Liner conferences

Liner conferences Evolution of US policy

Robert A. Ellsworth

This article outlines the history of US policy towards liner conferences from the Shipping Act of 1916 to the Shipping Act of 1983. The author analyses the method of regulating the conference system contained in the 1916 act and describes the effect of the act on the next 40 years of US maritime policy. The lsbrandtsen decision, the Bonner hearings and the Celler Report are analysed and the events leading up to the 1983 act are detailed. The article contains a economic the summary of arguments for and against the conference system and an analysis of the repercussions of the 1983 UNCTAD Code of Conduct. Keywords: Shipping; treaties; USA

International

Dr Ellsworth is the Director of the Office of Policy Planning and International Affairs for the Federal Maritime Commission and a lecturer in economics at George Mason University, Fairfax, VA, USA. He can be contacted at the Federal Maritime Street, 1100 L Commission, Washington, DC 20573, USA. ILiner operators, as distinguished from non-liner operators, hold themselves out to all shippers and sail accordingto a fixed, advertised schedule. Zonferences are associationsof shipping lines that are formed so that members can agree upon common rates, practices and continued

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This article traces the development of US policy towards liner’ shipping conferences.2 It will be shown that, although there have been several actual and proposed amendments to the original Shipping Act of 1916, fundamental attitudes towards the conference system, in particular in the philosophical area of competition versus rationalization, have remained essentially the same. Unfortunately, the judicial branch, with help from the judiciary committees of the US Congress, has tended to usurp control of liner shipping policy from the legislative branch of Congress and, as a consequence, caused US policy to deviate from the original course charted for the conference system in US trades. An understanding of the policy developments in this area requires a brief history of US attitudes towards liner conferences. This is followed by a discussion of the economics of liner shipping, which will assist a better understanding of recent policy formulations by the US Congress. The international background to US policy is also described, including such developments as shipping negotiations between the USA and other nations and the UNCTAD Code of Conduct for Liner Conferences (UNCTAD Code). Throughout this article, however, the central theme is that the Congressional attitude towards conferences has been a preference for rationalization over competition.

The Alexander Committee Report The first large-scale investigation of liner shipping practices was conducted during 1912-14 when the Merchant Marine and Fisheries Committee of the House of Representatives under the Chairmanship of Joshua W. Alexander undertook a massive inquiry into shipping practices.3 As a backdrop to the Committee investigation, the UK had investigated shipping conference practices from 1906 to 1909 under the Royal Commission on Shipping Rings.4 In 1911 the US Department of Justice brought suits against three conferences, charging violations of the Sherman Act through agreements and practices in restraint of trade. The UK investigation concluded that on the whole conferences did more good than evil and should be permitted, and that shippers should be able to organize to form a countervailing power to the conferences. The anti-trust cases begun in the USA were made redundant by the fact

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Liner conferences: evolution of US policy

that the first world war had erupted and by the time the cases reached the Supreme Court the conferences had been dissolved. It was with this background, then, that the Alexander Committee decided to investigate liner shipping conferences. The Committee reviewed the advantages and disadvantages of the conference system, concluding that the system should be maintained, but under closer government regulation. As John S. McGee noted, ‘The Conference system was found to be an admixture of bad and good; the good so good as to be worth keeping; the bad either not so bad as to be beyond cure or capable of being removed’.5 The Committee did not favour the prohibition of conferences because it felt that such an action would involve a ‘wholesale disturbance’ of the conditions that existed in the shipping industry. It was also concluded that prohibition would deprive shippers of the advantages of agreements and conferences ‘honestly and fairly conducted’. The advantages cited were: (1) greater regularity and frequency of service; (2) stability and uniformity of rates; (3) economy in the cost of service; (4) better distribution of sailings; (5) maintenance of US and European rates to foreign markets on a parity; and (6) equal treatment of shippers through the elimination of secret arrangements and underhanded methods of discrimination.6 The Committee felt that termination of conference arrangements would result in either rate wars or consolidation through common ownership. Neither alternative was seen as preferable to the conference system. In the Committee’s words:

continued from page 254

It is the view of the Committee that open competition cannot be assured for any length of time by ordering existing agreements terminated. The entire history of steamship agreements shows that in ocean commerce there is no happy medium between war and peace when several lines engage in the same trade. Most of the numerous agreements and conference arrangements discussed in the foregoing report were the outcome of rate wars and represent a truce between the contending lines. To terminate existing agreements would necessarily bring about one or two results: the lines would either engage in rate wars which would mean the elimination of the weak and the survival of the strong, or, to avoid a costly struggle, they would consolidate through common ownership. Neither result can be prevented by legislation, and either would mean a monopoly fully as effective, and it is believed more so, than can exist by virtue of an agreement.’

