Spenser Bachus, a Representative in Congress From the State

of Alabama ............................................................................................................ 68

The Honorable Howard Coble, a Representative in Congress From the State

of North Carolina ................................................................................................. 68

The Honorable Lindsey Graham, a Representative in Congress From the

State of South Carolina ....................................................................................... 69

The Honorable Darrell Issa, a Representative in Congress From the State

of California .......................................................................................................... 70

Statement by Mr. Stewart D. Hauser, New York/New Jersey Foreign Freight

Forwarders and Brokers Association, Inc. ......................................................... 70

MATERIAL SUBMITTED FOR THE HEARING RECORD

June 3, 2002 letter from Mr. Tay Yoshitani, Port of Oakland ............................. 75

May 29, 2002 letter from J. Robert Bray, Commonwealth of Virginia ............... 77

Organization for Economic Co-operation and Development, Final Report on

Competition Policy In Liner Shipping, April 16, 2002 ...................................... 79

Westbound Transpacific Stabilization Agreement Press Release ........................ 166

Statement and letter included in the record by Mr. Koch ................................... 169

June 4, 2002, letter from Mr. Michael Sacco, President, Maritime Trades

Department ........................................................................................................... 175

June 14, 2002 letter from Mr. Kurt Nagle, American Association of Port

Authorities ............................................................................................................ 178

Page

IV

May 30, 2002 letter from Mr. Bernard S. Groseclose, Jr., to the South Carolina State Ports Authority ................................................................................... 179

June 7, 2002 letter from Mr. Michael Baroody, National Association of Manufacturers ................................................................................................................ 181

June 10, 2002 letter from Mr. Alfred Hernandez, Anchor Shipping Co. ............ 182

(1)

FREE MARKET ANTITRUST IMMUNITY

REFORM (FAIR) ACT OF 2001

WEDNESDAY, JUNE 5, 2002

HOUSE OF REPRESENTATIVES,

COMMITTEE ON THE JUDICIARY,

Washington, DC.

The Committee met, pursuant to call, at 10:43 a.m., in Room

2141, Rayburn House Office Building, Hon. F. James Sensenbrenner (Chairman of the Committee) presiding.

Chairman SENSENBRENNER. The Committee will be in order.

The Committee on the Judiciary has exclusive jurisdiction over

laws pertaining to antitrust that affect competition in the marketplace. As Chairman of the Committee, I have made it a priority to

carefully examine the implementation and enforcement of our antitrust laws to ensure effective competition in our free market economy. This Committee also periodically considers competitive aspects of various industries, including those exempt from the antitrust laws.

Today we will consider H.R. 1253, the Free Market Antitrust Immunity, or FAIR, Act of 2001, a measure I introduced to remove

the antitrust exemption presently accorded to ocean carriers.

The United States has the world’s largest economy and its largest market. International trade represents close to 30 percent of

the U.S. gross domestic product and accounted for nearly a quarter

of U.S. economic growth over the last decade. Most of this trade

was conducted over ocean-shipping lanes, and this industry forms

the basis of an international commercial system upon which the

strength of the American economy depends.

The Shipping Act of 1916 exempted ocean carriers from United

States antitrust scrutiny. As a result, carriers have been free to

jointly set open shipping rates in what are known as carrier conferences or discussion agreements. The shipping rates directly affect the international commercial opportunities of potential U.S. exporters and the consumer choices of all Americans.

Subsequent amendments to the 1916 legislation have helped

remedy persistent competitive concerns within this industry, and

the Ocean Shipping Reform Act of 1998 helped address some of

these concerns by permitting independent shippers to enter into

service contracts with ocean carriers on a confidential basis.

However, over the last 75 years, market conditions upon which

ocean carrier antitrust immunity was predicated bears little resemblance to modern realities.

2

Today there are no major American-owned ocean carriers. As a

result, this protection almost exclusively benefits foreign-owned

carriers at the expense of Americans.

American shippers and companies which consolidate smaller

shipments for import are given little choice but to pay rates that

are collusively set by the carriers themselves. American corporations cannot avail themselves of export opportunities that would

exist in the competitive marketplace. American workers who transport goods to and from ocean ports are required to accept trucking

fees on what amounts to a take-it-or-leave-it basis. And ultimately,

American consumers are forced to pay higher prices for a variety

of imported goods.

If Congress were to consider granting antitrust immunity to

ocean carriers in today’s shipping environment, it would be hardpressed to justify this policy to the American people.

International comity has traditionally been a factor Congress

considers when passing laws relating to international trade. However, Congress has a continuing and affirmative obligation to periodically examine or repeal laws which have become detrimental to

the well-being of American citizens.

Moreover, when maritime countries currently permit ocean carriers to evade competition laws, there’s been a considerable movement away from this policy.

Canada is currently examining fundamental reform proposals,

and a European Union court recently prohibited carrier conferences

from collectively establishing inland transportation rates in Europe.

As a result, last April the Organization for Economic Cooperation

and Development, an international organization comprised of the

world’s leading economies, issued a comprehensive report examining the international ocean carrier industry. This report, which

will be included in today’s hearing record, concluded that antitrust

exemption for conference price fixing no longer served their stated

purpose, if they ever did, and are no longer relevant. The report

further recommended that member countries seriously consider removing antitrust exemption for price fixing and rate discussions.

H.R. 1253 would accomplish precisely this goal, and the American people deserve no less.

I would also like to acknowledge the leadership of former Chairman Henry Hyde, who introduced similar legislation in the last

Congress and has long been a leading advocate for American shippers and consumers.

I note that Mr. Conyers is not here. So without objection, all

Members will be allowed to submit opening statements at this

point in the record.

[The information referred to follows in the Appendix]

Chairman SENSENBRENNER. Our first witness will be Charles A.

James, the Assistant Attorney General for Antitrust at the Department of Justice. Before joining the Antitrust Division, Mr. James

practiced law and served on the Federal Trade Commission.

The second witness is James P. Hoffa, who was elected general

president of the International Brotherhood of Teamsters in 1998.

Mr. Hoffa is a member of President Bush’s Council on the 21st

Century and serves on the Energy Secretary’s advisory board.

3

The third witness is Robert Coleman, chairman of the Pacific

Coast Council of Customs Brokers and Freight Forwarders Association. Mr. Coleman will also testify on behalf of non-vehicle-owning

vessel operators, an important part of the shipping industry.

The last witness will be Christopher Koch, the president and

CEO of the World Shipping Council, a trade association which represents the ocean carrier industry. Before joining the council, Mr.

Koch served as Chairman of the Federal Maritime Commission,

was chief of staff to Senators John McCain and Slade Gorton, and

was counsel to the Senate Commerce Committee.

Gentlemen, would you all please stand and raise your right hand

and take the oath? Do each of you solemnly swear that the testimony you are about to give this Committee shall be the truth, the

whole truth and nothing but the truth, so help you God?

Let the record show that each of the witnesses answered in the

affirmative.

Without objection, the written statements of all of the witnesses

will be included as a part of their testimony, together with the

OECD report that I referred to in my opening statement.

[The information referred to follows in the Appendix]

Chairman SENSENBRENNER. I would like to ask each of the witnesses to summarize their remarks in 5 minutes or so, and then

we will go to questions under the 5-minute rule.

Mr. James.

STATEMENT OF CHARLES A. JAMES, ASSISTANT ATTORNEY

GENERAL FOR ANTITRUST, U.S. DEPARTMENT OF JUSTICE

Mr. JAMES. Thank you, Mr. Chairman. It’s my great pleasure to

be here this morning and to testify on behalf of the Department of

Justice in support of your legislation.

A few introductory comments: The U.S. economy relies on competition to ensure economic efficiency. We recognize that competition provides for consumers the benefit of the lowest possible prices

and the most aggressive level of innovation.

Against that background, we in the antitrust community obviously are quite dubious about antitrust exemptions. We certainly

understand that there are circumstances where an exemption may

be appropriate but only in the circumstance of very serious and

persistent market failure. We understand, as you indicated in your

introduction, that there has been an exemption from the antitrust

laws for various forms of carrier cooperation since 1916.

Under the present state of legislation, carriers are free to engage

in very explicit price-fixing arrangements in the form of conference

agreements and, more importantly in the current environment, less

formal discussion arrangements that are nonbinding in nature but

certainly provide the carriers with an opportunity to discuss competitive conditions and their prospective responses to those competitive conditions in a very informal way, subject only to the requirement that those not take the place of binding agreements.

The rationale for the exemption has been really twofold over the

years: One, that in the absence of the exemption, the carriers

would engage in a form of ruinous competition; secondly, that the

international nature of this particular enterprise provides a basis

for an exemption in the sense that our major trading partners have

4

some level of exemption in their own circumstance and the idea

that it might not be possible for the U.S. antitrust laws to reach

anti-competitive conduct that takes place by foreign actors.

I think both rationales do not stand up in the current environment. We understand that the concept of ruinous competition is

something that is certainly alluded to by a number of industries,

but we recognize the important discipline that competition can provide and certainly support the exercise of that discipline in this

particular industry setting.

More importantly, on the international dimension, it’s become

clear over the last several years that the U.S. antitrust laws do

have the reach to protect against anti-competitive conduct engaged

in by foreign actors or in foreign venues that have an impact on

U.S. commerce. Additionally, we would note, as you did in your introduction, that the overall trend in policy here is for our trading

partners to take serious looks at the need for continuing exemptions in this area, and the OECD report is one indication of that.

The fact that the European Union does not permit these discussion

agreements is another indication, and the fact that the European

Union itself has indicated an intention to look at whether an exemption is appropriate is yet a third.

We understand the very important benefits that competition can

bring to consumers in this very critical area of our economic activity and think that it is about time that we allowed the true, full

measure of competition to work in this industry setting. And, for

all of those reasons, we at the Department of Justice strongly support the proposed legislation and the elimination of the exemption.

Thank you.

[The prepared statement of Mr. James follows:]

PREPARED STATEMENT OF CHARLES JAMES

Good morning, Mr. Chairman and Members of the Committee. It is a pleasure to

appear before this Committee to state the Department of Justice’s in support of H.R.

1253, a bill that would remove the antitrust exemption for ocean carriers from the

Shipping Act of 1984. The bill would phase out the exemption for intercarrier agreements after one year, while not affecting the immunity for marine terminal operators.

The Department of Justice believes that competition under the antitrust laws is

the way to provide consumers with the best products and services at the most affordable prices. That is the general rule applicable to virtually every sector of the

American economy and has served our Country, its economy and its businesses and

consumers extraordinarily well. In certain limited circumstances, more aggressive or

less restrictive antitrust rules may be appropriate. We do not believe that the ocean

shipping industry exhibits extraordinary characteristics that warrant departure

from normal competition policy or the application of the antitrust laws.

Price fixing and other anticompetitive practices by ocean shipping conferences

over the years have imposed substantial costs on our economy through higher prices

on a wide variety of goods shipped by ocean transportation. In the current era of

expanding globalization of trade, in which we are ever more dependent upon an efficient transportation system, it is important that our public policy promote full and

open competition.

BRIEF HISTORY OF ANTITRUST EXEMPTIONS IN OCEAN SHIPPING

Since the Shipping Act, 1916, there has been an exemption, in one form or another, from the antitrust laws for ocean shipping carriers to engage in rate discussions and price-fixing agreements. Congress has revisited the issue at various times

over the years, but thus far has not yet enabled the competition generally applicable

to the rest of the economy to apply to ocean shipping. It is time to do so now.

5

While outlawing certain specified monopolistic conference practices, the 1916 Act

expressly conferred an exemption from the antitrust laws for conference agreements

on shipping rates, pooling arrangements, and shipping route allocations, as long as

those agreements were first submitted to and approved by the newly created U.S.

Shipping Board (the body that eventually became the Federal Maritime Commission).

Following enactment of the 1916 Act, conferences began making extensive use of

‘‘dual rate’’ contracts to bind shippers to the conferences and stave off non-conference carrier competition. These dual-rate contracts, also referred to as ‘‘loyalty

contracts,’’ offered discounted rates to shippers who agreed to use only conference

carriers. The Supreme Court ruled in Federal Maritime Board v. Isbrandtsen Co.,

356 U.S. 481 (1958), that dual rate contracts violated the Act.

In the wake of the Isbrandtsen decision, Congress amended the 1916 Act in 1961

to permit dual-rate contracts, though limiting the permissible discount to 15 percent. At the same time, Congress also amended the Act to require the filing of tariffs, transferred the Board’s authority to an independent Federal Maritime Commission, and gave the Commission the power to disapprove agreements between and

among carriers that were ‘‘contrary to the public interest.’’

In 1984, Congress substantially rewrote the 1916 Act. The Shipping Act of 1984

broadened the antitrust exemption for carrier agreements and streamlined the regulatory process for those carrier agreements. The exemption from the antitrust laws

was expanded to cover not only agreements that had gone into effect under the Act,

but also activities, ‘‘whether permitted under or prohibited by this Act,’’ if they were

undertaken ‘‘with a reasonable basis to conclude’’ that they were pursuant to an effective agreement. The antitrust exemption was further expanded to cover intermodal through rates incorporating rail, truck, and ocean legs. The 1984 Act abolished the Commission’s public interest standard for reviewing carrier agreements.

A carrier agreement would no longer require Commission ‘‘approval,’’ but would go

into effect—and thereby become immunized from the antitrust laws—45 days after

filing or submission of any additional information requested by the Commission. As

a result of the 1984 Act, once an agreement has been filed, the only way it can be

challenged, as anticompetitive, is if the Commission seeks to have a court enjoin the

agreement on grounds that it is ‘‘likely, by a reduction in competition, to produce

an unreasonable reduction in transportation service or an unreasonable increase in

transportation cost.’’ (To the best of our knowledge, the Commission has never filed

such a challenge.) The 1984 Act otherwise retained the common carrier provisions

of the 1916 Act, as amended in 1961, under which the conferences were required

to file published tariffs with the Commission, as well as the list of specified prohibited acts. The Act provided for the use of service contracts in limited circumstances.

Next came the Ocean Shipping Reform Act of 1998. The 1998 Act took some notable competitive steps, but it stopped short in some important respects. On the procompetitive side, the 1998 Act guarantees that conference members can take ‘‘independent action’’ on service contracts—that is, can negotiate service contracts with

a shipper at rates that differ from the conference tariff—and thereby compete for

large volumes of business by offering discounted rates. The 1998 Act improves on

the 1984 Act not only by requiring shipping conferences to permit individually negotiated service contracts, but also by helping protect carriers from anticompetitive

pressure from the conferences by prohibiting the conferences from requiring carriers

to disclose the rates in those service contracts and by eliminating the requirement

that the negotiated rate be made available to all similarly situated shippers.

However, the 1998 Act also allows conference members to adopt so-called ‘‘voluntary’’ guidelines regarding individual service contracts, which a conference can

use, along with its already significant influence over its members, to signal them

as to expected behavior. At a minimum, this can be used to discourage vigorous

competition with respect to individual service contracts.

These and other provisions of the 1998 Act perpetuate the conference system, either by facilitating intercarrier agreements that would be unlawful in the absence

of an exemption or by restricting the ways in which conference members can meaningfully compete on an individual basis for the business of large and small shippers

alike. The conference system could not exist in the absence of an antitrust exemption.

Such an exemption no longer makes sense, especially at a time when countries

all over the world are turning to competition, rather than antitrust exemptions and

regulation, as the best hope for economic prosperity.

6

THERE ARE NO GOOD RATIONALES FOR THE ANTITRUST EXEMPTION

We know the benefits of competition: low prices, innovative service, and efficient

operations. Yet shippers—and consumers—have been denied the full benefits of

competition because carriers have been able to persuade policy makers over the

years that the ocean shipping industry has certain characteristics that make it necessary to protect carriers from competition.

Supporters of the antitrust exemption for ocean carriers have been reciting essentially the same rationales from the beginning. The rationales tend to fall into two

categories: those based on the economics of shipping and those based on the international nature of the business. Whatever may have been the force of those rationales at the time the exemption was first enacted in 1916, they have become increasingly dubious in the years since, and are particularly so in the current economic and

legal environment. They do not justify a departure from the competitive principles

that other industries throughout our country—and much of the world—have come

to live by.

A consistent theme of those supporting an antitrust exemption, rather than competition, has been that carriers need protection from the consequences of ‘‘too much’’

competition. Absent an exemption to allow collective decisionmaking by carriers, the

fear expressed has been that carriers would engage in rate wars that might result

in certain carriers being unable to cover their capital costs, which would ultimately

drive these inefficient carriers out of the market.

In other words, carriers should be exempt from the antitrust laws because, absent

the ability to collude, shipping costs would be lower. In our view, this is a seriously

flawed public policy. As the General Accounting Office stated in a 1982 report to

Congress, a primary objective of shipping conferences ‘‘is to increase the profits realized by their members as a group.’’ This is why cartels form. But simply because

competitors desire to collude in order to inflate their joint profits does not mean that

it is good public policy to allow them to do so. In fact, the contrary is true.

Furthermore, this rationale is difficult to accept, even on its own terms. Arguments based upon concerns about ‘‘ruinous’’ or ‘‘destructive’’ competition are often

made, but are virtually never substantiated. Congress has heard them many times

before, often with respect to transportation industries such as railroads, airlines,

and motor carriers. At one time or another, each of those industries was subject to

pervasive federal regulation and enjoyed a broad exemption from the antitrust laws.

Over time, however, each of them has been substantially deregulated and the applicable antitrust exemption has been curtailed or eliminated, with the result that

competition has increased for shippers and consumers, and without the horrible consequences predicted by industry. In fact, economists have often found that a ‘‘regulated’’ cartel yields the worst of both worlds: high prices and low profitability, as

companies over-invest in capacity and lose the incentive to innovate and operate efficiently. Certainly, the ocean shipping exemption has not saved U.S. carriers.

Another rationale for the exemption has been that the international character of

ocean shipping somehow made it inappropriate to subject the industry to the antitrust laws. The notion has been that it would be unfair to apply U.S. antitrust laws

just to U.S. carriers, but that attempting to apply them to foreign carriers as well

would provoke our trading partners. Whatever may have been the validity of such

a concern many decades ago, it has no continuing validity today. There has been

no doubt for many years that U.S. antitrust laws can properly be applied to foreign

persons engaged in commerce with the U.S. and that the transportation of freight

between the U.S. and a foreign country falls well within that principle. Thus, foreign carriers serving the U.S., no less than U.S. carriers serving the U.S., are subject to our antitrust laws with respect to those activities. Furthermore, in the intervening years, foreign governments have made a pronounced shift to embrace freemarket competition and to adopt and apply antitrust laws. Indeed, it is ironic to

note that the most significant recent antitrust enforcement action with respect to

ocean shipping in U.S.-Europe trades was taken by the European Commission a few

years ago, when it imposed fines on U.S. and foreign carriers operating between the

United States and Europe after determining that they had exceeded the scope of the

applicable European exemption. This puts to rest any contention that it would be

inappropriate, as a matter of fairness or comity, for the United States to apply its

antitrust laws to carriers operating to or from the U.S.

Perhaps a final rationale—and one that reflects both the economics and the international character of shipping—is that some foreign countries subsidize their statecontrolled carriers and operate them for reasons other than profit. This was a significant concern to U.S.-flag carriers in the 1970s, but Congress has already dealt

with that. The Shipping Act of 1984 gave the Commission power to disapprove rates

of such carriers that were below a just and reasonable level.

7

In our view, the case for a broad exemption from the antitrust laws has never

been a strong one and is especially weak today. Congress has acted decisively over

the past 25 years to deregulate other transportation industries—railroads, airlines,

and motor carriers—and the predictions that ruinous competition would harm carriers and consumers alike never came to pass. The case for continuation of the antitrust exemption for ocean carriers is no stronger. Indeed, at a time when the U.S.

model of deregulation—coupled with appropriate antitrust enforcement—is winning

converts around the world, the antitrust exemption for ocean shipping is badly out

of step with the times.

CONCLUSION

Mr. Chairman, the 1998 Act took an important but limited step forward toward

more competition in ocean shipping. The Department of Justice believes that the

proposed legislation would firmly establish competition as the touchstone for this

important industry. We believe that the ocean shipping marketplace can benefit, no

less than other industries, from healthy competitive market forces safeguarded by

appropriate antitrust enforcement.

The Department of Justice urges Congress to enact your legislation and allow

competition to flourish in ocean shipping—subject only to our antitrust laws. A competitive marketplace protected by the antitrust laws will do more than the most

carefully constructed regulatory scheme to allow competitive forces in the ocean

shipping industry to benefit consumers, shippers, the economy, and ultimately the

ocean shipping industry itself.

Chairman SENSENBRENNER. Thank you, Mr. James.

Mr. Hoffa.

STATEMENT JAMES P. HOFFA, GENERAL PRESIDENT,

INTERNATIONAL BROTHERHOOD OF TEAMSTERS

Mr. HOFFA. Thank you. Mr. Chairman and Members of the Committee, my name is Jim Hoffa, and I’m general president of the

International Brotherhood of Teamsters. It’s a pleasure to be here

today to support H.R. 1253, the Free Market Antitrust Immunity

Reform Act.

On behalf of the 1.4 million members of the Teamsters Union

and the 50,000 truck drivers who haul intermodal containers

throughout the country, I urge you to eliminate the antitrust exemption for ocean carriers.

At present, these foreign-owned carriers reap billions of dollars

in profits off the backs of American workers. Complete elimination

of this exemption, as called for in Chairman Sensenbrenner’s bill,

is the only way to end the systematic exploitation of America’s port

drivers.

Under the current law, ocean carriers are permitted to meet and

discuss the rates they charge for moving a container from the port

of origin to its final destination. Included in this rate is the charge

for moving a container from the U.S. port to the inland point.

Based upon these collective set rates, ocean carriers then negotiate

individual service contracts with shippers.

Once a service contract is finalized, the ocean carrier or its

broker usually contracts out the inland segment of the move to an

independent port trucking company. Unlike their relationship with

shippers, ocean carriers enjoy tremendous leverage over port trucking companies, due to the carriers’ ability to collaborate with one

another with regard to freight rates.

Because the carriers know what the other carrier is going to pay

for inland transport, they can present a take-it-or-leave-it rate to

the trucking companies. Thus, there are no meaningful negotiaVerDate 11-MAY-2000 15:03 Aug 15, 2002 Jkt 000000 PO 00000 Frm 00011 Fmt 6633 Sfmt 6601 G:\WORK\FULL\060502\80030.000 HJUD3 PsN: HJUD3
8

tions. Trucking companies are then forced to either accept or not

haul the freight at all.

Since the ocean carriers dictate similar rates to all of their port

trucking services providers, the latter is not a viable option. Thus,

trucking companies routinely are left to provide these services at

a rate that barely covers the cost, and sometimes they have to even

operate at a loss.

To compete in this environment, many trucking companies offer

incentives such as no charge for the long hours that port truck

drivers have to spend in port in congested areas waiting for their

loads. Trucking companies also offer additional free services, such

as cleaning out, loading and unloading containers, or waiting for

hours in long lines to interchange containers.

Ultimately, it is the port drivers who actually provide these free

hours of service, not the trucking companies. The wages port drivers receive are unsustainable and below the standards we must

have in this country. Trucking companies pay port drivers povertylevel wages to offset the losses they absorb from accepting belowcost trucking rates set by the ocean carriers. On average, port drivers earn an average effective rate of $7 to $8 per hour before taxes, and that is during good times. Port drivers receive no health benefits for themselves or their families and

no retirement benefits.

Faced with such hardships, many drivers are forced to choose between making their truck payments and repairs to their trucks or

feeding their families. As a result, large numbers of port drivers

are operating poorly maintained trucks. And more and more port

drivers have been forced into bankruptcy, losing their homes as

well as their trucks.

In the end, these hardworking men and women and their families are forced to rely on public assistance to survive. Their plight

is directly caused by the multibillion-dollar cartel that has flourished at their expense. This is bad policy, and it must be stopped.

Ocean carriers assert that, without this exemption, the efficiencies of movement of freight would be compromised. Specifically,

they are concerned that carriers will not be able to coordinate their

need to carry the capacity that they believe they need. Their concerns are clearly unfounded.

First, if structured appropriately, carriers could enter into joint

ventures or partnerships that would enable them to maximize their

capacity without violating antitrust laws.

Secondly, even if this proved unworkable, nothing in this legislation would prohibit carriers from using third-party brokers to assist

them in coordinating their capacity needs. Such arrangements are

commonplace in the trucking industry.

Simply put, this legislation in no way threatens the ability of

ocean carriers to move freight efficiently.

Mr. Chairman, there is a great imbalance in the economic forces

at work here. We’re talking about a David and Goliath fight, your

average Joe out there driving a truck, who bought a third- or

fourth-generation truck for $25,000, versus these giant ocean carriers. Something is seriously wrong with a system where the laws

protect the multibillion-dollar foreign cartel but not the American

citizen who drives the truck, the hardworking port driver.

9

We’re still operating under a 1916 law that gives the economic

giants of the steamship industry antitrust protection and prosecutes the driver if he meets with three other truck drivers in a

church basement or union hall to consider the idea of getting together to make—set forth—set rates for themselves to protect their

own existence.

I urge this Committee and the 107th Congress to correct this picture, to right this wrong, to eliminate this antitrust exemption that

does more harm than good and that no longer serves America.

Thank you, Mr. Chairman.

[The prepared statement of Mr. Hoffa follows:]

PREPARED STATEMENT OF JAMES P. HOFFA

Mr. Chairman and Members of the Committee, my name is Jim Hoffa and I am

the General President of the International Brotherhood of Teamsters. It is a pleasure to appear before you today to support H.R. 1253, the Free Market Antitrust Immunity Reform or ‘‘FAIR’’ Act of 2001, that proposes to eliminate antitrust immunity for ocean carriers. I am here today on behalf of the 1.4 million members of the

Teamsters Union, some of whom are already employed in the ports. In addition, I

am here representing the 50,000 truck drivers who haul intermodal containers in

ports located throughout the United States and who, in the near future, will be

Teamsters members. I thank you for the opportunity to address these important

issues.

Notably, this is not the Teamsters’ first appearance before Congress on behalf of

port drivers. Two years ago, the Director of the Teamsters Port Division appeared

before this Committee in support of Representative Hyde’s 1999 Free Market Antitrust Immunity Reform Act. Soon thereafter, the Port Division’s National Coordinator testified before the House Transportation Committee on the negative effects

of the Ocean Shipping Reform Act of 1998 (‘‘OSRA’’) on port drivers and on the deplorable wages and working conditions of those drivers. Our message was then, and

remains today, a very simple one: By allowing ocean carriers to continue to collectively set rates, even through voluntary discussion groups, competition in the inland

transportation segment will remain suppressed, and port drivers will suffer the results.

Most of the participants in the maritime industry ignore the plight of port drivers,

and thus their interests are seldom mentioned in any discussion of maritime trade.

