{"id":914,"date":"2015-09-25T13:38:07","date_gmt":"2015-09-25T17:38:07","guid":{"rendered":"\/?p=914"},"modified":"2018-08-10T13:40:23","modified_gmt":"2018-08-10T17:40:23","slug":"chairman-cordero-participates-in-u-s-japan-maritime-discussions","status":"publish","type":"post","link":"\/chairman-cordero-participates-in-u-s-japan-maritime-discussions\/","title":{"rendered":"Chairman Cordero Participates in U.S.-Japan Maritime Discussions"},"content":{"rendered":"<div>September 25, 2015<\/div>\n<h3>Chairman Cordero\u2019s Remarks at the U.S.-Japan International Shipping Forum<\/h3>\n<p>I would like to thank the hosts of today\u2019s sessions, the Japan International Transport Institute, the Japan Maritime Center and the Maritime Bureau of MLIT, for the opportunity to participate in this important forum — with this distinguished group of businessmen and government officials. I would also like to thank Administrator Jaenichen for his kind words and support of the FMC\u2019s mission. I am pleased and honored to be here. I am, however, also aware that this great opportunity entails a great challenge. I\u2019ve been asked to offer my views, over the next 30 minutes, on two subjects — recent liner shipping trends and the limited antitrust immunity granted by Congress under the Shipping Act of 1984 — each of which could easily justify a full day\u2019s discussion and debate. So, while I will do my best to meet that challenge, the time constraint means that my remarks will be both brief and presented as a general observation.<\/p>\n<div id=\"photos\">\n<h3>Photos from the U.S.-Japan International Shipping Forum<\/h3>\n<div style=\"width: 330px\" class=\"wp-caption alignnone\"><img loading=\"lazy\" src=\"https:\/\/www.fmc.gov\/assets\/1\/AssetManager\/IMG_0107.JPG\" alt=\"IMG 0107\" width=\"320\" height=\"240\" \/><p class=\"wp-caption-text\">U.S.-Japan International Shipping Forum Panel<\/p><\/div>\n<div style=\"width: 330px\" class=\"wp-caption alignnone\"><img loading=\"lazy\" src=\"https:\/\/www.fmc.gov\/assets\/1\/AssetManager\/IMG_0370.JPG\" alt=\"IMG 0370\" width=\"320\" height=\"257\" \/><p class=\"wp-caption-text\">Chairman Cordero keynote lecture at the U.S.-Japan International Shipping Forum<\/p><\/div>\n<div style=\"width: 330px\" class=\"wp-caption alignnone\"><img loading=\"lazy\" src=\"https:\/\/www.fmc.gov\/assets\/1\/AssetManager\/TokyoJapan-i%209-15%20687.JPG\" alt=\"TokyoJapan i 9 15 687\" width=\"320\" height=\"158\" \/><p class=\"wp-caption-text\">U.S.-Japanese Shipowners\u2019 Association Industry Meeting<\/p><\/div>\n<div style=\"width: 330px\" class=\"wp-caption alignnone\"><img loading=\"lazy\" src=\"https:\/\/www.fmc.gov\/assets\/1\/AssetManager\/TokyoJapan-i%209-15%20704.JPG\" alt=\"undefined\" width=\"320\" height=\"398\" \/><p class=\"wp-caption-text\">U.S. Delegation Meeting with Mr. Toshiya Morishige, Vice-Minister for International Affairs, MLIT<\/p><\/div>\n<\/div>\n<p>And let me begin with two caveats:<\/p>\n<p>First, my comments this afternoon are my own. They do not necessarily represent the official policy of the Commission as a whole or the views of any of my fellow Commissioners.<\/p>\n<p>Second, my remarks on trends in container shipping will be narrowly focused. Originally, I thought I might talk on some important trends that are already significantly affecting international trade and liner shipping \u2013 such as China\u2019s slowing economic growth, the devaluation of the Chinese yuan, oil production and pricing, and the challenges facing European economies. But, given the emphasis on competition policy in today\u2019s program, I assume that the trend of most interest to this group is the advent of large multi-carrier alliances in the world\u2019s major East\/West trades, and to a lesser extent the merger and acquisition activity that is, in many ways, the main alternative to alliances. So that will be my focus.<\/p>\n<p>Nine years ago today \u2013 September 25th 2006 \u2013 the E.U. announced the repeal of the block exemption from European competition law for liner conferences \u2013 to take effect two years later in mid-October of 2008.<\/p>\n<p>In January 2012 \u2013 a little over three and a half years ago \u2013 the Commission released a research report by our Bureau of Trade Analysis entitled “Study of the 2008 Repeal of the Liner Conference Exemption from European Union Competition Law.” Or, as we refer to internally: the “E.U. Study.” It was undertaken to determine, to the extent we could, whether Europe\u2019s termination of the liner conference exemption would have any negative impact on US shippers. For example, would liner freight rates to and from Europe decline significantly compared to rates in US trades? And if they did, would US shippers be disadvantaged?