service charges. Conferences may also be organized to Permit members to Pool The Committee noted, however, that various abuses associated with revenues or cargoes, fix sailing schedules monopolies were inherent in the conference system and that only through or similar collective measures. Conferences can receive anti-trust immunity effective government regulation could these abuses be eliminated. The for these practices if their agreements are d’isa d vantages cited by the Committee included: (1) the elimination of filed at and approved by the Federal competition through the use of fighting ships and unlimited rate cutting; Maritime Commission (FMC). 3Committee on Merchant Marine and (2) excessive and arbitrary rates; (3) complete conference domination of Fisheries, House of Representatives, shippers; ’ (4) conference indifference to the landing of freight in proper

Report on Steamship Agreements and Affiliations in the American Foreign and Domestic Trade, 63rd Congress, 4 Vols,

condition; (5) secrecy of agreements and conferences; (6) discriminatory between large and small shippers; and (7) the state of continual Printing Office, dependence Government us that shippers were placed in as a result of the deferred Washington, 1914. rebate.8 %eport of the Royal Commission on Evidence obtained by the Committee reflected the fact that virtually all Shiooing Rings, Cmnd 4666, HMO, Loridon~l909.conferences and shippers were in favour of some form of government S’Ocean freight rate conferences and the American merchant marine’, University of Chicago Law Review, Winter 1960, p 195. 6Commi~ee~OP Citl Ref 3, WA 41 PP ZS303. ‘Ibid, Vol4, p 416. ?lbid, Vol4, pp 304-307.

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rates

regu1ation-

In light of the advantages and disadvantages of the conference system, the Committee recommended a number of ways in which government regulation of the US foreign trade would effectively eliminate the inherent abuses. These included: 255

Liner conferences: evolution of US policy

0

Interstate

0

l l *

Commerce

Commission

(ICC)

regulation

of rates and

firms entered into with other such firms and other transportation companies. All conference agreements must be filed with the ICC which could order cancellation should any portions be found to be discriminatory, unfair, or detrimental to US commerce. Freight rebates and other discriminatory actions be made illegal. ICC would investigate reasonableness of rates or other discriminatory practices. The use of ‘fighting ships’ and deferred rebates to be made illegal.9 approval

of contracts of shipping

As a result of the Committee’s recommendations, the bible of regulation of the US ocean transportation industry evolved - the Shipping Act of 1916. The Shipping Act encompasses the major recommendations of the Alexander Report and remains today, as amended, the guiding legislation for ocean freight regulation. The act provided for acceptance of the conference system with government supervision, but, rather than investing the regulatory power in the ICC, Congress created the US Shipping Board, a predecessor of the Federal Maritime Commission. The act also provided anti-trust immunity for certain anti-competitive agreements, when such agreements were approved by the Board. Additionally, the act outlawed some of the undesirable features found by the Alexander Committee, such as the deferred rebate,*O the fighting shipll and various unduly discriminatory practices.12 As will be demonstrated below, prohibitions against these three practices have been the focus of US shipping policy since 1916. For over 40 years following enactment of the Shipping Act, there were no ~ndamental changes made in the act’s regulatory provisions. The Merchant Marine Act of 1920, the Merchant Marine Act of 1936 and the Intercoastal Shipping Act of 1933 all made changes to the regulations governing the waterborne foreign commerce of the USA but the basic tenets of the Shipping Act remained the cornerstone of regulation.

Isbrandtsen Q/bid, Vol4, pp 41 S-421.

lODeferred rebates are a form of loyaltyor tying agreement where a shipper who guarantees all or a significantshare of his cargo to a conference for a predetermined period of time, say a year, receives a rebate of IO-20% of his accumulated freight charges. Deferred rebates are illegal in US trades (see Section 14 of the Sh@pingAct of 1916, Ch 451,39 Stat 728, as amended 46 USC, No 801-42). ItFighting ships are vessels deployed by conferences with the intent to track the port calls of independent lines - ie nonconference lines - and cut rates on cargoes carried on these vessels with the intention of driving the independent line out of the trade or at least severely disciplinino it so that it raises its rates. Fighting ships are also prohibited by Section $4 of the ShiDDinaAct. Warious reference;’ a& found in the Shipping Act prohibiting discriminatory practices (see especially Sections 16, 17 and 18). Tederal Maritime Board Ca., 356 U.S. 481,1958.

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decision

In 1958 the US Supreme Court handed down its decision in the Isbrandtsen case.‘3 After over a decade of questioning the legality of dual-rate contracts used by conferences, the Supreme Court found that such contracts violated Section 14 of the Shipping Act when employed as ‘predatory devices’. It should be noted that the dual-rate contract is a form of tying arrangement whereby contract signatories are charged a lower freight rate than non-signatories. This system of immediate rebates had been used in place of the deferred rebate, which was outlawed in the US trades by the Shipping Act. As a result of the Isbrandtsen decision, there was concern that the effective operation of the conference system would be hampered. Consequently, Congress enacted legislation suspending the effect of the Isbrandtsen decision for two years, during which time the dual-rate system would be carefully scrutinized so that an ‘ultimate solution to the problem could be finally and fully resolved’. Congressional concern resulted in two years of hearings on the ocean freight industry.