Although widely disregarded, these workers play an integral role in United States

trade. Ships and trains only can transport goods so far; nothing is delivered to or

from a customer’s dock unless it is delivered by a port truck driver.

In my testimony today, I will explain how the perpetuation of ocean carriers’ antitrust immunity directly contributes to the poverty level wages and deplorable working conditions endured by port drivers. To do so, I will briefly describe (1) the economic growth in the maritime industry compared to the economic depression experienced by port drivers; (2) the manner through which the ocean carriers’ antitrust

exemption allows carriers to dictate rates and suppress competition in the trucking

industry; (3) how this suppressed competition perpetuates unsafe and unsustainable

working conditions for port drivers; and (4) why this exemption should be eliminated.

1. The Intermodal Industry Has Expanded And Ocean Carriers Have Enjoyed Increasing Profits, But Port Drivers Continue To Earn Poverty Level Wages

United States’ ports and the shipping industry form the foundation for international trade on which the vitality of the United States’ free market economy depends. Foreign trade accounts for one-fifth of the United States Gross Domestic

Product. In 1996, port activities provided employment for over 1.4 million Americans

and contributed approximately $74.8 billion to the U.S. Gross Domestic Product.

Fueled by the advent of the global economy, this foundation has developed at a

rapid pace. International trade experts reported that the global container trade rose

from an estimated 83 million containers in 1990 to 198 million in 2000. In the Port

of Los Angeles alone, container volume increased by over 20% in 2000. And despite

the economic slowdown in 2001, the top 20 U.S. ports still experienced increases in

container volume from 2000. Not surprisingly, experts predict that by 2010 at least

90% of all freight carried by ocean carriers will be transported by intermodal containers.

10

1 46 U.S.C. § 1702(11) and § 1702(12). We understand that certain ocean carriers have enterred

into an agreement under which they ‘‘discuss, evaluate and reach agreement . . . [regarding]

matters pertaining to the interchange of carrier equipment . . . for shippers and consignees.’’ Ocean Carrier Equipment Management Association, FMC No. 202–011284–048, Art. 2. Under

its terms, certain carriers agree that they are not authorized to ‘‘negotiate, agree upon, or jointly

contract for freight rates or compensation to be paid by the parties to motor carriers and/or port

truck drivers.’’ See id. at Art. 5.8. Although the language in this agreement is a step in the right

direction, it falls well short of protecting against rate setting for inland transportation. First,

it is not binding on all ocean carriers. Second, even though the signatory carriers may agree

not to set trucking rates, they are permitted to discuss information (including costs) ‘‘related

to any aspect of inland transport.’’ Id. at Art. 5.9. In addition, under this agreement, carriers

are permitted to discuss charges for insurance, terminal handling, destination delivery, detention, and many other charges, all of which are used to establish through rate. Thus, albeit indirectly, a ceiling rate is placed on the amount an ocean carrier will pay a motor carrier for the

cost of the inland move. Finally, the language of the Act does not expressly prohibit discussion

among carriers of the ‘‘charge to the public by a common carrier for the non-ocean portion of

through transportation.’’ See 46 U.S.C. 1706(b)(2). Accordingly, under current law, carriers are

permitted to discuss such issues. 2 46 U.S.C. § 1709(c)(4).

Consistent with this growth, the profits of these foreign-owned ocean carriers, on

the whole have increased over the last three years. Hapag-Lloyd Container Line’s operating profit for 2001 totaled $168 million, an increase of 17% from 2000. Similarly, P&O Nedlloyd Container Line Ltd. reported record profits of $201 million in

2000, from $7 million in 1999. Even with a decrease in profits for 2001, P&O

Nedlloyd averaged a $40 million increase per year over the last three years. Based

upon these promising statistics, one could easily assume that everyone associated

with the flourishing shipping industry is reaping its rewards. This is certainly true

for the large, foreign-owned carriers and the port authorities, which directly benefit

from increased container traffic at their ports.

This has not been the case, however, for port drivers. Despite the financial success

of the ocean carriers, port drivers earn substandard wages and have not received

any type of pay increase in over a decade. On average, port drivers earn an effective

wage of $7.00 to $8.00 per hour, before taxes. They are not provided health benefits—either for themselves or their families—nor do they receive pension or retirement benefits. As a result, many are forced to choose between making the payments

and repairs on their trucks or buying groceries for their families. Faced with such

hardship, many drivers have been forced into bankruptcy and have lost their homes

as well as their trucks—their primary means of livelihood. Consequently, port drivers and their families are forced to rely on public assistance to survive. Their plight

is directly caused by the multi-billion dollar cartel that has flourished at the expense of hard working men and women. This is bad policy and must be stopped.

2. The Ocean Carriers’ Antitrust Exemption Suppresses Competition In The Trucking

Industry

Under the Shipping Act of 1916, Congress allowed ocean carriers to enter into

conference agreements (with other ocean carriers) to establish shipping rates, pooling arrangements, and trade route allocations. In the 1970s, a number of United

States ocean carriers were prosecuted by the Department of Justice for exceeding

the scope of their antitrust exemption. In response, Congress essentially rewrote the

1916 Act to broaden the antitrust exemption. Under the Shipping Act of 1984, Congress eliminated the Federal Maritime Commission’s (‘‘FMC’’) oversight of the ratesetting agreements established by the ocean carrier conferences. In addition, Congress broadened the exemption to permit conferences to establish intermodal

‘‘through rates’’ incorporating rail, truck, and ocean legs of intermodal transportation.

In 1998, Congress passed the Ocean Shipping Reform Act of 1998 (‘‘OSRA’’), with

the hope of introducing a more competitive relationship among ocean carriers.

Under OSRA, carriers are permitted to participate in voluntary discussion groups

to discuss and collectively establish rate guidelines, including inland rates carriers

will charge their customers. In addition, OSRA expressly does not prohibit discussion or agreement among ocean carriers regarding ‘‘the charge to the public by a

common carrier for the nonocean portion of through transportation.’’ 1 Thus, ocean

carriers may discuss or enter into agreements regarding the rates they will charge

shippers for inland transport and may set ‘‘joint through rate[s] by a conference,

joint venture, or an association of ocean common carriers.’’ 2

The antitrust immunity provided by both the Shipping Act of 1984 and perpetuated by OSRA allows ocean carriers to dictate non-sustainable rates in the trucking industry. Through these agreements and discussion groups, ocean carriers collectively establish through rates, which include the aggregate cost of moving a conVerDate 11-MAY-2000 15:03 Aug 15, 2002 Jkt 000000 PO 00000 Frm 00014 Fmt 6633 Sfmt 6621 G:\WORK\FULL\060502\80030.000 HJUD3 PsN: HJUD3
11

tainer from its port of origin to its final destination. Thus, the inland transportation

charge—the charge for moving a container from a port to a customer’s dock or other

destination—is embedded in the established rate.

Based on these rates, ocean carriers negotiate individual and confidential service

contracts with shippers. These rates generally include both the ocean voyage and

the transport of the container from the harbor to an inland point. The ocean carriers

then dictate set rates to trucking companies to provide the inland transport segment

of the move. According to the trucking companies, ocean carriers try to use port

trucking rates to ‘‘recoup’’ the losses they encountered as a result of underpricing

the cost of the ocean voyage. To do so, the ocean carriers dictate rates to the trucking companies that are prohibitively low in order to reduce the ocean carriers’ overall cost of transport.

Since the rate negotiated between the ocean carrier and shipper already has been

established, the trucking company is forced to either accept the proposed rate or

forego the work and lose business. As the latter is not a viable business option,

trucking companies are left to provide service at a rate that barely covers their

costs. After the trucking company covers its costs, the port drivers are left to work

for substandard wages with no health or retirement benefits.

At first blush, one could think this market a competitive one. After all, this collective behavior is what keeps trucking prices low. The problem, however, is that the

forces driving these prices are artificial. Neither supply nor demand influences these

rates, nor does the cost of the service. As a result, port trucking companies are unable to compete effectively with one another or to improve their own operations

when they are operating below cost. In the long run, the quality of the service for

the customer is compromised. Most importantly, however, these conditions place the

public at risk as veteran drivers leave the industry and are replaced with less

skilled workers, who generally operate run-down trucks and are forced to pull

unroadworthy chassis. At times, port truck drivers are pulling over 80,000 pounds

of equipment and freight with vehicles that are at best marginally roadworthy and

at worst, grossly unsafe. As a result, both they and the drivers with whom they

share the road are at great danger.

In addition, these practices foreclose the possibility of any competitive movement

in inland transportation rates. When ocean carriers increase their rates, no increase

is passed along to the trucking companies or port drivers. For example, in May

1999, ocean carriers collectively implemented $400 to $900 (per container) shipping

rate increases. Notably, neither trucking companies nor port drivers enjoyed the

‘‘trickle down’’ effect of that increase. Similarly, in March 2002, the Trans-Atlantic

Conference Agreement implemented a $120 to $150 shipping rate increase (per container) for its eastbound trade lanes. Again, no rate increase was passed on to the

trucking companies or port drivers. To the contrary, many port trucking companies

on the East and West coasts recently have received notices from ocean carriers announcing a rate reduction for inland transport. One ocean carrier, Evergreen America Corp., informed its trucking company vendors that it would be reducing its inland transport rates by 5% effective April 15. These unilateral decreases show that

it is the ocean carriers, not free market forces, that control inland transport rates.

And because carriers have no incentive to increase those rates (to the contrary, low

inland transport rates help carriers recoup losses from underpricing the ocean voyage), they will continue to set prohibitively low rates for inland transport.

Simply put, ocean carriers’ antitrust immunity gives carriers the ability to establish through rates that are so low that the cost of inland transport is essentially

treated as a pass-through. Meaningful competition in the trucking industry is eliminated because ocean carriers, rather than free market forces, prescribe inland trucking rates. Consequently, trucking companies are forced to provide inland transport

services at rates that barely cover their costs and are left with little to pay port

drivers.

3. The Rates Established By Conferences and Discussion Groups Cause Port Drivers

to Endure Substandard Working Conditions and Earn Poverty Level Wages

The low inland transport rates dictated by the ocean carriers encourage trucking

companies to squeeze every possible penny and cut every corner in dealing with port

drivers. This dynamic, initially triggered by the ocean carriers’ conference agreements, and perpetuated under voluntary discussion agreements, results in abusive

conditions for port drivers and questionable, from a legal standpoint, practices on

the part of trucking companies, ocean carriers, terminal operators, and shippers. For

example, the following practices have become the norm in the container hauling industry:

12

• Port drivers are forced to spend an average of ‘‘3 hours per day’’ or 15 hours

per week in ports, all unpaid, waiting in various lines to pick up chassis and

containers.

• Port drivers are forced to choose between hauling unsafe chassis, which are

owned by the ocean carriers, or taking their place at the end of a new line

to wait while the maintenance and repair shop makes the chassis barely roadworthy.

• Port drivers are forced to choose between hauling overweight containers or receiving no work as a result of their refusal.

• Port drivers are forced to haul improperly labeled containers that often contain hazardous materials. In addition, port drivers sometimes are forced to

clean out these containers without protective gear, proper training, and appropriate means of disposal, thus placing themselves and the public at risk.

• Port drivers are forced to purchase insurance from the trucking company or

the trucking company’s designated company. Trucking companies charge drivers exorbitant administrative fees for this service yet routinely fail to provide

a copy of the policy nor an accounting of the premium payments.

• Trucking companies often withhold fuel surcharges they receive from customers rather than passing them onto the drivers who actually pay for the

fuel.

• If a port driver complains about these conditions, he or she is likely to suffer

some retaliation from the trucking company or ocean carrier, either by being

denied future work or simply having their lease terminated with the trucking

company.

Unfortunately, these practices have become standard in the port trucking industry. They are the direct result of the ocean carriers setting substandard inland

transportation rates as permitted by the antitrust exemption perpetuated by OSRA.

Because the ocean carriers set such a low ceiling for inland transport, trucking companies are forced to accept unreasonably low rates from both the carriers and the

shippers. As a result, the trucking companies have done everything possible to recoup their losses from port drivers.

4. The Ocean Carriers’ Antitrust Exemption Should Be Eliminated Because Its Original Purposes Are No Longer Relevant and the International Community Demands It

Congress granted ocean carriers antitrust immunity to place American ocean carriers on an even keel with their foreign competitors. Congress also provided this exemption based on the belief that in return for making the enormous capital investment in vessels and equipment, United States ship owners would earn a secure return on their investment and, in turn, develop new operations to build United

States foreign trade.

These reasons, which were sound and rational at the time, are no longer valid.

First, there is virtually no United States-owned fleet. In the last few years, ocean

carriers owned and based in the United States have disappeared. Sea-Land has

been sold to Maersk, a wholly owned subsidiary of Denmark’s A.P. Moller. Crowley

Maritime’s South American services were sold to Germany’s Hamburg-Sud, and

American President Lines has been sold to Singapore’s Neptune Orient Lines. Thus,

protecting an American industry can no longer be used as a basis to support antitrust immunity. Second, the rationale of protecting ocean carriers’ capital investment in vessels and equipment so they may preserve another domestic industry is

no longer applicable. It would be one thing if the United States ship building industry was flourishing because these foreign conglomerates were building their new

ships in the United States. That, however, is not the case.

Ocean carriers argue that without this exemption, the efficiency of the movement

of freight will be compromised. Specifically, they are concerned that carriers will not

be able to coordinate with other carriers to meet their capacity needs. At present,

carriers often assist one another by sharing freight when an ocean liner is about

to set sail below capacity. This concern however is unfounded. First, if structured

appropriately, carriers still could enter into joint ventures or partnerships that

would enable them to maximize their capacity. Second, even if that proved unworkable, nothing in this legislation would prohibit carriers from using third party brokers to assist them in coordinating their capacity needs. Similar arrangements are

commonplace in the trucking industry. Accordingly, this legislation in no way

threatens the ability of ocean carriers to move freight efficiently.

Moreover, the international community has recognized that ocean carriers no

longer need, nor should they enjoy, the benefits of antitrust immunity. In the Spring

13

3The OECD represents 30 member countries that all share a commitment to democratic governance and a market economy. Principally, the OECD conducts research and issues reports,

statistics, and publications on trade, education, and science and development. 4Organization for Economic Co-Operation and Development, Draft Liner Shipping Competition Policy Report, dated November 6, 2001, (‘‘OECD Draft Report’’) at 72. 5 Id.

6OECD Draft Report at 73.

7Organization for Economic Co-Operation and Development, (Final) Liner Shipping Competition Policy Report, dated April 16, 2002, (‘‘OECD Final Report’’) at 77. 8OECD Final Report at 78.

9OECD Final Report at 74.

10 In Case T–96/95, Judgment of the Court of First Instance (Third Chamber), ¶ 12. Inland

transport includes ‘‘inland transport to the port, and inland transport from the port of destination to the place of final destination.’’ ¶ 15. 11 Id. at ¶ 23. 12 Id. at ¶ 83.

of 2001, the Organization for Economic Cooperation and Development (‘‘OECD’’) 3

issued a report—for ‘‘discussion purposes’’—which recommended that countries ‘‘reviewing the application of competition policy in the liner shipping sector should remove anti-trust exemptions for common pricing and rate discussions.’’ 4 The OECD

explained that ‘‘[o]ne can reasonably expect that removing anti-trust exemptions for

price-fixing and rate discussion, insofar as they contribute to more competition in

the liner industry, would lead to an acceleration of current trends relating to service

quality, decreasing rates, and increasing industry concentration.’’ 5 The OECD also

reported that it did not find ‘‘convincing evidence that the practice of discussing and/

or fixing rates and surcharges among competing carriers offers more benefits than

costs to shippers and consumers and recommends that limited antitrust exemptions

not be allowed to cover price-fixing and rate discussions.’’ 6

Based upon its considered deliberations, in April 2002, the OECD issued its Final

Report calling for the elimination of ocean carriers’ antitrust immunity. The OECD

concluded that ‘‘anti-trust exemptions for conference price-fixing no longer serve

their stated purpose (if they ever did) and are no longer relevant.’’ 7 Further, the

OECD stated, with regard to voluntary discussion groups, that the ‘‘ability for competitors to discuss sensitive market information regarding rates and to suggest pricing guidelines potentially serves to distort the market pricing mechanism, despite

assurance from carriers to the contrary.’’ 8 Finally, the OECD noted that while many

countries ‘‘at first, supported the principle of rate-fixing within conferences’’ they

have since ‘‘increasingly sought to reduce the power of liner conferences and provide

shippers with countervailing powers.’’ 9

Based in part on OECD’s recommendations, the European Union recently announced that it has launched an extensive review of its own antitrust exemption for

ocean carriers. In addition, the European Union recently prohibited ocean carriers

from jointly setting inland transport rates under the European Union’s antitrust

laws.10 The European Commission held, and a European court affirmed, that the

members of the conference had infringed upon their ocean carrier antitrust exemption by ‘‘agreeing [on] prices for inland transport services as part of a multimodal

transport operation for the carriage of containerised cargo between northern Europe

and the Far East.’’ 11

The ocean carriers’ argued that the establishment of inland rates among the conference members’ in-house or contracted trucking companies produced no appreciable effect on trade between Member States of the European Union.12 The court

rejected this argument and found that although ocean carriers were establishing inland rates for only some portion of port trucking providers, the practice produced

an anti-competitive distortion of the inland transport market. As in Europe, ocean

carriers in the United States dictate the inland rates for the majority, if not all, of

port trucking providers. As a result, the market for inland transportation services

is distorted because it is dictated by the ocean carriers, rather than by the natural

forces of supply and demand. The European Union now prohibits ocean carriers

from establishing rates for the inland transportation segment of intermodal freight.

Congress should follow this important decision and eliminate antitrust immunity for

ocean carriers and allow inland transport rates to be determined by a free market.

In conclusion, by allowing ocean carriers to continue to collectively set rates, even

through voluntary discussion groups, competition in the inland transportation segment will remain suppressed, and port drivers will suffer the results. Mr. Chairman, in 2000, critics of Mr. Hyde’s bill argued that we should wait two more years

and give OSRA a chance to work before stripping the ocean carriers of their antitrust immunity. In 2000, we argued against waiting because we feared that, in that

time, too many American port drivers would lose their trucks, their homes, and

14

their livelihoods. The decision to wait, in hope for increased competition among

ocean carriers, only has brought 50,000 port drivers closer to poverty and that many

families closer to despair. Our message is a simple one. We asked you then, and

we ask you again today, to end the systematic exploitation of port drivers by foreign-owned ocean carriers.

Mr. Chairman, thank you again for the opportunity to address this important

issue. I truly hope that Congress will take action to create a fair and sustainable

market place for the port trucking industry. Thank you.

Chairman SENSENBRENNER. Thank you, Mr. Hoffa.

Mr. Coleman.

STATEMENT OF ROBERT COLEMAN, CHAIRMAN, PACIFIC

COAST COUNCIL OF CUSTOMS BROKERS AND FREIGHT FORWARDERS ASSOCIATION

Mr. COLEMAN. Thank you, Mr. Chairman.

My name is Robert Coleman. I am chairman of the Pacific Coast

Council of Customs Brokers and Freight Forwarders Association.

This is an organization that represents people in the business of

providing international trade services to companies who manufacture products for export and who grow agricultural products for export. We also represent importers who import component parts. In

addition, I am speaking on behalf of the National Customs Brokers

Association of America and the Agricultural Ocean Transportation

Coalition.

We are all small businesses providing international trade services to American manufacturers and American importers. We generally represent small- and medium-sized businesses who manufacture products, who grow products, and importers who bring in component parts and finished products. These businesses that we represent are the backbone of our U.S. economy. They pay taxes, they

provide payrolls, they provide employment in every one of your districts.

Giant companies rise and fall, as we have all seen in the past

few months. It’s the small- and medium-sized business and entrepreneur who provides and helps maintain our economic stability.

This is not a case—as Mr. Hoffa alluded to, this is not a case of

a giant U.S. company versus a small U.S. company who simply

can’t be competitive in the marketplace. This is the case of foreign

and, in many cases, State-owned cartels who manipulate pricing

and capacity in regards to ocean transportation. In effect, they control my customer’s ability to sell his product, his U.S.-made product, into the foreign marketplace.

It also affects the U.S. marketplace, because most things today

tend to be imported. And when you and I go to the cash register,

the cost of ocean transportation has a very, very large role in the

price that we’re paying when we purchase products.

I think that my testimony has been submitted, but I wanted to

cover just a couple of new developments that have taken place

since I testified 2 years ago before Chairman Hyde then.

It’s important to note that Congress is not the only one looking

at this issue. You alluded to the OECD, who just issued a report

urging member countries to review antitrust immunity laws. The

European Community has continued to limit the exemption of antitrust carriers serving Europe. Ocean steamship carriers can no

longer collectively set rates for European inland cargo movements.

15

We’ve had recent cases where carriers have once again abused

the antitrust immunity for discriminatory purposes. The Transpacific Stabilization Agreement is a cooperative working agreement

among 14 ocean carriers serving inbound transpacific trade, which

incidentally covers 80 percent of the capacity in the eastbound

trades. These carriers are protected by antitrust immunity.

They have recently assessed nonvessel operating common carriers—which in layman’s terms are simply cargo consolidators,

which is what we do. We represent small businesses who do not

have the wherewithal to generate large container loads. And so we

provide that service to them, and then we deal with the steamship

lines.

They have added surcharges of more than $300 a container over

a direct cargo shipper, which is a discriminatory practice against

every one of my clients. The National Customs Brokers and Freight

Forwarders Association have filed a formal petition with the Federal Maritime Commission to look into this policy.

This spring is an example. We encountered a threat via the

Westbound Transpacific Stabilization Agreement specific to refrigerated containers. There was a scheme concocted that would basically penalize a carrier $1,000 per container if they released any

more refrigerated containers in 2002 than they did in 2001. This

has a devastating effect on any agricultural shipper.

I think that we just have to remember that transportation is a

huge component of the landed cost of U.S. products, both in the

United States and anything that’s sold abroad. We need to also recall that antitrust immunity has done nothing to protect the U.S.-

flag merchant marine. Antitrust immunity, which has existed since

1916, has declined and, in the past year, has disappeared completely.

The people who are testifying before you on behalf of former U.S.

companies are now employees of Dutch and Singapore companies,

which together with a Canadian company now own what is left of

the U.S. container fleet. Antitrust immunity didn’t save these companies.

Because of that, we support your act, sir.

[The prepared statement of Mr. Coleman follows:]

16

PREPARED STATEMENT OF ROBERT COLEMAN

17

18

19

20

21

22

23

Chairman SENSENBRENNER. Thank you, Mr. Coleman.

Mr. Koch.

STATEMENT OF CHRISTOPHER KOCH, PRESIDENT AND CEO,

WORLD SHIPPING COUNCIL

Mr. KOCH. Thank you, Mr. Chairman.

The Shipping Act we are discussing today just recently went

through an exhaustive review up here on the Hill. Four years of

congressional effort successfully produced the Ocean Shipping Reform Act, which just came into play in 1999. The bill was formed

with the complete involvement and agreement of American shippers, the port industry, carriers, seagoing labor, longshore labor,

and marine terminal operators.

That regulatory regime, administered by the Federal Maritime

Commission, is working as Congress intended. The FMC’s 2-year

report on the act confirms that, and the marketplace confirms that.

The OSRA regime does have a limited antitrust exemption, but

it is hardly blanket immunity, as our testimony points out. It is

limited and is part of an entire regulatory system administered by

the FMC. It is internationally understood and accepted. No nation

in the world applies its national antitrust laws to international

liner shipping.

It does not, as Mr. Hoffa said, provide antitrust immunity for

carriers to set trucking rates. And it has been identified by the

OECD as a model worthy of emulation around the world in a successful demonstration of how to get around the impasse over theoretical debates about the antitrust law’s application to this industry.

More importantly, the Shipping Act has successfully produced exactly what you would want from this international transportation

industry. There are no regulatory barriers to entry. There is a huge

array of carriers and services from which to choose. There are no

switching costs. There is intense price competition, which I’ll come

back to. There’s ample capacity to handle all importers’ and exporters’ needs at any time of the year. There’s high-quality service.

There’s an expert Government agency to deal with any problems.

And there are regulatory policies that work internationally, are accepted, and result in no conflict of laws. And it’s sufficiently stable,

where carriers continue to invest in this business.

Let me come back to one of those characteristics, which is intense price competition. As our testimony shows, there can be no

question that competition is fierce in this industry, that rates are

at historic lows, and that lines are losing hundreds of millions, if

not billions, of dollars this year.

Mr. Coleman has talked about the devastating effect on agricultural shippers, about the rates. The Department of Agriculture—

and this is a Department of Agriculture report issued just a couple

of months ago, and the Agriculture Department is not a historical

supporter of the maritime industry—said that rates are lower now

than they were in 2001 when they were perceived to be, ‘‘extraordinarily low,’’ that they are ‘‘remarkable,’’ and at times they are

below variable cost.

Shippers are increasingly worried also about the viability of shipping lines, according to the Department of Agriculture. One head

24

of a shippers’ association recently said: If I were a shipping line,

I would not accept some cargo. It’s not commercial.

Mr. Chairman, there is no shortage of competition in this industry. There is no problem that H.R. 1253 would fix in the port industry. The carrier, seagoing labor, and longshore labor do not support undoing the Shipping Act. The bill would further destabilize

an industry that needs to have confidence in what kind of regulatory environment it will be conducting its business in. That was

the reason for OSRA, and OSRA is working.

Several of my colleagues on this panel today have criticized the

Shipping Act. The Justice Department criticizes it, saying there is

not adequate competition but provides not a single fact to buttress

that argument. And they cannot identify any nation in the world

that applies antitrust laws to this industry.

Regarding the Teamsters’ issue, let me be clear again, ocean carriers do not have antitrust immunity under the Shipping Act to

agree on the rates they pay truckers. Mr. Hoffa criticizes the carriers’ limited antitrust immunity, ironically saying not that the system is insufficiently competitive but that it is too competitive and

that carriers’ antitrust immunity is resulting in carriers charging

their customers too little, and as a result, the carriers are taking

it out on the port drivers by trying to cut costs. The logic that antitrust immunity results in carriers charging U.S. importers and exporters too little is, at its very best, inconsistent with Justice’s view

and is plainly illogical.

Further, if H.R. 1253 were passed, it would do nothing to address

Mr. Hoffa’s fundamental concern except make it worse; H.R. 1253

would, amongst other things, destabilize an already highly competitive business, produce destructive competition, discourage investment, drive people out of business, and put more pressure on rates

paid to truckers not less.

Furthermore, even if the bill were enacted, ocean carriers would

still provide their customers with the through rates he talked

about, that Mr. Hoffa said are too low, even if they don’t have antitrust immunity, because that’s what the customers demand of the

ocean carriers.

