Biden’s shot across the bows for the world’s shipping lines

Hello from London, where the sun is finally shining and the last legal coronavirus restrictions have just been lifted despite soaring numbers of new infections. “Freedom day” will be anything but for prime minister Boris Johnson and chancellor Rishi Sunak, however, with nightclubs spared for another week at least, after both were forced to isolate having hung out with health secretary Sajid Javid, who tested positive for Covid-19 on Saturday. 

The focus of today’s main piece, though, is on events on the other side of the Atlantic. We look at the reaction of regulators, exporters and the shipping liners to Joe Biden’s executive order, aimed at lowering businesses’ transport costs, which have soared during the pandemic.

An executive order that’s making waves

Of the many industries accused this month by US President Joe Biden of being dominated by a handful of firms, few have had their fortunes transformed so dramatically during the pandemic as container shipping.

After more than a decade fighting for morsels of profitability, carriers have flipped into their most lucrative run in memory. The top 11 chalked up a record $16.2bn in earnings before tax and interest in the first three months of the year, greater than all of the first quarters in the previous 10 years combined, according to consultancy Sea-Intelligence.

The downside of those bumper profits is the suspicion and scrutiny that comes along with it — including from the president of the world’s most powerful nation.

You can see why Biden might believe the shipping industry functions as an oligopoly. Its pursuit of consolidation to drive transport costs down has left the 10 largest companies controlling more than 80 per cent of the market, up from 51 per cent in 2000, and without a single American company among the ranks.

Eight of the top 10 operate in one of three main alliances, which rather like their more well-known airline equivalents, allow cargo to be shared between services. And when the pandemic struck, carriers protected freight rates — and saved costs — by cancelling hundreds of sailings at the same time as economies locked down only to see them soar to record-highs months later when US imports from China surged unexpectedly.

What to do, then, about this “small number of dominant foreign-owned lines and alliances” allegedly disadvantaging US exporters? Powerless to lower freight rates, Biden’s executive order, signed on July 9, instead encourages the Federal Maritime Commission, a watchdog, to clamp down on “unjust and unreasonable” detention and demurrage charges levied by carriers on shippers when containers are returned or picked up late.

Shippers in Europe and the US have been complaining about these surcharges for months. Assuming a typical importer makes between 5 and 10 per cent profit on a container full of goods worth $40,000, a $750 demurrage charge — at the top end of what US exporters say they’re being charged — constitutes a substantial hit to margins.

James Hookham, secretary-general of the Global Shippers’ Forum, a trade body for importers and exporters, welcomed Biden’s intervention. “This puts pressure on the new chair of the FMC to actually take action,” he said, pointing out that the regulator’s existing guidelines on detention and demurrage charges are often poorly enforced.

Edward Aldridge, senior vice-president of global ocean freight at Agility, a large freight forwarder, said Biden’s executive order was a “shot across the bows’‘ for the shipping carriers in what could be a first step towards the US re-entering the ocean transport business dominated by European and Asian companies. “It’s about trying to control a part of your supply chain,” he added.

Some US exporters of low-cost goods such as agricultural products have been struggling to find availability on ships this year. The executive order could help in ensuring the carriers do not rush to get empty containers back to exporters in Asia as quickly as possible by requiring them to accept minimum amounts of cargo for export, Aldridge added.

Carriers say they are simply the victim of market forces. Maersk and Hapag-Lloyd, two of the five biggest shipping lines, both blamed unprecedented consumer demand for the capacity “bottlenecks” affecting virtually every stage of the maritime supply chain. John Butler, president and chief executive of the World Shipping Council, said that normalised demand rather than regulation would solve delays.

“There is no market concentration ‘problem’ to ‘fix’,” Butler said in a statement after the executive order was announced. “Punitive measures levied against carriers based on incorrect economic assumptions will not fix the congestion problems.”

Matthew Thomas, partner at law firm Blank Rome who formerly served as assistant general counsel for international affairs at the FMC, stresses that detention and demurrage charges have been a contentious issue between carriers and shippers for a long time. He doubts whether the executive order will have a “significant, substantive impact”, however, as it does not grant the FMC any extra powers to stop excess fees from being charged.

“Ten global competitors is not an oligopoly,” Thomas said. The detention and demurrage charges, he argued, were a response to market conditions, not an outgrowth of an elimination of competition.

“[The executive order] invites the FMC to do what it has been doing for the last few years,” Thomas added, leaving shipping liners’ freedom to co-operate on rate guidelines intact thanks to exemptions from normal restrictions on what information can be exchanged. “The order can’t really broaden or change the FMC’s underlying authority or jurisdiction — this is more of an exhortation for them to enforce their own rules.”

Hookham is more optimistic. Echoing the sentiments of attorney Tim Wu, who helped draft the order and described it as an attempt to “bring back antitrust as a popular movement”, he thinks that while the FMC’s “necessarily parochial” investigation will have an immediate effect only in the US, its actions will nonetheless influence regulators elsewhere.

“It’s symbolic,” Hookham said, “and it should take the sting out of quite an aggressive surcharging regime that’s sprung up around the congestion and delays in the ports in particular”.

Trade links

The EU’s carbon border tax, unveiled last week, has provoked the ire of several foreign governments, led by Russia. Adam Tooze’s latest Chartbook also tackles the Fit for 55 programme and assesses the risk that it triggers another “gilets jaunes” movement.

In an interview with Nikkei ($, subscription required), Australian trade minister Dan Tehan said he was willing to be “patient” in working out Canberra’s differences with Beijing, despite the latter snubbing his previous overtures. Statistics released by Beijing over the weekend showed (Nikkei, $) that trade between North Korea and China dropped 84 per cent in the first half of 2021, as Covid-19 precautions halted the flow of people and goods. 

The UK government has published proposals for a new initiative aimed at fostering trade between the country and developing economies. Economists from the London School of Economics and University College London ask whether economic integration promotes higher levels of foreign direct investment. As far as the EU is concerned, the answer is a resounding yes. Claire Jones