Bonner Hearings

v. lsbrandtsen

Immediately

following the Isbrandtsen case, the House Merchant Marine MARINEPOLICYOctobert 983

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and Fisheries Committee, under the chairmanship of Herbert C. Bonner, conducted an extensive study of steamship conferences and dual-rate contracts. Also in 1959, the Antitrust Subcommittee of the House Judiciary Committee chaired by Emanuel Celler began an investigation of monopoly problems in the ocean freight industry. This study was another in a series of the Celler Subcommittee’s investigations of regulated industries. The Bonner Committee made extensive use of the Celler Subcommittee’s findings in developing its recommendations. The findings of the Bonner Committee resulted in the 1961 enactment of Public Law 87-346 which authorized the use of dual-rate contracts, while providing additional safeguards to shippers.14 This was the first major piece of legislation amending the regulatory provisions of the Shipping Act since 1916. The Committee had ascertained that the traditional principles of anti-trust could not be applied to the ocean freight industry. It decided that: ‘. . . it should encourage the continued maintenance of effective conferences and that, within safeguards, it should authorize and direct the Federal Maritime Board to approve exclusive patronage arrangements without which conferences might well become ineffective [emphasis added]‘.15 The Committee had clearly intended that a strong conference system be ensured through the dualrate contract.

Celler Report Following enactment of Public Law 87-346, the Celler Report was published in 1962. This report reflected the Subcommittee’s view that the national shipping policy as embodied in the Shipping Act of 1916 was of the statutes fundamentally sound; however, the enforcement regulating the industry had been deficient. The Subcommittee found that the conference system had changed very little since the Alexander Report - there continued to be flagrant abuses of the conference’s privileges, while its strengths increased. Among the abuses found by the Celler Subcommittee were: (1) secret rate agreements; (2) unapproved divisions of traffic and territories; (3) secret rebates; (4) conference admission restrictions; and (5) discriminatory treatment of shippers.16 The Subcommittee noted with respect to conferences, that where antitrust immunity has been so widely abused it would have been consistent with Congressional policy to withdraw it. However, the Subcommittee cited three basic reasons for not recommending withdrawal of anti-trust immunity:

14House Committee on the Merchant Marine and Fisheries, Providing for the Operation of Steamship Conferences, HR Rep No 498, 87th Congress, 1st Session 1961. =/bid, p 13. 16Committee on the Judiciary, House of Representatives, Report of the Antitrust Subcommittee on the Ocean Freight Industry, 87th Congress, US Government Printing Office, Washington, 1962, p 382. “Ibid, pp 386-386.

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. . . existing institutional structures of long and historical standing should not be set aside except as a last resort. . . . the conference system is an international one that could not be eliminated and might not be improved merely by withdrawal of lines, foreign as well as American, operating in the foreign commerce of the United States. . . . outright elimination of the conference system in U.S. foreign commerce without enactment of substantial safeguards and authorization of much increased subsidies might well result in inflicting severe hardship upon our American merchant marine and in creating substantial rate instability presently undesired by American shippers. l7 The Celler Subcommittee

made it abundantly clear that it did not endorse the manner in which conferences had been conducting their operations. The Subcommittee indicated that it was necessary ‘to devise methods for

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la/bid, p 386. 19FMC v. Aktiebolaget Svenska Amerika Linien, 390 US 238,1968. %arnation Co. v. Pacific Westbound Conference, 383 US 213, 1966. The Supreme Court held that, since the conference had impiement~ an unfited Section 15 agreement, it was exposed to treble damage penalties of the anti-trust laws. “Sabre Shipping Corp. v. American Presidenttines. et. al.. 285 F. Sum. 1966. The Court heid that even though a conference had secured immunity from the anti-trust laws by the fact that an agreement was filed with the FMC, and a carrier files its rates subsequentto Section 18(b) (3) if these rates are found to be too high or too low, then the rates are unlawful and the carrier exposed to the anti-trust laws. “Gee for the example, The ~egu/ated Ocean Shimmingfndust~, A Report by the US Depar&en?of Justice, January f977, and Liner Shipping in the US Trades: A VW/ST Study for CENSA, The University of Wales Institute of Science and Technology, April 1978.

