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Deregulation of the Liner Conference System: the Creation of Countervailing Power in Shippers As a Means to Control Oligopoly Market Power Andrew M

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Deregulation of the Liner Conference System: the Creation of Countervailing Power in Shippers As a Means to Control Oligopoly Market Power Andrew M Northwestern Journal of International Law & Business Volume 6 Issue 2 Summer Summer 1984 Deregulation of the Liner Conference System: The Creation of Countervailing Power in Shippers as a Means to Control Oligopoly Market Power Andrew M. Danas Follow this and additional works at: http://scholarlycommons.law.northwestern.edu/njilb Part of the International Law Commons Recommended Citation Andrew M. Danas, Deregulation of the Liner Conference System: The rC eation of Countervailing Power in Shippers as a Means to Control Oligopoly Market Power, 6 Nw. J. Int'l L. & Bus. 373 (1984-1985) This Article is brought to you for free and open access by Northwestern University School of Law Scholarly Commons. It has been accepted for inclusion in Northwestern Journal of International Law & Business by an authorized administrator of Northwestern University School of Law Scholarly Commons. ARTICLES Deregulation of the Liner Conference System: The Creation of Countervailing Power in Shippers as a Means to Control Oligopoly Market Power Andrew M. Danas* I. INTRODUCTION ........................................... 374 A. Background .......................................... 376 B. Regulation of Liner Conferences and the Monopoly Price Problem ........................................ 377 II. STRENGTHED CONFERENCES AND THE PROTECTION OF SHIPPERS' INTERESTS: THE CONCEPT OF SHIPPERS' COUNCILS ................................................ 388 A. The Strengthened Conference System ................. 391 B. Consultative and Negotiating Shippers' Councils ....... 394 1. The European Consultative Model ................. 396 2. The UNCTAD Negotiating Council Model .......... 398 C. Past Legislative Proposals ............................ 400 I. The Consultative Shippers' Council Proposals ....... 401 2. The Negotiating Shippers' Council Proposals ........ 404 3. Protection From Abuse of Power ................... 408 D. Recent Legislative Proposals .......................... 410 1. S.47: Small Shippers Joint Ventures ............... 411 * Mr. Danas is an associate with the law firm of Grove, Jaskiewicz, Gilliam and Cobert in Washington, D.C., and is a member of the Bar of the District of Coulmbia. Northwestern Journal of International Law & Business 6:373(1984) 2. H. R. 1878: Export Trading Company Based Models .................................................. 4 11 3. Shippers' Associations: The Shipping Act of 1984 Approach ......................................... 413 III. WILL SHIPPERS' COUNCILS WORK? . 415 A. The Theoretical Predicates of Shippers' Councils ...... 416 1. Empirical Support ................................. 420 B. The Practical Predicates for Shippers' Councils ........ 423 L Shippers' Councils as a Domestic Economic Activity. 424 2. Shippers' Councils as Engaged in Foreign Activity... 431 3. A Webb-Pomerene Act Analysis .................... 433 a Success of the Act ............................. 435 b Frederal Trade Commission Studies: Countervailing Power in the Export Trade ...... 437 4. Application of the Webb-Pomerene Experience to Shippers' Councils ................................. 438 a The Domestic Spillover Problem of Intermodal R ates .......................................... 439 b Council Cohesion and American Entrepreneurism ............................... 441 (1) Use of Middlemen ......................... 442 (2) Government Information .................. 444 IV. THE EXPORT TRADING COMPANY ALTERNATIVE .......... 444 A. Advantages to Exclusive Reliance on Export Trading Companies as a Form of Countervailing Power in the Conference Liner System ............................. 445 B. Examples: Ports and Domestic Cooperative Associations--Opportunities Created by the Shipping A ct of 1984 .......................................... 44 8 C. Criticism s ............................................ 453 D. Contract Rate Advisory Boards ....................... 454 V. CONCLUSION ............................................. 