<\/p>\n<p>Our EU Study, covering the years from 2006 through 2010, is available on the Commission\u2019s website. For those of you interested in a more detailed examination of the impact of the abolition of the EU block exemption, I strongly recommend it. The findings are interesting \u2013 and persuasive \u2013 but, perhaps, not particularly surprising. They were:<\/p>\n<p>First, that the repeal of the EU block exemption did not negatively impact US trades. In both the US and EU\u00a0<em>import trades<\/em>\u00a0that were compared, average revenue per TEU (the proxy for freight rates)\u00a0<em>declined<\/em>\u00a0by similar degrees. In the US and EU\u00a0<em>export trades<\/em>, average revenue per TEU\u00a0<em>increased<\/em>\u00a0by similar degrees. In short, the end of Europe\u2019s block exemption did not result in relatively lower freight rates in EU trades as compared to US trades.<\/p>\n<p>Second, the existence of rate discussion agreements in US trades \u2013 specifically in the transpacific trade \u2013 did not result in higher average rates relative to the EU trades where such carrier agreements are disallowed. There was a difference in rate volatility \u2013 which was somewhat lower in the US trades. However, it was not clear that the existence of rate discussion agreements — which share information on present and expected near-term market conditions — was the source of that lower rate volatility. Other factors, like fewer long term contracts in EU trades, might also help explain the rate volatility difference.<\/p>\n<p>And finally, the repeal of the EU block exemption, may have resulted in a modest increase in market concentration in European trades. However, given the lack of concentration in those trades, the modest increase was seen as unlikely to present any competition problems.<\/p>\n<p>If we leave aside questions of rate volatility and minor increases in market concentration for a moment, what the Study shows, at least for the five years it covered, is that the removal of the EU block exemption did\u00a0<em>not<\/em>\u00a0result in a noticeable increase in price competition or reduction in freight rates. Why not?<\/p>\n<p>As the Study notes, there were two important measures that provided the legal and policy context to its detailed research: The Ocean Shipping Reform Act of 1998 (often referred to as OSRA), which took effect in US trades on May 1, 1999, and EC Regulation No. 1419\/2006 that repealed the EU liner conference block exemption. In discussing the former, the Study notes that (and I quote):<\/p>\n<p>“As expected, the implementation of OSRA in US trades had immediate and dramatic consequences. It ended the authority of liner conferences to regulate their member lines\u2019 contract rates and terms, and strongly encouraged service contract confidentiality. OSRA\u2019s promotion of one-to-one, confidential service contracts between shippers and individual liner operators introduced a degree of commercial freedom and flexibility that soon made service contracting the overwhelmingly preferred method of doing business.”<\/p>\n<p>In short, substantial liner shipping deregulation arrived \u2013 at least for US trades \u2013 roughly 16 years ago. European competition authorities \u2013 the Directorate General of Competition (or DG Comp) — saw the change and took swift action to ensure that European shippers would enjoy the same pro-competitive benefits. Again, from the FMC\u2019s EU Study:<\/p>\n<p>“Even before the DG Comp began its review of the block exemption in 2003, it took steps to ensure that EU-based liner conferences could not restrict the availability to shippers of individual, confidential service contracts. In particular, DG Comp adopted the position that the block exemption for liner conferences applied only to rate setting via liner conference tariffs and not to service contracting. DG Comp officials entered discussions with carriers and shippers with a view, in the words of DG Comp officials, \u2018to breaking the sterile cycle of litigation and establishing a consensus on the way forward. Out of these discussions came an indicative set of guiding principles for future conference agreements. From the [European] Commission\u2019s perspective, the most important of these principles was that conference members should be free to enter into confidential individual contracts with shippers.