controlling the operations of conferences and for prohibiting abuses which violate conference agrements, to deter violations of the law, to safeguard shippers from unreasonably high conference rates, to protect nations and ports from unjusti~ed dis~mination, and to leave the way free for independents to enter the trades’. I8 The legislative revisions to the Commission’s responsibilities that were enacted into law in 1961 included the addition of Section 18(b) which required all carriers in the foreign trade to file with the Commission their tariff rates, classification, rules and regulations and any changes thereto. This legislative change initiated the tariff filing requirement that is currently the subject of much debate. It is interesting to note that the Congressional and Executive decisions to require that the Commission ensure that the carrier’s tariffs contain a certain amount of integrity was based on years of investigations which revealed a litany of abuses and discriminator behaviour. The increased attention given to shipping regulation in the late 1950s and early 1960s resulted in an increase in the Commission’s responsibilities, apparently because Congress had decided that the regulation of liner shipping had not been rigorous enough to prevent abuses of power. During this same time period, a series of decisions by the courts reduced the scope of anti-trust ~munity that the shipping companies had thought they possessed. These court decisions have become part of the shipping industry lexicon and the mere mention of Svenska, Carnation and Sabre can send chills up the spine of shipping executives. As a result of the Svenska19 decision, the Commission decided that activities which represented serious anti-trust intrusions required a more substantial anti-test-tie justification before they could be approved, The net result of the Curnation2* and Sabrezl decisions was that carriers are no longer certain as to whether agreements are vested with total anti-trust immunity. To a large degree the stricter conditions placed upon conference behaviour reflect the Judiciary Committee’s view that conferences should be tolerated but not encouraged. The reason for their reluctance to give conferences reasonable authority to organize and rationalize their activities without an abundance of government regulation reflected the anti-trust view of the economics of conferences.

The ~onomi~ debate over the merits of coherency The debate over the economic justification for permitting the existence of rate-fixing cartels has raged for years in academic and politicai circles. 22 There are two, perhaps contradictory, arguments that can be introduced to explain the economic rationale for permitting cartels, such as liner conferences, to exist. The first argument is that liner shipping displays the characteristics of a natural monopoly and therefore a perfectly competitive solution is impossible. The argument hinges on the existence of a cost structure wherein costs decline throughout the relevant long-term output levels. Thus, expansion of plant size implies lower cost, which ultimately means that a single firm can produce the entire output demanded at lower costs than could a collection of smaller firms. While there are some indications that liner shipping companies do experience some economies of scale, there is no evidence that these scale economies are so extensive that, in most trades, natural monopolies could ever exist. A second, more persuasive, economic justification for conferences is MARINE POLICY October 1983

Liner conferences: evolution of US policy

%ee for example, D. Marx, ‘International shipping cartels: a study of industrial selfregulation by shipping conferences’, Princeton University Press, Princeton. NJ, 1953, and R.S. Agman,. ‘Competkon; rationalization and United States shipping policy’, Journal of Maritime Law and Commerce, October 1976, and UWIST Study, ibid. Z4This inelasticity is because, in large part, the demand for shipping is not direct but rather derived from the underlying demand for the commodity to be transported. z5By political economy I refer to the older, richer view of economics which encapsulated the political and economic causes and effects of various actions. It is clear that a return to the classical view of the operation of the economy is long overdue, since the newer, more sterile and highly explain mathematical attempts to economic phenomena have largely failed.

MARINE

POLICY October 1983

that the economic structure of liner shipping is such that if carriers were forced to compete in an atmosphere of unfettered competition, the ultimate result would be fluctuations between ruinous competition and oligopolistic domination of the market .23 That is, competition would be so fierce that rate wars would erupt periodically, driving freight rates to levels which, over the long term, would not permit some firms to replace their capital equipment and would lead to bankruptcies. There would be only a few remaining firms and, therefore, the resulting industry structure would be oligopolistic. This view of liner shipping has been used extensively by advocates of the conference system; indeed, as we have seen, the Alexander Committee used this explanation to describe why it permitted conferences to exist in US trades. Clearly this explanation of the behaviour of liner shipping firms more closely approximates the real world experience. Competition in the shipping industry can and has been ferocious for a number of economic reasons; including the large proportion of fixed or constant costs involved in liner shipping, which stems from the fact that in the short term, ie until the vessel is fully loaded, average costs decline rapidly with each additional ton of cargo loaded. This declining cost phenomenon can lead to short-term marginal cost pricing at levels far below average costs. One must also bear in mind the fact that output cannot be stored or inventoried. The large scale of the operation (a container vessel that can transport 1 500 20-foot containers can be best imagined by visualizing a line of truck trailers that stretched for almost six miles without a break) explains the temptation to cut rates to the bone if necessary. A final explanation of the extent of competition stems from the fact that the demand for shipping is inelastic.24 However, the pure economic argument for permitting cartels to exist in ocean shipping is admittedly weak. The fact that rate wars may periodically erupt and eventually drive from the trade certain weak carriers should not, in itself, be cause for great public concern. In the long term there will always be entrepreneurs who will come forward to transport the cargoes as soon as rates begin to rise again, so why should public officials concern themselves with the tendency towards vicious competition in liner shipping? One argument that has historically been made is that the shippers themselves disdain rapid fluctuations in rates because it makes the determination of forward contracts difficult. However, in an era of deregulation of land transportation and floating exchange rates, shippers will and are making the adjustments necessary to cope with more uncertainty. What other possible economic concern could there be for not wanting competition to prevail? In my estimation there are no convincing purely economic arguments as to why conferences should be allowed to exist. There are, however, compelling political economy25 reasons that can be arrayed to justify conferences and the stability they represent. First and foremost, liner shipping is, by its very nature, international in scope; every export from the USA represents another nations’ imports and therefore the rules of the game must take into consideration the views of the USA’s international trading partners. The international aspect of liner shipping is important when considering the impact of fierce rate competition on the survivability of certain shipping lines. In a purely domestic setting, public policy makers need not be overly concerned about which firms survive a rate war provided that a continuation of service, where economically feasible, is assured in the long term. In the

