 Don¡¯t look to government to solve container shipping woe |
Source |
American Shipper |
Post Date |
06/18/2021 |
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The container shipping markets are in a state unlike anything seen before. There is clearly not sufficient capacity to move all the cargo shippers want to get moved, freight rates are far beyond any previous records, reliability is far worse than at any point in time, and it appears as if every day brings another operational disruption to make matters worse.
In this environment it is hardly surprising that voices calling for governments to step in to ¡°handle¡± the situation are increasing. As such, it is relevant to explore what governments can do and whether this can provide at least a partial solution to the problems. In this analysis, it is assumed that the ¡°government¡± not only has the desire to proceed with the proposed action, but also has parliamentary majority to actually follow through with legislation. This is highly doubtful in many countries.
First of all, governments can only impose new laws or restrictions within their own countries. There is no such thing as ¡°global law.¡± Governments can align and coordinate and thus something close to global law ¡ª but such alignment is a process that often takes years, and at times, even decades. A global coordinated approach to solving the current debacle is therefore entirely unrealistic.
From a national perspective, a government can indeed impose price controls and set a price ceiling. Often when this has been done in other sectors, it has led to market inefficiencies. The mandated artificial price ceiling can lead to reduced capacity and/or the creation of a parallel black market.
If a government were to impose a ceiling on freight rates, what would happen? Hypothetically, let us assume the US government imposed a ceiling on freight rates into the US ostensibly to prevent carriers from profiteering off the current situation. Again, hypothetically, assume the going market rate is $10,000, but the ceiling is now set at $5,000.
The first problem is who this ceiling would apply to. The carrier that provides a quote to a US importer would be bound by the ceiling and hence offer freight at $5,000. But then the carrier would simply tell the importer that there is no space available. Instead, it would offer the $10,000 rate to the Korean exporter and reserve all vessel capacity purely for freight bought at the non-US origin. The importer would then have to buy the goods cost, insurance, and freight (CIF) instead of free on board (FOB) in order to actually get space onboard the vessel.
A price ceiling alone would therefore be ineffective, and would skew the trading terms between importers and exporters.
Capacity mandates not an answer
The ceiling could then be combined with the government mandating that a certain percentage of the vessel capacity coming into the US should be offered to the US importers. In this case, a carrier could respond by simply not deploying sufficient capacity into the US ¡ª after all, there is a global vessel shortage, and hence some vessels could be shifted to, for example, Asia to South America, where there is no price ceiling. This leaves less space for the US importers and increases prices even more for those having to buy CIF to get any space at all.
To circumvent this problem, yet another law could mandate that carriers operating to and from the US must provide a certain minimum carrying capacity per week. But what should that limit be? Who can say exactly how many TEU of capacity Maersk, Wan Hai, OOCL, Matson, and others absolutely must provide on FOB access terms to the US market without drastically skewing the market?
The above scenario is extremely simplistic, but a deeper dive into the ramifications would reveal even more problematic issues.
Also, let us not forget that governments are already involved and have been for years and decades. It has been a recurrent theme that government subsidies to shipping lines and shipyards have skewed the marketplace for decades, creating overcapacity, and that such intervention was detrimental to the market. Now, in a 180-degree turn, governments are indirectly called upon to deliberately overcapacity. And, by the way, given that lack of vessel and port capacity is among the problems, even swift interference from a government would still have a lead time measured in years before any such ordered capacity is delivered.
The one element in the industry where governments can indeed make a very real and tangible improvement is on the issue of allowing vessel crew changes, which is a major problem as many countries are simply not allowing this presently because of COVID-19 concerns. But in this one element where governments indeed have the power to act, they have clearly chosen not to.
Hence, in summary, it is perfectly understandable that shippers are increasingly desperate for someone ¡ª anyone ¡ª to bring about a resolution to the current problems. The unfortunate reality is that there is no such easy resolution and government intervention is unlikely to solve any of the current problems, but would in all likelihood more problems in
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