The real difficulty that Teamsters have, which they testified to

2 years ago, is that U.S. labor and antitrust laws prevent the organization of port truck drivers, who are predominantly owner-operators rather than employees; H.R. 1253 doesn’t address that issue.

In conclusion, today the Shipping Act is working. Ocean carriers

and shippers under OSRA can now operate under individual confidential service contracts and do so. The system is intensely competitive. It does allow carriers to get together and have operating

agreements amongst themselves, which have lowered costs, improved efficiency and frequency of service, and provide for more efficient utilization of capacity.

Those agreements also do allow limited rate-stabilization discussions to try to help stabilize an industry plagued by overcapacity

and ruinous competition. It is internationally accepted, and it provides all the desired characteristics I mentioned earlier.

We appreciate the Committee’s interest in the industry, Mr.

Chairman. And we hope that a close analysis of the facts about the

25

industry and the Shipping Act will show the Committee that no

further legislation is needed in this area.

[The prepared statement of Mr. Koch follows:]

PREPARED STATEMENT OF CHRISTOPHER KOCH

SUMMARY AND OUTLINE OF WORLD SHIPPING COUNCIL TESTIMONY

I. INTRODUCTION

Congress just recently concluded an intense four-year review and reform of the

Shipping Act, which regulates international liner shipping. The Ocean Shipping Reform Act, which became effective in 1999, was developed by Congress with the support of shippers, ports, seagoing and shoreside maritime labor and carriers, and it

is working well. H.R. 1253 would repeal that successful compromise and is not supported by America’s ports, maritime labor or carriers.

II. CURRENT INTERNATIONAL LINER SHIPPING REGULATION

No nation applies its national antitrust laws to international liner shipping, nor

is there any need to do so (pp. 4–5). OSRA has fostered those industry characteristics that any effective economic regulatory system, however structured, should provide American commerce. Under the Shipping Act, as amended by OSRA, there are:

• No regulatory barriers to entry, and a wide array of carriers and competitive

services from which to choose (pp. 6–9)

• Intense price competition, and commercial freedom for carriers and shippers

to agree on mutually beneficial business arrangements (pp.6, 9–14)

• Ample capacity to handle normal trade flows, peak season or surge demand,

and the long-term growth of demand (pp.14–17)

• High-quality service, including reliable ocean and intermodal transportation,

and value-added logistics services (p. 18)

• Technological and organizational innovation, and adequate investment in the

continuous improvement of transportation infrastructure (p. 17)

• An expert government agency, the Federal Maritime Commission, to handle

any complaints or problems (pp 18–19)

• Regulatory policies that are internationally accepted and understood, so as to

minimize international conflict of laws (pp 19–20)

• A sufficiently stable regulatory environment to encourage the high levels of

capital investment required to meet the future needs of America’s trade

(p.20).

III. THE VALUE AND IMPACT OF THE INDUSTRY’S LIMITED

AND REGULATED ANTITRUST IMMUNITY

The regulatory system for this international transportation business must be

internationally accepted, and international comity must be respected. The Shipping

Act does that (p. 21). The existing regime also addresses the unique structural features of the industry which include (p. 22–25):

• High fixed costs to operate a regularly scheduled service

• Relatively inelastic demand for services (meaning that rate reductions very

rarely can increase the market demand for services)

• Significant mismatches in demand arising from chronic bi-directional trade

imbalances (import and export volumes often differ widely) and significant

fluctuations in demand

• Inelastic supply (carriers must maintain supply at consistent levels sufficient

to meet peak demand, yet are very limited in their ability to rapidly ‘‘flex’’

supply because of their large fixed sunk costs and the nature of liner shipping

which requires regular service and strings of vessels that call numerous different ports in a single voyage)

• ‘‘Lumpy’’ supply (capacity must be added or withdrawn in large units—namely entire strings of vessels, unlike a railroad which can add or subtract cars

from a train based on variation in demand)

• No regulatory barriers to new entry or capacity expansion

• Distortive government subsidization of shipping and shipbuilding.

26

1 A list of the World Shipping Council’s member companies is provided as Attachment A. Pursuant to the Rules of the House, the World Shipping Council states that it has received no federal grant or contract which is relevant to this testimony.

The Shipping Act does not provide carriers with unrestricted antitrust immunity,

but a carefully constructed regulatory system with ample safeguards and protections

(pp. 25–28). Under this system, carriers may operate under agreements filed and

overseen by the Federal Maritime Commission that enable and promote operational

cooperation and efficiency, and market discussions and diminished market volatility

(pp. 27–31).

IV. CONSEQUENCES OF REPEALING THE SHIPPING ACT’S SUCCESSFUL REGULATORY

SYSTEM

H.R. 1253 proposes radical surgery on a regulatory system that Congress just reformed and that is working well. The Antitrust Division of the Justice Department

has theoretical arguments for the benefits of antitrust law and has a preference for

it being the agency to regulate the industry, rather that the Federal Maritime Commission; but, it has no facts showing defects in the results of the present system.

The rationale for antitrust law—namely low prices, innovative service, and efficient

operations—is completely fulfilled under the Shipping Act. Prices are so low that

carriers are losing hundreds of millions of dollars. Service innovations and improvements are numerous and described in this statement, but continued improvement

will require lines to make profits that can be reinvested. Operational efficiency and

cost cutting have been a continuous quest for the industry; in fact, the industry uses

its immunity extensively in efficiency enhancing operational agreements. It is noteworthy that one consequence of the carriers’ constant, intense pursuit for efficiency

and lower costs—lower trucking rates—is the basis of the Teamsters’ erroneous

complaint about the Act (p. 14). The Shipping Act is a proven, internationally accepted regulatory regime. There is no reason to believe that H.R.1253 would produce

a superior system; in fact, if enacted, it would (pp. 32–36):

• Cause destructive competition, industry concentration, and fewer competitors

• Discourage investment and disrupt a reliable, efficient, and smoothly operating international transportation system, and

• Create a discordant, international regulatory dilemma.

STATEMENT OF THE WORLD SHIPPING COUNCIL

The World Shipping Council thanks the Members of the Committee for the opportunity to provide its views today on H.R. 1253, a bill to amend the Shipping Act

of 1984, as amended.

I. INTRODUCTION

The World Shipping Council is a non-profit trade association of over forty international ocean carriers, established to address public policy issues of interest and

importance to the international liner shipping industry. The Council’s members include the leading ocean liner companies from around the world—carriers providing

efficient, reliable, and low-cost ocean transportation for goods reaching billions of

people. The members of the World Shipping Council are major participants in an

industry that has invested over $150 billion in the vessels, equipment, and marine

terminals that are in worldwide operation today. The industry generates over a million American jobs and over $38 billion of wages to American workers. The industry

provides the knowledge and expertise that built, maintains, and continually expands

a global transportation network that provides seamless door-to-door delivery service

for almost any commodity moving in America’s foreign commerce. The Council’s

member lines 1 include the full spectrum of carriers from large global lines to niche

carriers, offering container, roll on-roll off, and car carrier service as well as a broad

array of logistics services.

The existence of an efficient and innovative international shipping industry, operating under maritime regulations that enjoy broad international acceptance, is of

critical importance to our member lines, to the international trading system as a

whole, and to the American economy which benefits from the smooth flow of international commerce. Governments around the globe periodically undertake reviews

of liner shipping regulatory policy. Those reviews, including those recently concluded by Australia, Canada, Japan, Korea and the United States, have all affirmed

that limited antitrust immunity, subject to appropriate safeguards and regulatory

27

oversight, remains the most effective and widely accepted regulatory regime for

international liner shipping. That remains the case.

In particular, the liner shipping industry worked closely with the Congress, American shippers, the U.S. public port community, and American maritime and shoreside labor to develop the broad consensus that led to Congress’ passage of the Ocean

Shipping Reform Act of 1998 (‘‘OSRA’’). OSRA was designed to achieve a dynamic

balance—one that initiated important and far-reaching changes in the way liner

shipping operates in U.S. international trades while preserving a stable, internationally accepted regulatory system. The agreement on which OSRA was based

involved three foundational principles for reforming liner shipping regulation: (1)

the ability of an ocean carrier and its customers to negotiate individual, confidential

contracts of their choosing without a carrier conference or discussion agreement inhibiting the parties’ ability to agree; (2) the removal of the former U.S. regulatory

requirements of public disclosure of contracts’ terms and ‘‘me too’’ requirements,

which prevented carriers from tailoring contracts to particular shippers’ needs; and

(3) continued limited, antitrust immunity for ocean carriers regulated by the Federal Maritime Commission.

Unlike industries such as aviation, trucking, rail service, telecommunications and

public utilities, which have been subject to governmental entry and pricing restrictions, or enjoy government-sanctioned monopoly status, the liner shipping industry

has always been characterized by free entry and abundant price and service competition. Consequently, the savings and efficiencies that resulted from the elimination of governmental restrictions and protection in these other industries cannot

be obtained by repealing the limited antitrust immunity that applies in liner shipping. Indeed, the forces of supply and demand dominate the economics of liner shipping, and, in conjunction with the present maritime regulatory regime, ensure that

the inefficiencies that have existed in those other regulated industries are not

present in liner shipping.

II. CURRENT INTERNATIONAL LINER SHIPPING REGULATION

No country applies its national antitrust laws to international liner shipping.

Nor is there any need to. There is no shortage of competition, innovation, efficiency or investment. There are no government or regulatory barriers to entry that

need to be removed. There are no route regulations to remove. There are no rate

regulations to remove. There are no government monopolies to break up. There are

no restrictions on marketing to be removed. There are no nationality investment requirements. There are no bottlenecks or chokeholds that warrant regulation. There

are no significant ‘‘switching costs’’ to address. There are no captive customers to

protect.

In 1999, the Shipping Act’s regulatory regime governing this industry underwent

significant reform pursuant to the Ocean Shipping Reform Act (OSRA). That law

took four years of Congressional effort to enact, and it achieved a hard-won, but

broad, consensus among labor, port, shipper and carrier interests. That effort has

been a success.

OSRA has fostered industry characteristics that any effective economic regulatory

system, however structured, should provide American international trade. Specifically, in liner shipping today, one finds:

• No regulatory barriers to entry, and a wide array of carriers and competitive

services from which to choose

• Intense price competition, and commercial freedom for carriers and shippers

to agree on mutually beneficial business arrangements

• Ample capacity to handle normal trade flows, peak season or surge demand,

and the long-term growth of demand

• High-quality service, including reliable ocean and intermodal transportation,

and value-added logistics services

• Technological and organizational innovation, and adequate investment in the

continuous improvement of transportation infrastructure

• An expert government agency, the Federal Maritime Commission, to handle

any complaints or problems

• Regulatory policies that are internationally accepted and understood, so as to

minimize international conflict of laws

• A sufficiently stable regulatory environment to encourage the high levels of

capital investment required to meet the future needs of America’s trade.

The existing liner shipping regulatory regime is remarkably successful and is providing American commerce with excellent choice, service and value. Today a VCR

28

2See, for example, the supply, demand and capacity utilization data provided in the March

22, 2000 Mercer Management Study in ‘‘Hearing on the Free Market Antitrust Immunity Reform Act of 1999’’. Pages 17 through 20 of that study contain figures for the major U.S. trades. 3Drewry Container Market Quarterly, September 2000, p. 15.

can be transported from Hong Kong to the West Coast of the United States for 70

cents; a bottle of beer can be transported from Europe to North America for 3 cents;

a pair of athletic shoes can be moved from Asia to North America for 40 cents. As

global trade has flourished, expanding faster than our domestic economy, the liner

industry has consistently provided a reliable, efficient global transportation network

to handle America’s trade growth at lower per unit costs.

The efficiency of liner shipping has helped American exporters from every state

develop and maintain markets around the world for a variety of commodities, ranging from paper and forest products, to pharmaceuticals, from fruits and vegetables

to chemicals, from poultry and beef to cotton, and from machinery and automobile

parts to frozen fish.

The industry has also provided American consumers and businesses with inexpensive access to a vast array of goods from around the world, including 75% of the

apparel and 95% of the footwear worn in this country, food products and beverages

from around the world, electronic goods and bicycles, furniture and household appliances, auto parts and tires, machinery and tools, marble and tile, computer equipment and copiers, flowers and kitchenware, coffee and beer, manufacturing components and supplies, and thousands of other goods. Last year, the liner shipping industry transported roughly $500 billion worth of American commerce, or $1.3 billion

of goods per day, through U.S. ports. That represents roughly 4.8 million containers

of export cargo, and 7.8 million containers of import cargo.

Although most Americans never stop to think about it, their homes are filled with

an enormous array of products that liner shipping has transported from abroad at

exceptionally competitive shipping rates. Last year, the cost of transporting all of

these goods—all of America’s oceanborne liner imports, including industrial and

non-consumer goods—was only $133 per American household. That’s an amazing

bargain.

The benefits to American commerce of the existing regulatory regime are considerable.

1. No Regulatory Barriers to Entry and a Wide Array of Service Choices

Ocean carriers are able to offer international service without governmental restriction on entry. Compared to other modes of international transportation, such

as aviation with its bilateral treaties and agreements that restrict air carriers as

to where they can fly, how frequently, and how much capacity they can offer, liner

shipping markets are impressively open and efficient. This freedom of market entry

helps promote an extensive array of carrier services at competitive prices. New entrants and established incumbent carriers can expand and reconfigure their services

as they believe the market warrants.

It is worth keeping in mind this comparison between the relative freedom of liner

markets and the bilateral regimes and attendant restrictions of international aviation when considering what alternatives might result from a decision to repeal the

industry’s limited antitrust immunity. Atomistic competition among individual lines,

with the most efficient carriers being the ‘‘winners’’, is neither the inevitable outcome of such a step, nor necessarily the most likely.

Free entry in liner shipping minimizes the risk that any carrier or group of carriers can dominate the market and impose above-market rates. Open trades help

ensure that rates reflect the existing, and expected, market conditions of supply and

demand. With no restrictions on new entrants or on the ability of incumbent carriers to adjust their capacity or service, as they deem appropriate, unmet demand

for vessel space is at worst a rare and short-lived phenomenon at peak seasons.

Despite the continuing and rapid growth in demand for liner service, overcapacity

is far more common in the industry than are space shortages.2 Even in those rare

instances where unforeseen economic circumstances result in a strong sellers’ market, new entry and/or expansion by incumbent lines provides the additional capacity

needed to ensure adequate service. For example, when the Asian export boom to the

United States produced unexpectedly high demand for vessel space and equipment

during the trans-Pacific trade’s 1998 peak season, and demand that strained available vessel space, the dramatic entry by more than a half-dozen lines in 1999 eliminated the space shortage. Indeed, in 1999, there was an increase in capacity deployed in the Asia/North America route of more than 23 percent.3 That strong capacity growth also reduced the upward pressure on rates. Furthermore, those new

entrants have remained in the Asia/North America trade, and some lines that had

29

4For example, Containerization International’s November 2000 issue noted that the president

of China Shipping Group has stated his intention of growing its container line, China Shipping

Container Line, into one of the top five carriers in as many years. The CI article points out

that CSCL had expanded it slot capacity 70 percent in the previous 12 months, and would likely

double its fleet over the next two years. Today, CSCL ranks number 15 in total cargo carried

in U.S. trades. Similarly, Sinotrans announced last week that it will launch its first string of

containerships in the trans-Pacific beginning in late June. Journal of Commerce, May 28, 2002. 5FMC OSRA Impact Final Report, September 2001, p. 18.

virtually no presence in that trade prior to 1999 have announced plans to introduce

enough new tonnage to make them leading carriers in the trade in but a few years.4

In spite of some industry consolidation, the liner industry is still far from concentrated. The shipping public has a wide array of carriers and variety of shipping

services from which to choose. For example, only one carrier has a market share

above 7.5 percent, and the top ten carriers combined account for only 57.5 percent

of the total containerized cargo carried (exports and imports combined) in U.S.

trades.

In addition to the existing competition among ocean carriers, non-vessel-operating

common carriers (NVOCCs) provide an additional element of price competition, and

are gaining in market power. NVOCCs dominate the less-than-container-load business and are increasing their share of the full container load business. A recent

FMC review of a random sample of service contracts showed that NVOCCs were

parties to approximately 25 percent of the contracts filed with the Commission.5

NVOCC’s control roughly 30 to 40% of the cargo moved. NVOCCs directly compete

against ocean carriers for the business of proprietary shippers, creating another

source of competition in addition to the intense competition among shipping lines,

by purchasing space from ocean carriers on a ‘‘wholesale’’ basis and reselling the

space to shippers on a ‘‘retail’’ basis.

Another important factor in making the existing open system even more competitive are the minimal ‘‘switching costs’’ involved in a shipper’s decision to move its

business from one ocean carrier to another. Mercer Management, in its analysis of

the industry, found that ‘‘100 percent of the shippers surveyed consider switching

costs to be insignificant or zero’’ and that shippers ‘‘are ready to switch carriers

30

6Statement of Mercer Management Consulting, Inc. before the U.S. House Committee on the

Judiciary, Hearings on the Free Market Antitrust Immunity Reform Act of 1999, March 22,

2000, p.16. 7Section 18 Report on the Shipping Act of 1984, Federal Maritime Commission, September

1989. 8 Clyde, Paul S. and Reitzes , James D., ‘‘The Effectiveness of Collusion Under Antitrust Immunity,’’ Bureau of Economics Staff Report, Federal Trade Commission, December, 1995. The

study expands on work that began when the authors were DOJ and FTC staff serving with the

Advisory Commission on Conferences in Ocean Shipping.

without hesitation.’’6 As a practical matter, a shipper can easily move its cargo to

the carrier offering the combination of rates and service that best fits the shipper’s

current needs.

In short, the absence of regulatory barriers to entry, the large number of liner

services available, and low switching costs, ensure an open trade in which shippers

enjoy an abundance of competitive choices.

2. Market-Driven Price Competition and Freedom of Contract

Supply and demand play the determinative role in establishing liner shipping

rates and promoting customer-responsive service. The evolution of traditional conferences into more flexible organizational forms in recent years, and the attendant

dramatic increase in one-to-one contracting, have produced a more efficient and responsive negotiating process that results in business arrangements that are better

tailored to the needs of individual shippers.

Past empirical studies of U.S. liner trades, even in the pre-OSRA environment,

confirmed that market forces operate effectively in liner markets, producing competitive rates that are driven by supply and demand. An FMC study using quarterly

rate data for the major commodities moving in eighteen U.S. trades between 1976

and 1988 found that fluctuations in the supply of and demand for liner shipping

services were the basic cause of rate changes that occurred after implementation of

the Shipping Act of 1984.7

A Federal Trade Commission staff report 8 produced by economists from the U.S.

Department of Justice’s Antitrust Division and the Federal Trade Commission’s Bureau of Economics, was a subsequent econometric study using the same FMC data

set. That study found no statistically significant relationship between freight rates

and the market share of the conference serving the route—demonstrating that conferences did not act as effective cartels. The authors further observed that ‘‘it is also

possible that conferences provide some offsetting benefits, such as increased efficiency in providing a network of ocean transportation services.’’

Two other findings from the FTC staff report’s analysis of U.S. trades are worthy

of attention in light of current regulatory policy and industry practices.

• The level of freight rates is significantly lower on routes where conference

members are free to negotiate directly with shippers.

• Increases in market concentration are associated with statistically significant,

but economically small, increases in freight rates.

Today, as the FMC’s two-year study on OSRA’s impact makes clear, carriers and

shippers enjoy full commercial freedom to negotiate freight rates and terms of service. According to the FMC’s study, service contracting has more than doubled since

OSRA took effect, with reports that 80 percent or more of the cargo moves under

contracts. And 98 percent of the contracts in the FMC’s sample study were individual, confidential contracts.

Thus, OSRA’s contract reforms have eliminated just the sort of conference and

regulatory control over members’ ability to negotiate individual, confidential contracts that concerned the authors of the FTC study.

The other potential issue identified in the FTC study is that substantial market

concentration, while currently not an issue in the industry, could increase freight

rates. As discussed in Part IV of this testimony, if the Shipping Act’s limited antitrust immunity were repealed, destructive competition and market instability

would, among other things, lead to rapid industry concentration and higher costs

for shippers.

Any review of shipping trade publications will show that the liner industry is constantly focused on supply and demand interactions, and the economic pressures of

highly competitive rates.

An examination of the change in average freight rates in the 20 years prior to

the passage of OSRA in our two major East/West trades gives some sense of the

chronic financial challenges that the liner industry faces.

31

9Paul F. Richardson Associates, Inc. ‘‘Pricing Dilemma in the Global Container Industry’’,

May 5, 1999, pages 9–15. 10For additional details see Containerization International, October 2000, ‘‘On the Mend,’’

pages 53–57.

Similarly, a 1999 study of the major U.S. trades from 1985–1998 found that, with

the exception of the eastbound trans-Atlantic trade, all of the major U.S. markets

recorded losses, with rates declining approximately 25 percent (even before being

adjusted for inflation) over the fourteen-year period. Carrier losses on the major

trade lanes for 1998 alone were estimated to exceed $3 billion.9

During 1999 and 2000, trade conditions supported the carriers’ revenue recovery

efforts. In 1999, the recovery mainly was assisted by the combination of a general

rate increase in the eastbound trans-Pacific trades and a 13 percent increase in

cargo volume, on top of the two previous years’ cumulative volume growth of over

33 percent. A strong recovery in the intra-Asia trades also contributed. In 2000,

there were also improvements in the Europe-Asia-Europe trades and other routes.10

Unfortunately, the recovery didn’t last long. By 2001, deteriorating international

economic conditions, and especially the unpredicted slowdown of the U.S. trades, led

to a sharp decline in international trade.

The following charts illustrate rate trends in various U.S. trades in the period

from 1985 to 2000. They show an overall reduction of ocean transportation costs.

The surge in 1999 and 2000 eastbound trans-Pacific cargo resulted in an upturn in

rates in that trade due to high capacity utilization, but the unbalanced westbound

direction of that trade (with poorer capacity utilization) saw rates fall. That is what

one would expect from supply-demand dynamics.

32

11Source: Paul F. Richardson Associates (2001) 12 Id. The three major U.S. trades are the trans-Pacific, the trans-Atlantic and the East Coast

United States-East Coast South America.

These charts 11 show rates for ocean transportation in 2000 lower than they were

15 years ago, even without adjusting for inflation. The following chart 12 compares

import and export rates in the major U.S. trades (not adjusted for inflation) with

the consumer price index, a general measure of economy-wide inflation.

33

13The Drewry Container Market Quarterly, March 2002, page 1. 14 ‘‘Service Over Rates: With freight rates at historic lows, US agriculture exporters are demanding—and receiving—expanded service terms from ocean carriers,’’ JoC Weekly, February

11–17, 2002, pages 30–31. 15 Agricultural Marketing Service, ‘‘Agricultural Ocean Transportation Transportation

Trends,’’ December 2001, at www. ams.usda.gov/tmd/AgOTT/December%202001/Dec2001—content.htm.

And when one looks at what has been happening to rates since 2000, it is clear

that the historical downward trend continues. The current imbalance between the

supply (available capacity) and demand for liner shipping has generated a deep decline in rates. Lines ordered new capacity based on the projected double-digit growth

of U.S. container volumes. However, the value of U.S. liner imports actually declined slightly in 2001, and the already imbalanced, ‘‘backhaul’’ export trades grew

by less than 3 percent, while available capacity grew by nearly 11 percent. Drewry

consultants reported that in the main east/west trades carriers were reporting average decreases in freight rates of between 15 and 50 percent in 2001.13

In the trans-Pacific inbound trade, average revenue per forty-foot container in

March of 2002 was approximately 24 percent below what the rate was in March

2001.

According to a semi-annual survey conducted by the U.S. Department of Agriculture, American shippers of agriculture goods have reported that they are able to

obtain most of the service elements they are requesting in contract negotiations, and

rates are so low that they are not an issue. Well over 90 percent of containerized

agriculture shipments are moving under service contracts, as envisioned by OSRA.14

Specifically, the USDA’s December 2001 report on ‘‘Agricultural Ocean Transportation Trends’’ 15 states that:

• ‘‘The rates for U.S. outbound dry containers, particularly westbound transpacific rates, are approaching historically low levels. Virtually all U.S. agricultural exporters are paying less for transportation than they were in early

2001 when rates were already perceived to be extraordinarily low.’’

• ‘‘It is remarkable that commodities are reportedly moving in certain transpacific, westbound trades at $225 per 40-foot equivalent unit. Shippers appear

increasingly concerned as to the continued viability of these trade lanes.’’

• ‘‘Rates are so uniformly low, they are no longer the primary determining factor for carrier selection. There is a presumption that rates will hit ‘‘rock bottom,’’ so, while agricultural shippers continue to keep an eye on the overall

rates (the base rate plus the surcharges), carriers are now primarily selected

according to service capabilities.’’

In fact ocean freight rates in the major east-west trades were so low by the end

of 2001 that the general manager of the Unaffiliated Shippers of America was

34

16 ‘‘Carriers’ Winter of Discontent,’’ JoC Week, December 10–16, 2001, p 19. 17Section 10(c)(4) of the Shipping Act of 1984, as amended (46 App. U.S.C. 1709(c)(4)). 18FMC’s OSRA Report, September 2001, p. 41–42. The Teamster’s complaint that U.S. labor

laws make it difficult to organize independent owner-operator truckers is beyond the scope or

competence of the shipping or antitrust laws. 19These capacity numbers, while substantial, do not convey the full impact of the new vessels

placed into service. In fact, each new vessel is employed many times over in the course of a

year. For example, in the trans-Pacific trades a vessel in a string of 5 ships makes approximately 10.4 roundtrip voyages per year. Thus, one new 5,000 TEU vessel deployed in the transquoted as saying: ‘‘If I were a shipping line, I would not accept some cargo. It’s not

commercial.’’ 16

There is no lack of intense competition in the liner industry.

Teamster Allegations

Before concluding this discussion of the marketplace, it is appropriate to address

the International Brotherhood of Teamsters’ arguments against the limited antitrust immunity provide under the Shipping Act. Ocean carriers do not have antitrust immunity to collectively negotiate or set the rates they pay truckers or railroads. 17 The Teamsters, however, complain that ocean carriers are using antitrust

immunity to agree to through rates (a rate that includes the ocean and inland transportation, such as between Shanghai and Chicago) with American importers and exporters that are too low, and then, as a way to deal with these low rates, don’t pay

port truck drivers enough. It is true that port truck drivers are not highly compensated. It is simply not true that carriers’ limited antitrust immunity is the problem or results in carriers charging their customers too little or in mistreating truckers. The Teamsters’ allegations before this Committee two years ago were thoroughly reviewed by the Federal Maritime Commission, which found them to be

without merit.18 It is also worth noting the irony that the Justice Department, with

no facts, today argues ocean carriers’ rates are too high, while at the same time the

Teamsters argue that ocean carriers’ rates are too low. Ocean carriers’ rates are in

fact too low and currently are resulting in large losses for the lines. But the problem

is the imbalance in supply and demand, not antitrust immunity.