Liner conferences:

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international setting, where firms of many nationalities are competing, the identity of the surviving firm is important. Most nations of the world want a merchant fleet and, as a consequence, the most feasible way to permit low-cost and high-cost firms to survive together may be to permit them to enter into some sort of relationship which reduces the natural forces of competition. 26 Recent developments in microeconomic theory also lend support to the belief that, on the whole, a trade organized around a strong, rationalized conference may produce significant public benefits and that the concern that conferences may exercise excessive economic power may be overstated. Many economists have been dissatisfied with the conventional theory of pure competition and recently Professor William Baumol has offered a new theory of how markets work.27 Advocates of conferences who also view with disdain the extent of regulation practised in the USA will no doubt find great comfort in this theory - the theory of contestable markets. Baumol’s description of how competitive markets behave rests heavily on the concept of entry and exit in a particular industry. In other words his theory emphasizes one of the so-called conditions for competitive markets. These conditions are: 0 0 0 0

?% this respect shipping is similar to international aviation where governments have a large stake in the national carrier and view it as an instrument of the state. It is viewed as an earner of scarce foreign exchange and an instrument of military, strategic, and political importance. ~William Baumol. ‘Contestable markets: an uprising in the theory of industry structures’, The American Economic Review, March 1982, pp 1-15. ‘*For a more complete explanation of the effect of the commitment to supply regular service at a fixed price or capacity utilization see, J.A. Zerby and R.M. ‘Capacity utilization in liner Conlon, shipping’, .Joorbal of Transport Economics and Policy, January 1978, Vol XII, No 1, pp 32-35. ‘9Baumo1, op tit, p 4.

the existence of many firms; homogeneity of output; ease of entry and exit; and perfect information.

Traditionally, most economists measured the degree of competition present in a market by looking at the first two conditions - number of firms and homogeneity of output - in other words, it was a numbers game. The more firms, the closer the market would be to pure competition; the fewer, the closer it would approach oligopoly or monopoly. The newer theory focuses on the costs involved in entering new markets for small ‘upstart firms’ and conversely the cost of exit. If both entry and exit are relatively costless then the market may be labelled as contested. Clearly, liner shipping operates in a highly contested market, since entry is swift and relatively inexpensive - all a prospective operator need do is charter a few vessels and he is in business. By a similar token, the cost of exit is low because there are few ‘sunk’ costs; ie assets that cannot readily be transferred to another firm so they are either of no value or upon resale would return little of the original investment. Entry is made even more attractive for independent lines because the conference has developed a pricing structure that facilitates the movement of lesser-valued goods. This pricing structure is, of course, value-of-service pricing which, contrary to popular belief, does not necessarily mean that higher-valued goods subsidize lower-valued goods because if the latter could not move at rates which covered average costs then higher-valued commodities would pay a higher proportion of fixed costs and therefore face higher rates. Furthermore, the common carrier obligation to provide reasonable amounts of service at all times naturally makes the conference costs higher than if they did not have this public responsibility. 28 These factors lead to the conclusion that liner shipping is one of the most highly contested industries, especially in light of Baumol’s statement that ‘the crucial feature of a contestable market is its vulnerability to hit and run entry’,*9 a condition that history demonstrates has MARINE POLICY October 1983

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plagued liner conferences. Since independent lines may tend to actively compete for only the higher-valued goods and avoid the marginal traffic, it can reasonably be argued that a public policy which encourages too many independents may result in wasteful competition, which is contrary to the reason for allowing conferences to exist in the first place - to provide reasonably balanced service at rates which reflect the economies of rationalization. The real question is not whether conferences should be permitted to exist, but rather the degree of regulation to which they should be subjected.

Regulation of conference practices For many years the USA was the only nation in the international community which regulated liner conferences. This section examines the regulatory structure that has developed in the USA and compares it to recent developments in other countries. It will be shown that, for better or for worse, many nations have changed their perspectives on the conference system and are imposing regulatory schemes on carriers serving their trades. Furthermore, the coming into force of the UNCTAD Code of Conduct for Liner Conferences will impose another regulatory system on the liner industry. Current regulatory

thinking in the USA

The development of US policy towards conferences and the way the original intent of Congress to encourage rationalization was twisted by the courts to favour competition has already been described; this section demonstrates how Congress intends to rectify this. Current thinking on how liner shipping should be regulated is best understood by examining the contents of a recently proposed bill in the US Congress. Although it may be subjected to further modification, the embodiment of current Congressional thinking is found in HR 1878 - the Shipping Act of 1983. This legislation has its roots in the many inconsistencies and difficulties that arose in the 1960s and 1970s because of various court and Federal Maritime Commission (FMC) decisions and because of Congressional displeasure with the length of time it took to get agreements approved by the FMC. It also reflects a restatement of support for rationalization agreements. The Report of the House Merchant Marine and Fisheries Committee accompanying HR 1878 stated explicitly that the purpose of the bill was ‘to exempt from the antitrust laws those agreements and activities subject to regulation by the Federal Maritime Commission; to expedite consideration and review of agreements filed with the Commission; to define and limit the powers of the Commission as an independent regulatory tribunal’.30 The Report also lists in more detail several of the main features of the proposed legislation: 0

