How the Ocean Shipping Reform Act 2022 will address US supply chain disruptions – or not..

The Ocean Shipping Reform Act of 2022 (OSRA22), was passed by Congress on the 13th of June 2022.. Naturally, there have been bouquets and brickbats on the passing of this Act from both sides of the fence..

“Lowering prices for Americans is my top priority, and I applaud the Congress for passing the Ocean Shipping Reform Act on a bipartisan basis, which will help lower costs for American retailers, farmers and consumers.

In my State of the Union address, I called on Congress to address ocean carriers’ high prices and unfair practices because rising ocean shipping costs are a major contributing factor to increased costs for American families. During the pandemic, ocean carriers increased their prices by as much as 1,000%. And, too often, these ocean carriers are refusing to take American exports back to Asia, leaving with empty containers instead. That’s costing farmers and ranchers—and our economy—a lot of money. 

This bill will make progress reducing costs for families and ensuring fair treatment for American businesses—including farmers and ranchers. I look forward to signing it into law.” read a statement from the White House quoting the POTUS..

“We are appalled by the continued mischaracterization of the industry by U.S. government representatives, and concerned about the disconnect between hard data and inflammatory rhetoric.” said a statement by the World Shipping Council (WSC) responding to these comments by the POTUS.. WSC is the united voice of international liner shipping with many international shipping lines as members..

“As long as America’s ports, railyards and warehouses remain overloaded and unable to cope with the increased trade levels, vessels will remain stuck outside ports to the detriment of importers as well as exporters” added the statement by WSC

“Until the import congestion is remedied, export congestion will persist. The World Shipping Council will continue to work with federal and state policymakers, as well as other parties, to pursue the necessary lasting solutions – such as continued investment in port infrastructure – that can have real impact in strengthening the intermodal transportation system that has supported the U.S. economy through the pandemic.

Ocean carriers continue to move record volumes of cargo and have invested heavily in new capacity – America needs to make the same commitment and invest in its landside logistics infrastructure.” the statement further read..

So, what led to the introduction and passing of the Ocean Shipping Reform Act

Since the onset of the pandemic, there has been a huge spike in consumer demand on the back of lockdowns across various countries at various stages for varying periods of time.. Some countries had phased lockdowns, some had hard lockdowns and some have recurring lockdowns..

These lockdowns shifted consumer buying patterns shifting from services to goods creating a boom in e-commerce.. Especially in the USA, e-commerce sales in 2021 increased by 50.5% compared to 2019 and by 14.2% compared to 2020 reaching $870 billion in the US as per Forbes.

An article on Forbes said “The fastest growth category of e-commerce sales over the past two years were furniture, building materials, and electronics which cumulatively grew more than 200% since 2019. Food and beverage e-commerce grew 170%, representing 9.6% of all grocery sales in 2021 according to eMarketer. Apparel was one of the few categories of e-commerce to grow slower than the industry average at 39%.”

On one side, while COVID-19 affected labor due to restricted movement by people, creating labor shortages, on the other side, a combination of the ease of online shopping, panic buying, continued work from home and the necessity created by COVID-19 led to a boom in container shipping volumes across the world, choking ports and terminals, warehouses and container depots..

The term “supply chain” graduated from being an industry term to a household name as supply chain disruptions hit global trade with the US ports in general and West Coast ports, in particular, bearing the brunt with up to 100+ ships waiting outside the ports of Los Angeles and Long Beach for a berth to offload the goods that the surge in demand brought about..

These delays, caused US importers to pay millions in additional interest and created a panic that Christmas 2021 in the USA will be delayed because the gifts ordered were all sitting outside the ports, ostensibly spurring action at the highest level of the US Government namely the White House, who appointed a Special Envoy and Task Force to tackle the supply chain disruption..

In the midst of all this, there has been a huge uproar in the market about the profits that the ocean carriers were making, bringing the issues relating to the alleged price gouging by ocean carriers and alleged unjust and unfair demurrage and detention practices of the carriers into sharp focus..

All these events led to the introduction of the bipartisan Ocean Shipping Reform Act of 2021, H.R. 4996 in the House of Representatives on the 10th of August 2021 by Representatives John Garamendi (D-CA) and Dusty Johnson (R-SD) and passed in the House in December 2021..

As per the US Congress, “This bill revises provisions related to ocean shipping policies and is designed to support the growth and development of U.S. exports and promote reciprocal trade in the foreign commerce of the United States.”

The Ocean Shipping Reform Act of 2022 S. 3580 which was based on the Ocean Shipping Reform Act of 2021, H.R. 4996 was passed by the House on the 13th of June 2022 and presented to the POTUS to be signed into Law..

So, what will Ocean Shipping Reform Act do for trade and the US consumer..??

As per Congress, this bill/law will “take key steps toward easing current supply chain challenges by expanding the authority of the Federal Maritime Commission (FMC) to promote U.S. exports through a maritime system that is transparent, efficient, and fair.”

