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Shipping Price-Fixing Pacts Hurt Consumers, Critics Say

Wall Street Journal
Interactive Edition
Anna Wilde Mathews
October 7, 1997
text is a cache of http://pacioli.bus.indiana.edu/erasmuse/g570/_tests/q1_s98.htm

Every two weeks, in an unobtrusive office building here, about 20 shipping-line managers gather for their usual meeting. They sit around a long conference table, exchange small talk over bagels and coffee and then begin discussing what they will charge to move cargo across the Atlantic Ocean. All very routine, except for one detail: They don't work for the same company. Each represents a different shipping line, supposedly competing for business.

Under U.S. antitrust law, most people doing this would end up in court. But shipping isn't like other businesses. Many of the world's big shipping lines, from Sea-Land Service Inc. of the U.S. to A.P. Moller/Maersk Line of Denmark, are members of a little-noticed cartel that for many decades has set rates on tens of billions of dollars of cargo. Impact Enormous Most U.S. consumer goods exported or imported by sea are affected to some degree. The cartel -- really a series of cartels, one for each major shipping route -- can tell importers and exporters when shipping contracts start and when they end. They can favor one port over another, enough to swing badly needed trade away from an entire city. And because the shipping industry has an antitrust exemption from Congress, all of this is legal. "This is one of the last legalized price-setting arrangements in existence," says Robert Litan, a former Justice Department antitrust official. Airlines and banks couldn't do this, he says, "but if you're an ocean shipping line, there's nothing to stop you from price fixing." You could call them the OPEC of shipping, though not quite as powerful because they can't keep members from building too many ships. To get more business, some of the shipping cartels' own members undercut cartel rates or make special deals with big customers. They also face the emergence of new competitors, which are keeping rates down in some markets. Nonetheless, the industry is playing a bigger role now in the U.S. economy as American companies plunge more deeply into world trade. Exports over the seas have jumped 26% in the past two years and 50% since the start of the decade. For consumers, the impact is hard to measure. Transportation costs make up 5% to 10% of the price of most goods, and increases in shipping rates are usually passed on to consumers. A limited 1993 survey by the Agriculture Department, examining $5 billion of U.S. farm exports, concluded that the cartels were raising ocean shipping rates as much as 18%. A different report, by the Federal Trade Commission in 1995, found that when shipping lines broke free of cartel rates, contract prices were about 19% lower. Viewed as Base Prices "The cartels' whole makeup is anticonsumer," says John Taylor, a transportation professor at Wayne State University in Detroit. "They're designed to keep prices up."

Some moves are afoot to change all this. The U.S. Senate is considering a bill that, for the first time in a decade, would weaken the cartels, by reducing their power to police their members. The bill, sponsored by Sen. Kay Bailey Hutchison of Texas, has the support of some other high-ranking Republicans, including Majority Leader Trent Lott. Even some major cartel members, including Sea-Land and Maersk, support it, under pressure from customers seeking world-wide contracts. But even supporters think that only a watered-down bill could pass the Senate; a similar measure passed the House last year and went nowhere. Moreover, the U.S. has only limited jurisdiction over cartel members; most of them are based in Europe, like Maersk, or in Asia, like Orient Overseas (International) Ltd., which is controlled by the family of Hong Kong's top official, Tung Chee Hwa. Even if the U.S. banned cartel-like behavior, foreign shipping lines probably could still meet abroad to set rates. The biggest U.S. player, Sea-Land, is a unit of CSX Corp., which is far better known as a railroading giant.

Cartels Unapologetic

The companies' executives are unapologetic about the cartels, which they say help limit the pressure toward both mergers and bankruptcies. They contend that a wave of acquisitions would leave even less competition, with just a few world-wide companies dominating ocean trade. Some note America's uneven experience with deregulation in other transportation industries, such as airlines and railroads, where quick consolidation reduced prices but hurt on-time performance and other aspects of service in many markets. In many ways, some shipping executives say, cartels are pro-consumer. "Unfettered competition is not in the public interest," says Conrad Everhard, chairman of Cho Yang (America) Inc., a Rutherford, N.J., subsidiary of a South Korean cartel member. "You would get a chaotic rate war." But many U.S. companies say they would welcome a little unfettered competition. Blue Diamond Growers, one of the nation's biggest agricultural exporters, says that in the early 1990s its shipping rates to Europe jumped almost 50% in 18 months -- when a cartel decided prices were too low. The cooperative recently was able to switch to noncartel lines, but for years, the only carrier near the co-op's Sacramento, Calif., base was too busy carrying lumber. A Blue Diamond attempt to send thousands of boxes of almonds overland, by railroad to the port of Montreal, ended disastrously when the train ran late and the nuts missed the boat. Transportation Manager Jilian Morley says negotiation is out of the question; the cartel officials sometimes don't even return her phone calls. In a letter, the cartel, now called the Trans-Atlantic Conference Agreement, told the co-op to "let nature take its course" and pay the rates. Cartel officials didn't return repeated phone calls about the letter and other matters. In Scarborough, Maine, David Hefler says cartel rates have discouraged free trade, at least in eggs, the main product he exports. When the cartel that dominates U.S. routes to the Mideast raises prices, he can't afford to ship there for months at a time. "An egg is an egg is an egg," he says. "A difference of three cents a dozen can put us out of the ballgame."