0 %ommittee on the Merchant Marine and Fisheries, House of Representatives, Report on International Ocean Commerce Transportation, 98th Congress, Rep 9853,Partl,p3.

MARINE POLICYOctober 1983

‘The FMC is provided exclusive jurisdiction in administering all the provisions of the Shipping Act as they relate to international liner shipping regulations’. ‘Carriers are authorized to organize and rationalize services fully with clear antitrust immunity [emphasis added]. These strong liner conferences are counterbalanced by competitive safeguards such as mandatory independent action in certain instances and authorization of service contracts. Expedited procedures for filing and hearing 261

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0

before the FMC will minimize delay and avoid the current cumbersome process’. ‘The entire method of regulation is changed to minimize government involvement in shipping operations’.3l

In another section of the Report, the Committee stated a central theme of the proposed regulatory change: Regardless of the membership restrictions and regardless of the form of concerted action taken by ocean common carriers, it is the underlying purpose of this legislation to provide the means by which common carriage will become more efficient in an industry in which fixed costs remain high regardless of the amount of cargo being carried. Conferences, consortia, or joint service arrangements can provide the public with the full benefits of common carriage only if they are not unduly inhibited in their ability to pool earnings, losses, or otherwise order their joint business activity.32

311bid, pp 3-4. Vbid, p 14. 33Comparison of Open and Co-ordinated on the North Atlantic Competition Container Trade, Hapag-Lloyd, Hamburg, 1976. 34Rationalization of Liner Services, United States Atlantic and Gulf Ports to Northern Europe, Manalytics, Inc, San Francisco, CA, December 1980.

262

It is noteworthy that the Shipping Act of 1983 once again focuses on the three ‘shalt nots’ of the 1916 act. Thou shalt not use fighting ships, pay deferred rebates or discriminate against shippers or ports (the first two are viewed as predatory acts and the third an abuse of dominant position against shippers or ports). In return for these obligations, the conferences are given clear anti-trust immunity and almost automatic approval of agreements. We shall see below that these same prohibitions against predatory behaviour have been raised by the USA in recent negotiations with the Japanese and Europeans, and also are addressed by the UNCTAD Code. Thus Congress is resurrecting the belief that conferences are to be encouraged because they serve a useful public purpose by creating conditions necessary for the production of output, while using the fewest economic resources, ie though rationalization of supply. In part, this movement was influenced by several publications in the 1970s. These publications include a study by a major German shipping line, Hapag-Lloyd.33 In their study the analysts at Hapag-Lloyd showed that in 1975 there were 36 vessels operating in the North Atlantic trade, each with an average load of 68% and making 76 weekly port calls. It was demonstrated that a coordinated, rationalized service would require only 16 optimally-sized vessels making only 33 weekly calls, with each vessel achieving average load factors of 85%. This rationalization would have resulted in cost savings of $200 million and allowed freight rates to be reduced by 28%. A second study prepared by Manalytics, Inc, for the MC, demonstrated the economic gains implicit in a well coordinated rationalization programme. This study showed how a total rationalization of the US Atlantic and Gulf/Northern Europe trades could have resulted in enormous economic savings. A rationalized service required only 78 vessels versus the 178 actually used to serve the trade. This represented a net reduction of 44% in terms of vessels in the trade. Part of this reduction was due to the fact that larger, more economical vessels were used in the rationalization model. Manalytics estimated that rationalization could have resulted in a 27% reduction in cost which represented about $211 million in direct cost savings compared to the actual level of expenditures in these trades in 1978. If these savings and the savings inherent in having few containers, lower port costs, inland distribution charges, etc were passed on to the payers of the freight bills, it was estimated that there could have been a saving to shippers of $670 million. Furthermore, slower MARINE POLICY October 1983