The Ocean Shipping Reform Act 2022

• (A) Expands safeguards to combat retaliation and deter unfair business practices;
• (B) Clarifies prohibited carrier practices pertaining to detention and demurrage charges and vessel space accommodation;
• (C) Establishes a shipping exchange registry through the FMC;
• (D) Expands penalty authority to include refund of charges;
• (E) Increases efficiency of the detention and demurrage complaint process.

“The Ocean Shipping Reform Act of 2022 will make tangible improvements for Americans exporters, easing our international supply chains and helping keep prices down for consumers,” Rep. DeFazio said on the passing of the bill in the House.

“It seems that no one in America today doesn’t know the phrase ‘supply chain disruption.’ That’s why, as Chair of the Subcommittee on Coast Guard and Maritime Transportation, I’ve held hearings on these ongoing bottlenecks and met with stakeholders across all industries who’ve felt the pain of these disruptions—including those who’ve had problems with ocean carriers,” Rep. Carbajal said. “I am proud of our committee’s work with them on this important legislation that will protect American manufacturers and farmers and counter trade imbalances with foreign exporting countries.” added Carbajal..

“Nine multinational ocean shipping companies formed three consortiums to raise prices on American businesses and consumers by over 1,000% on goods coming from Asia. This allowed these foreign companies to make $190 billion in profits last year—a sevenfold increase in one year,” Rep. Garamendi said.

“I introduced the ‘Ocean Shipping Reform Act’ to provide the Federal Maritime Commission with the necessary tools to protect American businesses and consumers and address America’s longstanding trade imbalance with China and other countries.” added Garamendi..

So, will OSRA22 address all the issues that have come out in the COVID-19 wash..??

Short answer: Not likely

Long answer: The pandemic and the resultant boom in container volumes has exposed the vulnerabilities faced by supply chains and their susceptibility to disruptions.. These disruptions are mainly of an operational nature in the US due to the below issues..

1) Operational inefficiencies in US ports – Although the main US gateway ports of Long Beach and Los Angeles have been operating at peak capacity and handled record volumes since 2021, the Container Port Performance Index (CPPI) 2021 by the World Bank and S&P Global placed these two ports dead last at 369 and 370 out of 370 ports in terms of efficiency.. The San Pedro Bay ports which bore the brunt of the high port congestion in 2021 account for between 40-42% of container traffic coming into the USA a lot of which comes from the East..

The CPPI is based on metrics such as crane moves per hour, and berth time of ships in port.. US ports have been lacking in these areas compared to their Asian counterparts and many experts are of the view that automation could be a solution..

Much of course depends on the labor negotiations between Pacific Maritime Association (PMA) and the International Longshore and Warehouse Union (ILWU) which are underway.. Both parties have said that neither party is preparing for a strike or a lockout, automation of ports..

The OSRA22 does not address this very key issue..

2) Chassis operations – Apart from the port inefficiencies, another key factor that is affecting the supply chain, is the age-old debate about how chassis operations are managed in the USA.. For the past several years till about 2009, the US chassis market was being controlled by the ocean carriers who owned and maintained the chassis that would be hitched to the trucks for the movement of containers in and out of the ports and terminals..

The chassis had numbers similar to container numbers and the carriers would provide customers with chassis along with the containers and charge “Chassis usage surcharges” for the use of the chassis.. This practice was unique to USA compared to many other countries around the world..

Eventually, the ocean carriers got out of the business of owning and managing chassis, giving rise to Intermodal Equipment Providers (IEP) who took on the job of owning, maintaining and providing chassis to customers using chassis pools as well..

However, ocean carriers still hold a massive sway over how the chassis is used because they provide door to door contracts (carrier haulage) restricting the use of chassis for only specific line boxes..

Matt Schrap, CEO of the Harbour Truckers Association, told Shipping and Freight Resource “Ocean carriers are placing restrictions like you can’t use a certain type of chassis unless you’re holding our boxes or boxes of an alliance that we’re a part of.” This means that if a trucker has a chassis and he was using it for a blue box, he can only use that chassis to drop off a blue box or pick up a blue box and cannot pick up a magenta box (unless the terminal he is going to, has both – which is unlikely in many cases)..

What seems to be missing here is interoperability among chassis pools and carriers which is hampering the smooth movement of containers in and out of ports and terminals which in turn is hampering port operations causing clogging of yard spaces in the port and gate movements, restricting ship arrival at the berth and forcing them to wait outside.. This was the case at the height of the congestion in US ports in the 4th quarter of 2021..

“Chassis length is another issue because you can’t necessarily bring in a 20’ box, even if you have your own chassis to go pick up a 40’ box, because some terminals won’t let the trucker out of the vehicle to adjust the sliding chassis to take the 40’ box or vice versa,” added Schrap..

To overcome some of these problems, Scharp alluded to the fact that while truckers have the ability to purchase their own chassis it’s an issue of supply and cost due to the limited US manufacturing, and the anti-dumping tariffs on China..

“While other places like Mexico, Thailand, and Vietnam are starting to produce more chassis and are coming online, it takes time and the costs have gone up. They have basically doubled since the pre-pandemic, so you have the ability but, it’s just challenging to secure the equipment in the first place both from a cost and availability perspective,” said Schrap..