3. Ample Capacity to Meet Demand

There is today no international liner trade without adequate capacity to serve the

trade’s needs. And because of the lack of barriers to entry and the industry’s con- fidence in today’s regulatory system, there is no market that will not see capacity

added as market conditions warrant. As nations around the world have liberalized

their trade policies, international cargo movements have increased dramatically,

with the growth rates being even more rapid for cargo carried by the liner shipping

industry. This has created a large demand for additional shipping capacity. The

liner industry has succeeded in increasing its capacity to service this increase in demand.

How the liner industry has increased the capabilities of its international transportation infrastructure to handle the 112% percent growth in the international liner

trades in the last ten years is a story of quiet success. More to the point for purposes of this hearing, the regulatory system that fosters that achievement—the

Shipping Act of 1984—is an essential part of that success.

Worldwide, it has been estimated that over the last seven years (1995–2001) the

liner industry has grown the capacity of the dedicated containership fleet on an average of about 12.3% per year. In the last three years (1999–2001), approximately

1.3 million TEUs of new capacity have been added, 19 and the forecast for capacity

35

Pacific adds roughly 52,000 TEUs of new annual carrying capacity in each direction, or 104,000

TEUs of new annual capacity for the roundtrip. 20Drewry Container Market Quarterly, March 2002, p. 39 (Table 3.9). 21Drewry Container Market Quarterly, March 2002, p.64 (Table 5.2).

to be delivered this year (which was ordered before the economic slump and September 11) indicates a larger increase.20

These large increases in capacity were all added by the industry to meet the remarkable rate of actual and projected growth of America’s foreign trade. Consider

the example of the eastbound (U.S. imports) trans-Pacific trade, which is the largest

trade in the world; it experienced the following recent double-digit year-to-year

growth of container volumes:

At the Committee’s last hearing on this issue, there was discussion of the period

in 1998 when trade growth was so rapid in the eastbound trans-Pacific trade that

demand temporarily exceeded supply. The industry, in fact, committed to build the

capacity that was projected necessary to handle America’s booming trade growth,

adding 34 percent additional capacity in 1999 and 2000, 21 and with the long lead

times required for ship orders, receiving additional capacity in 2001 and 2002. Unfortunately, the economy suffered an unexpected slowdown and foreign oceanborne

trade volumes exhibited virtually no growth. As a result, the industry has been

struggling with the resulting overcapacity that it had committed to bring on line to

serve the projected needs of the trade.

Even if one considers only the level of investment in new vessels represented by

this capacity increase, the industry’s commitment to meeting the growing demand

for ocean transportation services is impressive. But carrier investment in capacity

goes well beyond the introduction of new vessels. It also includes investment in tens

of thousands of standard 20-foot and 40-foot containers, as well as specialized equipment routinely provided by many lines, including flat rack, hard-top and open-top

containers, 45-foot containers, reefer containers, high-cube containers, hangertainers

(for apparel), and bulk containers. Carriers also operate inland container depots,

container freight stations, and transloading facilities to allow their customers greater flexibility and efficiencies. Shippers require increasingly efficient terminal facilities and intermodal connections, adequate rail service, and on-line booking, documentation, tracking and payment services. These sorts of ‘‘capacity’’ are also crucial

to ensuring an efficient ocean transportation system.

As discussed later in Part III of this testimony, the liner industry faces significant

challenges in planning its investments to meet growing market demands, including

long lead times in ordering and building new ships, ‘‘lumpy’’ supply additions,

mismatches and fluctuations in demand, and the need for accurate trade growth

forecasts of international markets.

36

One of the reasons that capacity has been added to meet the increasing transportation demands of the various trades is the flexibility carriers have to use their limited, regulated antitrust immunity to discuss a particular market’s needs. By sharing the costs and risks of the added assets, and by having the ability to discuss existing and projected demand and what rates the market conditions may support, orders for new capacity and the ability to meet market demands for expanded service

are facilitated. Whether as a foundation for cooperative operational agreements, or

as a foundation for conferences or other market discussion agreements that give a

carrier better information to justify making new service or capacity decisions, limited, regulated antitrust immunity ensures that adequate capacity is made available

to meet any market’s growing demand.

4. Innovation and Investment

As a service industry, liner shipping has demonstrated an impressive history of

continuous technological and organizational innovation. From the initial

containerization of international routes in the mid-1960s, through the development

of cellular vessels, the implementation of intermodal service via dedicated stack

trains, and the provision of increasingly sophisticated special equipment (such as

temperature and humidity controlled reefer containers), to the latest efforts to establish on-line services, including the development of multi-carrier internet platforms, the industry continues to invest in technological innovations that increase efficiency, expand markets, and contribute to better management of resources.

Marine terminal automation, on-dock rail facilities at terminals to speed shipments by rail, and increasingly sophisticated tracking and tracing systems are examples of additional assets developed as part of liner companies’ on-going efforts to

better serve their clients. Carriers are also establishing improved distribution operations, including programs that give total visibility to a customer’s cargo flow, that

facilitate a shipper’s ability to mix international and domestic freight to build full

truckload shipments, and that substantially minimize delivery costs. Cooperative

supply chain reviews of customers’ operations are another service that can enable

liner companies to add value, increase inventory visibility, produce measurable results, and reduce costs for shippers. This commitment to innovation pays off for the

shipping public in faster, safer, and more transparent inventory flows.

Organizational innovation has also been important. Carriers have established

operationally integrated multi-trade alliances that provide shippers with:

• Broader service networks with more port calls

• Additional capacity

• More frequent service

• Shorter transit times, and

• Reduced waiting time and fewer transshipments.

By reducing each carrier’s share of the investment and risk involved in developing

and expanding their service networks, such alliances reduce costs and improve efficiency. That in turn expands the options available to the lines’ customers, and helps

reduce their overall transportation, distribution, and administrative costs.

5. High Quality Service

At present the liner industry not only provides the shipping public with a reliable

and relatively inexpensive ocean transportation system complete with modern terminal services and intermodal links, it is continually working to improve that system. Such improvements include faster and more efficient vessels that allow reductions in per unit costs; modern, technologically advanced terminal handling systems

and equipment; and a growing list of related logistics services.

Working with individual customers to meet special needs and reduce customer

costs, carriers conduct supply chain reviews, address cargo consolidation and

deconsolidation needs of shippers, provide dedicated customer service representation, develop contracts that combine multiple services, perform quality assurance inspections, and offer an assortment of other customized services.

For example, ocean carriers have developed considerable expertise in moving temperature and humidity sensitive goods. Their sales and marketing personnel can assist agricultural shippers, not only in operational matters such as how best to load

cargo in a container, but in helping identify potential markets for their goods. The

liner industry’s successful efforts to develop atmosphere-controlled refrigerated containers actually helped shippers develop some markets by providing technologically

acceptable, and less expensive, ocean transportation for perishable commodities that

previously could only be shipped by expensive air freight.

37

22 Canadian Transport Ministry Press Release, March 1, 2001.

In a commercial environment dominated by individual contracting and characterized more and more by the use of business-to-business e-commerce systems, the

services that lines offer are increasingly customized and involve greater participation in customers’ supply chain management efforts, involving both the physical

movements and the attendant information flows.

Individually, lines are committing substantially more resources to develop and implement value-added logistics services of all kinds. These services allow carriers and

their customers to reduce the time involved in packing, haulage, and consolidation

of cargo prior to ocean shipping, and follow-on stripping and delivery in ways that

sharply reduce lead-time, reduce inventories and associated costs, and increase customers’ net profits.

Collectively, members of the industry are developing multi-carrier electronic channels to make it easier for shippers to conduct business with multiple providers using

common standards for core business transactions (such as booking, documentation,

and tracking shipments).

6. Regulatory Expertise

International liner shipping is subject to oversight and regulation by the Federal

Maritime Commission, which is responsible for identifying and, if needed, addressing any anti-competitive conditions or other problems that might arise in the industry. The FMC has well-tested procedures for acting on formal and informal complaints that may arise, and extensive authority to conduct investigations and take

appropriate corrective action when warranted.

The Commission reviews all carrier agreements filed in the U.S. trades before

they become effective, including detailed information forms that are submitted with

proposed agreements. The Commission has an extensive monitoring program in

place that covers all U.S. trades. Its monitoring program includes the review of conference and discussion agreement meeting minutes, and detailed quarterly economic

reports filed by conferences and discussion agreements. Since the implementation

of the Ocean Shipping Reform Act in mid-1999, that monitoring program has been

supplemented by access to the Commission’s service contract database that includes

the rates and terms of all service contracts filed with the Commission. The Commission also has the authority to issue information demands if it has concerns about

agreement activities.

In addition to its agreement review and monitoring program, the Commission

staff has developed its industry expertise by conducting or participating in several

high-profile industry studies (including the five year review of the Shipping Act of

1984, the Advisory Commission on Conferences in Ocean Shipping Study, and the

FMC’s recent OSRA Impact Study). It has also conducted a number of major fact

finding investigations, and regular, informal, industry interview projects covering

special topics.

7. Internationally Accepted Regulatory Policies

The United States and its trading partners have consistently recognized the special situation and characteristics of international liner shipping. Consequently, Congress created the successful regulatory regime under the Shipping Act, which includes, as one component, a limited exemption from our national antitrust laws, just

as all our trading partners have done. In addition to Congress’ passage of OSRA,

which became effective in 1999, in the last few years alone, a number of nations

have conducted thorough reviews of their national liner shipping policies and have

made what they considered appropriate adjustments to their maritime laws. For example:

• The Australian Parliament passed legislation in 2000 to amend Part X of the

Trade Practices Act of 1974.

• The Canadian government has undertaken an extensive review of the Shipping Conferences Exemption Act and found that: ‘‘Conferences play an important role in Canada’s foreign trade, providing stability and reliability in shipping services for Canadian shippers, importers and exporters.’’22

• Japan implemented amendments to its Marine Transportation Law.

• South Korea implemented amendments to its Marine Transport Act.

In every case, limited exemption from the national competition/antitrust laws has

remained an essential feature of the revised regulatory regimes. In every case, proposals to repeal the industry’s limited antitrust immunity were rejected.

38

23 ‘‘Competition Policy in Liner Shipping’’, OECD Division of Transport, Final Report, April

2002, p.78. 24 Id. at p. 80.

Indeed, even the most recent report by the OECD’s Transport Division staff on

Competition Policy in Liner Shipping:

• ‘‘does not call into question the principle of limited anti-trust exemptions for

operational agreements in liner shipping’’ 23 as H.R. 1253 does, and

• as to the limited antitrust immunity afforded to rate matters, commends the

Ocean Shipping Reform Act in the United States and its principles as a model

for other OECD member nations to use if an when they review their shipping

regulatory laws, and states OSRA’s ‘‘principles represent a way out of the carrier/shipper impasse. . . . They can, and are meant to, co-exist side-by-side

with a regulatory regime that continues to extend anti-trust exemptions to

price-fixing and rate discussions in the liner-shipping sector.’’ 24

That is what Congress intended three years ago when it implemented OSRA. Congress succeeded, and its success should not be disturbed.

8. Relatively Stable Regulatory Environment

Many of the positive characteristics that have been discussed so far—such as high

quality service, ample capacity, and on-going technological innovation—depend on

the ability and willingness of carriers to continue to make massive capital investments to expand and modernize their assets. That ability and willingness depends,

in turn, on the lines’ expectations that they can, over the long term, achieve a reasonable level of profitability that would justify such large investments.

The industry has made huge investments in new terminals, equipment, information technology, and larger vessels to achieve economies of scale, developed alliances

to take advantage of economies of scale and scope, and invested in new technologies

that made possible significant cost savings. Those efficiency gains and cost reductions have been passed on to shippers in lower rates and improved service.

Forecasts of the growth of demand for liner shipping over the next decade are as

impressive as they will be challenging to accommodate. One common estimate is

that the amount of cargo being transported in liner shipping is likely to double by

2020, with the highest growth rates in the Far East, South Asia and South America.

To keep pace with such an increase in demand, carriers will need to invest an estimated $100 billion in new vessels and containers alone. Expenses for additional

maritime terminal capacity, efficiency-enhancing information technologies, and

other related investments—such as enhanced security measures in the post-September 11 environment—will have to be added as well.

Given the forecast trade growth, the cyclical nature of liner markets, and the

problem of chronic trade flow imbalances, ocean carriers face significant and difficult challenges in their planning and investment decision making. It is in both carriers’ and shippers’ interests that the stability of the current regulatory environment under the Shipping Act not be undermined. If investments in new vessels,

equipment, and marine terminal assets do not keep pace with growing demand, or

if regulatory changes and uncertainty produce substantial industry concentration

and an oligopoly market structure, the benefits of today’s commercial environment

would be lost.

Under the current regulatory regime, shippers enjoy a wide choice of carriers continuously trying to improve service, and enjoy rates that trend down over the longterm. For such service and price stability to be maintained, it is important that carriers have sufficient confidence in the marketplace to continue making the high levels of capital investment needed to meet future demand. While carriers’ limited and

regulated use of antitrust immunity can not overcome the forces of supply and demand, it does improve the lines’ market knowledge, increase carrier confidence, and

provide increased market stability.

III. THE VALUE AND IMPACT OF THE INDUSTRY’S LIMITED

AND REGULATED ANTITRUST IMMUNITY

Today’s regulatory environment offers carriers and shippers each of the desired

characteristics of a transportation system discussed above. However, the continuation of those beneficial conditions ultimately depends on a reasonable level of market stability and continued carrier investment and innovation to meet the growing

and increasingly sophisticated demands being made on the system. The Shipping

Act, as amended by OSRA, is internationally accepted and understood, and results

in an efficient, highly competitive transportation network that is providing excellent

39

25 Vessel services generally call at multiple countries, not just two. It is not uncommon for

a single service string to call in seven or more countries, serving literally thousands of pointto-point service offerings. As just one example, NYK Line operates a service to and from the

U.S. East Coast that provides direct services to Taiwan, the Peoples’ Republic of China, Thailand, Singapore, Sri Lanka, Italy, Canada and Saudi Arabia. The regulatory exposure faced by

ocean carriers is not merely bi-national, but global. 26 In the case of most commodities, industry rate reductions do not induce additional volumes

and associated revenues. In the case of VCRs shipped from Hong Kong to the United States,

for example, if carriers provided free ocean transportation, that would change the cost to the

VCR consumer by less than a dollar (assuming the entire reduction were passed on, which is

questionable), hardly enough to stimulate VCR sales.

service to the world’s expanding commerce. This recently validated and successful

system should not be disrupted.

The Shipping Act’s regulatory regime with limited, regulated antitrust immunity

should be analyzed in the context of the unique commercial environment in which

the liner shipping industry operates. The inherently international nature of the industry requires a consistent, internationally accepted regulatory framework, which

is what the Shipping Act of 1984, as amended by OSRA, provides.

1. International Comity

In this age of globalization, many companies have become transnational entities.

That is, they operate plants, or sub-contract work to production facilities in a variety of countries. In such cases, the business unit operating in the firm’s home country is subject to the laws and regulations that apply there, and units operating in

foreign countries are, in turn, subject to the relevant foreign statutes and regulations. Corporate headquarters needs to be aware of all the relevant regulations, foreign and domestic, but each separate operating unit is subject only to the national

laws obtaining in its geographic location.

Liner shipping, on the other hand, is a truly international industry. That is, its

operations (the carriage of goods between different nations) are simultaneously subject to the maritime laws and regulations of two or more nations. As a result, it

is necessary to the maintenance of an efficient ocean transportation system that

conflicts between national regulatory regimes be minimized. Serious problems affecting international commerce could result if, for example, the United States sought

to enforce a strict antitrust policy in its trades, while its trading partners adopted

a regulatory regime that provided liner shipping with limited antitrust immunity.

Because liner shipping operations are global in scope, the potential for conflict is

not limited to bilateral differences in maritime policy.25 This simultaneous application of potentially conflicting national competition policies is precisely why it remains essential to the smooth flow of international commerce to retain the existing,

broadly based consensus on liner regulation.

2. International Liner Shipping Market

Liner shipping is characterized by a unique set of economic and political features

which, taken together, can produce unstable cycles with respect to both rates and

space availability. These characteristics include:

• High fixed costs to operate a regularly scheduled service

• Relatively inelastic demand for services (meaning that rate reductions very

rarely can increase the market demand for services) 26

• Significant mismatches in demand arising from chronic bi-directional trade

imbalances (import and export volumes often differ widely) and significant

fluctuations in demand

• Inelastic supply (carriers must maintain supply at consistent levels sufficient

to meet peak demand, yet are very limited in their ability to rapidly ‘‘flex’’

supply because of their large fixed sunk costs and the nature of liner shipping

which requires regular service and strings of vessels that call numerous different ports in a single voyage)

• ‘‘Lumpy’’ supply (capacity must be added or withdrawn in large units—namely entire strings of vessels, unlike a railroad which can add or subtract cars

from a train based on variation in demand)

• No regulatory barriers to new entry or capacity expansion

• Distortive government subsidization of shipping and shipbuilding

While other industries may share with liner shipping one or even several of these

characteristics, the combination of all of them is unique and produces an industry

that is subject to chronic market instability.

40

27 A typical 5,000 TEU container vessel costs approximately $60 to $65 million. A carrier must

have a number of containers for each vessel container space, with their costs ranging from approximately $2,000 to $30,000 each depending on the characteristics of the container. According

to the Mercer Study, a carrier’s operating costs range from approximately $40,000 to over $50,000 per day per ship. The minimum number of ships needed to provide a regular service

will vary on the trade (four in the trans-Atlantic, five in the trans-Pacific, nine in the Asia-Europe trade). In addition, carriers must incur substantial marine terminal, shoreside and overhead expenses. 28 Because of the trade’s substantial economic losses in 1998, some carriers withdrew some

capacity from the trans-Pacific that year. 29Lloyd’s List, May 15, 2000, quoting Drewry Shipping Consultants 30 Id. In an example of another unbalanced trade, in the trans-Atlantic between October 1999

and September 2000, carriers had to reposition 534,000 TEUs of empty boxes from the United

States to Northern Europe. See Dynamar Liner Trades Review, p.5 (January 2001).

The high fixed costs in providing a regularly scheduled international service,27

and the fact that ocean carriers offering liner shipping services face inelastic yet

variable demand, create special economic constraints. Since carriers’ variable costs

are relatively small, their ability to adjust rapidly to decreases in demand in a trade

by reducing supply is limited.

Furthermore, chronically imbalanced international trade flows make offering a

profitable roundtrip service extremely difficult. Balanced trades, where outbound

containers and inbound containers approximately match, are relatively rare in U.S.

trades. On the ‘‘light’’ leg, empty containers must be shipped, with no revenue to

the ocean carrier, back to be available for use by other shippers on the ‘‘heavy’’ leg.

Nor is the equipment needed for outbound cargo (such as refrigerated containers for

foodstuffs) likely to match the needs of inbound cargo (say auto parts). The existence

of peak seasons also creates difficulties since carriers must maintain capacity and

equipment adequate to meet peak season demand, even though utilization of that

capacity and equipment drops off in non-peak periods.

As an example of the imbalances between capacity offered by the industry and

the demand for such capacity, the following graph shows the dynamics of the transPacific trade in 1998:

As one can see, capacity supply is relatively stable,28 yet (1) the eastbound trade

shows substantial seasonal variability—sometimes using all the capacity and sometimes not, and (2) the westbound trade shows chronic overcapacity because U.S. imports greatly exceed U.S. exports.

In such an unbalanced trade, a carrier will collect revenues from shippers moving

export cargo and from shippers moving import cargo, and the sum of those rates

will be the carrier’s total roundtrip revenue. However, carriers incur substantial

costs, which are part of their total roundtrip costs, in addition to the cost involved

in moving a shipper’s cargo—namely, the costs of repositioning empty equipment

arising from the trade imbalances discussed above. In July and August of 1998 in

the trans-Pacific trades shown above, approximately 40% of the containers in the

trade had to be repositioned empty back to Asia in order to handle cargo moving

eastbound, and all the expenses associated with the assets and the operations to do

this were part of the carriers’ roundtrip market economics. An analysis done in 2000 showed that ocean carriers spent $12.8 billion repositioning empty containers.29 Roughly 20% of all containers moved globally are

empty boxes.30 Due to its trade imbalances, America’s leading ‘‘export’’ is empty containers that ocean carriers must reposition with no export cargo providing offsetting

revenue.

41

31 ACCOS Report , page 69.

Liner shipping markets are inherently unstable. The industry operates with

heavy capital requirements and high fixed costs—about 75% of the industry’s costs

exist whether there is cargo on the ship or not-and relatively low marginal costs.

Carriers thus do not avoid significant costs when vessel space is empty. Instead,

empty space represents a sunk cost that cannot be recovered. The resulting tendency for carriers facing the constant dilemma of empty space—which cannot be

stored for later use—is to cut rates to fill space and help cover fixed costs. That

leads to marginal pricing that does not recover full costs. Left unchecked, marginal,

non-compensatory pricing arising from structural overcapacity would lead to insolvency, withdrawal of capacity, and service degeneration. Rates would subsequently

increase, attracting new capacity, and the cycle would begin again. The existing regulatory system is necessary to avoid such destructive competition.

The lines’ high fixed costs of providing a scheduled service and limited ability to

use rate reductions to increase shipper demand are further complicated by the need

to offer levels of service that are sufficient to cover the directional, seasonal, and

special equipment imbalances that so commonly exist.

A line’s commitment to providing a service that meets its customers’ demand for

regular and timely service, in both directions, at all times of the year, as well as

one that is adequate for the longer-term demands of growing markets explains why

simply pulling a vessel or string of vessels out of a trade when supply temporarily

exceeds demand is a challenge for a line. Many shippers’ businesses depend on their

meeting tight ‘‘just in time’’ schedules. They expect, and their business operations

are built around ‘‘conveyor belt’’ service. Regularity of sailings and adequate availability of equipment and space is crucial. In order to maintain the regular scheduled

services that are the defining characteristics of the liner industry, vessels must sail

on time, whether they are full or not. When making their annual business plans,

and negotiating their transportation contracts, shippers expect their carriers to

maintain reliable sailing schedules, fast transit times, and ample slot availability.

Smoothly functioning supply chains depend on high levels of predictability and reliability in transportation and logistics services.

The flexibility to change capacity levels rapidly in response to transient demand

changes is possible, but it is both difficult to do and requires great care in order

to be responsive to shippers’ service needs. Rapid entry and exit from a trade would

produce unacceptable instability in rates and service. Such efforts are best organized within the framework of existing carrier agreements.

In making decisions on how much capacity to put into a given trade, lines are

also handicapped by the nature of their assets. There is a two to three year gap

between the decision to purchase new vessels and their arrival in the trade. That

means that new capacity being added cannot be precisely coordinated with increases

in demand. This might be less of a problem if capacity could be added in discrete

units. But capacity ordinarily can only be added in large, vessel string-sized

‘‘lumps.’’ Consequently, lines must purchase new vessels (which have lives of 25

years) in anticipation of uncertain trade growth and, bring in more tonnage to a

trade than will initially be needed even if the growth forecasts are accurate. Without the ability to share information on the market and future capacity plans, the

problem would be even greater than it often is.

Furthermore, carriers’ ability to avoid excess capacity, in spite of the problematic

economics of the industry, is further hampered by nonmarket-driven tonnage. Liner

shipping is affected by an extensive system of governmental subsidies that generate

surplus tonnage worldwide. One element of this system, is the subsidization of domestic shipbuilding industries. As was stated in the Report of the Advisory Commission on Conferences in Ocean Shipping: ‘‘Shipbuilding subsidies mean that the problems of industry overcapacity will tend to be more lasting than otherwise, and less

responsive to the economic incentives that drive surplus capacity from more conventional markets. This in turn implies that rate wars could be a persistent feature in

even a deregulated ocean liner market.’’ 31 Recent press accounts indicate that competitive subsidization of shipbuilding may, in fact, be increasing. Given open trades

and the highly competitive nature of the industry, the overcapacity generated by

these subsidies further reduces rates and profits in the affected trades.

Taken together, these economic and political factors can and do produce chronic

excess capacity in major trades. Through limited antitrust immunity, carriers can

at least partially address the excess capacity problem by sharing assets via operational alliances and space sharing agreements, and by the exchange and discussion

of key market information. And they can try, pursuant to applicable law, to mitigate

the financial effects of the industry’s structural overcapacity by promoting rational

pricing.

42

It is against this backdrop of structural overcapacity and its effects that governments around the world have affirmed that limited, regulated antitrust immunity

is important. If the spiral of non-compensatory rates, business failures, and consolidation that would otherwise result from such overcapacity is to be prevented, there

must be a mechanism for addressing the intense pressure on carriers to lower prices

below compensatory levels. Limited antitrust immunity allows carriers to discuss

and agree on rate levels or guidelines that moderate to some extent the tendency

toward rates that do not fully cover costs. These group activities, although they do

not overcome or change the forces of supply and demand, do help to buffer the most

extreme rate swings that would otherwise harm the industry through destructive

competition. In an industry where margins are as thin as in liner shipping, that

buffer is crucial.

3. Regulated, Limited Immunity With Safeguards

Carriers’ use of antitrust immunity is limited both by the laws providing such immunity and by the nature of the markets in which they operate. The potent combination of free entry into the trades, the lack of ‘‘switching costs’’, the persistence

of overcapacity, the dominance of contract carriage conducted on a confidential basis

between individual lines and shippers, and the existence of lines that are not parties

to agreements, provide intense competition and strong market safeguards.

In addition, liner trades are already subject to active oversight by the Federal

Maritime Commission, which has the authority to investigate and, if needed, apply

remedial measures.

Stated simply, international liner shipping does not operate with unrestricted

antitrust immunity. International liner shipping operates with limited antitrust immunity accompanied by a plethora of pro-competitive regulatory requirements administered by a federal government agency well versed in liner shipping. Under the

Shipping Act of 1984, as amended by OSRA, shipping lines:

• May not operate under an agreement with other lines except in accordance

with the terms of an agreement which has been filed and reviewed by the

FMC

• May not operate under an agreement with other lines if that agreement has

been rejected, disapproved or cancelled by the FMC

• May not operate under an agreement that unreasonably increases rates or decreases service

• May not engage in unjust or unfair or predatory practices

• May not retaliate against any shipper

• May not restrict members of an agreement from entering into individual, confidential service contracts with shippers

• May not require a member of an agreement to disclose the terms of its individual service contracts

• May not drive competitors out of a trade

• May not impose any unreasonable prejudice or disadvantage with respect to

any port or any person due to the person’s status as a shippers’ association

or ocean transportation intermediary

• May not allocate shippers

• May not offer or pay deferred rebates

• May not unreasonably refuse to deal or negotiate

• May not engage in any predatory practice

• Have no antitrust immunity to negotiate rates or services provided to them

by trucking or rail carriers.

