Regulating the choppy shipping industryOctober 1, 2021
Exporters globally have been suffering from extremely high freight rates and container shortages. In many cases container shipping rates have increased 5 times or more, and waiting time for empty containers needed to ship exports have extended to several weeks.
There is no doubt that a lot of this has to do with genuine disruptions brought about the global pandemic. But by early 2021 consumption, production, and trade had largely recovered from the initial shock and rebounded to the pre-pandemic normal.
While global container shipping lines have registered record profits, exporters and trade have continued to suffer from delays, unavailability of containers, and steep increase in container shipping rates. Exporters in India too, have been reaching out to government for relief.
Finding the appropriate regulatory instruments to curb unfair trade practices by shipping lines and bring transparency to their pricing has been part of India’s National Trade Facilitation Action Plan (NTFAP) agenda since 2017.
The policy developments in the US on this issue are pertinent for two reasons. First, being one of the biggest consumers of container shipping services, policy in the US would have global ramifications. Second, the US policy response might have important lessons for regulators in India, and other G20 economies.
Based on the complaints received by industry associations, the US Federal Maritime Commission (USFMC) undertook an inquiry which established that there were indeed problems in the way container shipping lines were imposing charges for demurrage and detention, and there was a need for much greater oversight and transparency. Based on these findings the USFMC issued a set of interpretive rules for detention and demurrage in 2019 and 2020. The pandemic only made things worse, leading to calls for more robust regulation.
In response a formal Fact-Finding Commission (FFC) was set up to investigate a larger set of issues. The FFC report released in July 2021 made a case for stricter regulation of the shipping industry stressing that there was an intrinsically unequal relationship between large global shipping conglomerates and their customers, especially MSMEs. Normal channels for contract dispute resolution were considered inadequate since MSMEs seeking legal or regulatory remedy might be subjected to retaliation from the powerful shipping lines and the costs of litigation could be very steep.
US President Joe Biden issued the Executive Order on Promoting Competition in the American Economy, July 9, 2021 which required the USFMC to strictly enforce the prohibition of unjust and unreasonable practices by shipping lines.
However, industry observers felt this didn’t go far enough, and there was need for legislative changes for stricter regulation. Consequently, Congressmen Garamendi and Johnson introduced the Ocean Shipping Reform Act of 2021 in August with bipartisan support from Democrats and Republicans.
The contents of this draft law should be of interest to Indian policy-makers for meeting of the NTFAP. Of specific interest are the following elements of the draft law.
(i) Providing for strict rules to prevent unreasonable demurrage and detention charges
(ii) Putting the burden of proof for establishing the reasonableness of any demurrage or detention charges on shipping lines and not the shippers
(iii) Requiring shipping lines to maintain all records supporting the assessment of any demurrage or detention charges for 5 years, thereby ensuring transparency. Such records are to be accessible to the regulator on demand.
(iv) Measures to ensure reasonable availability of containers needed for US exports
(v) Measures that ensure allocation of space on vessel for US exports and ensure that shipping lines do not unreasonably decline export cargo
(vi) Prohibition against retaliation against a business by shipping lines by their refusing, or threatening to refuse cargo space, or resort to other unfair methods because the shipper has patronised another carrier, or has filed a complaint against a shipping line.
Introduction of the law has a caused a buzz. The maritime regulators of the three big trading economies, i.e., US, EU, and China held their biennial summit in September. While it was not officially acknowledged, the challenge posed by unilateral regulation of what is essentially a global industry must have dominated the meeting agenda. Global cooperation would be the ideal situation, with perhaps the G20 providing a forum for such regulatory collaboration. But India and other G20 economies could also learn from the US example, and strengthen their own national legislation first to initiate reforms.
The impact of the policy moves in the US is already being felt. On September 9, CMA-CGM, the world’s fourth largest container shipping line, announced that they will stop all spot-rate increases immediately. A competitive market cannot function without effective regulation, especially under an oligopolistic structure. Indian policy-makers need to follow developments in the US closely when considering policy options to support Indian businesses get fair and equitable access to container shipping services. This is also imperative for the success of Indian exports and the country’s successful participation in global value-chains.
The writer is an independent trade and logistics expert