By Patrick Rogers
Due to years of rampant pirate activity and, more recently, Houthi attacks on shipping vessels, the Red Sea and the Gulf of Aden have become perilous for commercial ships.[i] The resulting security crisis has prompted ocean carriers to either bolster security measures or reroute ships around the southern tip of Africa – both of which add significant expenses.[ii] Naturally, ocean carriers pass on these costs to the U.S. businesses shipping their products overseas (“shippers”); however, in doing so, the ocean carriers must adhere to certain legal requirements.[iii] The Federal Maritime Commission (FMC) enforces these legal requirements. Its mission statement is to “support the U.S. economy and protect the public from unfair and deceptive practices.”[iv] On February 7th, the FMC held an informal public hearing to hear from U.S. shippers and other interest groups in light of the current Red Sea Crisis.[v] Considering both the issues raised in testimonies at the hearing and the FMC’s stated mission, Congress and the FMC should consider (1) establishing evidentiary requirements for Special Permissions, (2) investigating supply and demand issues in the spot market, and (3) dismantling the ocean carrier monopoly.
Two simple methods for ocean carriers to pass on costs are to raise shipping prices, called tariffs in the shipping world, or to apply surcharges. In recent years, ocean carriers have frustrated U.S. businesses by assessing vague congestion surcharges[vi] and breaching service contracts shortly before a shipment departs.[vii] Now, ocean carriers appear to be taking advantage of the Red Sea security crisis to engage in more profiteering. For example, some shippers reported price increases of 250%,[viii] surcharges of $3,000 per container,[ix] and surcharges on non-Red Sea shipments.[x] These price increases and surcharges may exceed the value of the goods in the cargo and, in the case of the non-Red Sea shipments, do not seem rationally related to the Red Sea crisis.[xi]
The FMC requires that ocean carriers provide at least 30 days’ notice of any tariff or surcharge that causes an increase in costs to U.S. shippers.[xii] However, an ocean carrier may obtain “Special Permission” from the FMC to avoid the 30-day notice requirement if the carrier shows good cause.[xiii] In the wake of the Red Sea Crisis, the FMC granted several Special Permissions, some within mere hours of their submission.[xiv] In response, U.S. shippers have proposed that the FMC establish mechanisms to scrutinize requests for Special Permission.[xv] The FMC could require ocean carriers to submit evidence showing that the proposed tariff hikes are reasonable and targeted, such as balance sheets showing the extra security measures and fuel costs.[xvi] This would prevent ocean carriers from engaging in “unfair and deceptive practices” by ensuring that tariff hikes and surcharges are targeted toward recouping costs related to security upgrades or reroutes.[xvii]
In addition to raising prices and applying surcharges, ocean carriers have raised prices in the spot market. Essentially, there are two ways to transact with an ocean carrier: (1) to engage in a service contract whereby the carrier agrees to ship a certain number of units per year, or (2) to participate in the spot market, which is the market that ocean carriers offer for immediate, one-time shipments to small shippers who lack the economies of scale to engage in service contracts.[xviii] Ocean carriers can artificially raise prices in the spot market by breaching service contracts with existing customers, forcing those shippers to the spot market in desperation.[xix] By breaching the service contracts, the ocean carriers increase demand in the spot market and thus increase prices.[xx] Ocean carriers also engage in “blank sailings” where ships skip ports along the published voyage to avoid picking up cargo.[xxi] This reduces the available cargo capacity on the ships, thereby increasing price by reducing supply.[xxii] These practices negatively impact small shippers the most because they are the primary users of the spot market.[xxiii] To mitigate this, the FMC could use its power to initiate “Fact-Finding Investigations”[xxiv] to investigate (1) whether blank sailings during times of crisis are a result of honest inefficiency or are a “deceptive practice” and (2) ways that the U.S. government can help increase small shippers’ bargaining power so that they can get service contracts with ocean carriers instead of having to rely on the spot market.[xxv] These investigations could reveal ways to prevent “deceptive practices” and “support the U.S. economy” by protecting small businesses.[xxvi]
Ocean carriers can manipulate Special Permissions and the spot market because of their monopoly over the industry; ten companies divided into three alliances control more than 84% of the market.[xxvii] Furthermore, none of these companies are based in the United States.[xxviii] A common government tactic for breaking up a domestic monopoly is to open up the country to international trade, thereby inviting in foreign businesses and forcing the domestic monopolist to lower prices.[xxix] Since the problem is an international monopoly, the U.S. government could try an inverse of that strategy: break up the foreign monopoly of ocean carriers by investing in a domestic ocean carrier industry.[xxx] Immense startup costs make it prohibitively expensive for new ocean carrier companies to enter the market which is why the government must intervene.[xxxi] The U.S. government could create a quasi-corporation like Amtrak but for the shipping industry.[xxxii] The charter of the new company could be to “support the U.S. economy” by never assessing unreasonable surcharges or price hikes.[xxxiii] The foreign ocean carriers would have to change their practices to adjust for the new entrant in the market.