There are many other provisions in the Shipping Act regulating shipping activities and transactions. In short, shipping lines are regulated by an expert government agency in a manner that ensures competition, promotes commercial freedom,

allows for limited but valuable carrier cooperation in the marketplace, and is understood and accepted internationally.

Before concluding the discussion of the FMC and the Shipping Act’s regulatory

safeguards, it is appropriate to briefly comment on criticisms that some in the

freight forwarding and NVOCC community have made against ocean carriers—

namely, that carriers use their limited antitrust immunity to injure small U.S. importers and exporters, and that they have discriminated against NVOCCs as a class.

As an initial matter, it is simply illogical that ocean carriers would try to impair

the ability of shippers of any size, large or small, from being competitive and sucVerDate 11-MAY-2000 15:03 Aug 15, 2002 Jkt 000000 PO 00000 Frm 00046 Fmt 6633 Sfmt 6621 G:\WORK\FULL\060502\80030.000 HJUD3 PsN: HJUD3
43

cessful in their markets. The more a customer succeeds, the more business the carrier may get, and carriers are looking for business wherever they can find it.

Specifically, some NVOCCs have alleged that ocean carriers in the trans-Pacific

trade have agreed to unjustly discriminate against NVOCCs on rates. A petition

was very recently filed at the FMC with such allegations. In light of the petition,

some comments are in order. First, NVOCC’s are a successful growing part of the

marketplace. Many NVOs are larger companies than ocean carriers and their financial earnings are generally superior to ocean carriers’. Some of the most intense

competition is big NVOCCs against smaller NVOCCs. Second, the carrier agreement

in question—the Transpacific Stabilization Agreement—has flatly and unequivocally

denied the allegations in this petition. Third, the petition contains not a single fact

in support of the allegation, nor identifies a single NVOCC or party with an alleged

injury. Third, notwithstanding the above, the carrier agreement has offered to provide a neutral mediator, at its expense, for any NVOCC that has a complaint.

Fourth, if the petitioners would present the FMC with actual facts that demonstrate

that what they say is true, the carriers would be guilty of violating the Shipping

Act, and the existing law provides ample penalties and remedies. Finally, to the predictable dodge of ‘‘we can’t provide facts because we’re afraid of carrier retaliation’’, one should consider that, in addition to the fact that even ocean carriers should receive the due process of law: it would be illegal under the Shipping Act for carriers

to retaliate; it is illogical that ocean carriers could or would ‘‘retaliate’’ against

NVOCCs who control 30 to 40 percent of the market; NVOCCs don’t give their business to one carrier and the second a carrier tried to ‘‘retaliate’’, it would lose that

business to a competitor; and, to the extent there is ‘‘retaliation’’ in the market, it

is common for NVOCCs to be the ones who retaliate or ‘‘punish’’ carriers by ‘‘cutting

them off’’ and denying them cargo if the carrier does not provide acceptable terms.

That leverage possessed is powerful and is frequently used, and is one of the reasons the market is so intensely competitive and rates are so low.

4. Uses and Benefits of Immunity

Carriers use their limited and regulated antitrust immunity to establish and

maintain two general types of agreements:

• Agreements that primarily involve a cooperative sharing of operating assets

such as ships and equipment, and

• Trade-lane agreements with pricing authority (conferences and discussion

agreements)

(A) Asset Sharing Agreements

Asset-sharing agreements produce operating efficiencies and reduce costs. They

have allowed participating lines to expand their service networks, reduce operating

costs, optimize capital investment, and reduce risk. They have also made it easier

for carriers to enter new trades by sharing space with other lines rather than having to incur 100 percent of the costs and risks of developing their own string of ships

in a service. The benefits to shippers of such expanded and flexible networks are

well recognized. Multi-trade alliances also offer an alternative to greater industry

concentration via merger and acquisition. Such alliances demonstrate a clear positive benefit of carrier antitrust immunity. That immunity has allowed carriers to

undertake the detailed discussions necessary to establish, operate, and periodically

revise these efficiency-enhancing agreements.

It is helpful to consider how carriers’ use of limited and regulated antitrust immunity, working together with today’s system of free entry, has produced such a highly

responsive set of service improvements around the world. Decisions to expand service cannot be made in isolation from confidence in what revenues can be generated

from that capacity in the marketplace and what costs will be incurred. This confidence is often based on the ability of carriers to work under agreements that have

price discussion authority. To illustrate how today’s regulatory system has allowed

and promoted carriers’ ability to easily and efficiently offer new capacity and competition in the marketplace, consider the following examples since 1995 of several

World Shipping Council carriers’ use of antitrust immunity to join with other carriers in capacity sharing agreements and thereby enter into new trades:

• APL entered the United States-Northern Europe trade, the United StatesMediterranean trade, the United States-Central America trade, the United

States-South America trade, a number of intra-Asia trades, the Asia-Middle

East trade, and the Asia-Mediterranean trade.

• COSCO, Evergreen, the Malaysia International Shipping Corporation and K

Line in February 2001 announced a joint entry into the Northern Europe-Indian Subcontinent trade.

44

• Hapag-Lloyd entered the United States East Coast-Mediterranean trade, the

Mediterranean-Far East trade, the North Europe-East Coast South America

trade, the Asia-Caribbean trade, and the United States East Coast-South

America East Coast trade.

• Evergreen entered the United States East Coast-East Coast of South America

trade and the Asia-Australia trade.

• K Line entered the United States East Coast-North Europe trade, the U.S.

Gulf Coast-North Europe trade, the United State-Mediterranean trade, and

the all water Asia-United States East Coast trade.

• Maersk-Sealand entered the Europe-South Africa trade and the Europe-Caribbean trade.

• Mitsui O.S.K. Line entered the Europe-United States East Coast and Gulf

Coast trades, began direct service between various Chinese and United States

ports, and entered a number of United States-Mexico/Central America/Caribbean trades.

• NYK entered the Canada-North Europe trade, the United States-North Europe trade, the United States-West Coast of South America trade, the KoreaMiddle East trade and several intra-Asia trades.

• OOCL entered the United States-Mediterranean trade, the Asia-Mediterranean trade, the Europe-Mexico trade, and the United Kingdom/Germany to

Russia trade

• P&O Nedlloyd entered the trans-Pacific trade, the Asia-United States East

Coast trade, the Europe-Canada trade, the United States East Coast-East

Coast of South America trade, the United States Gulf Coast-East Coast of

South America trade, the Mexico-Europe trade, the Mexico-Asia trade and the

Mercosul trade.

• Yangming entered the Southeast Asia-Australia trade, the trans-Atlantic

trade, the Far East-New Zealand trade, the Far East-South Africa-South

America trade, the North Europe-Mediterranean trade, and the Asia-United

States East Coast trade via the Mediterranean.

This small sampling of examples of carriers using the current system of limited

antitrust immunity to the benefit of improved, more efficient service and entry into

new trades is far from exhaustive. Furthermore, it does not even attempt to show

the numerous ways carriers have operated with limited antitrust immunity to expand and improve services to trades they were already serving, with more direct

services, more and faster vessel strings, and better transit times to core port pairs.

It is illustrative, however, of the existing regulatory system’s clear and demonstrable record of providing excellent, constantly improving service to meet the needs

of global commerce. Continuation of that record would be threatened by enactment

of H.R. 1253.

(B) Trade Lane Agreements

OSRA’s service contracting reforms have produced a shift away from conference

contracts to one-to-one business arrangements between shippers and their preferred

carriers. The development of more flexible and innovative contracting and a gradual

growth of multi-trade contracts have accompanied that shift.

If the new, looser agreements that have evolved out of traditional conferences no

longer regulate their members’ service contracts, what do they do? And how does

what they do contribute to greater market and service stability?

Trade-lane agreements may engage in:

• Collecting, exchanging, and discussing market information (such as supply

and demand forecasts, anticipated growth rates, current utilization levels,

and relevant government policies affecting service),

• Developing and proposing standardized surcharges (such as bunker charges,

currency adjustment charges, and terminal handling charges),

• Discussing and proposing common approaches to pricing to the extent permitted by law (such as common tariffs, recommended prices, proposals for

general rate increases and peak season charges), and

• Conducting dialogues with national shippers’ councils and government agencies.

Allowing the lines to develop a collective perspective on emerging market opportunities and problems raises the members’ level of confidence in the accuracy and completeness of market information and thereby their confidence in making tactical

pricing decisions and strategic capital investment decisions.

45

(C) Carrier Agreements Are Not ‘‘Cartels’’

As mentioned earlier, the forces of supply and demand and the restrictions of existing regulatory requirements limit the extent to which carrier agreements can affect prices. To operate as an effective pricing cartel, trade-wide liner agreements

would need to accomplish four central tasks:

• Predict and prevent the provision of new capacity by non-members

• Restrict the total capacity made available to the market

• Establish each member’s capacity quota, and

• Detect and prevent independent pricing and contracting decisions by members.

Carrier agreements are not doing this. Market conditions and existing regulatory

limitations on immunity prevent cartelization. First, open trades, free of regulatory

restrictions on new or expanded capacity, ensure the unobstructed entry of new capacity in response to increased demand.

Second, the sharing of supply/demand forecasts and utilization information provides agreement members with improved market information. Carrier agreements

do not involve capacity restriction programs that artificially limit capacity in a way

that would distort the market. And no such program would escape the close regulatory scrutiny to which liner shipping is subject.

Third, there are no agreements that establish trade-wide capacity quotas for

member lines, and regulatory officials have stated that, absent clear and convincing

justification, they would not allow such capacity restriction programs.

Fourth, and very importantly, OSRA prohibits carrier agreements from restricting

members’ right to contract as they wish with shippers. This freedom of contracting,

and the environment dominated by confidential one-to-one business arrangements

to which it gives rise, ensures keen competition.

Fifth, as stated above, the existing shipping laws contain a plethora of protections.

Carrier agreements, even those with relatively high market share, are not, and

cannot be, cartels. Any review of actual market conditions, rates and profit levels

conclusively will demonstrate that calling carrier agreements ‘‘cartels’’ is empty

rhetoric. Such agreements do, however, create important benefits for carriers and

shippers alike.

(D) Benefits of Carrier Agreements

First, the exchange and discussion of market information is itself important to the

development of better market information and forecasts, and more rational approaches to market pricing as well as strengthening business confidence.

Second, a carrier agreement can, subject to existing market conditions, help improve planning, encourage better capacity utilization, and diminish rate volatility.

Although a minority of the cargo moves under the tariff in many conferences today,

the tariff acts as a benchmark for collective and individual rate-setting by the agreement members for the remaining cargo and thus helps to provide stability for the

trade. In trades that have discussion agreements rather than conferences, voluntary

guidelines serve a similar function.

Third, such agreements can and do produce standards for certain surcharges that

are needed to address fluctuating cost variables, such as currencies or fuel costs.

Such agreements can provide a market standard for contracting season cycles, and

allow carriers to communicate to shippers, in advance, expectations about supply

and demand and about future rates for planning purposes.

Fourth, by improving the quality of their supply and demand forecasts, producing

accurate and timely reports on utilization levels, and sharing other commercial information, agreement members can help avoid exaggerated rate fluctuations in the

face of supply/demand imbalances.

Fifth, such information exchange can also assist member lines to identify and respond promptly to impending increases in demand for capacity and equipment.

Liner markets are driven by supply and demand conditions. Any efforts by carriers to avoid panic pricing or better appreciate market facts and opportunities are

still subject to market forces and the regulatory prohibitions against unreasonable

rate increases and the list of prohibited activities discussed earlier. The benefits to

carriers—better market information and marginal improvements in revenue results—are more than matched by benefits to the shipping public. Today’s existing

practical and well-accepted regulatory system avoids the negative consequences of

conflicting maritime regulations and chronic price and service instability, and encourages adequate private investment in the greater capacity and new technologies

needed to meet future market demand.

46

(E) Rebutting the Argument that the System Only Benefits ‘‘Foreigners’’

Some critics of the Shipping Act have alleged that, since ocean carriers like SeaLand, APL, Lykes and Farrell are now owned by non-U.S. companies, the law only

benefits ‘‘foreigners’’ and is therefore somehow defective. A little thought will show

otherwise.

First, the liner industry generates more than one million American jobs and $38

billion in wages to American workers. One can’t affect the industry without affecting

that.

Second, U.S. owned liner companies were sold because the industry is so competitive that U.S. companies were not rewarded by investors or Wall Street for being

in the business. I can tell you from personal experience, for example, that CSX sold

Sea-Land—not because it wasn’t an excellent, innovative, well-run or efficient company—but because the industry’s returns were judged consistently inadequate and

CSX stock suffered as a result of its investment in the industry. In short, the sales

of these lines only confirm how intensely competitive the industry is, not that American consumers are in any way being adversely affected by the Shipping Act.

Third, the overwhelming majority of the U.S.-flag vessels in the international

liner industry are used and financially supported by carriers that are not U.S.

owned companies. My personal opinion is that is very important for this country to

have a merchant fleet; the government continues to consider how to have more effective maritime promotional policies, which is an issue beyond both the scope of

this hearing and the World Shipping Council’s activities. But, one thing is certain:

Subjecting an already intensely competitive industry to destructive competition by

repealing the Shipping Act would certainly do nothing to encourage vessels being

placed under the more expensive U.S. flag.

There is a fourth and final point I’d like to make in this regard. We have each

Member of the Committee a booklet, entitled ‘‘Partners in America’s Trade’’, briefly

explaining the substantial contribution liner shipping makes to the American economy and the efficient movement of America’s exports and imports. With the industry struggling to make adequate financial returns, and especially with our own U.S.

laws failing to attract American capital to this business, the continued presence and

investment of foreign capital in the industry which transports America’s international commerce is critically important, not something that should be disparaged

or discouraged. It is entirely appropriate for the Shipping Act to be designed to ensure robust competition, innovation, efficiency and an appropriate level of regulatory

oversight. But it is also important that the regulatory regime be mindful of the need

for invested capital to be sufficiently profitable to not only remain invested, but to

grow, so that the future needs of America’s expanding foreign commerce can be met

as well as today’s.

IV. CONSEQUENCES OF REPEALING THE SHIPPING ACT’S

SUCCESSFUL REGULATORY SYSTEM

A review of international liner shipping shows not only that it is a unique international business, but also that it is currently operating in highly competitive markets with all the desired characteristics set forth in Section II of this testimony. The

Shipping Act of 1984, as amended by OSRA, which includes as one element limited,

regulated antitrust immunity, is a major reason for this success. If one were to compare, for example, the U.S. domestic aviation industry, or the international aviation

industry under bilateral agreements, with international liner shipping, there would

be no question that liner shipping is a more competitive, more flexible and less concentrated industry. If one were to compare any nation’s rail transportation system

with liner shipping, there would be no doubt about which transportation mode provides shippers with greater competition and choice.

Antitrust regulation is one form of government regulation intended to provide

competitive, efficient markets. It is not the only form of government regulation, nor

necessarily the most effective at achieving this. It will not produce results superior

to the existing, well established and internationally accepted form of liner shipping

regulation in operation today.

The assumption that repealing antitrust immunity would have no negative effects

on the current open, multilateral, non-restrictive regime, but would simply facilitate

increased competition and lower rates, is ill-founded. It is worth recalling, at the

outset of any discussion about revamping the Shipping Act, that:

• Today’s regulatory system is well understood, internationally accepted, and

working well. It produces excellent results for shippers and nations concerned

about the efficient movement of international trade, and it provides sufficient

clarity and certainty for carriers.

47

• Not all nations share a common approach to competition policy.

• Some nations view liner shipping as a strategic national industry deserving

of direct and/or indirect governmental support.

• Many nations play a central role in both international trade and the provision

of liner shipping services, and appropriate consideration of their views on

shipping policies is important.

• Even nations that apply antitrust/competition measures relatively strictly in

their domestic economies, have recently reaffirmed that international liner

shipping is a unique industry that is best regulated by providing limited antitrust immunity accompanied by government oversight rather than by applying domestic antitrust laws.

There are several consequences that could be expected to follow from a repeal of

the current regulatory regime. It would produce destructive competition in an industry that is already fiercely competitive and suffering from inadequate returns on investment. It would result in poorer service and fewer service choices, at likely higher post-consolidation rates. It would invite other nations to respond by applying

their own, different, national shipping laws to the business. And, finally, it is likely

to produce a shortfall of private investment in transportation infrastructure, with

predictable negative long-term consequences for international trade, including:

• Reduced technological and organizational innovation

• Additional infrastructure bottlenecks

• Slower growth of industry productivity

• Impaired system-wide efficiency, and

• Slower trade growth.

In short, the net effect would be significantly negative.

Repeal of the Shipping Act’s limited antitrust immunity would be virtually certain

to result in incompatible national maritime policies and conflicts of law. Such conflicts would result in inconsistent and incompatible enforcement of laws, the probable use of national ‘‘blocking statutes’’ to prevent effective enforcement of antitrust

laws, severe regulatory and business instability and uncertainty, and the possibility

of other nations’ enacting counterveiling measures. For the Justice Department to

dismiss such concerns is simply naı ̈ve.

Many nations have firmly established national policies to support and promote

their merchant fleets. These fleets operate in an exceptionally competitive international market today. To believe that such nations would welcome a destabilized

market that could put their merchant fleets’ economic future at risk would be unrealistic in the extreme. There are several potential responses that those nations could

offer, none of which would result in a superior regulatory environment to that which

exists today, or as uniform an international approach as exists today. For example:

• Nations could refuse to apply antitrust law, leading to uneven, uncertain, and

incompatible regulation of an international business.

• Nations could apply significantly different competition laws to this international business and enforce their laws in inconsistent ways.

• Nations could impose anticompetitive regulatory requirements on the trade to

increase stability. Such measures could include reversing the recently won

ability in OSRA to have confidential contracts, and replacing the commercial

freedom of today with regulated, public, government enforced contracts.

• Nations could embrace bilateral maritime agreements, such as those that

exist in international aviation, which restrict and regulate market access.

• Nations could seek to establish trade allocation regimes to stabilize markets

and protect their national fleets.

• Nations could increase market distorting subsidies and supports for their

merchant fleets, so that marketplace ‘‘winners’’ would not be decided on the

merits of superior efficiency and service, but on governments’ willingness to

expend resources or provide preferential treatment for their fleets.

For those nations that do not have a large national merchant fleet, like the

United States, their satisfaction with liner shipping markets depends on having a

sufficiently large number of competitors in their trades to ensure that the lack of

a substantial national fleet has no significant adverse effect on their commerce. In

the destabilizing, destructive competition and industry concentration that would follow a repeal of limited, regulated antitrust immunity, such nations may become unVerDate 11-MAY-2000 15:03 Aug 15, 2002 Jkt 000000 PO 00000 Frm 00051 Fmt 6633 Sfmt 6621 G:\WORK\FULL\060502\80030.000 HJUD3 PsN: HJUD3
48

32 New Yorker, December 11, 2000.

comfortable as the transportation of their commerce would be subject to fewer and

fewer carriers.

As a consequence, H.R. 1253’s radical surgery on the Shipping Act would not only

disrupt a reliable, efficient smoothly operating international transportation system,

but it could transform international shipping from an effective facilitator of international trade to a discordant foreign relations dilemma.

Modern liner shipping has been the engine driving our global economy, a key factor in making today’s economic globalization possible. The recently enacted Ocean

Shipping Reform Act already addressed the need for any changes. The current system is working well and both shippers and carriers are reasonably happy with the

current regulatory regime and results. Accordingly, a regulatory Hippocratic oath

should be observed: First, do no harm.

V. CONCLUSION

A sound analysis of liner shipping must recognize that the guiding purpose of

whatever regulatory system is applied to the industry must be to produce an efficient, effective and innovative transportation infrastructure for the movement of

international trade. There is no question that the liner industry has invested in and

built such an infrastructure and has accommodated the enormous growth in international trade very well. It has succeeded to such an extent that the liner industry

has been called ‘‘the heart of the global economy.’’ 32

There is also no question that competition in this industry is fierce and that the

financial returns in international liner shipping have been poor. Nor is there any

question that to maintain and continue building the transportation infrastructure

capable of handling this decade’s forecasted doubling of cargo movements, carriers

will be required to invest huge sums of additional capital. Where will that investment come from if markets are further destabilized and the industry’s financial returns are further weakened?

The most important international shipping challenge facing carriers and shippers

alike in the coming years is not the existing regulatory structure for liner shipping.

That structure is working well. The biggest challenges are addressing the strains,

bottlenecks and inefficiencies in the landside transportation infrastructure, and,

even more importantly, working with the United States government to design an

international transportation system that is more secure against the threat of terrorism. Significant cost savings and improved efficiencies will not be found by

changing today’s liner shipping regulatory system.

The Ocean Shipping Reform Act was the product of many years of effort involving

all stakeholders, including shippers, carriers, ports, and labor. The Act, which has

been in place for only three years, provided a comprehensive and thorough examination and reform of the international liner shipping regulatory system. One piece of

that system is a limited and regulated antitrust immunity, accompanied by a coherent regulatory regime, overseen by the Federal Maritime Commission, that is internationally accepted, understood and successful. We respectfully submit that the Act

is working well and does not require any amendment. We further submit that H.R.

1253 would fail to achieve any meaningful economic benefits for the shipping public,

the U.S. public port community, American maritime labor or carriers, but would

jeopardize the considerable benefits that America’s international trade now enjoys

under the present system.

We appreciate the opportunity to provide this testimony and look forward to assisting the Committee with any questions it may have on the international liner

shipping regulatory system.

ATTACHMENT A

MEMBER COMPANIES OF THE WORLD SHIPPING COUNCIL

APL

A.P. Moller-Maersk Sealand

(including Safmarine)

Atlantic Container Line (ACL)

CP Ships

(including Canada Maritime, CAST, Lykes Lines, Contship Containerlines, TMM

Lines, and ANZDL)

China Ocean Shipping Company (COSCO)

China Shipping Group

CMA-CGM Group

49

Compania Sud-Americana de Vapores (CSAV)

Crowley Maritime Corporation

Evergreen Marine Corporation

(including Lloyd Triestino)

Gearbulk Ltd.

Great White Fleet

Hamburg Sud

(including Columbus Line and Alianca)

Hanjin Shipping Company

Hapag-Lloyd Container Line

HUAL

Hyundai Merchant Marine Company

Italia Line

Kawasaki Kisen Kaisha Ltd. (K Line)

Malaysia International Shipping Corporation (MISC)

Mediterranean Shipping Company

Mitsui O.S.K. Lines

NYK Line

Orient Overseas Container Line, Ltd. (OOCL)

P&O Nedlloyd Limited

(including Farrell Lines)

Torm Lines

United Arab Shipping Company

Wan Hai Lines Ltd.

Wallenius Wilhelmsen Lines

Yangming Marine Transport Corporation

Zim Israel Navigation Company

Chairman SENSENBRENNER. Thank you, Mr. Koch.

Members are advised that the Chair will enforce the 5-minute

rule, and I’ve been writing down who has appeared in which order.

So I will recognize people alternatively from one side to the other

in the order of appearance, beginning with myself.

Mr. Hoffa, you heard Mr. Koch basically say that the passage of

this legislation won’t make any difference in how much money the

port drivers will be able to charge and the availability of more

money to do repairs and maintenance to bring their trucks up to

safety standards. I am sure you disagree with his analysis. Would

you please tell us why?

Mr. HOFFA. Our study of this area, Mr. Chairman, indicates that

these large oceangoing carriers conspire amongst themselves to dictate what they’re going to pay. Therefore, they put pressure on

these owners of these trucks. And when I say owners of the trucks,

a lot of them are fleet owners, where you have a number of people

that own their own trucks, the owner-operators, who then work

through somebody called a truck owner. The pressure on the truck

owner is unbelievable.

They dictate exactly the same rates across the board. And they

have to then—and they’re artificially low. And this is where these

carriers are making money. And then they in turn put pressure on

the drivers to basically do this work for nothing, and that’s what’s

happening.

And it’s also important to know the type of drivers we have.

Many of them are new to our country. Many of them are people

that are seeking their American dream. They bought a truck; they

think they can succeed here. They’re from all over the country, but

they are American citizens who have been nationalized. And they

are trying to succeed. But they are squeezed by the people they

work for, who in turn are squeezed by the carriers, who keep on

pushing down the rates.

50

And this is basically one step—everybody is pushing down the

next person to try and make money off their backs.

I’ve been out to the ports. I see the type of drivers they have, the

type of equipment they have. They’re barely surviving. And they’ve

created like a subculture and a subclass of workers here who can

barely exist in America. And it’s not right.

If we change the law, we will start the beginning of getting rid

of the exemption for the big carriers, and then that will percolate

down to the owners and then helping the owner-operators in the

end.

Chairman SENSENBRENNER. In other words, you’re saying that if

smaller carriers were allowed to compete at free market rates rather than this artificial cartel, they would negotiate better rates for

the port truckers.

Mr. HOFFA. That’s exactly right. And also they will start breaking up this conspiracy that dictates the lower rates.

Chairman SENSENBRENNER. I have one question for Mr. Coleman. Near and dear to my heart is the export of good Wisconsin

butter and cheese all over the world. We make a lot of it. I am disturbed that there is a $1,000 per container tax on refrigerated containers that you alluded to in your testimony. Will you tell me how

that works? I assume that having to pay for the tax in the foreign

country on the other end is going to make the good products from

my State much less competitive overseas, particularly against the

cheap junk that comes out of Europe. [Laughter.]

Mr. COLEMAN. Well-stated, Mr. Chairman.

This spring, the WTSA, the Westbound Transpacific Stabilization

Agreement, filed a proposal. In fact, they submitted it to the Federal Maritime Commission. And I incidentally would ask that that

be included in the record of this hearing.

Chairman SENSENBRENNER. Without objection.

[The information referred to follows in the Appendix]

Mr. COLEMAN. The carriers basically set up a scheme by which

they wanted to reduce growth in export capacity. And several of

the carriers had invested in new refrigerated equipment, so they

could more efficiently carry U.S. exports. And under this WTSA

scheme, it was proposed that any carrier be assessed $1,000 per

container for every container they carried in 2001 above the capacity that they carried in 2002.

Numerous organizations, when that scheme was filed with the

Federal Maritime Commission, had informal conversations with

them. The carriers immediately understood that they had been

caught red-handed, and they withdrew their proposal. So the

$1,000 surcharge was not imposed.

Chairman SENSENBRENNER. I yield back the balance of my time.

The gentlewoman from California, Ms Lofgren.

Ms. LOFGREN. Thank you, Mr. Chairman. This has been a useful

hearing.

And listening, Mr. Hoffa, to your description of the drivers reminded me of my own youth. My father, my late father, was a

Teamster, and his father was a Teamster. And your testimony is

compelling.

I wanted just to raise two quick issues. One, and I’d ask unanimous consent to make this a part of the record.

