Biden Misses the Boat on Shipping

P resident Biden has been pushing for Congress to pass the Ocean Shipping Reform Act (OSRA) in response to the record prices of containerized shipping and severe port congestion that America has seen recently. He posted a video on Twitter and made a speech at the Port of Los Angeles to make his case.

The journey of the OSRA has been long, and it gets rebranded as the political winds change. It was initially drafted in the summer of 2021 “in response to mounting complaints by U.S. agricultural shippers that unscrupulous business practices by foreign container ship operators are causing them to lose money and market share overseas,” according to a FreightWaves article last June.

That is actually what the OSRA is about. As I wrote in December, the bill is classic Washington corporate-interest politics. American exporters have been upset for years about the way the Federal Maritime Commission regulates ocean carriers. The OSRA gives certain advantages to exporters in regulatory disputes and gives the FMC more power to investigate and punish carriers. It also gives the FMC more power to require carriers to take American exports.

American exporters, naturally, are in full support. And some provisions, such as requirements for more data reporting from carriers and more transparency from the FMC, are probably good ideas. But these issues have little, if anything, to do with port congestion. American exporters saw an opportunity to secure regulatory changes they’ve wanted for a long time by branding the bill as a way to solve the supply-chain crisis. Politicians, fearing the voters’ wrath, were more than happy to play along.

Enter Biden. Now, the bill is part of his plan to reduce inflation. “One of the key ways to fight inflation is by lowering the cost of moving goods through the supply chain,” Biden said in Los Angeles. The OSRA is malleable to whatever politicians need it for.

Biden claimed to be “viscerally angry” that there are “nine major ocean-line shipping companies that ship from Asia to the United States.” These comments recalled his mention of “four basic meatpacking facilities” from his State of the Union address, and they are just as poorly informed. As with the meatpacking example, Biden throws a number out there and says it as though it’s prima facie evidence of uncompetitive behavior, but he never specifies how many companies there should be. Would Biden be happy if there were ten ocean carriers? Or 20?

How about 23? According to container industry analyst Lars Jensen, that’s the actual number of carriers that have operated services between Asia and the West Coast so far this year. In addition to the nine alliance carriers that Biden references, Israeli carrier ZIM works with one of the alliances for Asia-Pacific trade, and 13 other non-alliance carriers have joined the Pacific trade. Jensen writes:

Between them these 13 carriers have made 241 sailings from Asia to the USWC [United States West Coast] from January 1st until today. For comparison the total number of sailings in this trade was 780. In other words, they have operated 31% of the sailings moving cargo from Asia to USWC.

Granted, they tend to operate smaller vessels and hence they account for 15% of the capacity. This does not mean that the remaining capacity is under the full control of the alliances — it should be noted that another 19% of the capacity is operated outside the scope of the alliances as per Sea-Intelligence data.

In other words, the industry is competitive. The FMC agrees. Commissioner Rebecca Dye issued a report on May 31 that finds that ocean shipping is not overly consolidated and that high rates were largely the product of high demand, not low supply.

The evidence of increased competition in ocean freight is not new. In February, I wrote about a report from Greg Miller of FreightWaves that documented how carriers increased capacity between Asia and North America and new carriers entered that market. Miller also found that carriers delayed retiring old vessels and placed orders for more new vessels, indicating that the industry responds to market conditions.

It is true that prices soared nonetheless, and carrier profits soared as well. Biden was particularly taken with that fact, saying in his speech about the OSRA that “the rip-off is over.”

In a sense, Biden is right. After holding steady around $16,000 for a while, the price of a container from East Asia to the West Coast began to decline at the end of April and sits at around $9,500 today, according to logistics data firm Freightos. That’s still well above the pre-pandemic levels, and those rates could increase again as peak shipping season begins soon. But the decline in container prices, which occurred without any government action, indicates that competition is alive and well. A truly uncompetitive industry wouldn’t let its prices fall by 40 percent in less than two months.

The reason competition increased is precisely that prices were allowed to soar. The high profits attracted carriers who didn’t operate in the Asia-Pacific market before, and the increased capacity they brought allowed prices to come down. It’s exactly what the laws of economics would predict, and allowing prices to fluctuate freely gave carriers the information about where capacity was most desperately needed.

Regardless, the OSRA doesn’t give the FMC or anyone else the power to break up ocean carriers. Biden’s complaints aren’t economically or legally related to any of the actual issues at play.

The most telling part of Biden’s appearance at the Port of Los Angeles occurred before Biden even began talking. Biden was introduced at his speech by a member of the International Longshore and Warehouse Union. He praised Biden for “his commitment to strengthening the role of labor within the economy.”

Biden has been clear about that commitment, as have officials in his administration. The ILWU’s opposition to automation is one of the reasons that America’s major West Coast ports aren’t competitive compared with other major ports around the world that allow more advanced technology to load and unload containers more quickly. And the union is currently in negotiations with port employers for a new labor contract. Given the administration’s support, it is likely to get what it wants, as usual.

The ILWU’s stranglehold on port labor over the entire West Coast is one type of lack of competition that Biden is perfectly fine with, and it has a lot more to do with our inefficient supply chains than the “nine” ocean carriers.