International ocean carriers’ exploitation of the Red Sea Crisis requires more regulatory scrutiny and maybe even a bold solution to protect U.S. businesses and foster a fair and transparent ocean supply chain. The FMC can alleviate the immediate strain on shippers by scrutinizing Special Permissions and regulating the spot market. In the long run, the Red Sea crisis will eventually dissipate, the ocean supply chain will recover, and the market will correct. However, the ocean supply chain is volatile, and international incidents often have tremendous effects on it. While the U.S. government via the FMC already has many regulations that protect U.S. businesses, the Red Sea crisis has revealed gaps that can filled. Taking the initiative to fix the current shortcomings will not only protect U.S. businesses in the wake of the current crisis, but also in future crises as well.
Bibliography
46 C.F.R. § 502.281.
46 C.F.R. § 520.14(c).
46 C.F.R. § 520.2.
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Agriculture Transportation Coalition. Written Testimony. “Written Testimony and Resources on Informal Public Hearing on the Impact of Current Conditions in the Red Sea and Gulf of Aden Regions.” Written Testimony, February 7, 2024. https://www.regulations.gov/comment/FMC-2024-0003-0018.
Alphaliner. “Alphaliner Top 100.” Accessed March 18, 2024. https://alphaliner.axsmarine.com/PublicTop100/.
Appleyard, Dennis R., and Alfred J. Field. International Economics. 8th ed. The McGraw-Hill Series Economics. New York: McGraw-Hill/Irwin, 2014.
Baraniuk, Chris. “Red Sea Cargo Ship Hijack: How to Keep Merchant Vessels Safe from Attack.” BBC, December 17, 2023. https://www.bbc.com/future/article/20231215-red-sea-cargo-ship-hijack-how-to-keep-merchant-vessels-safe-from-attack.
Bigg, Matthew Mpoke, Vivek Shankar, and Thomas Fuller. “Houthis, Undeterred by Strikes, Target More Ships in Red Sea.” The New York Times, January 16, 2024, sec. World. https://www.nytimes.com/2024/01/15/world/middleeast/houthis-ships-red-sea.html.
Brock, Joe. “Insight: Old Is Gold: Sky-High Cost of Ageing Ships Sounds Inflation SOS.” Reuters, June 21, 2022. https://www.reuters.com/markets/commodities/old-is-gold-sky-high-cost-ageing-ships-sounds-inflation-sos-2022-06-21/.
Complaint at 1-2, MCS Indus., Inc. v. COSCO Shipping Lines Co., 3 F.M.C.2d 132 (Aug. 3, 2021) (No. 21-05), https://www2.fmc.gov/readingroom/docs/21-05/21-05_Complaint.pdf/.
Federal Maritime Commission. “About the Federal Maritime Commission.” Accessed March 18, 2024. https://www.fmc.gov/about-the-fmc/.
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Federal Maritime Commission. “Impacts From Threats to Shipping,” December 21, 2023. https://www.fmc.gov/impacts-from-threats-to-shipping/.