51

Chairman SENSENBRENNER. Without objection.

[The information referred to follows in the Appendix]

Ms. LOFGREN. I have received a letter from the Port of Oakland

expressing a variety of concerns about the bill, but one in particular I’d be interested in your comment, Mr. Hoffa. They are concerned, they say, that ports that benefit from the antitrust exemption now have labor-management agreements on benefit assessments. And they want to make sure that that is preserved, that

their ability to do the agreements for benefit assessments and

labor-management is preserved.

I’m not sure I see the issue. I’m wondering if you have a comment on that point.

Mr. HOFFA. Well, I’m not so sure I understand that either, because these people are really on their own, these owner-operators.

And I’ve been to the Port of Oakland. And Chuck Mack, who is

our——

Ms. LOFGREN. Know him well.

Mr. HOFFA [continuing]. Very capable vice president from the

bay area, knows what goes on in the Port of Oakland. And the

problem we have there is that these people have to wait long hours

in long lines, and sometimes they’re there all day just to get a load.

Ms. LOFGREN. Yes.

Mr. HOFFA. It’s like the old shapeup they used to have in the

movies, you know, and on the ports, where people had to wait all

day long just to get a load. So you basically waste a day or two just

to get some load that barely pays for your truck. And that’s what’s

going on.

I don’t know if this—I don’t—I’m not aware of what you’re talking about, this agreement. But certainly, we could work around

that. We don’t want to disturb anything that is helpful to the drivers.

But we’re trying to elevate the drivers from their low status right

now, and the fact that they’re being exploited by just about everybody. And it’s time that we recognized the problem; we step forward. And the first step, I think, would be passing this bill. Thank

you.

Ms. LOFGREN. Do you know, Mr. Hoffa, where organized labor,

other than Teamsters, are on the bill? For example, have the Longshoremen taken a position? Are you aware of that? Or have the

Sailors’ Union?

Mr. HOFFA. They all have. They are supporting us in our efforts.

We have established a port division in the Teamsters that is working on both coasts, with both the ILW and the ILU, to organize

port drivers. And they’re supporting our efforts. And we’re working

cooperatively, with regard to trying to organize these people.

So this is an effort recognized by the longshoremen unions on

both coasts who support our efforts and are aware of the problem.

So they’re very supportive of this.

Ms. LOFGREN. Thank you very much. And, you know, thinking

back, my grandfather actually was a Teamster in Oakland and, actually, years ago was one of those guys that waited and waited and

waited for loads. So I’m very appreciative of your comments.

And I would ask if I can, well, we’ll make this letter part of the

record. Perhaps the Teamsters’ experts can take a look at the point

52

that Oakland has made, and we’ll work on that, if you agree that

it’s a problem.

Mr. HOFFA. I’ll do that.

Ms. LOFGREN. Thank you very much. I yield back the balance.

Mr. HOFFA. And I’ll make sure Vice President Mack sees it also.

Chairman SENSENBRENNER. The gentleman from Virginia, Mr.

Forbes.

Mr. FORBES. Thank you, Mr. Chairman.

Mr. Chairman, this has been a good hearing. And just a couple

of questions.

First of all, Mr. James, do you feel that ocean carrier rates are

too low now?

Mr. JAMES. Thank you, Congressman Forbes.

The fact of the matter is, whatever the level of the rates are at

the present time, they’re not the market rates. They’re not the

rates that would be set in a competitive circumstance. Whether the

rates have room to go any lower is unclear. We’ve never really had

the benefit of an experiment that would allow us to determine that.

We do know, however, that low rates certainly favor the carrier

side of this equation. And I think that it would be important to provide consumers the benefit of that lowered rate, if it can be

achieved.

Mr. FORBES. I’ve heard some suggestions about other countries

that may apply their antitrust laws to international liner shipping.

Are there any other countries? I just don’t know the answer to

that. And I’ve heard—do you know of any other countries that do

apply them? If you can, would you let us know that?

Mr. JAMES. As I understand the situation, at present there are

none that presently have a situation where the antitrust laws

would be effective to address these kinds of issues. And that’s part

of the issue. It’s a chicken and egg kind of concept, where whenever

someone starts talking about eliminating this exemption, the notion is that other countries have it.

One of the situations that we face here is that this is perhaps

an opportunity for the United States to exercise leadership in a situation where, as the OECD report indicates, countries are actually

thinking about bringing more competition to this market space.

Mr. FORBES. Mr. Koch, a question for you, if you could. You

talked about some of the results that you thought the exemption

had produced. But can you give me any particular types of activities that carriers engage in by virtue of the antitrust immunity and

maybe the economic reasons for those activities?

Mr. KOCH. I’d be happy to, Congressman.

They fall into two groups, and the testimony that we provided for

the record has many, many different specific examples. They fall

into the category of operating agreements where carriers get together with their immunity and agree to share capacity amongst

themselves, so that one particular line may also offer on its ships

space that can be used by other lines. That’s resulted in a more efficient utilization of capacity, increased service, more frequent service, and greater scope of service. And even those agreements, specifically, the OECD report said, they have antitrust immunity, but

are very positive and should not be disrupted, even though H.R.

1253 doesn’t make that distinction.

53

The other kind of agreements are what—are the rate discussion

agreements, where the carriers try, as I discussed earlier, to deal

with the incredible cyclicality and structural overcapacity in this

business to come up with rate discussion agreements that provide

some modicum of target-level pricing and some level of market stability. What OSRA did in 1999 was fundamentally change the

Shipping Act, so that they can agree on that.

But there’s no way to enforce a particular rate. All carriers negotiate individual confidential contracts, confidential amongst each

other too, which makes sure there’s adequate competition. Nevertheless, the rate discussion agreement at least provides some level

of market stability and benchmark as to how to approach what is

a very, very difficult market.

Mr. FORBES. And we’ve heard many of the unions are supporting

this. Are the ports and maritime unions supportive of this legislation?

Mr. KOCH. Thank you for that question. No, the ports wanted to

testify today and weren’t able to. I think they’ve submitted testimony against the bill. And the maritime labor unions, in fact, are

opposed to this bill.

I have a letter here, which maybe Mr. Hoffa hasn’t seen. The

Seafarers Union; the Master, Mates and Pilots; the Marine Engineers; and the American Maritime Officers are all opposed to this

legislation.

And if it’s not in the record, Mr. Chairman, I’d ask that it be put

there.

Chairman SENSENBRENNER. Without objection.

[The information referred to follows in the Appendix]

Mr. FORBES. Mr. Chairman, thank you. I yield back the balance

of my time.

Chairman SENSENBRENNER. The gentlewoman from California,

Ms. Waters.

Ms. WATERS. Thank you very much, Mr. Chairman.

I am trying to understand who is benefiting from this antitrust

immunity.

And I’d like to ask, Mr. Koch, you represent the World Shipping

Council. Are there any United States companies in your council?

Mr. KOCH. Yes, there are a couple.

Ms. WATERS. A couple. Who are they?

Mr. KOCH. Crowley and Great White Fleet.

Ms. WATERS. Are they basically operative now?

Mr. KOCH. Yes.

Ms. WATERS. Are they operating?

Mr. KOCH. Yes.

Ms. WATERS. Because it appears that, from the information that

I have, that all of the ocean liners are foreign-based.

Mr. KOCH. I’d be happy to address that.

Ms. WATERS. And as you are addressing that, I really want to

understand how immunity will make it easier for U.S. companies

to enter and remain in the ocean liner industry. And if immunity

helps, why haven’t U.S. companies been able to remain in the industry? Could you give me a little discussion on that?

Mr. KOCH. Sure. I’d be happy to. And I’d point out that Crowley

is actually headquartered in Oakland.

54

The liner industry is not just a foreign industry. It generates

more than a million American jobs.

Ms. WATERS. Could you—— Mr. KOCH. And $38 billion in wages. Now, the U.S.-owned liner

companies that were sold—such as Sealand, where I worked for 7

years, APL, Lykes, and Farrell—they were sold for a very distinct

reason, which is, in the United States, if you’re a publicly traded

company on Wall Street or even with private investment, this industry is so competitive that you get punished for owning—having

investment in the shipping industry.

I’ll give you a personal example. CSX Corporation owned

Sealand. CSX stock was punished on Wall Street. The financial analysts criticized CSX for having investment in this industry, because the rates were so consistently low, profitability was so low,

that it suffered for that. And so CSX sold the company to Maersk.

So sales of these lines only confirm how intensely competitive the

business is, not that American consumers are being harmed.

Third, the overwhelming majority of U.S. flags that are still in

operation in the international liner industry are used and financially supported by carriers that are not U.S.-owned companies. So

those vessels that still operate out there, such as Maersk and APL

and Lykes and Farrell that have U.S. flags in their service, are

companies that are headquartered offshore.

And one thing is certain, which is subjecting an already—— Ms. WATERS. I’m sorry, would you—U.S. companies that operate

offshore?

Mr. KOCH. These are U.S.-flagged vessels that are operated by— or that are used by ocean carriers that are not headquartered in

the United States, such as Maersk, for example.

So what I’m saying is that what is left under the U.S. flag in this

industry is supported ultimately by these foreign investments.

The fourth point I’d like to make is that, with this industry

struggling the way it is to make adequate financial returns, and especially with our own U.S. laws unable to attract American capital

into this industry, the presence of the companies that are there and

the capital they are investing in this business is something which

should be encouraged not disparaged, because what this industry

does is it provides the transportation infrastructure for the movement of our foreign commerce, over $500 billion worth of goods,

$1.3 billion a day through U.S. ports.

This is an industry providing an immense, not only employment

base, but an immense value to our economy at exceptionally good

rates. It should not be something that is destabilized or made unprofitable.

Ms. WATERS. Thank you.

I yield back the balance of my time.

Chairman SENSENBRENNER. The gentlewoman from Pennsylvania, Ms. Hart.

Ms. HART. Thank you, Mr. Chairman.

I have a question for Mr. Koch. You stated that under the antitrust exemption, ocean carriers are not permitted to establish inland trucking rates. Many of those carriers argued, I assume under

oath, to the contrary before a European court and later before the

European Commission. In trying to persuade the European ComVerDate 11-MAY-2000 15:03 Aug 15, 2002 Jkt 000000 PO 00000 Frm 00058 Fmt 6633 Sfmt 6601 G:\WORK\FULL\060502\80030.000 HJUD3 PsN: HJUD3
55

mission that carriers were entitled to set inland rates under the

antitrust exemption, those carriers argued that several countries,

including the United States, allow liner conferences to fix the

prices for inland transport services as part of intermodal transport.

Moreover, although the commission rejected the carriers’ argument,

the commission, relying on their evidence, did recognize that such

was the case in the United States in, I believe it’s case—Compagnie

Generale Maritime v. Commission of the European Communities.

Are you familiar with that? Could you speak to that, please?

Mr. KOCH. I’d be happy to. The Shipping Act clearly does not provide antitrust immunity to ocean carriers to get together and discuss or set the rates they pay truckers. Mr. Hoffa, on that point,

has simply been given some bad information. If they do, they are

subject to the antitrust laws today.

What ocean carriers do have is the ability to sit down and discuss the rates that would be charged the importer or the exporter.

What importers and exporters generally want, at least as an option, is what is the through rate. Let’s say, for example, Shanghai

to Chicago. Because they want one rate—‘‘I just want to move my

stuff from China to Chicago. What’s it going to cost me?’’ So they

ask the ocean carrier to provide that through rate for the whole

thing, and the ocean carrier will arrange for the inland transportation. That is what the carriers have immunity to discuss, not

what they will get together and pay you as truckers.

The European Commission issue you’re talking about deals with

a variance under European law where ocean carriers don’t have

that ability in Europe to set the through rate for what they charge

the importer or the exporter.

I hope I answered your question clearly.

Ms. HART. So you’re basically saying that they can set it if it’s

for the entire trip but not if it’s separate, basically.

Mr. KOCH. No. Let’s say GM wants to move some components in

from China, so you charge them $2,000. GM can be quoted in a

conference or a discussion agreement could recommend a rate of

$2,000 bucks, China to Chicago. What cannot happen is for the carriers to get together and say: We’re going to pay the trucker or the railroad or whoever $1,000 bucks to move it from LA to Chicago.

That they do not have antitrust immunity to do.

Ms. HART. The next leg, you’re saying the next leg is—— Mr. KOCH. Well, it’s a piece of it, yes. They have the immunity

to set the rate they charge the customer. They do not have immunity to get together and set the rate that they will pay to their own

vendors, the trucker or the railroad.

Ms. HART. Thank you.

Mr. Hoffa, do you have any comment on that?

Mr. HOFFA. What I’m saying is that the pressure is on the truck

owners, who then give the loads to the independent contractors,

who are the drivers that we are trying to organize.

So I’m not saying that the ocean carriers are dealing with the

owner-operators. They’re dealing with these trucking companies

and dictating collectively such low rates that it amounts to exploitation of these drivers.

So it’s basically the ocean carriers set low rates for the trucking

companies. The trucking companies then have a series of these

56

owner-operators that are standing around with these broken down

trucks. So the rates are so low there is nothing left for the driver

to operate on. And as I said, he has to stand around.

So that’s where the problem is. The rates are low. So low, as dictated to the trucking companies, there’s nothing left. And it is this

collective power to dictate low rates that’s the problem. And that

is because of the antitrust exemptions.

And these people are talking all the time, and no one believes

that they don’t talk about the rates they charge, that they just sit

around and talk about shipping something elsewhere over the

ocean.

This is part of their cost. So this is where they get involved to

dictate rates. And they might deny it, but the indication is that

they are artificially low across the board.

Ms. HART. I will allow—Mr. Koch, if you want to say something.

Mr. KOCH. There’s a certain amount of sympathy with what Mr.

Hoffa is saying, because rates to truckers are low. The port drivers

are not well-compensated people. There is some sympathy about

the lines being long in the ports, too.

It is the low rates that the ocean carriers are getting that are

in fact causing the pressure on trucking rates.

What is not correct is that those low rates are in any way the

result of carriers getting together to set low rates. I mean, that

wouldn’t make any sense.

Carriers, if they have antitrust immunity, are not going to use

it to set rates that are unreasonably low. If there is a complaint,

it’s more like Mr. James’ complaint that somehow the rates are

somehow higher than they should be.

Ms. HART. My time is up. I yield back.

Chairman SENSENBRENNER. The gentlewoman’s time has expired.

The gentleman from North Carolina, Mr. Watt.

Mr. WATT. Thank you, Mr. Chairman.

I guess before I ask a question, I want to make disclosure, so

that I try to respond to the gentlelady from California. Sealand,

which had a major operation in my congressional district, was acquired by a foreign-based company in a merger acquisition. That

foreign-based company has continued to have an equivalent if not

larger base of employees and people in my congressional district,

even though it moved the ownership. I mean, this is part of this

whole globalization thing that’s taking place.

So that’s neither here nor there on the issue of whether there

ought to be an antitrust exemption. But at least we should understand that, in this industry as in a number of industries, all of the

headquarters won’t necessarily be in the United States, but many

of the jobs will continue to be in the United States, because they

can’t operate in the United States, whether they’re U.S.-based or

foreign-based, without having U.S. employees.

Having said that, I’ve tried to understand both sides of this. And

there is nothing better, probably, than having a base of employees

in your congressional district to make you try to understand that

and try to be as evenhanded about this as you can.

Let me ask Mr. Koch a couple of questions. He seems to be outnumbered on this panel, so I’m going to ask him a couple of quesVerDate 11-MAY-2000 15:03 Aug 15, 2002 Jkt 000000 PO 00000 Frm 00060 Fmt 6633 Sfmt 6601 G:\WORK\FULL\060502\80030.000 HJUD3 PsN: HJUD3
57

tions. They’re not softball questions, though. They’re questions that

are truly troubling me.

Mr. Hoffa makes the argument that one of the problems here is

that rates are too low. As I understand it, rates are very low in this

industry, and you seem to be defending that, which seems to be

counterintuitive. What I could see happening, and maybe I don’t

understand how this would work, is if you didn’t have the ability

to talk to each other and give through rates and have these sharing

arrangements that you have, there would be more competition and

ultimately less carriers short term, but less carriers and less competition long term, possibly. I’m not sure that I’m there.

If you didn’t have these artificially low prices short term,

wouldn’t the most aggressive one or two carriers basically, over

time, drive out the other carriers? How do you respond to that?

That would be a concern that I think we ought to at least put on

the table here.

Mr. KOCH. Fine. I’ll do my best.

First, if I’m defending low rates, I want to correct that for the

record. Rates are very, very low. The point I was trying to make

is that they are not low because antitrust immunity exists for carriers to discuss rates. They are low because we’re suffering from a

major imbalance between supply and demand. There is overcapacity in the business.

Mr. WATT. Why wouldn’t they be low because—you can discuss

rates as long as they’re shipping rates. What you’re saying is you

can’t discuss rates for trucking.

Mr. KOCH. What we pay the truckers, that is correct.

Mr. WATT. Right.

Mr. KOCH. That is correct. But just intuitively, if carriers get together to discuss shipping rates, their purpose is not to get them

too low. Their purpose is to try to stabilize the market and rates

out there. The fact that they are not very effective at the present

time in doing that because the market conditions are so adverse because of supply and demand is just the nature of what the market

is right now.

If I’ve answered that part of your question, I’d like to go to the

next, which is what would happen if you did lose the Shipping Act

system. And I don’t know that anybody is ever clairvoyant enough

to predict with certainty what would happen. But I think it’s fairly

clear that if you destabilize this industry any further, you will

clearly cause rates in the short term, as you point—to potentially

go down. And you’re almost certain to have, as a result of that, a

number of carriers go out of business and have severe consolidation

in this business.

As you point out, antitrust theory assumes that the most efficient operator will survive. And, therefore, it’s good, because the efficient ones survive.

In this industry, there are very many different situated carriers.

Some are State-controlled, as you pointed out. Some are structured

very differently. And it is by no means certain that the most efficient carrier would be the one to survive.

As you said—I think your term was the most aggressive carriers

would survive. I don’t know who wins that war in the end. I don’t

know who’s left standing when it’s all over. But I’m fairly confident

58

that you will not have the number of carriers or the number of

choices that you do today, and I don’t know who will end up holding those carriers that do.

Chairman SENSENBRENNER. The gentleman’s time has expired.

The gentleman from Pennsylvania, Mr. Gekas.

Mr. GEKAS. I thank the Chair.

I would like to take personal privilege in substituting for the

Chairman’s inclusion of Wisconsin cheese in his hypothetical. I

want to substitute Hershey chocolates in the same hypothetical, so

keep that—— [Laughter.]

Chairman SENSENBRENNER. Also a very good product. [Laughter.]

Mr. GEKAS. Yes, thank you.

The Congress is fast approaching finalization of trade authority

or fast-track authority for the President of the United States and—

it being in conference as we speak.

Without telling us whether you approve of or not the concept of

fast-track authority for the President, I would like to know, assuming that it will pass, and I think it will in a final conference report,

what does this issue have to do with the President’s negotiations

with other nations on trade? Does this have an impact, this particular issue?

Let’s start with Mr. Coleman.

Mr. COLEMAN. Well, I will go on record as being a very, very

staunch supporter of the President having trade promotion authority. I think it’s essential in our global economy that our President

be able to negotiate trade agreements.

I think that the cost of ocean transportation has a lot to do with

any kind of a trade agreement that’s negotiated. Trade agreements

are just exactly that. It’s the ability to move product and sometimes services back and forth between countries in our global economy.

Transportation costs, ocean transportation costs, are a very real

part of the cost of any product or service that’s provided in the

global economy. So I think that antitrust immunity basically allows

a carrier to arbitrarily raise transportation costs.

Let me give you an example, if you don’t mind. Agriculture is an

example. Contracts for the sale of products abroad, for agricultural

products, are negotiated months in advance. Prices are set, the

product is produced, the product is gotten ready for shipment, and

then a carrier can come around and arbitrarily announce a freight

rate increase. This totally destabilizes the entire process. It will put

a shipper in the position of either perhaps losing his contract or

having to move his products to the global marketplace at a loss. Or

even if the carrier withdraws the freight rate increase, which they

do many times—they will announce a major freight rate increase,

and then they will at the last minute withdraw it—it still has completely destabilized the market.

The buyer of our American products in many cases will go to another country that produces a similar product where there is stability in ocean shipping, and they will purchase that product from

the foreign country. New Zealand and Australia are two countries

that are benefiting from our unstable situations.

59

So I think that antitrust immunity affects freight cost, and I

think freight costs are a part of any trade agreement that’s negotiated.

Mr. GEKAS. Mr. Hoffa?

Mr. HOFFA. Well, on behalf of the Teamsters, we’re against fast

track, and we think that Congress should not abdicate its responsibility to have input. You are the people that are elected by the people, responsive to the people. And you’re the ones that reflect the

feelings of America. And I believe you ought to have——

Mr. GEKAS. But assuming that it passes——

Mr. HOFFA. You ought to have input into any type of bill that’s

passed or any type of treaty or trade agreement.

And also, under the fast track, we would suffer by losing a lot

of consumer protection bills that we’ve passed, Congress has

passed——

Mr. GEKAS. I understand.

Mr. HOFFA [continuing]. Legislation passed——

Mr. GEKAS. I understand that. I said, assuming that it passes,

is what my question is.

Mr. HOFFA. All right, I just wanted to let you know where I

stood. [Laughter.]

Mr. GEKAS. Yes. I knew that.

Chairman SENSENBRENNER. Will the gentleman yield?

I just want to put on the record at this point in time that I have

expressed my concern to U.S. Trade Representative Zoellick that

the Europeans will end up putting competition clauses into the latest round of trade agreements that would legitimately fall under

the jurisdiction of the Judiciary Committee, since competition is

our bailiwick and not that of Ways and Means. And I advised him

that I am strongly opposed to that and would strongly oppose any

type of international trade agreement that was negotiated that

would end up modifying U.S. competition law, whether it be the

antitrust laws or the Federal Trade Act, in any way, shape or form.

I want to put that marker in there right now, so that 4 years

from now, we all of a sudden don’t find out that our ability to

amend the antitrust laws ends up being delegated to the World

Trade Organization.

Mr. GEKAS. I ask unanimous consent that I be granted an additional period of time to hear the full answer of Mr. Hoffa, and the

same——

Chairman SENSENBRENNER. The gentleman will get an additional

minute.

Mr. HOFFA. Okay. My point is I think that we should get rid of

this antitrust exemption, because there would be more competition

and more of an ability for us to raise the level of the truck drivers.

That’s our position.

And I don’t think—and to be consistent with that, you wonder

how that works out with any type of a fast-track agreement, which

would possibly make a treaty nullify our antitrust laws. So it’s conceivable there could be a conflict here.

But as we said at the beginning, we’re against this antitrust exemption. We want that out. I don’t see the conflict. But conceivably, they could get into negotiations with somebody that say, on

60

top of that, all of your antitrust laws have to go. So I think there

could be a conflict there.

They’re talking about repealing—many trade agreements go to

some of our consumer protection laws that our Legislatures in different States have passed. They have to get removed, because

they’re found to be in conflict with the World Trade Agreement, or

NAFTA, or something like that.

So there really is a problem here with fast track and how it conflicts with our laws, both State and Federal.

Chairman SENSENBRENNER. The gentleman’s time has expired.

Mr. GEKAS. Mr. Chairman, I need an extra 30 seconds to allow

Mr. Koch to answer the same question, if he can in 30 seconds.

Chairman SENSENBRENNER. If he can do it in 30 seconds, because Mr. Conyers is really getting antsy to have his licks.

Mr. GEKAS. Well, Mr. Conyers owes me a couple of seconds over

the years. [Laughter.]

Mr. KOCH. I’ll try to be brief, Congressman. Our industry supports anything that promotes free trade, international trade, because that’s what we do. That’s what we carry. So we would support fast track.

I would also say—I just have to say that the statements by Mr.

Coleman are just simply not true, particularly as to agricultural exports. Rates are so low—I refer you to the Department of Agriculture’s own report that—to say ocean carriers would price a commodity’s transportation in such a way as to keep it from getting to

a market and, therefore, lose the cargo, is just plain silly. It is nonsense to make that kind of argument. The facts don’t support it.

There are no facts to support it.

If you took the total cost of importing—now, on the import side,

all commodities by liner shipping, whether they’re for consumers or

industrial, and averaged it out, it would be $130 per American

household. This is not a huge part of the cost of either imported

goods—— Mr. GEKAS. But back to the question, fast track would have to

take into consideration what this legislation would do.

Mr. KOCH. No, I don’t think it would. I think it is a separate

issue.

Mr. GEKAS. Thank you. I yield back the balance of my nontime.

Chairman SENSENBRENNER. And it is nontime. [Laughter.]

Chairman SENSENBRENNER. The gentleman from Michigan, Mr.

Conyers.

Mr. CONYERS. Thank you, Mr. Chairman.

First of all, I want to greet my former Detroiter, James Hoffa,

and let him know he really knows how to put a pro-labor Congressman in a tough spot. I want to congratulate you for that, sir.

[Laughter.]

Mr. CONYERS. I could really take care of most of the other witnesses with you, but this complicates things, and especially since

you relate it to other larger issues and where this will all spin out.

Now, the shippers would love this, so there you are. General Motors, Ford, and Chrysler happen to be laying around Detroit since

the beginning of the automobile industry; they would like it. The

cargo consolidators, Mr. Coleman’s group, they would love it. But

the rest of the labor movement, I get an uneasy silence, or an outVerDate 11-MAY-2000 15:03 Aug 15, 2002 Jkt 000000 PO 00000 Frm 00064 Fmt 6633 Sfmt 6601 G:\WORK\FULL\060502\80030.000 HJUD3 PsN: HJUD3
61

right opposition, which leaves your friends in a difficult position.

The carriers oppose it.

And so I just want to ask our new Assistant Attorney General

in charge of antitrust, whom we welcome to the Committee, his

first appearance before us, which I hope will be—he will receive the

kind of kind cooperation that will lead him to be anxious to respond to our invitations in the future. [Laughter.]

Mr. CONYERS. Can you explain—where is that report that came

out? Let’s take a look here at a report that kind of tries to tell us

what’s happened with the 1998 Ocean Shippers Reform Act. I need

the name of the report. Remember that report that came out? ‘‘The

Impact of the Ocean Shipping Reform Act of 1998,’’ prepared by the

Federal Maritime Commission, and they released it in September

of last year.

Mr. JAMES. I’m familiar with the report, sir.

Mr. CONYERS. You said what?

Mr. JAMES. I’m familiar with the report.

Mr. CONYERS. You’re familiar with it.

So they didn’t come up with this notion that’s before us in the

form of a bill, did they?

Mr. JAMES. No, they didn’t.

Mr. CONYERS. And—— Mr. WATT. Is your mike on?

Mr. JAMES. Yes, it is.

Mr. CONYERS. Well, pull the mike closer.