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steaming, compensated for by additional vessels, would have increased the savings to $711 million. Another study completed during the 1970s presented a new microeconomic model to replace the neoclassical model that had been used to analyse the economic structure and performance of the liner industry. The University of Wales Institute of Science and Technology (UWIST) study35 offered a convincing explanation of the economic behaviour of conferences that was much better equipped to describe the realities of liner shipping than the conventional models of neoclassical economics. Using the normal cost theory developed by P.W.S. Andrews, UWIST was able to demonstrate that the liner industry, even with conferences, was essentially competitive and, therefore, a strong regulatory regime was not necessary. They also argued that banning conferences would result in a less efficient economic structure since the industry was inherently oligopolistic and any attempt to produce a regime of unfettered competition would only result in an unstable market where periodic rate wars were followed by a return to oligopoly. This pattern would repeat itself so the industry would constantly be in turmoil. If this were not bad enough, UWIST argued that, although the competitive models of the textbooks conclude that the winners in any rate war should be the most efficient firms, the fact of the matter was that many national governments see their flag fleets as instruments of the state. These nations, therefore, may not be willing to stand aside and let their fleets be driven from the seas. Thus, it is not guaranteed that only the most efficient carriers will survive. The return to the original perspective towards conferences is destined to bring the USA more in tune with the view of conferences that had existed in Europe from the time of the Shipping Rings investigation at the turn of the century. Ironically, just as US policy towards the conference system was shifting towards less regulation and granting more discretionary power to conferences, the rest of the world was about to enter into a new grand experiment with regulation. 3-YJWIST, op tit, Ref 21. 36The United Nations Conference on Trade and Development (UNCTAD) Code of Conduct for Liner Conferences represents an international regulatory scheme which will directly affect all contracting parties. The Code provides for various regulatory activities including mandatory intervals between conference general rate increases - perhaps up to 15 months - (Article 14) the encouragement of pooling arrangements along the lines of 40-40-20 pooling agreements where national-flag carriers receive access to 40% of their respective conference markets, leaving 20% for third-flag carriers (Article 2) and a national-flag veto provision over conference decisions (Article 3). Convention on Code of Conduct for Liner Conferences, 6 April 1974. UN DocTD/CODE/ll/Rev.l 1974. FinalAct and Annexes. YSee the UWIST Study, op cif, Ref 21, pp 72-76 where in 1978 a lack of interest in regulating liner conferences was shown by most of the major European nations. 38UNCTAD Code, op tit, Ref 36, Article 18.

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The coming into force of the UNCTAD Code year 1983 may very well represent a watershed for the regulation of liner conferences. Not only may the USA have a new regulatory regime, but the UNCTAD Code will finally become international law in those states which have ratified the Code .36 In essence, the European nations and the less developed countries (LDCs) will sail off into uncharted waters. In many respects the Europeans, who have so strenuously objected to US regulation, have succumbed to the siren song of the LDCs and acquiesced to a regulatory system which is potentially more restrictive than the US Shipping Act. 37In other respects the Code mirrors policies which were adopted in the USA many years ago. There are numerous references in the Code to the phrase ‘appropriate authorities’, a euphemism for government authorities, which will open up the previously secret behaviour of conferences in non-US trades to government regulation, especially by the less developed countries. The Code will also require that tariffs be made publicly available to governments if they want to scrutinize rate levels. No doubt most governments will eventually request conferences to provide them with copies of their tariffs, since the Code requires tariffs to be strictly adhered to and not unfairly differentiate between shippers. Fighting ships38 are The

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WNCTAD Code, op cir, Ref 36, Article 7 permits the use of any legal loyalty conEuropean governments The tract. engaged in the negotiations with the USA have produced documents that show in most European trades shippers are given the option of choosing between deferred or immediate rebates and the percentage spread between the two is extremely narrow. WNCTAD Code, op cir, Ref 36, Articles 23-46. 41This note was reprinted in Transport 2000, January/February 1983, pp 18-l 9. Vbid, p 18. 43The Europeans will sign the code withthe reservationsoutlined in EEC Regulation No 964/76 commonly called the Brussels package. These reservations include disapplication of cargo sharing in intra-EEC trades and on a reciprocal basis within EEC-OECD trades. Under the European scheme, Codist LDCs might automatically receive rights to a fixed share, say 40% of the conference pooled cargoes.

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expressly prohibited but deferred rebates are not, although deferred rebates appear to be a dying species.39 Thus, the Code deals with at least two of the three ‘shalt nots’, fighting ships and discrimination, which form the foundation of US shipping policy. Perhaps the most painful part of the Code will prove to be the dispute settlement machinery, which may create a bureaucratic structure that could incapacitate the conferences.40 The USA has repeatedly stated its opposition to the Code and recently reiterated this policy in a Diplomatic Note sent to the European and Japanese delegations which represent the Consultative Shipping Group (CSG).41 The USA stated that it: ‘shuns the Code because it believes that the imposition of a world-wide cargo sharing cargo regime would impact adversely on world commerce and is contrary to the economic free trade policy that it has historically espoused’.42 Once again, the USA has decided to embark on a policy path that diverges from that chosen by its European allies. The European acceptance of the Code has placed additional pressure on the USA to respond to the demands of LDCs for a guaranteed share of the market similar to that granted them under the terms of the Code. The USA will attempt to resist cargo sharing as much as it can, but it must also be aware of the impact that such a programme of resistance will have on the shipping community. In an effort to reach an understanding with the CSG governments, the USA has attempted to arrive at a mutually acceptable programme to resist the increasing pressure to enter into multilateral or bilateral arrangements to use non-market forces to allocate cargoes. The basic assurances which the USA is seeking from the CSG governments is that they do not encourage any additional cargo sharing beyond that covered by the European reservations43 and, furthermore, that the CSG governments restrain LDC governments if they attempt to expand the cargo sharing provisions of the Code beyond the scope of the conferences to the entire trade. The USA is also concerned about the commercial practices of conferences which may unduly limit US access in CSG/LDC trades. The commercial practices that the USA would like to see limited include those types of predatory practices symbolized by fighting ships and deferred rebates.