The OSRA22 does not address this very key issue but focuses more on the ocean carriers and their practices..

3) Alleged price gouging – The POTUS was quite vocal about ocean carriers who were shipping cargo from Asia to the United States saying that these “foreign” companies have raised their prices by as much as 1,000%..

“Every once in a while, something you learn makes you viscerally angry. Like if you had the person in front of you, you’d want to pop them. No, I really mean it,” President Biden said, adding: “There are nine — nine major ocean line shipping companies that ship from Asia to the United States. Nine. They form three consortia. These companies have raised their prices by as much as 1,000 percent.”

“That’s why I called on Congress to crack down on foreign-owned shipping companies that raise their prices while raking in, just last year, $190 billion in profit — a seven-fold increase in one year,” President Biden said.

These “foreign” companies have been in operation in the USA for years and as per the WSC, “The 22 (not nine) international carriers that serve the American people, industry and government on the Asia – United States trade are part of the global supply chain that has built this country, importing and exporting food, medicine, electronics, chemicals, and everything else we depend on. The increased rate levels we have seen over the past years are a function of demand outstripping supply and landside congestion, exacerbated by pandemic-related disruption.”

The OSRA22 itself does not talk about any measures to mitigate the challenges posed by the price increases and the international carriers.. On this point, Biden’s view about the increase in prices seems to be at odds with the final report of Fact-Finding 29 by the Federal Maritime Commission which found “the ocean freight rates, especially the container spot freight market were the result of market forces of supply and demand-driven mainly by the pandemic, and an unexpected and unprecedented surge in consumer spending in the United States leading to supply chain congestion. ”.. This point was also highlighted by the WSC in their response to the passing of OSRA22..

4) Retaliation – Where the OSRA22 seems to be benefitting the trade, is the addition of new clauses in terms of retaliation and discriminatory practices by ocean carriers and/or MTO and OTIs.. The OSRA22 has amended Section 41102 of title 46, United States Code, to read

“A common carrier, marine terminal operator, or ocean transportation intermediary, acting alone or in conjunction with any other person, directly or indirectly, may not—

(1) retaliate against a shipper, an agent of a shipper, an ocean transportation intermediary, or a motor carrier by refusing, or threatening to refuse, an otherwise-available cargo space accommodation; or

(2) resort to any other unfair or unjustly discriminatory action for—

(A) the reason that a shipper, an agent of a shipper, an ocean transportation intermediary, or motor carrier has

(i) patronized another carrier; or

(ii) filed a complaint against the common carrier, marine terminal operator, or ocean transportation intermediary; or

(B) any other reason.’’

5) Rejection of cargo – The OSRA2022 also adds a new provision that states that ocean carriers shall not “unreasonably refuse cargo space accommodations when available, or resort to other unfair or unjustly discriminatory methods clearly to address informal complaints from US exporters to the FMC about lack of space and equipment for exports offered by carriers”..

It also states that common carriers shall not engage in “unfair or unjustly discriminatory practices against any commodity group or type of shipment or in the matter of rates or charges”..

6) Demurrage and Detention – One of the key areas where the OSRA22 has addressed the concerns of the market is in terms of the invoicing of demurrage and detention by ocean carriers..

The OSRA22 states that a demurrage and detention invoice by the ocean carriers shall include accurate information on each of the following, as well as minimum information as determined by the Commission:

• Date that container is made available.
• The port of discharge.
• The container number or numbers.
• For exported shipments, the earliest return date.
• The allowed free time in days.
• The start date of free time.
• The end date of free time.
• The applicable detention or demurrage rule on which the daily rate is based.
• The applicable rate or rates per the applicable rule.
• The total amount due.
• The email, telephone number, or other appropriate contact information for questions or requests for mitigation of fees.
• A statement that the charges are consistent with any of Federal Maritime Commission rules with respect to detention and demurrage.
• A statement that the common carrier’s performance did not cause or contribute to the underlying invoiced charges.

Conclusion

The OSRA22 has come about on the back of several challenges faced by consumers and businesses in the USA after the general public became aware of the intricacies involved in global supply chains and how it affects them.. The bottlenecks and disruptions faced by the consumers made “supply chain” a household term pushing the US Government to initiate discussions, set up task teams and take action to address the issues..

Whether the OSRA22 has and will succeed in addressing all the problems faced, is up for debate and can only be evaluated with the passing of time.. In the meantime, the FMC seems to be taking some visible action against errant ocean carriers with Wan Hai and Hapag Lloyd paying penalties after the lines were found to have violated the law by knowingly and wilfully failing to establish, observe, and enforce just and reasonable regulations and practices relating to or connected with receiving, handling, storing or delivery property, by unreasonably refusing to waive detention charges, in violation of 46 USC 41102(c)..

There are of course several inherent issues facing the US supply chains all of which the OSRA22 is not going to/able to address and the industry at large needs to come together to find solutions to these problems..

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Source: shippingandfreightresource.com