Well, what—did you disagree with the report?

Mr. JAMES. I don’t know that I necessarily need to disagree. I

think—— Mr. CONYERS. Did you like the report? [Laughter.]

Mr. JAMES. Did I like the report? I read it. I thought it had some

interesting insights in terms of what it suggested.

But the issue is not, I think, one that has to be taken in very

binary terms. Did the reform act work, or is the reform act not

working? The real issue that we’re attempting to address here is

sort of the nature and quality of competition.

As we’ve talked about the discussion today, the ocean carriers

under the current situation are allowed to act as a cartel. Mr.

Hoffa and Mr. Coleman represent organizations that are forced to

deal with this cartel on a daily basis, and it has consequences for

their operations.

Mr. CONYERS. Okay, Mr. James, forgive my intrusion, but I only

have a couple of minutes left.

This act, as counsel advises me, was about the impact of antitrust on ocean shipping. So you and I can have some longer discussions about that, but the gist of the report, I thought, was that everything was okay as it is.

Now, let me ask you another question. I’ll put a pin in that one.

Is there any rationale for people attempting to remove the antitrust immunity provision, projecting that costs will go up, and others projecting cost will go down, which you’ve heard here today?

Can you help me sort that one out?

Mr. JAMES. I’m not exactly sure the basis for projection that cost

would go up. I think the issue that’s discussed here is the extent

to which the existence of the immunity permits competition. The

62

substance of the report was that OSRA had, the effect to the extent

that it permitted more independent action by shippers, permitted

a degree of additional competition. By the same token, it permitted

the use of these discussion agreements, which a different report by

the FMC, in reference to the 1998 situation in the Pacific trades,

suggested that the discussion agreement, the so-called TSA, Transpacific Stabilization Agreement, has had potentially anti-competitive effects and was something that was of concern to the FMC

commissioner who investigated that matter.

Chairman SENSENBRENNER. The gentleman’s time has expired.

The gentleman from Virginia, Mr. Goodlatte.

Mr. GOODLATTE. Thank you, Mr. Chairman. Mr. Chairman, I

very much appreciate your holding this hearing. I do not have any

questions for the witnesses. In fact, I’m just learning about the

issue.

But I have been requested by the Virginia Port Authority to put

a letter, from them to me, into the record, and I ask permission to

do so.

Chairman SENSENBRENNER. Without objection.

[The information referred to follows in the Appendix]

Mr. GOODLATTE. Thank you, Mr. Chairman.

Chairman SENSENBRENNER. The other gentleman from Virginia,

Mr. Scott.

Mr. SCOTT. Thank you, Mr. Chairman.

Mr. Hoffa, I think I understand the idea that if the cartel has

got a price that doesn’t leave enough money left over for truckers,

that you can’t get a reasonable fee and that they’re going to be

using broken down trucks. People are going to actually operate on

that.

My question though is how this bill will affect that situation, because it seems to be that if they’ve agreed on that low fee, if they

can’t agree anymore, at least somebody would be willing to go for

that low-ball fee. If others charge a higher fee, the one with the

low-ball fee is going to get the contract on a competitive bid, and

you’re right back where you started from.

How would—so I guess my question is, how would the passage

of the bill relieve the situation you’re in?

Mr. HOFFA. Our belief is that this cartel is making tremendous

amounts of money. There’s no doubt about that. They’re doing very

well. And they’re squeezing the people below them to make this

money.

If we broke up the cartel, at least they wouldn’t be working like

they’re working now, and we could start making separate arrangements with them. But they’re comfortable with the fact that they

have the cartel, and they just deal with each other, and they collectively exploit everybody below them.

So the first step is let’s break up the cartel and let’s see what

happens. I mean it’s like OPEC. We broke up OPEC. Let’s see what

happened with OPEC, and maybe we can talk to Venezuela, maybe

we can talk to other companies—I think that’s the—other countries. I think that’s the idea.

If we could break up the cartel, then they could—we would see

what happens economically with their dealing with trucking comVerDate 11-MAY-2000 15:03 Aug 15, 2002 Jkt 000000 PO 00000 Frm 00066 Fmt 6633 Sfmt 6601 G:\WORK\FULL\060502\80030.000 HJUD3 PsN: HJUD3
63

panies and setting overall rates that are the ultimate rate that is

set for the entire transportation of a container.

So I think the answer is, you’re not going to know. It’s like

breaking up OPEC. If you broke up OPEC, what would happen?

Well, we could have more competition. We might be able to get better deals with them, get lower rates.

But let’s go the other way. Let’s take this cartel. This cartel has

collectively got together; they’re making a lot of money exploiting

everybody down. Let’s break up the cartel, let’s get rid of the antitrust exemption, and let’s see what happens, because I think we

can then start dealing with them on an individual basis, and they

won’t be able to rely on each other to exploit people. And perhaps

we could do better in setting rates.

Mr. SCOTT. Mr. Koch, several people have mentioned the stability

of the industry. If the bill is passed, what effect would it have on

investments in U.S. ports, employment level at ports, and salary

levels at ports?

Mr. KOCH. To the extent the bill was enacted, Congressman, and

produced the results anticipated, it would cause further destabilization and rate droppage. It would obviously—Mr. Hoffa’s got a point,

which is, because rates are so low, carriers are forced to try to find

cost savings everywhere. Truckers, he’s got a point, are not making

what he would like to see them make.

If you drive rates even further, that pressure on the truckers will

increase, the pressure on longshoremen would increase, the pressure on oceangoing crews would increase, on sales forces, everywhere. So what that would do is certainly have a major impact on

the more than 1 million Americans who get their employment from

this industry.

What follows after that, what kind of consolidation emerges, and

what kind of price competition reduction might occur, is somewhat

speculative. Nobody would really know the answer to that. But it

certainly would be a more concentrated industry with fewer carriers. And it would certainly be a situation where, because they’d

have to go through that shakeout period, there would be a lot of

people who work who are affected by these companies who would

get squeezed even more than they are today.

Mr. SCOTT. How much of the rate-setting would be affected by

the antitrust repeal, as opposed to the idea that the rates are set

pretty well worldwide and it doesn’t matter what we do here?

Mr. KOCH. Well, shipping rates aren’t set worldwide. They’re

really set by trade lanes. We have transatlantic rate—trade lanes,

transpacific. I mean, every trade lane that serves American commerce will have different rates. So they really aren’t set on a worldwide basis.

What is true is that——

Mr. SCOTT. A shipper doesn’t have a choice between a lot of different shippers? And if we change our antitrust exemption, it

would get—I mean, would the price change?

Mr. KOCH. The assets that are used in this business certainly

can be moved from one trade to another, to the extent profitability

got to the point where you couldn’t make money in a U.S. trade.

Theoretically, you could move it to another trade; let’s say Asia-EuVerDate 11-MAY-2000 15:03 Aug 15, 2002 Jkt 000000 PO 00000 Frm 00067 Fmt 6633 Sfmt 6601 G:\WORK\FULL\060502\80030.000 HJUD3 PsN: HJUD3
64

rope trades. That would be, frankly, difficult to do, because there

is already adequate capacity in those trades.

That’s one of the traps the carriers find themselves in. They

build capacity for a trade. If that trade collapses, that investment

is sunk. It’s there to serve what was projected. And you theoretically can move it somewhere else, but if you’ve already invested to

serve those other trades, then you just exacerbate the problem in

that trade by moving capacity around.

Chairman SENSENBRENNER. The gentleman’s time has expired.

The gentlewoman from Texas, Ms. Jackson Lee.

Ms. JACKSON LEE. Thank you very much, Mr. Chairman.

Let me thank the gentlemen for their testimony and indicate my

presence on the floor for debate, having missed their statements.

So forgive me if some of the inquiries have been mentioned in your

statement. But I would like to make a number of inquiries.

And before I do that, let me simply say that this is a dilemma,

but I think a point that is not a dilemma but, frankly, sad is to

acknowledge that all of the major carriers operating in and out of

the United States are now under a foreign flag. I think that’s disappointing.

If you begin to look at our history, even if you happen to be a

history buff that looks at the various early wars, and not that you

would necessarily be a hawk, but you looked at the various sea

wars and know the prowess and the expertise that we had in the

United States on shipbuilding, and the controversy that we’ve had

over the years, regarding that industry, and to think now that our

carriers are under a foreign flag.

With that said, let me try to understand this issue with Mr.

James and, just in a brief scenario, have you taken a position?

When I say you, has the DOJ taken a position on this legislation?

Mr. JAMES. Yes, we have, Congresswoman. We have consistently

supported elimination of this antitrust exemption, and this has

been the position of the Department of Justice for at least 12 to 13

years.

Ms. JACKSON LEE. And you see no problem with this sort of benefit being given to foreign carriers? I know there are a lot of subsets. There are the shippers and—but you don’t see the difficulty

in giving this benefit, this exemption, to foreign-flagged carriers,

who will then have an added advance, if you will, to some of the

needs that we have here in the United States?

Mr. JAMES. We are actually opposed to the exemption, and so——

Ms. JACKSON LEE. Okay. I wasn’t hear——

Mr. JAMES. I apologize. We are actually opposed to the exemption

and believe that this benefit, the idea that a cartel should be permitted to stabilize this industry, is actually a bad public policy

idea.

Ms. JACKSON LEE. And why do you think—why would you then

take the position that they don’t need it? What can they do in the

alternative besides seek an exemption?

Mr. JAMES. They could compete like companies do in other industries and deliver to consumers the benefit of competition. We are

opposed to the cartel.

Ms. JACKSON LEE. And your research suggests they could compete?

65

Mr. JAMES. Absolutely.

Ms. JACKSON LEE. Mr. Hoffa, would you kindly just—because

there is this dilemma that the Ranking Member has exposed and

is clear between some of the Federal trades and, of course, the

Teamsters. I’m interested in creating jobs. How do we balance that

by opposing the exemption?

Mr. HOFFA. Well, we want the antitrust exemption lifted because

we believe then we would be able to work with—it would have

some effect that they cannot rely on each other to set rates that

are artificially low. And perhaps then it would start moving and

getting us an ability to deal with these carriers and the trucking

companies, so we can organize our people to raise the level of these

workers.

Everybody at this table has admitted that what the truckers get

is artificially low and they are being exploited. But it doesn’t

square with the fact that the companies are making record profits.

So somewhere, somebody is grabbing that money, and it is not

trickling down to where it is. And we have—we’ve tried it with the

antitrust exemption right now, and it hasn’t worked. The money

hasn’t trickled down.

Therefore, we agree with the Chairman that they should be lifted. And then, with competition, it could open the fact that we could

have better rates for the drivers and that more of these profits

would trickle down to the people who need the jobs and have to be

able to live a life in America that is one that they can enjoy, as

opposed to basically living in your truck, as many of these people

do.

Ms. JACKSON LEE. Let me just have you broaden your perspective just for a moment, and I understand that you support the lifting of the exemptions so that there can be the kind of regulation

that needs to be. But how do you balance that with your needs and

the individuals that you represent, truckers, and trickling down to

the other workers, such as port workers, which have a concern that

it hurts them if we don’t have the ability for the cartel to save

itself—because that’s what they’re saying. Do you believe that this

lifting will trickle down to all of the workforce?

Mr. HOFFA. I think it would, and I don’t know of anybody that’s

doing well at these ports. They’re being under tremendous pressure

right now with so-called globalization and everything else that are

pushing down the wages that they make right now. The truckers

are one of them. The other people are also suffering the same way.

These ports are under tremendous pressure right now, because of

these cartels that are setting these rates, taking all the money and

not sharing it and making sure that other people share in this

great amount of money that’s being made.

So we believe, if you break up the antitrust, we’re going to be

able to deal with these companies and maybe then work out the

fact that we can get more money for our truckers, more money for

the people at Sealand and other companies that are working in the

ports across the United States.

Ms. JACKSON LEE. That is a concern.

Chairman SENSENBRENNER. The gentlewoman’s time has expired.

Ms. JACKSON LEE. Thank you.

66

Chairman SENSENBRENNER. Let me thank each of the witnesses

for their very good testimony today. This hearing was much better

than the one we had 2 years ago on this subject.

There being no further business, the Committee is adjourned.

[Whereupon, at 12:07 p.m., the Committee was adjourned.]

(67)

A P P E N D I X

STATEMENTS SUBMITTED FOR THE HEARING RECORD

PREPARED STATEMENT OF THE HONORABLE F. JAMES SENSENBRENNER, JR., A

REPRESENTATIVE IN CONGRESS FROM THE STATE OF WISCONSIN

The Committee on the Judiciary has exclusive jurisdiction over laws pertaining

to antitrust and effective competition in the marketplace. As Chairman of this Committee, I have made it a priority to carefully examine the implementation and enforcement of our antitrust laws to ensure effective competition in our free market

economy. This Committee also periodically considers competitive aspects of various

industries including those exempt from antitrust laws. Today, we will consider H.R.

1293, the Free Market Antitrust Immunity, or ‘‘FAIR Act of 2001,’’ a measure I introduced to remove the antitrust exemption presently accorded to ocean carriers.

The United States has the world’s largest economy, and is its largest market.

International trade represents close to 30 percent of U.S. Gross Domestic Product

and accounted for nearly a quarter of U.S. economic growth over the last decade.

Most of this trade is conducted over ocean shipping lanes, and this industry forms

the basis of an international commercial system upon which the strength of the

American economy depends. The Shipping Act of 1916 exempted ocean carriers from

United States antitrust scrutiny. As a result, carriers have been free to jointly set

ocean shipping rates in what are known as carrier conferences or discussion agreements.

These shipping rates directly affect the international commercial opportunities of

potential U.S. exporters and the consumer choices of all Americans.

Subsequent amendments to the 1916 legislation have helped remedy persistent

competitive concerns within this industry, and the Ocean Shipping Reform Act of

1998 helped address some of these concerns by permitting independent shippers to

enter into service contracts with ocean carriers on a confidential basis.

However, over the last 75 years, the market conditions upon which ocean carrier

antitrust immunity was predicated bears little resemblance to modern realities.

Today, there are no major American-owned ocean carriers. As a result, this protection almost exclusively benefits foreign-owned carriers at the expense of Americans.

American shippers and companies which consolidate smaller shipments for import

are given little choice but to pay rates that are collusively set by the carriers themselves.

American corporations can not avail themselves of export opportunities that

would exist in a competitive marketplace. American workers who transport goods

to and from ocean ports are required to accept trucking fees on what amounts to

a ‘‘take it or leave it’’ basis. And ultimately, American consumers are forced to pay

higher prices for a variety of imported goods. If Congress were to consider granting

antitrust immunity to ocean carriers in today’s shipping environment, it would be

hard-pressed to justify this policy to the American people.

International comity has traditionally been a factor Congress considers when

passing laws pertaining to international trade. However, Congress has a continuing,

affirmative obligation to periodically examine or repeal laws which become detrimental to the well-being of American citizens.

Moreover, while maritime countries currently permit ocean carriers to evade competition laws, there has been considerable movement away from this policy. Canada

is currently examining fundamental reform proposals and a European Union Court

recently prohibited carrier conferences from collectively establishing inland transportation rates.

In addition, last April, the Organization for Economic Cooperation and Development, an international organization comprised of the world’s leading economies,

issued a comprehensive report examining the international ocean carrier industry.

The report, which will be included in today’s hearing record, concluded that ‘‘antiVerDate 11-MAY-2000 15:03 Aug 15, 2002 Jkt 000000 PO 00000 Frm 00071 Fmt 6601 Sfmt 6621 G:\WORK\FULL\060502\80030.000 HJUD3 PsN: HJUD3
68

trust exemptions for conference price-fixing no longer serve their stated purpose— if they ever did—and are no longer relevant.’’ The report further recommended that member countries ‘‘seriously consider removing antitrust exemptions for price-fixing and rate discussions.’’ H.R. 1253 would

accomplish precisely this goal, and the American people deserve no less.

Before I yield to Ranking Member Conyers, I would like to acknowledge the leadership of former Chairman Henry Hyde, who introduced similar legislation last Congress and has long been a leading advocate for American shippers and consumers.

PREPARED STATEMENT OF THE HONORABLE SPENCER BACHUS, A REPRESENTATIVE IN

CONGRESS FROM THE STATE OF ALABAMA

Mr. Chairman, ranking Member Conyers, and distinguished Members of the Judiciary Committee, as a member of this Committee and the Transportation and Infrastructure Committee, I have spent considerable time on the issue of ocean carrier

antitrust immunity. At the outset, let me say that I believe the reforms made in

the Ocean Shipping Reform Act of 1998 (OSRA) are working, and that we should

carefully consider the entire regulatory scheme under which this industry is regulated before we rush to enact changes to it.

In September 2001, the Federal Maritime Commission released a two-year study

of OSRA’s impact on the liner shipping industry. The report concluded that OSRA

is working as intended. There is price competition in the industry; rates are actually

lower than they were 15 years ago. There is ample capacity, high quality service

and regulatory oversight. In this industry, Mr. Chairman, we are in a much better

place today than we were prior to the enactment and implementation of OSRA.

In contrast, repeal of the carriers’ limited antitrust immunity would disturb the

hard-won consensus reached in OSRA. Instead of providing a benefit to the market,

such a change would result in a destabilization of the market, destructive price

wars, severe financial loss, industry consolidation and poorer service for U.S. customers.

Finally, as we all recognize, the ocean carrier industry is undergoing major

changes in the way it secures its ships and containers to thwart terrorist attacks.

I caution the Committee from proceeding down a legislative path that will require

the industry to redirect resources from port security to economic matters at this critical time for our nation.

Mr. Chairman, liner shipping is the heart of our economy. Whether we realize it

or not, products from around the world fill our offices, homes and backyards. Many

of these products arrived in the U.S. on container ships. We should work together

to ensure that this industry remains secure and strong in the years to come.

Thank you.

PREPARED STATEMENT OF THE HONORABLE HOWARD COBLE, A REPRESENTATIVE IN

CONGRESS FROM THE STATE OF NORTH CAROLINA

Mr. Chairman, thank you for conducting this hearing on H.R. 1253, the Free Market Antitrust Immunity Act of 2001. I am glad to have the opportunity to participate here today because, as you know, I was Chairman of the Subcommittee on

Coast Guard and Maritime Transportation when we first began to discuss ocean

shipping deregulation almost eight years ago.

As Chairman of the Subcommittee, I held extensive hearings on this issue and

believe that the compromise reached in 1998 represented a delicate balance that

had the support of a majority of the major stockholders in the ocean shipping industry. That is certainly not to say that this law is perfect. In fact, I would venture

to say that the Congress rarely passes a perfect piece of legislation.

As you know, the Ocean Shipping Reform Act of 1998 (OSRA) dramatically

changed the regulatory and competitive environment of the ocean shipping industry.

It is also important to recognize that the changes brought about by this legislation

took effect only three years ago—May 1, 1999. In September of 2001, the Federal

Maritime Commission released a report stating that OSRA is working to the benefit

of all parties, including customers, and rates continue to be competitive.

In respect to this hearing and its focus on the antitrust aspects of the Ocean Shipping Reform Act, there are several key points that I think merit attention. While

I would not generally consider myself a supporter of antitrust immunity, it is important to recognize that the exemption from antitrust laws for ocean carriers has existed since 1916 and is the policy of our international trading partners. Additionally,

both the railroad industry and the motor carrier industry, both of which currently

69

operate in a deregulated environment, enjoy similar immunity. I do believe that unilateral action by the United States to revoke antitrust immunity would disrupt

international trading conditions and unfairly disadvantage U.S.-flagged carriers and

shippers.

If given time, I also believe that these reforms will provide a unique opportunity

for non-vessel-operating common carriers (NVOCCs), shippers’ associations and

freight forwarders to thrive. Shippers now have numerous choices in deciding how

their goods are transported and these intermediaries may become significant players

with which carriers and conferences will have to negotiate.

Finally, while some opponents of the antitrust exemption argue that today’s car- riers are foreign-owned and therefore should not receive U.S. antitrust immunity,

it is important to recognize that this industry employs approximately 528,000 American workers, including carrier management, tug crews, longshoreman, and harbor

pilots. Further, it is estimated that the liner shipping industry generates approximately $38 billion annually in U.S. wages. That said, in my opinion, although these

carriers may be foreign-owned, the American worker, customer and economy greatly

benefit from the success of this industry as a whole.

Mr. Chairman, in an ideal world we would have a completely deregulated global

shipping market with full competition. I believe that this notion is probably not realistic, and therefore, I maintain that antitrust immunity is desirable in order to

protect U.S. carriers and is in the national security interest of our country. Simply

stated, we

should allow the Ocean Shipping Reform Act to work as we intended and as it

is doing.

PREPARED STATEMENT OF THE HONORABLE LINDSEY GRAHAM, A REPRESENTATIVE IN

CONGRESS FROM THE STATE OF SOUTH CAROLINA

Mr. Chairman, ranking Member Conyers, and distinguished Members of the Judiciary Committee, I am submitting this statement for the record of the Committee’s June 5, 2002, hearing on ocean carrier antitrust immunity. This issue and the overall regulatory scheme governing the liner shipping industry is a matter of great importance to the State of South Carolina, which is home to the Port of Charleston,

the busiest container port along the Southeast and Gulf coasts and the fourth busiest nationwide.

The enormous role in which international trade plays in South Carolina is not

well known outside the State, but it is well recognized within our borders. International trade through the Port of Charleston provides over 83,000 jobs throughout

the State and pumps $2.6 billion in wages into our economy each year. Charleston

has played a major role in international commerce throughout our nation’s history,

and with three major port-related projects underway today, it will continue its leading role in the future.

In 1998, Congress approved the Ocean Shipping Reform Act (OSRA). It was a

hard-won consensus among shippers, carriers, ports and the maritime unions. Enactment of OSRA was a four-year project for Congress, and we are now seeing the

benefits of its implementation. There is ample capacity in the ocean carrier industry, high quality service, regulatory oversight and price competition. Rates are lower

than they were 15 years ago. Last September, the Federal Maritime Commission

released a two-year study of OSRA. It concluded that OSRA is working as intended

to the common benefit of shippers, ports, ocean carriers and transportation intermediaries.

Mr. Chairman, in order to keep our ports strong and vibrant into the future, we

should allow OSRA to continue in effect and not make major changes to it. If it’s

not broken, then let’s not try to fix it. In my opinion, repeal of the limited antitrust

immunity that ocean carriers use to address the structural defects and chronic instability of this unique market would disturb the hard-won consensus reached in

OSRA. The result will be destabilization of the market, destructive price wars, severe financial loss, industry consolidation and poorer service for U.S. customers.

We also must be mindful of the fact that this is an international business which

must operate under a regulatory regime that is acceptable to all trading nations.

No country in the world applies its domestic antitrust laws to liner shipping. Instead, the current regulatory regime, overseen in the U.S. by the Federal Maritime

Commission, is well-understood, functioning well and is internationally accepted.

Finally, the Chairman knows full well, having served as the House’s point person

on much of the post-9-11 anti-terrorism legislation, the heavy burdens being placed

on our nation’s transportation infrastructure to prevent future attacks. The port

community and the ocean carriers are front and center in this debate, and they are

70

devoting considerable manpower and resources to confronting the challenge. At this

time of intense activity on this front, we should not be enacting legislation to fundamentally alter the economics of the industry that keeps our ports bustling, productive and efficient links to the world.

Thank you, Mr. Chairman.

PREPARED STATEMENT OF THE HONORABLE DARRELL ISSA, A REPRESENTATIVE IN

CONGRESS FROM THE STATE OF CALIFORNIA

Thank you, Chairman Sensenbrenner and Ranking Member Conyers, for holding

this hearing on H.R. 1253, the ‘‘Free Market Antitrust Immunity Reform (FAIR) Act

of 2001.’’

I am very familiar with the shipping industry, and I am satisfied that competition

exists within the current model. As a small business owner for over twenty years,

I distributed my products all over the world. I depended on the shipping industry

to deliver my products on time and unblemished. I had choices as to which carrier

to use, and the marketplace was not dominated by a single carrier or pricing

scheme. I am confident that there is price competition within the industry.

The antitrust immunity the shipping industry currently has is limited in scope.

Carrier agreements have no authority to limit service contracting activities or enforce rates. However, these agreements serve the function of allowing shipping lines

to exchange market information, improve planning for capacity utilization, and diminish rate volatility. The need for limited antitrust immunity is best illustrated

in the market with which I am most familiar—America’s trans-Pacific trade.

Like most trade lanes, a severe cargo imbalance exists between the directions of

the lines’ roundtrip voyages. Precisely two containers of U.S. imports move east for

every container of U.S. exports traveling west. As a result, carriers incur heavy expenses repositioning empty equipment. In this situation, limited antitrust immunity

is vital. It allows the carriers to exchange and discuss market forecasts, capacity

plans, and determine a rational economic response.

Mr. Chairman, thank you for holding this hearing today, and I look forward to

hearing the testimony from the panel of witnesses.

PREPARED STATEMENT OF STEWART D. HAUSER, PRESIDENT, NEW YORK/NEW JERSEY

FOREIGN FREIGHT FORWARDERS AND BROKERS ASSOCIATION, INC. & CARLOS

RODRIGUEZ, ESQ., TRANSPORTATION COUNSEL TO THE ASSOCIATION, RODRIGUEZ

O’DONNELL, FUERST GONZALEZ & WILLIAMS

Mr. Chairman, Congressman Conyers, and Members of the Committee, on behalf

of the members of the New York/New Jersey Foreign Freight Forwarders & Brokers

Association (the ‘‘Association’’), I would first like to thank you for the opportunity

to provide written testimony before the Judiciary Committee as you consider H.R.

1253, the ‘‘Free Market Antitrust Immunity Reform Act,’’ or the ‘‘FAIR Act.’’ We are

pleased to submit comments before the Judiciary Committee as you consider various

antitrust aspects currently facing the international ocean shipping industry and

public. H.R. 1253 represents a bold and needed step forward for my industry. We

are pleased to see that the Committee remains committed to overseeing implementation of recent changes to our nation’s shipping laws, and more importantly, that

this body is serving as a forum for open debate of the issues confronting our industry and, indeed, the American public.

My comments reflect the views of our membership, which have been actively involved in ocean shipping regulatory reform for decades. I trust that you will find

our comments constructive and insightful as you examine antitrust aspects of U.S.

shipping laws and regulations. We hope that the Committee will ultimately agree

that now is the time for additional legislative modifications to our nation’s shipping

laws.

INTRODUCTION

The Association would also like to thank you, Chairman Sensenbrenner, for introducing H.R. 1253 and for holding this important hearing. You promised last session

that this congress would revisit shipping reform and, in particular, the outstanding

issues of concern to our membership. We would also like to thank Representative

Hyde for his long-standing and continued support of our Association and the Ocean

Transportation Intermediary (‘‘OTI’’) industry. We are all well aware of the ‘‘delicate

compromise’’ that resulted in passage of the Ocean Shipping Reform Act of 1998

71

1 ‘‘Non-vessel-operating common carrier’’ means a common carrier that does not operate the

vessels by which the ocean transportation is provided, and is a shipper in its relationship with

an ocean common carrier. See 46 U.S.C. app. §1702(17)(B) (2001).

