The 18th Annual Western Cargo Conference Wesccon 98

 October 3, 1998

Good morning. My compliments to all of you for making the effort to be here so early on a Saturday. To tell the truth, when I heard that my speech was scheduled for 8:00 a.m., I asked Peter Friedmann "What, was the 3:00 a.m. slot filled already?" Seriously though, I hope my comments warrant the interest you have shown by attending this early session.

I assume that all of you have heard that the ocean shipping bill passed the Senate late Thursday night and is awaiting the President’s signature. Almost four years of debate and compromise are over. While no one really gets that all they wanted out of this legislation, everyone gets at least something And that lengthy period of uncertainty will end for all of us.

I did not intend to focus on shipping reform today, and I think I will stick to my script. But I will discuss the new Act just briefly toward the end of my speech.

The major thrust of my remarks today will address certain conditions existing in our transpacific trades and the FMC’s response to them. I’ll start with the trade imbalance in that region and the problematic situation it has given rise to in ocean shipping.

I’m certain many of you are experiencing this problem first hand. The severity of the situation convinced the Commission to initiate a specifically-tailored fact finding dealing with carrier cargo space and pricing practices in the Pacific. What prompted the Commission to formally step into the fray were allegations of carriers refusing space unless shippers agreed to various forms of rate concessions.

We first learned of this problem when we received some anecdotal reports a few weeks back. Over the succeeding weeks, however, the Commission’s phones were ringing daily with numerous inquiries and complaints about a host of purported carrier actions in the Pacific. In addition to the regular reports of refusals to accept cargo or provide space absent the payment of higher rates, we were told of demands for renegotiation or amendment of service contracts to get cargo moved, carrier suggestions to misdescribe low-rated cargo as higher-rated cargo, improper termination of service contracts so that higher tariff rates could apply, and various other tactics that appeared to be "strong-arm" efforts beyond the bounds of reasonableness and possibly the strictures of the Shipping Act. Improper preference or discrimination also seemed to be occurring, as it was reported that NVOs, consolidators, and small- to medium-sized shippers were being targeted, while larger shippers or prime accounts were being exempted. What added credence to this last point was the fact that we heard no complaints from any proprietary shippers that could be considered "large."

Without a doubt, this situation has its roots in the financial woes facing various Asian economies. And it couldn’t come at a worse time, with U.S. importers needing to receive their goods during the peak shipping season before the Christmas holidays.

Now, I have told several carrier representatives that I sympathize with the underlying problem they face in these market conditions. Sure, a surge in cargo is terrific and increasing demand for space has to help the revenue side. But when the situation is so imbalanced, the carriers have a very difficult time providing the supply necessary to handle the demand in the dominant direction. Equipment just can’t be repositioned quickly enough for the stronger leg. Adding ship capacity to the trade may not always be practicable. These surges in cargo and cyclical trends in movements do create logistical nightmares for the suppliers of transportation.

But in no way am I suggesting that the carriers have an insurmountable problem, or that improper and unlawful solutions can be justified or will be tolerated. That’s why we stepped in with a formal investigation, as our informal efforts were not having the immediate impact required. We are moving quickly and forcefully to ascertain exactly what is happening out there and how any unacceptable or illegal behavior can be promptly terminated. Commissioner Delmond Won has been assigned as the Fact Finding Officer and already has been very active in his lead role. Hearings are scheduled in several West Coast cities, with the first to take place next week in San Francisco, and subpenas have been issued to various carriers.

Among Commissioner Won’s tasks are to determine the perpetrators and the nature of their alleged actions, and whether to recommend further agency action, including injunctive or prosecutory proceedings. He will be developing information regarding possible violations of section 10 of the 1984 Act as to unfair allocations of cargo, unjust preference or discrimination, and unreasonable refusals to deal. And while the Commission has no authority to set rates, he will look into concerted activity resulting in possible unreasonable increases in cost or reductions in service contrary to section 6(g) of the 1984 Act.

I certainly am not prejudging this situation, nor am I insinuating that our primary purpose is to go out and prove violations and then fine the violators. Our goal is to put a stop to any carrier practice that is disadvantaging shippers, and hopefully to create a vehicle for offering some redress for those who already may have been harmed. What we’d like to see are fair and reasonable actions during these difficult times, as opposed to precipitous, short-sighted moves by those with the leverage. Common carriers must be fair and reasonable in allocating available space.

In that vein, I must admit to a good dose of frustration and impatience with those who both privately and publicly have expressed a view that the Commission is incapable of resolving the problem, does not have the necessary tools to do so, is not proactive, is not inclined to move quickly enough, and a number of other mischaracterizations. Some have issued statements or policy positions to that effect, have blanketed Congress with their views, or have written individual members with this message.