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Informal Public Hearing on the Impact of Current Conditions in the Red Sea and Gulf of Aden Regions, 2024. https://www.youtube.com/watch?v=e8kUde7brEM.
Lauriat, George. “The Tripartite of Ocean Carrier Alliances Face Multitude of Challenges.” American Journal of Transportation, no. 740 (April 18, 2022): 4.
“List of Largest Container Shipping Companies.” In Wikipedia, February 28, 2024. https://en.wikipedia.org/w/index.php?title=List_of_largest_container_shipping_companies&oldid=1210900586.
Maritime Information Cooperation & Awareness Center. “Maritime Security Annual Report 2023.” Brest: Maritime Information Cooperation & Awareness Center, 2023. https://www.mica-center.org/en/the-fifth-annual-edition-of-the-mica-center-global-maritime-security-report-is-out/.
National Milk Producers Federation, and U.S. Dairy Export Council. Comment to RFI. “Comments Regarding Advance Notice of Proposed Rulemaking by the Federal Maritime Commission Detention and Demurrage Billing Requirements.” Comment to RFI, April 14, 2022. https://www2.fmc.gov/readingroom/docs/22-04/22-04_Comments_NMPF_USDEC.pdf/.
OJ Commerce LLC. Comment to RFI. “Comment on Informal Public Hearing on the Impact of Current Conditions in the Red Sea and Gulf of Aden Regions.” Comment to RFI, January 31, 2024. https://www.regulations.gov/comment/FMC-2024-0003-0003.
Rail Passenger Service Act, Pub. L. No. 91–518, 84 Stat. 1327 (1970).
Rogers, Patrick. “Bed Bath & Beyond Unreasonable: Two Ways the Law Stops Ocean Carriers from Sinking U.S. Businesses and One Way It Falls Short.” American University Business Law Review. Buzz Blog (blog), September 25, 2023. https://aublr.org/2023/09/bed-bath-beyond-unreasonable-two-ways-the-law-stops-ocean-carriers-from-sinking-u-s-businesses-and-one-way-it-falls-short/.
Ronan, Dan. “Shipping Officials: Supply Chain Equipped to Deal With Attacks.” Transport Topics, February 8, 2024. https://www.ttnews.com/articles/shipping-supply-chain-attacks.
Selwitz, Alex. “How Much Does a Shipping Container Cost?” Red Stag Fulfillment, June 13, 2023. https://redstagfulfillment.com/how-much-does-a-shipping-container-cost/.
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Notes
[i] See Matthew Mpoke Bigg, Vivek Shankar, and Thomas Fuller, “Houthis, Undeterred by Strikes, Target More Ships in Red Sea,” The New York Times, January 16, 2024, sec. World, https://www.nytimes.com/2024/01/15/world/middleeast/houthis-ships-red-sea.html (Houthi Attacks); Maritime Information Cooperation & Awareness Center, “Maritime Security Annual Report 2023” (Brest: Maritime Information Cooperation & Awareness Center, 2023), 110-11, https://www.mica-center.org/en/the-fifth-annual-edition-of-the-mica-center-global-maritime-security-report-is-out/ (Pirates).
[ii] See Chris Baraniuk, “Red Sea Cargo Ship Hijack: How to Keep Merchant Vessels Safe from Attack,” BBC, December 17, 2023, https://www.bbc.com/future/article/20231215-red-sea-cargo-ship-hijack-how-to-keep-merchant-vessels-safe-from-attack; U.S. Department of State (@StateDept), X (Feb. 5, 2024, 10:32 AM), https://x.com/StateDept/status/1754528439090987392?s=20 (showing a map of the route that ships must take to avoid the Red Sea); U.S. Department of State (@StateDept), X (Feb. 5, 2024, 10:36 AM), https://x.com/StateDept/status/1754529541526032661?s=20 (showing a graph of the resulting rising costs).
[iii] See “Impacts From Threats to Shipping,” Federal Maritime Commission, December 21, 2023, https://www.fmc.gov/impacts-from-threats-to-shipping/. (“[C]arriers are announcing rate increases and/or instituting fees or surcharges ostensibly to recoup expenses associated with longer voyages and/or higher costs of insurance and security. However, these charges must meet strict legal requirements.”).