US response to the Code: bilateralism The USA plans to resist cargo sharing, but its resistance will be ‘tempered by realism’ - meaning the USA will protect its shipping interests, including carriers, shippers and consumers, from the actions of other governments or the commercial practices of carriers. In at least two instances, foreign governments have attempted to pressure the USA to accede to restrictive cargo sharing regimes and the US response has been to engage those countries in bilateral discussion; the objective of which is to limit the scope of any cargo sharing scheme. The first country the USA met on a formal basis since the formulation of its policy to resist cargo sharing was the Republic of the Philippines. Bilateral discussions were required because, on 19 January 1982, the Philippine government issued Executive Order 769 (EO 769), which contained rules and regulations providing for at least SO% of all Philippine export and import cargoes to be reserved for Philippine-flag and bilateral-trading partners’ liner vessels. EO 769 clearly indicated that

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44FMC Docket No 82-58, Actions to Adjust or Meet Conditions Unfavorable to Shipping in the United States/Venezuela Trade, served 8 December 1982.

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the Philippines was on the road to implementing the UNCTAD Code even before it came into force. issued To make matters worse, the Philippine government Memorandum Order No 3 which was to become effective on 22 July 1982. Memorandum Order No 3 implemented the cargo sharing provisions of EO 769 in US trades. One further piece of legislation in the Philippines which affected access to cargo was Presidential Decree 1466, 11 June 1978, which required that all Philippine government-owned or controlled cargoes be transported on Philippine vessels unless a waiver was obtained. This series of cargo sharing decrees resulted in the US government meeting with the government of the Republic of the Philippines to discuss the conflicting policies of the two countries. Discussions were held in August 1982 in Manila and in February 1983 in Washington, At the February meetings, the US government presented to the Philippines a proposed bilateral agreement which expressed the policy of the USA with regard to cargo sharing. The intention of this bilateral agreement was to limit cargo sharing in general, and government preference regimes in particular. The USA recognizes the sovereign right of governments to attempt to protect their merchant marines via cargo sharing protectionist laws, but, at the same time, believes it has certain obligations to its general trading interests to encourage as much competition as possible in liner shipping so that its international trade can take place in the most inexpensive and efficient manner possible. Thus, under the US plan, national lines would receive equal opportunities to compete for government cargoes and third-flag carriers could participate in the trade, provided the latter granted reciprocity. In other words, third-flag carriers could compete for US/ Philippine cargoes if US carriers could operate in the trades of the third-flag nations. The importance attached to reciprocity, of course, stems from the coming into force of the UNCLAD Code. The USA has also held bilateral discussions with the Republic of Venezuela. These discussions were triggered because of US-flag carriers’ allegations that actions by the government and carriers of Venezuela had created conditions unfavourable to shipping in the foreign trades of the USA. The two US liner operators in the trade, Delta Steamship Lines, Inc, and Coordinated Caribbean Transport, contended that, due to the enforcement of the Venezuelan cargo reservation laws, they were being burdened in their ability to conduct their shipping business. These allegations precipitated a Section 19 rule-making proceeding by the Federal Maritime Commission44 and resulted in a meeting in Washington on 14 January 1983, between the representatives of the US and Venezuelan governments. This meeting led to the suspension of the Section 19 action and resulted in a second meeting in Caracas, which took place on l-3 June 1983. At this second meeting, the US delegation presented the Venezuelan government with a proposed bilateral agreement which attempted to treat cargo sharing in much the same manner as the document presented to the government of the Republic of the Philippines - ie to leave as much of the trade as possible open to commercial competition for national lines and permitting third-flag vessel operators to participate in the trade on a reciprocal basis. It is much too early to determine whether the USA will be successful in its efforts to maintain a substantial degree of competition and freedom in

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liner shipping, but certainly the effort is well worth the try. Surely the international economic system will benefit from any attempt to instil more rather than less freedom in liner shipping.

Conclusion In conclusion, we can see that the view towards conferences expressed by the Alexander Committee in 1916 reflects, to a large degree, current thinking in the USA. Judicial decisions in the intervening years sidetracked the original goal of encoura~ng rationa~ation, but new legislation may rectify this. Ironically, many of the problems with conferences which were perceived by the Congress in 1916 have been recognized by the rest of the world and are being addressed by the enactment of a world-wide shipping regime - the UNCTAD Code. Unfo~unately, the growth of government involvement in shipping, especially in the area of protectionism, is destined to create a host of new problems for liner shipping.

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