The Commission has no procedure to immediately stop an alleged unfair practice on the basis of unproven allegations from one side of the dispute. We, like any judicial or administrative tribunal, must adhere to the principle of due process, and must ensure that the applicable burden of proof has been met. I submit that the 1984 Act, and the new Act, provide us with the necessary authority and procedures.

To sum up, carriers and shippers both must strive for reasonable and effective dealings in order to efficiently move U.S. commerce. A primary goal of the 1998 Act is to facilitate the establishment of long-term relationships and global partnerships that can benefit all in U.S. international trade. If the allegations presented to us are in fact true, I would say that the industry has taken a step backwards from that goal and needs to regroup for the future.

I would encourage anyone who believes they have been harmed to participate in our fact finding. And, of course, I would hope that the carriers who may be guilty of any of the practices cited in the Commission’s fact finding order put a stop to them now, and go back to those who may have been harmed and discuss some lawful form of appropriate consideration. Short-term gains simply do not outweigh the long-term negative impact of such behavior. To the carriers out there, I say, BE REASONABLE.

Moving on to a different issue, in late May the Commission issued an order requesting specific information from the members of the Asian Shipowners’ Forum. This organization of shipowners comes together to discuss matters of common concern to Asian-based carriers. Reports that committees of this group were meeting to discuss rate levels definitely raised our interest. Our inquiry involves two separate but related issues. First, we are seeking to determine whether the activities of the group necessitate the filing of an FMC agreement, along with the minutes of meetings held pursuant to the agreement. Second, the Commission is concerned about the possibility that this group may be acting as an unregulated vehicle for concerted carrier activity in the transpacific relative to ratemaking and the amount of capacity dedicated to these trades. Naturally, if such is the case, the Commission would need to know precisely what the group is doing and then examine their ongoing activities, as required by the Shipping Act.

At this point, we are trying to establish some facts so as to perform our statutory responsibilities. We have drawn no conclusions nor should others. The Commission is in the process of considering requests of certain respondents that the Commission’s inquiry is perhaps too far reaching in some respects, and should be narrowed. Once that determination is made, we will be in a position to thoroughly analyze the pertinent information we receive. Any future action by the Commission will be dictated by the results of our analysis and review.

The transpacific also presents us with our two leading cases involving the restrictive practices of foreign governments. The laws and shipping policies of Japan and the Peoples Republic of China continue to be cause for concern.

China poses a host of issues, including restrictions on foreign carriers’ forwarding and agency services, limitations on the establishment of branch offices and subsidiaries, and delay in approving a U.S. carrier’s port project. Without going into much detail, I can tell you that foreign carriers serving China must deal with a wide range of requirements and procedures that make it extremely difficult to initiate service and then maintain efficient operations. Certain of these barriers also preclude consolidators and intermediaries from successfully operating in the China trade. While the U.S. Government recognizes any foreign country’s right to regulate its industries, it also expects an appropriate degree of flexibility and understanding when international commerce and bilateral trade are involved. Many of the circumstances in China are just unduly restrictive. The U.S. carriers have long complained about this situation, and the consolidator industry has now joined in. While the U.S. executive agencies have been attempting to reach a mutually satisfactory resolution with the Chinese for quite some time, bilateral discussions have not gone well and the persistent problems remain.

This prompted the Commission to solicit specific information from the Chinese and U.S. carriers, as well as others involved in the trade, about these restrictions and their impact. That information is due in late October. Our hope is that the Chinese will take a reasoned approach to this matter and move quickly to remove the serious barriers to open trade that have detrimental effects on U.S. companies. I continue to believe that loosening restrictions on American carriers would be mutually beneficial to both Chinese and American companies. My preference would be for diplomacy and bilateral negotiations to achieve a positive resolution, but the Commission will step in with appropriate actions if U.S. interests continue to be precluded from doing in China what Chinese companies can do here in the U.S.

The situation in Japan somewhat parallels that in China. But the restrictive practices are different in that they primarily impair operations in Japanese ports. The main culprit is a prior consultation system that creates unnecessary bureaucratic hurdles and significantly reduces carrier efficiencies. This is effectuated by the preferential and arbitrary actions of a powerful harbor organization, which operates with the approval of Japan’s Ministry of Transportation. And foreign carriers continue to encounter impediments in their efforts to enter the stevedoring business.