[iv] “About the Federal Maritime Commission,” Federal Maritime Commission, accessed March 18, 2024, https://www.fmc.gov/about-the-fmc/.
[v] See generally Informal Public Hearing on the Impact of Current Conditions in the Red Sea and Gulf of Aden Regions, 2024, https://www.youtube.com/watch?v=e8kUde7brEM.
[vi] “Commission Questions Shipping Lines About Surcharges,” Federal Maritime Commission, August 4, 2021, https://www.fmc.gov/commission-questions-shipping-lines-about-surcharges/.
[vii] See National Milk Producers Federation and U.S. Dairy Export Council, “Comments Regarding Advance Notice of Proposed Rulemaking by the Federal Maritime Commission Detention and Demurrage Billing Requirements,” Comment to RFI, April 14, 2022, https://www2.fmc.gov/readingroom/docs/22-04/22-04_Comments_NMPF_USDEC.pdf/ (“Our members have reported sharp increases in cancelled or delayed vessel bookings, cancelled service contracts and shifts to spot market rates . . .”).
[viii] Texan Minerals and Chemicals LLC, “Comment to RFI on Informal Public Hearing on the Impact of Current Conditions in the Red Sea and Gulf of Aden Regions,” Comment to RFI, January 31, 2024, https://www.regulations.gov/comment/FMC-2024-0003-0014; see also Federal Maritime Commission, Public Hearing, at 31:04 (reporting a 38% to 73% price hike on U.S. retail shipments).
[ix] Federal Maritime Commission, Public Hearing, at 28:56; see generally “Quick Quotes – Instant Container Shipping Rates – Hapag-Lloyd,” Hapag-Lloyd, accessed March 18, 2024, https://www.hapag-lloyd.com/en/online-business/quotation/quick-quotes.html?gad_source=1&gclid=CjwKCAjwzN-vBhAkEiwAYiO7oD8bXzJfchJuTAOM7LBEcArsKhNpkFFdImysnM6-jiRCwZ4u-dDPbxoCppMQAvD_BwE (providing information on normal prices for overseas shipping).
[x] Dan Ronan, “Shipping Officials: Supply Chain Equipped to Deal With Attacks,” Transport Topics, February 8, 2024, https://www.ttnews.com/articles/shipping-supply-chain-attacks.
[xi] See Texan Minerals and Chemicals LLC, “Comment to RFI on Informal Public Hearing on the Impact of Current Conditions in the Red Sea and Gulf of Aden Regions,” Comment to RFI, January 31, 2024, https://www.regulations.gov/comment/FMC-2024-0003-0014 (explaining that in the case of their business, the price increase exceeds the value of the goods in the shipment).
[xii] 46 C.F.R. § 520.8(a).
[xiii] See 46 C.F.R. § 520.14(c) (outlining the application process); 46 C.F.R. § 520.2 (defining “Special Permission”).
[xiv] See Peter Friedman, “FMC Should Guard against Carrier ‘Profit Center’ from Red Sea Surcharges,” Journal of Commerce, January 2, 2024, https://joc.com/article/fmc-should-guard-against-carrier-profit-center-red-sea-surcharges-agtc-chief_20240102.html.
[xv] See Agriculture Transportation Coalition, “Written Testimony and Resources on Informal Public Hearing on the Impact of Current Conditions in the Red Sea and Gulf of Aden Regions,” Written Testimony, February 7, 2024, https://www.regulations.gov/comment/FMC-2024-0003-0018.
[xvi] See Federal Maritime Commission, Public Hearing, at 31:29.
[xvii] See Federal Maritime Commission, About the FMC.