(‘‘OSRA’’), and we are all well aware that forwarders and non-vessel-operating common carriers (‘‘NVOCCs’’) 1 were not part of the final OSRA compromise. This piece

of legislation and this hearing are very important to helping ensure that our nation’s shipping laws serve the interests of the American public.

By way of background, the New York/New Jersey Foreign Freight Forwarders and

Brokers Association is an association of approximately one-hundred-sixty (160)

ocean freight forwarders, NVOCCs and customs brokers. We have served the New

York-New Jersey port area, the largest sea port operation in the U.S., for over ninety years. The Association is also an affiliated member of the National Customs Brokers and Forwarders Association of America, Inc., the nationwide organization of

forwarders and brokers. The New York/New Jersey Association has been actively involved in representing the views of forwarders and brokers at the regional, national

and international levels throughout the years. I was named as a private-sector advisor to the U.S. delegation to the Organization for Economic Cooperation and Development’s (‘‘OECD’’) Maritime Transport Committee, and continue to take part in the

OECD’s work on regulatory reform in liner shipping.

Although our industry is linked in so many vital ways to international trade, the

average person knows little or nothing about the essential services that our membership provides. Our members include ‘‘ocean freight forwarders,’’ who traditionally

have provided much-needed services to small and medium-sized exporters and importers, such as preparing and processing export declarations; booking, arranging

and confirming cargo space on vessels; preparing and processing ocean bills of lading; coordinating the movement of shipments from origin to vessels; and providing

expert advice to exporters concerning letters of credit, other documents, and licenses

or inspections, applicable to various shipments. It is well documented that forwarders sometimes are the very catalysts that bring small and medium sized domestic manufacturers to export for the very first time, providing the expertise that

brings goods to the international marketplace. Freight forwarders, in many cases,

become the ‘‘traffic department’’ of many small and medium-sized exporters and importers.

Another type of ocean transportation intermediary is the NVOCC. These are

intermediaries that provide transportation services but do not own the actual vessels by which the ocean transportation is provided. In effect, NVOCCs enter into

shipping arrangements, usually through service contracts with the vessel operators,

and agree to provide a certain amount of volume to the carrier in exchange for reduced rates, which are then offered to the general shipping public. It is in this way

that small and medium-sized shippers are able to obtain shipping rates that they

would not be able to otherwise obtain directly from steamship companies. Freight

forwarders and NVOCCs represent a vital segment of the shipping industry.

The Association’s members are directly involved in the international flow of goods,

and, thus, are positioned to comment on proposed changes to the U.S. regulatory

scheme that affects oceanborne transportation. In the past, for example, the Association has provided commentary on proposed trade and transportation legislation at

the state and national levels, Federal Maritime Commission (‘‘FMC’’), U.S. Department of Transportation, and U.S. Customs Service rulemakings, as well as with federal agencies that implement export and import control regulations. In each instance, the Association’s objective has been to provide insight from the forwarding/

NVOCC and customs broker community on the proposed legislation or regulation.

Hence, the members of the Association are well situated to provide constructive

commentary on how OSRA impacts their daily lives, as well as to provide recommendations on how Congress might modify OSRA to correct some of the flaws

that prejudice OTIs under the new Act.

The Association stands ready to assist the Committee with regard to each regulatory reform issue of concern raised by us and other OTI organizations on this

panel.

ENACTMENT OF H.R. 1253 IS NEEDED BECAUSE OSRA IS NOT

WORKING

First, Mr. Chairman, OSRA is not working. We have heard from many, including

FMC Commissioner Delmond J.H. Won, today and during past Judiciary Committee

hearings, that although OSRA represents an improvement in the shipping regime

of this nation, it is inherently flawed and will never provide the needed protection

to smaller shippers and ocean transportation intermediaries. This is predominately

true because of the potential for discriminatory conduct by the carriers under their

72

antitrust immunity. OSRA, and the ‘‘confidential world’’ that it created, has indeed

created a shift in the way that carriers and shippers do business. OSRA was, in theory, a good thing. However, the fact that carrier antitrust immunity was not

touched by OSRA, and was actually expanded in certain respects, now provides the

carriers with the best of all worlds. Carriers may still formally group in legalized

cartels - or ‘‘conferences’’ - and discuss, review, formulate, implement and enforce

collective rates for all shippers; they can form ‘‘discussion agreements,’’ which include both conference and non-conference carriers to review and establish pricing

structures to be used by the carriers in a given trade; they can exchange information on shippers that enables them to monitor what each carrier is doing, even in

a ‘‘confidential environment;’’ they can collude and discriminate against shippers

based simply on the type of company that may be seeking to use their transportation services; and they continue to avoid application of U.S. antitrust and competition laws and regulations. This begs the question how does Congress rationalize

that U.S. exporters and importers involved in the international commerce are subject to federal antitrust laws, while foreign steamship lines continue to operate immune from the very same laws? Mr. Chairman, it is important to note that there

have been major developments since the Committee’s last hearing on ocean shipping, specifically the sale of all remaining U.S.—owned and operated international

shipping companies to foreign parent corporations. Presently, there are no American

companies that provide international liner service to and from the United States.

This complete dismantling of U.S. shipping has occurred at the same time that

many are questioning whether it is in the interest of our nation to permit foreign

ownership of our rail lines or to increase foreign ownership in our airlines. Yet, until

now, there has been no real examination of what has happened to U.S. shipping interests. The end result is clear: no matter how they may attempt to rationalize it,

the sad and unfortunate fact is that there is no true U.S.—owned and operated

international steamship company providing service to U.S. ports today. When Congress first granted the immunity to the lines, one of the reasons was to assist with

the development of U.S. shipping lines. I proffer that the drafters of the Shipping

Act, 1916, which granted the immunity, would not be very pleased at the state of

U.S. shipping today. Yet, we still have antitrust immunity on the books that benefits foreign interests over American interests. I ask all members of the Committee,

how many would vote today for an antitrust immunity that benefits solely foreign

interests over those of clearly identifiable American interests?

Even today, as we discuss the merits of antitrust immunity for the shipping industry, carriers are taking advantage of their extraordinary rights to target OTIs

and smaller shippers in the Trans-Pacific trades. This year’s contract discussions

were overshadowed by carriers collectively agreeing to deal with OTIs as ‘‘second

class citizens’’ and the refusal to deal until large beneficial cargo owners were satisfied with their shipping rates. As a result, members of the Trans-Pacific Stabilization Agreement (‘‘TSA’’), which is the agreement in the inbound Pacific Trades, told

OTIs in the United States and abroad that they needed to ‘‘wait’’ until the proprietary shipper contracts were negotiated. Further, once some carriers began to talk

to OTIs, the OTIs were told that they would have to pay surcharges, repositioning

fees, and other ancillary costs that proprietary shippers of the same or sometimes

smaller size were not charged. In the end, OTIs, as shippers, were the victims of

the carriers’ antitrust immunity. The events surrounding the Trans-Pacific shipping

season are now before the Federal Maritime Commission as a result of a petition

by the National Customs Brokers and Freight Forwarders Association.

It is not a defense for ocean carriers to say that ‘‘discussion agreements’’ only provide for guidelines which carriers are ‘‘free to circumvent.’’ The reality is that even

if the market place does eventually give way to true market forces, the marketplace

was artificially distorted - if only for a few months - by the ‘‘voluntary’’ guidelines.

There is no valid reason for that type of collective and anticompetitive behavior by

ocean carriers.

In addition, the European Commission has decided to reconsider its approach to

the block exemption granted to liner shipping companies. The OECD has finally released its recommendations on the topic - and the verdict is clear: antitrust immunity must be revised. The OECD report was concluded after years of study and research. It includes the views of all sectors of the shipping community - including

carriers and shippers. There is a clear trend on the international level: carrier antitrust immunity must be reconsidered and revised. The Judiciary Committee is helping to ensure that United States shipping policies are not stuck in the 19th Century.

CONGRESS MUST CONTINUE TO REVIEW OCEAN SHIPPING POLICY

Opponents of the FAIR Act will argue that OSRA has killed the steamship cartels

and that there is no need to remove the immunity that the carriers have enjoyed

73

since 1916. Steamship cartels like those that existed before OSRA are dead. However, in their places the carriers have re-invented a device called the ‘‘discussion

agreement.’’ Since OSRA became law in May 1999, discussion agreements have been

the focus of many, including the Committee. In general, shippers, intermediaries,

and shippers’ associations, call for the application of antitrust and competition laws

to carrier discussion agreements because, in effect, they act like super-cartels by including over 90% of all carriers in a given trade - except one: the North Atlantic.

As a result of a carefully examined and implemented prohibition, the European

Commission (‘‘EC’’) does not permit carriers to operate in a discussion agreement.

This has already proven beneficial to us in the United States. During the last several shipping seasons, major and many minor carriers providing fixed container

service between the United States and Europe, met to establish a mega-discussion

agreement called the ‘‘North Atlantic Agreement.’’ The proposal was filed with the

Federal Maritime Commission, as well as with the appropriate European Commission. The EC’s Competition Directorate (DGIV) announced that it had problems with

the proposed agreement and articulated its opposition, on the grounds that the

agreement would amount to a carrier discussion agreement, which is prohibited

under EU law. In contrast, the FMC did not oppose the carrier agreement, and, in

fact, would have approved the agreement albeit for the fact that the carriers withdrew the proposal when it became clear that the EC would strike it down. On a

related note, and an argument that opponents of H.R. 1253 will advance, is the

question of whether OSRA is truly working and is it too early to begin again congressional action? First, it is clear by today hearing and the introduction of legislation, that Congress appears ready to listen to our concerns and move forward with

new ocean shipping reform legislation. For that, we thank the Committee for its

work to-date on this topic.

On the question of whether OSRA is working, our membership clearly believes

that it is not and that there must be congressional action. For example, the EC’s DGIV, in conjunction with its Transportation Directorate (DGVI), have focused on

apparent carrier collusion on the Atlantic with regards to the application of a surcharge that was announced and applied by both conference and non-conference lines

in recent shipping seasons. The joint review by DGIV and DGVI indicates that

things are not as peaceful as some would want the Committee to believe under

OSRA. A sharp contrast to the proactive stance taken by the EC is an examination

of antitrust/competition activities taken by the FMC since OSRA became law. Both

the FMC and the EC’s DGIV and DGIV have jurisdiction over shipping matters on

the Atlantic, but to-date the FMC has done nothing that comes close to the enforcement action taken by the EC in recent years.

Carriers do in fact review pricing information, shipper information - including

confidential information that OSRA was intended to protect - and establish price

‘‘guidelines’’ for certain type of shippers, such as smaller shippers and NVOCCs. The

issue of carrier antitrust immunity is important to my membership and the wellbeing of our nation’s import and export economies. Carriers continue to argue their

immunity is required, even under OSRA, and have cautioned Congress not reopen

debate on the new law. We must continue the debate on shipping reform. OTIs are

affected by ocean carrier antitrust immunity, just as every shipper, including

NVOCCs, are at the mercy of the inherently anticompetitive practices of carrier

‘‘discussion agreements.’’ In fact, OTIs have been specifically targeted, both prior to

and under OSRA, by groups of carriers operating under their immunity. We have

been subjected to discriminatory and predatory behavior of some lines. OSRA may

have weakened traditional rate-setting cartels, and provided for confidential contracting between shipper and carrier, but it did not remove or modify carrier antitrust immunity. Our industry has changed dramatically since 1916. Today, industry

analysts tell us that the future is in ‘‘mega carriers,’’ such as Maersk-Sealand, NOLAPL, CP Ships-Lykes, and P&ONedlloyd. These very same super steamship lines

are also providing ‘‘point-to-point’’ logistics and are directly competing with OTIs.

These lines are all foreign-owned, yet they enjoy an extraordinary privilege-immunity from U.S. antitrust laws. At the same time, these companies enjoy all the benefits under OSRA that OTIs are unable to claim. This makes no sense to the thousands and thousands of American owned companies that are OTIs - or for that matter, to U.S. importers or exporters.

As remarked, under OSRA, steamship cartels have been eliminated in every trade

but the Atlantic, and according to the carriers, the conferences’ replacements, the

‘‘discussion agreements,’’ have no enforcement authority on their members for price

setting. Many have asked what U.S. interests remain in retaining ocean carrier

antitrust immunity, now that all major international liners are foreign-owned. Further, we must ask why retain the immunity under the changes made by OSRA? Especially when, if you believe that carriers are actually relying on marketplace deVerDate 11-MAY-2000 15:03 Aug 15, 2002 Jkt 000000 PO 00000 Frm 00077 Fmt 6601 Sfmt 6621 G:\WORK\FULL\060502\80030.000 HJUD3 PsN: HJUD3
74

2See generally House Comm. on the Merchant Marine and Fisheries, Investigation of Shipping

Combinations under H.R. 587, 62d Cong., 2d Sess., 63d Cong., 2d Sess. (1913-1914).

mands, negotiating in confidence with shippers, ‘‘discussion agreements’’ don’t set

rates and the cartels no longer dominate the trades.

For further comment on this issue, I will defer to others on this panel and the

prior testimony of others in support of H.R. 1253 before the House Judiciary Committee here today. But I did want you to know that ocean carrier antitrust immunity is an important issue and Congress should revisit it because it does adversely

impact the lives of your constituents. It is time to at least modify the 1916 immunity to better reflect the times in which we find ourselves in the ocean transportation community.

CONCLUSION

OSRA does represent positive change, but it did not provide the same amount of

shipping freedom for certain segments of the shipping industry and public, such as

OTIs, smaller shippers, and shippers’ associations. Ocean carrier antitrust immunity has long been the subject of criticism by shippers. However, it is hard to disagree with the fact that the ocean shipping world has changed-indeed evolved-substantially since the days of the London-Calcutta Conference, circa 1875, first collectively established rates and services. In the United States, the shipping industry

and community is not the same as it was when the historic Alexander Committee 2

issued its report to Congress with a recommendation to exempt carriers from application of antitrust laws. OSRA helped introduce sweeping changes to the shipping

community in the U.S., but the new Act’s promise of a more market-driven approach

to ocean shipping will continue to be undermined unless carrier antitrust immunity

is substantially modified.

When Congress passed OSRA, members of this committee pledged to revisit the

outstanding issues and commented on the House floor that Congress would work to

correct some of the flaws in the new law because OTIs add such a great deal to

the free and open marketplace. Congress acknowledged that it would have to deal

with the concerns of OTIs and smaller shippers under OSRA. Today, carrier antitrust immunity hinders our ability to remain competitive in the marketplace because it does not permit the same freedoms as it does foreign-owned steamship companies and others. We call upon you and all members of the Committee to correct

the flaws of our nation’s shipping policy and help make the law a true deregulatory

piece of legislation. Congressional action to enable us to sign contracts with our clients, eliminating tariffs and addressing carrier discussion agreements under OSRA,

are all required to help keep us competitive in today’s marketplace. OTIs are unable

to wait silently for the next round of ocean shipping reform talks. We call upon you

to eliminate carrier antitrust immunity as soon as possible. Such action will ensure

that OTIs remain in business well into the 21st Century. Rep. Sensenbrenner, members of the Committee, I thank you for considering our comments, and we hope that

you have found them insightful, constructive and helpful.

The Association is happy to provide further assistance to the Committee as it continues to review antitrust policy vis-&-vis international liner shipping regulation.

Respectfully submitted,

NEW YORK/NEW JERSEY FOREIGN FREIGHT

FORWARDERS AND BROKERS ASSOCIATION, INC.

Stewart D. Hauser

President

New York/New Jersey Foreign Freight

Forwarders and Brokers Association, Inc.

Carlos Rodriguez, Esq.

Ashley W. Craig, Esq.

Transportation Counsel to the Association

RODRIGUEZ O’DONNELL

FUERST GONZALEZ & WILLIAMS

75

MATERIAL SUBMITTED FOR THE HEARING RECORD

76

77

78

79

80

81

82

83

84

85

86

87

88

89

90

91

92

93

94

95

96

97

98

99

100

101

102

103

104

105

106

107

108

109

110

111

112

113

114

115

116

117

118

119

120

121

122

123

124

125

126

127

128

129

130

131

132

133

134

135

136

137

138

139

140

141

142

143

144

145

146

147

148

149

150

151

152

153

154

155

156

157

158

159

160

161

162

163

164

165

166

167

168

169

170

171

172

1 ‘‘Who’s Making Money?’’ American Shipper, July 2002, p.20, 26. 2 ‘‘World Trade hits 20-year Low,’’ JOC-online, 5/2/2002.

ADDITIONAL STATEMENT OF THE WORLD SHIPPING COUNCIL

The World Shipping Council submits these follow-up comments to the Committee

for inclusion in the record of its June 5 hearing on the Shipping Act and the limited

antitrust immunity contained in that Act. These comments provide the Committee

with necessary responses to several allegations made during the hearing.

1. The Liner Industry’s ‘‘Record Profits′′

During his oral testimony faulting the existing regulatory system for the liner industry under the Shipping Act, Teamsters President Hoffa alleged that shipping

lines are ‘‘making tremendous amounts of money’’, and that ‘‘the companies are

making record profits.’’ In his written remarks, he recites figures on the growth of

global container traffic over the last decade, the selected profit figures for two lines

(Hapag-Lloyd for 2001, and P&O Nedlloyd for 1999 and 2000) and then states that:

‘‘Based on these promising statistics, one could easily assume that everyone associated with the flourishing shipping industry is reaping its rewards. This is certainly

true for the large, foreign-owned carriers and port authorities, which directly benefit

from increased container traffic at their ports.’’ His statement also alleges that carriers are benefiting from ‘‘increasing profits’’. (Hoffa, pages 2–3.) This is simply

false.

Of the long-term growth of container traffic in U.S. trades and its importance to

the American economy, there is no doubt. However, the statements that ocean carriers are generating substantial profits for their services is grossly inaccurate.

Falling Rates and Financial Losses

A more accurate picture is presented in a recent (4/29/02) Lloydslist.com article

entitled ‘‘Stark Warning to Industry.’’ It begins: ‘‘Fund managers will continue to

shun container shipping until the whole industry has demonstrated an ability to

produce a sufficient long term rate of return, a financial analyst warned last week.’’

It goes on to provide comparative data to support the claim that the liner industry

has performed very poorly over the last decade compared with other transport sectors.

That warning is supported by the detailed analysis of ocean carriers’ financial situation that appears in the most recent, July 2002 issue of American Shipper magazine, entitled: ‘‘Who’s Making Money?’’. The analysis concludes:

• ‘‘Effects of overcapacity and lower rates pushed ocean carriers into the red.’’

• ‘‘2001 was one of the worst years for the containership industry, and 2002 is

expected to be worse.’’

• ‘‘Some shippers are concerned about the viability of their ocean carrier vendors.’’

• ‘‘Cost-cutting programs are top priority for many carriers.’’

• ‘‘Trend towards carrier mergers and takeovers has slowed, but there are more

instances of ocean carriers withdrawing from certain markets or closing

down.’’

• ‘‘With uncertain prospects of a return to fast cargo growth, carriers and their

customers continue to face market instability.’’

• ‘‘If the decline in rates isn’t stopped, and with operating margins now lower

than they have been for years, the alternative scenario would have to be that

some carriers will be driven out of the industry.’’1

While cargo volumes have indeed grown rapidly in past years, freight rates have

generally declined over the long-term (see WSC testimony pages 10–14). In 2001

world merchandise trade declined by 1% in volume and 4% in value, the worst

performance since 1982.2 That decline in trade also represents a decline in the demand for ocean shipping services that, unfortunately, has coincided with significant

increases in new vessel capacity. The result: Falling freight rates and carrier financial losses that made 2001 one of the worst years for container shipping. Furthermore, quarterly financial reports for January through March suggest that 2002 may

well be even worse.

Recent Financial Figures

The financial figures provided below are from the cited American Shipper study.

Contrary to the impression created by the Teamsters’ allegation of a ‘‘flourishing’’

liner industry ‘‘reaping its rewards’’ and enjoying increasing profits, the industry is

going through a crisis of falling rates and financial losses that has even generated

173

4 ‘‘Hapag-Lloyd slips into the red despite higher cargo volumes,’’ Lloydslist.com, May 30, 2002.

5 ‘‘P&O Nedlloyd battles to stem mounting losses,’’ Lloydslist.com, May 10, 2002 6 ‘‘Dejavu,’’ Containerization International, June 2002, p. 46. [Note: The Rochdale Report refers

to the 1970 investigation into the desirability of shipping conferences by the U.K. Committee

of Inquiry into Shipping (the Rochdale Committee).]

concern among the lines’ client shippers in key U.S. export trades. (See WSC testimony, pages 13–14.)

The poor financial performances in 2001 are prelude to worse news in the first

quarter results in 2002. Take for example the two ‘‘success story’’ carriers cited in

the Teamster testimony, Hapag Lloyd and P&O Nedlloyd:

• Hapag Lloyd, which has ranked among the most profitable of container shipping lines, posted first quarter losses of $4.6 million this year.4

• P&O Nedlloyd also suffered significant first quarter losses. A recent (5/10/

2002) trade press article begins: ‘‘Anglo-Dutch carrier P&O Nedlloyd has been

galvanized into action by plunging freight rates that have sent revenue figures into a tailspin and losses sliding into the red. The company reported a

$66m loss in the first quarter of the year, a deterioration of almost $100m

over the past 12 months.’’ The action to which the line has been galvanized

includes ‘‘jobs being axed’’ and ‘‘back office work transferred to cheaper offshore centres.’’5

And, while the return on investment in 2001 and early 2002 may be miserable,

poor returns are hardly atypical for the industry. As one industry analysis recently

put it: ‘‘One of the most extraordinary features of shipping is the low return on investment (ROI) prevalent in the industry. The Rochdale Report examined the postwar decades, while Stopford continued the analysis through the mid-1990s: both

found dismal returns for shipping.’’6

A brief explanation of the unique set of economic and political factors that contribute to the chronic financial problems faced by ocean carriers can be found in the

World Shipping Council’s June 5th written testimony (See WSC, ‘‘International

Liner Shipping Market,’’ pages 22–26.). Given those factors, and the financial problems and uncertainties that follow from them, it is important to understand that

174

7JoC Week, March 25–31, 2002. pages 15 and 16. 8 Containerization International, July 2000, Page 39.

the liner industry uses the limited, regulated antitrust immunity granted by the

Shipping Act to try to help mitigate the structural overcapacity problem it faces.

2. Certain Allegations Regarding Charges on Shippers

Mr. Robert Coleman’s written testimony for Committee’s June 5, 2002 hearing

contains two references to $1,000 charges.

The Westbound Transpacific Stabilization Agreement (‘‘WTSA’’) Reefer Program

The first reference, on pages 2–3, is to a proposed one-year management program

for refrigerated (‘‘reefer’’) container service by WTSA, filed with the FMC for their

review on February 1, 2002 and withdrawn (without ever taking effect) on March

21, 2002 after several shipper organizations had expressed concern about the reefer

program’s possible longer-term impact.

The program would have established a mechanism to stabilize the sharply declining rates on reefer container movements by assigning each line a market share percentage based on the lines’ historic reefer liftings. (See attached press release.) The

$1,000 per 40-foot container charge ($500 per 20-foot) referred to by Mr. Coleman

was the payment that participating member lines would have paid under the proposed program if they exceeded their market share by more than 0.5 percent of the

total market. It was not a charge to shippers.

In fact, the WTSA’s reefer management proposal contained no rate increases for

shippers. It was designed to help stop the significant rate declines on the 15 percent

of the trade (reefer cargo) that requires expensive refrigeration equipment and related special services - and thereby preserve a revenue base sufficient to support

continued provision of premium reefer service. In any event, as noted, the program

was withdrawn and never became effective.

The US/South America Trades

The second reference by Mr. Coleman, on page 6 of his testimony, is to an allegedly ‘‘recent’’ and ‘‘suddenly’’ announced $1,000 per container rate increase in the

U.S./South America trades. The absence of clarifying detail in the written testimony

made it difficult to determine what announcement was being referred to and in

which particular trade. Subsequent inquiries, and a review of recent trade press,

produced no information about any such announced rate increase.

However, the apparent solution to the mystery can be found by comparing Mr.

Coleman’s June 5, 2002 testimony on H.R. 1253 with his March 22, 2000 testimony

on its predecessor bill H. R. 3138. Mr. Coleman’s June 2002 reference to the ‘‘recent’’

announcement of a $1,000 price increase turns out to be a word-for-word repetition

of his testimony of more than two years earlier. There has in fact been no ‘‘recent’’

announcement of a $1,000 per container rate increase in the U.S./South America

trades. Indeed, it is well recognized that rate levels in these trades have declined

significantly in 2002, and southbound (U.S. export) rates in particular remain

weak.7

As for the now dated March 2000 testimony, it neglected to point out that in 1998

and 1999 rates in the then highly imbalanced and overtonnaged East Coast U.S./

East Coast South America trade had declined severely - to the point where all lines

were reporting losses. The announced increase (of $500 per TEU) was aimed at restoring rates to reasonable levels and were a response to changed market conditions

- i.e., the north/south trades had come back into balance by early 2000, and over

the previous 12 months excess capacity had been cut in response to non-compensatory freight rates.8

Neither a tax nor a surcharge

During the hearing, Chairman Sensenbrenner questioned Mr. Coleman’s about

the WTSA reefer management program and the referenced $1,000 per container

‘‘tax on refrigerated containers’’ that would make U.S. products much less competitive overseas. In response, Mr. Coleman acknowledged that the WTSA proposal had

been withdrawn—without what he characterized as ‘‘the $1,000 surcharge’’ ever

being imposed—following informal conversations with shipper organizations.

From the question and response, it appears that there is a misunderstanding as

to the nature of WTSA proposed (but never implemented) reefer management program and the $1,000 charge. To clarify:

• The $1,000 was neither a ‘‘tax’’ nor a ‘‘surcharge’’ that would have been imposed on shippers. Freight rates in U.S. trades are established by individual

negotiations between shippers and the individual lines they select as their

preferred carriers.

175

• The $1,000 charge was a proposed charge on carriers aimed at encouraging

WTSA lines that would have participated in the reefer trade management

program to abide by their agreement not to seek higher market shares in a

trade that had at the time been experiencing extremely low rates, an excess

of very expensive reefer containers, and declining demand for reefer service.

• The lines elected not to go forward with the reefer program when their customers expressed concern about the management program—hardly behavior

indicative of an ability or intent to impose unwarranted collective rate increases by virtue of antitrust immunity.

176

177

178

179

180

181

182

183

184

185

186

187

188

189

190

191

192

193

194

Æ