The Commission’s actions of last fall brought this matter to the forefront and helped to focus attention on removing the unfavorable conditions. The bilateral agreement executed by the two governments last October spelled out the parameters within which resolution would be achieved. The Commission suspended additional monetary sanctions it had imposed against Japanese carriers, in light of the assurances that this bilateral agreement would resolve these long-standing problems. Although some progress has been made, for various reasons it is not as much as the Commission had expected. We continue both our monitoring effort and our discussions with U.S. executive agencies and the U.S.-flag carriers. We are hopeful that additional progress can be made in a more prompt fashion so that we do not need to reinstitute sanctions or take any other type of responsive action. The objective remains the removal of the restrictive practices, but we will use the extensive authorities Congress has given us, if necessary, to help achieve that end.

I will conclude now with a brief mention of S.414, or, I guess now we have to begin using its soon to be official designation of "Ocean Shipping Reform Act of 1998". The Commission has been gearing up for passage of this new law for several months. We really don’t have much choice in the matter, since the bill requires the Commission to have implementing regulations in effect on March 1, 1999. That’s five months from now. Any of you familiar with the Administrative Procedure Act, and the various other requirements involved in finalizing a rule, realize that that is quite a task. If we waited for passage of the Act before starting to plan for our rulemaking activities, we simply would not accomplish them.

I assume most of you are aware of the Notice of Inquiry the Commission issued this July seeking comments on how we can best transition from our current Automated Tariff Filing System to the individual private systems called for in the new act. We are in the process of assessing those comments at this very time. While we may not have received all of the information and suggestions I would have hoped for, we certainly gained a strong sense of the broad spectrum of views from the industry that will help us in developing our general approach.

This area involves the most drastic change from the current regulatory environment. Tariff filing with the government will cease, and the Commission must prescribe requirements for accessible and accurate private systems. Congress directs us to encourage innovative private sector approaches, and to avoid unnecessary government restraints, so long as integrity is not compromised. And Congress has indicated that tariff information should be simplified and standardized.

I am of the view that we must allow the industry the greatest amount of flexibility in this regard. Congress expects systems that are easy to access and are user friendly, and it doesn’t want the government to impose excessive requirements or to put limits on the industry’s creativity. How we will achieve this goal remains to be seen, but rest assured that we will have tariff rules in place by March 1. I would hope that all in the carrier industry have already begun the general planning necessary to ensure that they will be capable of developing private systems by May 1, 1999. We will not be asking for the impossible and we certainly will not expect the industry to finalize complex, sophisticated systems in a mere 60 days. But by the same token, the industry must do the preliminary planning necessary now. Those that do will be in a far better position to achieve compliance.

Our task involves more than just tariff transition. The Commission’s service contract rules have to be completely revised to accommodate the several changes Congress will be imposing in this area. Various procedures involving agreement filing and agreement activity will need to be altered. Then too, rules must be drafted for the new creature known as "ocean transportation intermediaries," or OTIs, as well as for licensing NVOs in the U.S. who now will qualify as OTIs. Controlled carrier provisions will need to be amended, as will specific rules involving our restrictive practices authority. We will also have numerous administrative changes to consider and conforming amendments to address.

All in all, it will be quite a task. One thing I have told my staff back in Washington is that we will comply with the Congressional mandate to have rules in place by March 1. We will consider the comments and ideas of all of you who must actually abide by our rules. Your expertise and vast knowledge will be very valuable to us. I encourage all of you to take an active role in any rule that impacts your future business operations.

And let me go off on a brief tangent before I close. Under the deregulatory approach of this new legislation, our job will be more difficult. But we will accomplish it. Congress has created more flexibility for the industry and removed certain regulatory requirements. But Congress has spoken on how it expects the Commission to oversee shipping practices and address illegal activities. Remember, the deal was that U.S. carriers retain antitrust immunity and can enter confidential contracts with shippers. But in exchange for those rights, the FMC is charged with a continuing oversight role.

My view is that if our future enforcement efforts uncover serious offenses that are knowingly and willfully committed -- in essence, that are intentional attempts to defraud, deceive, provide inaccurate information, or otherwise contravene the Act to another party’s detriment -- then we will need to take forceful action. No party should operate under the assumption that it can disregard the law or intentionally violate it, and then merely pay a fine if caught and consider it a "cost of doing business." Such willful neglect or intent to gain an unfair advantage must be met with appropriate fines, levels that will deter the respondent and all others from continuing the involved malpractice. Nothing less should be expected from the FMC in its oversight role.

I want to thank you for listening to me this morning and for providing me with the opportunity to give you my view from Washington. Enjoy the remainder of the conference.