USA

The Inflation-Fighting Bill You Don’t Know About

An overwhelmingly bipartisan effort would finally crack down on the ocean shipping cartel.

BY DAVID DAYEN
DECEMBER 13, 2021

STEPHEN B. MORTON/AP PHOTO
Container ship Ever Far, left, sails downriver past the Port of Savannah, September 29, 2021, in Savannah, Georgia.

Inflation is peaking at 6.8 percent. Real wages are falling, particularly among the middle class. Republicans smell blood, hoping to make rising prices the centerpiece of their midterm strategy. Democrats have pointed their own fingers, accusing the opposition of rooting against the economy for political gain rather than helping to fix the problems.

Given all this, you could have easily overlooked that the most focused legislation to alleviate a key driver of inflation passed the House last Wednesday with 364 votes.

The Ocean Shipping Reform Act of 2021 (OSRA 2021), the first update to ocean shipping rules in nearly 25 years, begins to reverse a punishing 1990s-era deregulation in the maritime portion of the supply chain. It’s unique in several ways: an anti-monopoly initiative from a federal government that has at best tolerated and at worst actively promoted monopolies for decades, a sharply bipartisan effort in a polarized and toxic Congress, and an expansion of regulatory power to structure markets that breaks with a federal bias toward self-regulation and laissez-faire posturing.

And “it all began in an almond orchard and a rice field,” its co-author told me.

Rep. John Garamendi (D-CA), who represents vast agricultural areas in Northern California, explained that exporters approached him earlier in the year with a problem. “They said, ‘We cannot get a container, and if we get one, we can’t afford it,’” Garamendi told me in an interview.

In parallel, Rep. Dusty Johnson (R-SD) was hearing the exact same thing from exporters in his home state. Valley Queen Cheese, a local supplier, has over two million pounds of lactose sold to interests in New Zealand that have been waiting for an empty container for six weeks. According to Johnson’s office, shipping times dock-to-dock have increased from 50–60 days to 120 days. And prices to secure a spot on a ship have increased as much as tenfold.

“We learned quickly that this was a market that is simply broken down,” Rep. John Garamendi said.

Importers were having similar problems. Garamendi told me about a company in his district that sells plastic Christmas decorations; their imported goods are stacked at the bottom of seven other containers at a port. The company is being charged millions of dollars in “demurrage and detention” fees, designed to clear goods from port terminals and get containers back to ships, even though that company has no way of getting its goods off the dock.

“We learned quickly that this was a market that is simply broken down,” Garamendi said. He teamed with Johnson to fix it, introducing OSRA 2021 in August. Within three months, it overwhelmingly passed the House. Sens. Amy Klobuchar (D-MN) and John Thune (R-SD) have indicated they would introduce a Senate companion, and a Senate hearing last week showed bipartisan interest in the issue. The White House has endorsed the bill.

To find the root causes, you have to go back to how ocean carriers have used their concentrated power to exploit anyone who wants to send cargo anywhere. As Matt Stoller laid out last month, for most of the 20th century the shipping industry was regulated as a public utility, which of course it is, as getting goods to markets swiftly benefits us all.

Under the old rules, ocean carriers could legally form alliances to set prices and manage routes, but all prices and fees had to be transparent; service had to be offered on equal terms with no individual rebates or volume discounts or geographic discrimination; and no exclusionary conduct, like promising slots to certain cargo, was permitted. Subsidies for the domestic shipbuilding industry ensured that U.S. carriers would play a vital role.

The goal was to expand commerce by allowing trade to flow reasonably, with affordable access for cargo shippers and a stable business for ocean carriers. That all was brought to an end with the passage of the Ocean Shipping Reform Act of 1998. Shipping contracts became proprietary and secret deals permitted, while the antitrust exemption for carrier alliances remained in place. Meanwhile, domestic shipbuilding subsidies vanished.