\u2019”<\/p>\n<p>So, even before DG Comp undertook its evaluation of the block exemption, it had already established \u2013 as a guiding principle \u2013 that European shippers would have access to OSRA-style individual, confidential contracts. Consequently, much of the heavy lifting on liner reform had, more or less, already occurred well before 2006. Conference tariffs rapidly gave way to confidential contracts. The original basis for the EU block exemption, its fundamental policy rationale \u2013 that traditional conferences would bring stability of freight rates and reliability of service through conference price setting and capacity regulation \u2013 disappeared with the shift to pricing by individual contracts.<\/p>\n<p>In sum, OSRA substantially deregulated liner shipping and eliminated traditional conferences in US trades, and Europe quickly followed suit. Like the US, Europe had \u2013 for all practical purposes \u2013 removed the traditional policy rationale for conferences by encouraging and protecting one-to-one, confidential contracting.<\/p>\n<p>In the US trades, traditional conferences gave way to voluntary rate discussion agreements. In the European trades, traditional conferences quickly evolved into the functional equivalent of voluntary rate discussion agreements, but they kept the name “conference.” The Shipping Act provides limited immunity for a variety of carrier agreements \u2013 not just traditional liner conferences. The EU block exemption, however, was explicitly limited to liner conferences \u2013 whose member lines were, in theory, collectively pricing under a common conference tariff. So, in European trades where rate discussion agreements would have had no exemption, carrier agreements continued to call themselves conference.<\/p>\n<p>As our EU Study findings demonstrated, the existence of two different approaches to liner shipping competition policy \u2013 the EU\u2019s elimination of rate agreements and the US\u2019s grant of limited immunity accompanied by a substantial list of prohibited acts and an active monitoring and enforcement regime \u2013 does not necessarily imply different competitive outcomes. And the reason for that, I believe, is the underlying common commitment, under both frameworks, to prevent carrier agreements from regulating member lines\u2019 contracts, and the resulting broad acceptance and use of confidential, individually negotiated contracts.<\/p>\n<p>As for what may lie ahead with respect to Shipping Act immunity, one of American baseball\u2019s great philosophers \u2013 Yogi Berra \u2013 once observed: “It’s tough to make predictions, especially about the future.” I agree, and so will refrain from speculating on the future of Shipping Act immunity. Instead, I will simply observe that the US Congress created the Shipping Act, and it will require congressional action to modify or eliminate the Act\u2019s grant of limited immunity. Typically, given the many important domestic and foreign concerns Congress faces, it would require a serious political effort by one or more major interest groups to get a revision of the Shipping Act onto the legislative agenda. And even then, Congress generally encourages the affected parties to negotiate, to the extent possible, a consensus framework that would provide a basis for legislation. That was the case, for example, when OSRA reforms were debated and voted into law in the 1990s.<\/p>\n<p>I should also note that, in the US, antitrust immunity from the Sherman Act was initially introduced with the passage of the Shipping Act, 1916 \u2013 which means that next year, September 2016, it will have been in place \u2013 although subject to substantial modifications in 1984 and 1998 \u2013 for 100 years.<\/p>\n<p>Which brings us to the advent of large East\/West multi-carrier alliances.<\/p>\n<p>As you are aware, the liner shipping industry has been undergoing a dynamic series of changes in its struggles to adjust to the financially challenging market situation that has existed for the past few years — and forecasted to continue to do so for several more.<\/p>\n<p>Since the world-wide recession of late 2008 through 2009, the growth in international trade often has been slower than the expansion of liner fleets \u2013 negatively affecting carriers\u2019 revenues. To reduce costs and enhance efficiencies, carriers are ordering larger, fuel-efficient vessels that they hope can provide economies of scale and lower fuel costs. The expense and risk of investing in and operating these huge vessels, coupled with the lines\u2019 expansive service networks, could easily have led to substantial merger and acquisition activity \u2013 and, thereby, resulted in greater market concentration. That has not, so far, happened in the major East\/West trades. Instead carriers have established cost-reducing, multi-carrier, operational agreements, informally known as “alliances,” that preserve each member lines\u2019 independent marketing and pricing. They remain price competitors despite their operational cooperation.