457 I. INTRODUCTION International ocean shipping is at the intersection of many nations' domestic and international economic policies. While theoretically it is one of only a few truly international industries, inasmuch as its activities occur primarily outside the boundaries of any nation state, in practice many nations consider the industry to be essential to the competitiveness of their exports in international markets and thus subject it to some do- mestic policy regulation. In recent years, the dual nature of the shipping Liner Conference System 6:373(1984) industry has become apparent to United States policy makers, as third world and certain industrialized nations have tended to enter into bilat- eral agreements or place certain cargo restrictions on their trade. At the same time the United States has assumed a greater dependence on inter- national trade for its economic well-being. The United States liner industry, both in its competitive rate struc- ture and in the competitiveness of United States based flag companies, has been declining for at least the past decade. This decline has prompted policymakers to propose that the United States liner confer- ence system be deregulated. Generally, two themes underlie these pro- posals: an elimination or weakening and streamlining of the regulatory powers of the Federal Maritime Commission (the United States is one of the few nations with a regulatory agency exclusively devoted to regulat- ing the conference system), and a strengthening of the conferences' anti- trust immunity. Because such legislation is antithetical to traditional concepts of United States domestic competition policy, previous Con- gresses failed to enact reform legislation. On March 20, 1984, however, President Reagan signed the Shipping Act of 1984, which comprehen- sively restructured the United States maritime laws. While this Act culminates seven years of attempted maritime reform by the Congress, it is compromise legislation, merely a step toward a more fundamental re- thinking of United States maritime policy. The Act authorizes the crea- tion of a Presidential Advisory Commission at the end of this decade that will ascertain the need to further strengthen the conference system and reform the United States regulatory policy. This article addresses one of the concerns of opponents to such re- form measures: the protection of shippers' interests through the creation of shippers' councils. These councils, which would enjoy an antitrust exemption that would permit them to either consult or negotiate general service and rate issues with conferences, exist in a number of other na- tions. United States proponents of these councils generally perceive them as a countervailing power to strong conferences, supplanting, to a certain degree, the role of the antitrust laws in protecting the interests of shippers and ensuring economic efficiency in the conference system. Af- ter a survey of current industry conditions, this author concludes that 1) the proposals previously considered by the Congress are inadequate for the creation of these councils; 2) based upon prior experience under similar legislation, these councils would probably not form even if given antitrust immunity; and 3) reliance on the creation of export trading companies under the Export Trading Company Act of 1982, combined with the shippers' associations provisions of the Shipping Act of 1984, Northwestern Journal of International Law & Business 6:373(1984) will achieve essentially the same goals as the shippers' council concept, thus negating any need for additional legislation. A. Background Any analysis of the feasibility of shippers' councils in the United States must commence with an identification of the market in which they are to operate. Tramps, independent liners (independents), and liner conferences (conferences or shipping conferences) are the primary com- ponents of regulated ocean transportation. A tramp is an independent carrier which contracts with shippers for the individual carriage of goods. It does not confine itself to one trade and therefore does not need to offer a fixed schedule or publish tariffs. In contrast, a liner serves a fixed trade, offering scheduled services and published tariffs. Its legal status is that of a common carrier.1 Liner service has several attributes common to regulated transporta- tion industries, which conference advocates argue preclude the industry from operating as a classical competitive market. Foremost among these characteristics are high fixed costs and high initial capital costs.2 In ad- dition, because liners must be large, they must have a fixed capacity. This factor distinguishes them from other transportation modes.3 The requirement that liners adhere to fixed schedules often has resulted in liners having to sail without utilizing their full capacity.4 In a competi- tive market, this underutilization of capacity, coupled with an inability to reallocate resources, can lead to "cut-throat" competition and destruc- tive price wars, with consequential bankruptcies and disrupted market service. 5 The English developed the concept of liner conferences in the 1870s 1 See G. SLETMO & E. WILLIAMS, LINER CONFERENCES IN THE CONTAINER AGE: U.S. POL- ICY AT SEA 7-12 (1981); D. Marx, INTERNATIONAL SHIPPING CARTELS (1953); see generally, Agman, Competition, Rationalization,and the United States Shipping Policy, 8 J. MAR. L. & COM. 1 (1976); Comment, The Sinking Shipping Industry, 5 Nw. J. INT'L L. & Bus. 99 (1983). 2 SLETMO & WILLIAMS, supra note 1, at 136-38; SENATE COMM. ON COMMERCE,
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