As a result, the top ten ocean carriers today control twice as much of the market, more than 80 percent, as they did in 1998. They are divvied up into three dominant carrier alliances, giving exporters even fewer choices. None of the major carriers are U.S.-based. As carriers consolidated, they built bigger ships, which couldn’t be docked at smaller ports, concentrating traffic at the larger ones (this is why the Ports of Los Angeles and Long Beach see 40 percent of all import traffic in the U.S.). They made volume discount deals with large retailers that guaranteed supply to them over smaller competitors.

With the Ocean Shipping Reform Act of 1998, shipping contracts became proprietary and secret deals permitted, while the antitrust exemption remained in place.

Moreover, as Garamendi pointed out, China entered the WTO 20 years ago this past week, rapidly becoming a dominant country for goods manufacturing. This extraordinary shift of production increased the global reliance on this narrow band of ocean carriers. “They’re able to collude, and plenty of them do,” Garamendi said.

The exploitation expanded during COVID, with profit taking precedence over access or fairness. Garamendi heard from constituents that containers with Chinese imports were brought to the U.S., unloaded, and then immediately sent back to Asia, bypassing ports where exports could be sent off. Though this seems like a lost opportunity, “we discovered that the ocean shippers could make far more money turning that container around than waiting for agricultural exporters to load it and return it to the ship,” Garamendi said.

These circumstances have been wildly lucrative for ocean carriers, while debilitating for exporters and consumers. Maersk, the world’s largest carrier, enjoyed its largest profits in 117 years last quarter. The record profits call into question whether the shipping industry is interested in solving the supply chain crisis, rather than profiting from it.

That’s where the updated Ocean Shipping Reform Act comes in. The bill is at once modest and pretty radical in scope. In 1998, the Federal Maritime Commission (FMC) was stripped of most of its ability to investigate and impose regulations on ocean carrier contracts. Under the new legislation, the FMC can initiate investigations of practices in the shipping industry, and set enforcement measures.

It can also apply minimum service standards to shipping contracts, and third parties could challenge contractual agreements if they find them to be anti-competitive. The bill also changes the FMC’s mission to one of reciprocal trade, and requires ocean carriers to accept cargo if it can be loaded into their containers, rather than just sailing off with empties.

While the FMC is currently investigating demurrage and detention fees, under OSRA 2021, these fees would be subject to regulation and would have to be reasonable, ending the practice of charging companies for failing to get cargo that they cannot access off the docks (a pervasive problem that predates the pandemic, as this 2018 FMC fact-finding demonstrates). Records of these fees would have to be kept as well, and a new process for challenging the fees would be established, with the FMC playing an active role.

“This supply chain crunch has laid bare many inefficiencies in the market today, and we have a chance to address those inefficiencies,” Johnson said in a floor speech last Wednesday.

Other legislators from both parties heard about the same problem from their constituents, which created the push for reform. Over 360 state and local groups endorsed OSRA 2021. It also helped, as it often does in Washington, that large special interests joined in the complaint, counterbalancing the large ocean carriers. “Just in the last week I got a call from Walmart,” Garamendi told me. “A few hours later it was Amazon.” This coalition was able to ward off the World Shipping Council’s opposition.

Overall, OSRA 2021 attempts, in a minor way, to shift the balance of power away from the ocean carrier cartel and back into the hands of democratically inclined interests, which have a role to play in structuring fair rules. The bill counts on the FMC being adequately aggressive and adequately funded; Garamendi said he would be watching next year’s budget closely to see if the agency has the resources necessary to do the job.

Moreover, the infrastructure legislation passed earlier this year provides funding to improve ports and the networks that carry goods off them. More broadly, competition policy to address such imbalances of power has to be on the government’s menu, too. “The market system cannot operate with a cartel or collusion,” Garamendi said. “We have had more than 30 years of neglect. Nobody has a right to the American market, but everyone ought to have a fair opportunity in the market.”

Anti-monopolists have been heartened by this legislation, because it actually intervenes in the public interest into markets that have obviously failed. Quietly, Congress is rediscovering its powers to actually operate in this fashion.

DAVID DAYEN is the Prospect’s executive editor. His work has appeared in The Intercept, The New Republic, HuffPost, The Washington Post, the Los Angeles Times, and more. His most recent book is ‘Monopolized: Life in the Age of Corporate Power.’

More from David Dayen