[xviii] See Complaint at 1-2, MCS Indus., Inc. v. COSCO Shipping Lines Co., 3 F.M.C.2d 132 (Aug. 3, 2021) (No. 21-05), https://www2.fmc.gov/readingroom/docs/21-05/21-05_Complaint.pdf/ (describing a spot market as being used “primarily by smaller shippers making small and/or one-time shipments, or for unexpected needs, such as a one-time or seasonal increase in shipping needs for a larger shipper.”) [hereinafter MCS Complaint].
[xix] See generally Patrick Rogers, “Bed Bath & Beyond Unreasonable: Two Ways the Law Stops Ocean Carriers from Sinking U.S. Businesses and One Way It Falls Short,” American University Business Law Review, Buzz Blog (blog), September 25, 2023, https://aublr.org/2023/09/bed-bath-beyond-unreasonable-two-ways-the-law-stops-ocean-carriers-from-sinking-u-s-businesses-and-one-way-it-falls-short/ (discussing the business and legal repercussions of an ocean carrier breaching a service contract with a major U.S. company).
[xx] See MCS Complaint at 2 (arguing that “[w]ith the onset of the COVID-19 pandemic, global ocean carriers . . . doubled down on policies and practices that manipulate prices and deliver unprecedented windfall profits to them by forcing shippers into an artificially inflated spot market.”).
[xxi] See What Is Blank Sailing in Shipping?, 2020, https://www.youtube.com/watch?v=vpfL_JVSnKE (explaining the meaning of blank sailing with examples).
[xxii] See OJ Commerce LLC, “Comment on Informal Public Hearing on the Impact of Current Conditions in the Red Sea and Gulf of Aden Regions,” Comment to RFI, January 31, 2024, https://www.regulations.gov/comment/FMC-2024-0003-0003 (arguing that “under the guise of the Red Sea crisis, the carriers’ manipulative business practices have intensified, with the carriers engaging in unprecedented blank sailings to artificially reduce capacity and drive up prices once again.”).
[xxiii] See MCS Complaint, at 2.
[xxiv] See 46 C.F.R. § 502.281 (describing the FMC’s investigatory power).
[xxv] See Federal Maritime Commission, Public Hearing, at 46:22 (discussing the lack of associations that advocate on behalf of small U.S. shippers).
[xxvi] See Federal Maritime Commission, About the FMC.
[xxvii] “Alphaliner Top 100,” Alphaliner, accessed March 18, 2024, https://alphaliner.axsmarine.com/PublicTop100/.; see generally George Lauriat, “The Tripartite of Ocean Carrier Alliances Face Multitude of Challenges,” American Journal of Transportation, no. 740 (April 18, 2022): 4 (discussing the impacts of the alliances on shippers).
[xxviii] See “List of Largest Container Shipping Companies,” in Wikipedia, February 28, 2024, https://en.wikipedia.org/w/index.php?title=List_of_largest_container_shipping_companies&oldid=1210900586.
[xxix] Dennis R. Appleyard and Alfred J. Field, International Economics, 8th ed, The McGraw-Hill Series Economics (New York: McGraw-Hill/Irwin, 2014) (listing “Weakening of power of domestic monopoly” as a “Potential Benefit[] of Foreign Direct Investment”).
[xxx] See Appleyard and Field, International Economics, at 194 (“Once the two firms start selling in each other’s country as well as in their own home countries, . . . the price in each country will change from the previous monopoly situation because of the new rivalry.”).
[xxxi] See generally Alex Selwitz, “How Much Does a Shipping Container Cost?,” Red Stag Fulfillment, June 13, 2023, https://redstagfulfillment.com/how-much-does-a-shipping-container-cost/ (discussing the cost of shipping containers); Joe Brock, “Insight: Old Is Gold: Sky-High Cost of Ageing Ships Sounds Inflation SOS,” Reuters, June 21, 2022, https://www.reuters.com/markets/commodities/old-is-gold-sky-high-cost-ageing-ships-sounds-inflation-sos-2022-06-21/ (discussing costs of cargo ships).
[xxxii] See Rail Passenger Service Act, Pub. L. No. 91–518, 84 Stat. 1327 (1970) (establishing Amtrak).
[xxxiii] See Federal Maritime Commission, About the FMC.
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