<\/p>\n<p>The Commission carefully and thoroughly reviewed each of the four major proposed alliance agreements that were submitted to us, and concluded that they were not likely to reduce competition, unreasonably raise rates or decrease service. They are, after all,\u00a0<em>operational<\/em>\u00a0agreements, without rate discussion authority, engaged in cooperative service activities in trades that are, in general, neither highly concentrated nor subject to barriers to entry.<\/p>\n<p>I referenced\u00a0<em>four<\/em>\u00a0alliances. There was, as you\u2019re aware, an earlier alliance proposal \u2013 the P3, among Maersk, Mediterranean Shipping and CMC CGM \u2013 that passed muster under the Commission\u2019s competition analysis, and drew no negative reaction from DG Comp either. Which provides further evidence, I suppose, that despite the differences in our competition frameworks, the US and EC regulatory systems tend towards similar practical outcomes.<\/p>\n<p>As I\u2019ve noted before, there are legitimate reasons to be cautious about these large new East\/West alliances. For example, sometimes alliance membership overlaps with that of rate discussion agreements in the same trade, as, for example, they do in the trans-Pacific. When that is the case, close and continued attention needs to be paid to the dynamics of that overlap \u2013 especially with respect to capacity availability and pricing. In US-based trades, the Commission provides that attention through its detailed monitoring of alliances and rate discussion agreements.<\/p>\n<p>That said, it is important to recognize that, when the alternative is merger and acquisition activity, alliances avoid creating additional market concentration by ensuring continued price competition among alliance members. They can also reduce carriers\u2019 financial risks while supporting wider service networks and sufficient vessel capacity to meet the transportation needs of the member lines\u2019 customers.<\/p>\n<p>Finally, I\u2019d like to say a few words about how the Commission monitors alliances and rate agreements. For each agreement, we look at the market structure of the relevant trades. Are they concentrated? Are there barriers to entry? And, using data and information from each agreement\u2019s required quarterly monitoring reports, we assess the member lines\u2019 behavior. That data includes, for example, each member\u2019s liftings, vessel utilization levels, and changes in average revenue per TEU. And we also review and analyze information from several commercial databases.<\/p>\n<p>Most important, we listen to what shippers and shipper organizations have to say about their experiences and concerns.<\/p>\n<p>As the expert regulatory agency for liner shipping and marine terminals in U.S. trades, the Commission\u2019s bedrock regulatory responsibility is to protect American exporters, importers and consumers. We meet that responsibility, in part, by closely reviewing newly proposed carrier agreements \u2013 operational agreements as well as rate agreements \u2013 and by monitoring key agreements after they take effect.<\/p>\n<p>Thank you for your kind attention.<\/p>\n","protected":false},"excerpt":{"rendered":"<p>September 25, 2015 Chairman Cordero\u2019s Remarks at the U.S.-Japan International Shipping Forum I would like to thank the hosts of today\u2019s sessions, the Japan International Transport Institute, the Japan Maritime Center and the Maritime Bureau of MLIT, for the opportunity to participate in this important forum — with this distinguished... <a class=\"read-more\" href=\"\/chairman-cordero-participates-in-u-s-japan-maritime-discussions\/\">Read More »<\/a><\/p>\n","protected":false},"author":7,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":[],"categories":[28,4],"tags":[],"acf":[],"_links":{"self":[{"href":"https:\/\/www.fmc.gov\/wp-json\/wp\/v2\/posts\/914"}],"collection":[{"href":"https:\/\/www.fmc.gov\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.fmc.gov\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.fmc.gov\/wp-json\/wp\/v2\/users\/7"}],"replies":[{"embeddable":true,"href":"https:\/\/www.fmc.gov\/wp-json\/wp\/v2\/comments?post=914"}],"version-history":[{"count":1,"href":"https:\/\/www.fmc.gov\/wp-json\/wp\/v2\/posts\/914\/revisions"}],"predecessor-version":[{"id":915,"href":"https:\/\/www.fmc.gov\/wp-json\/wp\/v2\/posts\/914\/revisions\/915"}],"wp:attachment":[{"href":"https:\/\/www.fmc.gov\/wp-json\/wp\/v2\/media?parent=914"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.fmc.gov\/wp-json\/wp\/v2\/categories?post=914"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.fmc.gov\/wp-json\/wp\/v2\/tags?post=914"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}