New rules

Shipping bill takes aim at inflation

Published April 27, 2023 by Carl Fincke

In theory, the Ocean Shipping Reform Act (OSRA) would, among other things, help reduce inflation by adding transparency to container handling fees. In practice, though, it’s not that simple.

When President Joe Biden signed OSRA into law in June 2022, he touted it as a weapon against shipping costs that had soared during the pandemic. One of OSRA’s objectives was to give the Federal Maritime Commission more power over monitoring and investigating shipping practices. But almost a year later, experts say the law will have little, if any, impact on inflation.

“Most in Congress don’t really understand the shipping industry,” says Christine McDaniel, senior research fellow at the Mercatus Center, a market-oriented think tank based at George Mason University. “They saw rising prices during COVID and thought there must be collusion. But, in fact, it was supply and demand. There was a huge spike in demand that overwhelmed supply.”

Supply not meeting demand created numerous problems, including a shortage of semiconductor chips affecting electronics and automobiles. But most noticeably, it caused shipping rates to skyrocket. During the pandemic, the charge for shipping 40-foot containers from the West Coast to China jumped from around $1,400 to more than $20,000. The cost has since dropped back to about $1,500.

“OSRA will not impact the rates charged,” says Brian Whitlock, an analyst specializing in global logistics with Connecticut-based Gartner Consulting. “OSRA gives the Federal Maritime Commission the ability to enforce the reasonableness of how rates are charged. As a result, it will likely not have a material impact on inflation.”

Joe Harris, spokesman for the Port of Virginia, says OSRA “doesn’t have a lot of bearing on” the port.

“We do not set rates,” Harris explains. “Those contracts are negotiated between the ocean carrier and cargo owner. What is important to ports is vessel schedule. When the carriers get off schedule as badly as they did during the pandemic, it’s felt at the ports.”

Shippers haven’t felt the impact of OSRA yet because the industry is waiting on the Federal Maritime Commission to rule how the law will be practically implemented, says Mike Coleman, president and CEO of Norfolk-based logistics and shipping firms CV International Inc. and Capes Shipping Agencies.

“I do not expect any appreciable impact until the final rules are implemented by the FMC, though freight providers will be preparing in advance,” he says. “OSRA was born out of the pandemic and the challenges it presented in shipping, specifically regarding equipment availability and associated costs.”

A secondary objective of OSRA is to address the issue of shipping companies refusing agricultural cargo and instead sending empty containers to foreign ports, often China, to be filled and returned. Many shippers preferred to send empty containers to China, where they could be quickly loaded with more profitable, high-demand cargo. In one two-month span in late 2020, U.S. carriers rejected almost 200,000 containers, according to a CNBC report. Under OSRA, there is more pressure on shippers to accept containers for export when space is available.

“But again, that happened during COVID, when U.S. demand for imported goods increased sharply,” says McDaniel. “So those price hikes and practices were largely the market’s response to supply and demand.”

OSRA also shifts the burden of proof in disputes from the shippers to the carriers, “a huge benefit to shippers who did not file complaints in the past due to this burden,” says Whitlock.

But, he adds, the impact of that “will rest squarely on the FMC and how they define and enforce the new rules. For example, fining Hapag-Lloyd [AG] $2 million for unfair detention charges when their first quarter [earnings before interest and taxes] exceeded $4 billion is hardly going to make a dent in ocean carrier behavior.”

McDaniel is concerned about recent discussions involving the Federal Maritime Commission that would single out ocean carriers as “special” and not subject to general antitrust regulations.

“That worries me because the big competition principles should be the same across industries and sectors,” she says. “Carving out one industry as ‘special’ is dangerous.

“The shipping industry is vital. Don’t mess it up.”