The Service Issue

For many companies, especially large ones, bad service can be an even more of an issue. Although Polaroid Corp. is only 20 miles from the port of Boston, the company trucks its film and chemical exports more than 300 miles to Montreal, where a noncartel line's rates are 20% lower and service is more consistent, says Rodney Schonland, manager of trade and regulations. In addition, Polaroid would have to pay an extra tax in the U.S. Even General Motors Corp. has to take orders from the big Atlantic cartel, which tells it to sign its annual shipping contract every December, eight months before the auto-model cycle begins. Cartel lines "dictate to us," says Cynthia Bridgeman, GM's director of international transportation. Cartel members say they aren't nearly as powerful as critics contend. Many lines suffer from a glut of ships and are engaged in a commercial war of sorts. Some members say that if they didn't break cartel agreements and cut rates for big customers, they would lose too much business to noncartel lines. Hanjin Shipping Co., a major South Korean line with a small trans-Atlantic operation, has gone even further, withdrawing from a 16-line Atlantic cartel so it could set its own rates. Moreover, the cartels are facing a rising breed of aggressive lines that are cherry-picking shippers with lower rates. Sometimes, the customers can play the new competitors off against conference lines, cartel officials say. Because of such tactics, shipping rates on the Pacific have slipped in recent years; from 1992 to 1997, for example, they fell 7% to the U.S. from Asia. There aren't "fearsome cartels wringing monopoly rates out of anyone," says Christopher Koch, Sea-Land's senior vice president and general counsel. "Conferences have shown they're ineffective."

The Subsidy Problem

And cartel members have another argument: Many ship lines, even in the U.S., get various subsidies. That can make for irrational, politically influenced pricing. "The general public is better off today with the system we have than with any other system," says Olav Rakkenes, chairman of the main Atlantic cartel. "You have to have some reliability and stability." The cartels try to present an innocuous front. They never use the word "cartel," for instance. The Trans-Atlantic Conference Agreement not only avoids calling itself a cartel, but it has its small office suite in the same building in Rutherford as the local chamber of commerce. Harold Holden, the shipping group's genial top administrator, goes by the nickname "Lucky" and says he worked his first sea passage by chipping rust off a freighter. Now, he oversees an organization that sets rates on about 70% of the cargo shipped between the U.S. and Northern Europe -- about $60 billion of products each year, from apples to suits to beer. Members enforce strict secrecy about their meetings, barring reporters and nonmember companies. But the meetings are hardly dramatic; the participants, usually midlevel managers, confer on the tiniest of minutiae. One 65-item agenda included prices for moving bad shrimp from the U.S. to Europe. "'Somewhat tedious' is how I would describe it," one participant says. But the results can be anything but tedious for U.S. ports. As the main conduit for international trade, the nation's ports are a major source of jobs and business revenues in big coastal cities. Port authorities are in the uneasy position of dealing with cartels that, in a single stroke, could abruptly change a port's future.

That's about what happened in Philadelphia in 1991. Members of an Atlantic cartel decided to cut off service to the city, ignoring a port that had handled $8 billion a year in cargo, in favor of larger ports, such as New York. Frantic officials in Philadelphia set out to win smaller, noncartel lines. That softened the blow, but even now many companies in the area have to put their freight through New York. To Mafco Worldwide Corp., Philadelphia "is a dead port," says Lynn Talotta, traffic manager for the licorice-flavoring maker. She can see Philadelphia's piers from her office but loads her European shipments on trucks to New York.

'Victory' in New Orleans

In New Orleans, port officials went on the offensive in 1995 against the cartel that dominated trade lanes from Latin America. In a complaint filed with the Federal Maritime Commission, the port argued, in effect, that the cartel was pricing New Orleans out of the market by favoring Florida ports with lower rates. The port cited frozen broccoli, which cost 83% more to ship from Guatemala to New Orleans than to Florida, and unfinished clothing, which cost 132% more to ship to Honduras from New Orleans than from Florida. Cartel members contended that the price discrepancies didn't apply to all products and that their rates were fair. But they didn't wait to find out whether the government agreed; they dissolved the New Orleans arrangement, and companies there declared it an enormous victory. But if it was -- some Louisiana shippers now believe they lost some business forever -- it was rare. For eight decades, shipping cartels have been protected by Congress under the Shipping Act of 1916, passed at the behest of American shipping customers, who thought cartels would guarantee reliable service. The law was revised significantly only twice, in 1961 and 1984, but both times the industry's antitrust immunity was left intact. The most recent major review was done in 1991 by a congressional commission. It heard more than 100 witnesses, produced a 250-page report -- and offered no conclusions or recommendations. One commission member who represented shipping customers complained, in his official comments, of the cartels' "almost unlimited monopolistic power." Another participant disagreed, praising shipping lines' "agreements that promote efficiency of operation."

In an executive summary, the commissioners said they hoped the report would serve as a "valuable policy tool." The real reasons for years of inaction in Congress may be apathy and the lobbying by various groups. Dockside labor, for example, fears that secret contracts would enable ship lines to divert cargo to nonunion workers without the union knowing it. David Butz, a University of Michigan economist who has studied shipping, thinks voters aren't likely to weigh in; the cartels aren't a hot topic. "It's below the radar screen," he says. "Consumers don't realize the impact they have."


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