Deregulation — Really?

Deregulation — Really?

For example, whether or not you agree that legislative fixes are needed to restore rail price and service equilibrium in the U.S. and Canada, it’s not difficult to understand where shippers are coming from in calling for change. The same can’t be said when it comes to potential container shipping deregulation in the U.S.

Shipper complaints about railroads fit into an understandable context. North American railroads have enjoyed a hugely successful run in increasing profits, yet U.S. shippers served by a single railroad say they are victimized by monopoly pricing and service. In Canada, shippers of all stripes have mounted an attack on service quality, resulting in a government-mandated Rail Freight Service Review, set to be completed by year-end.

Shippers’ issues with rail tend to be specific and long-standing — they can include a lack of car availability, inconsistent delivery times and excessive dwell time for shipments. They are rooted in the reality that rail service has a fixed number of suppliers and insurmountable barriers to entry, so unless the government nationalizes the tracks and opens them to competition, you’re stuck with the existing suppliers.

Rail service issues have come to a head in the U.S. and Canada, but only after long incubation periods. The Alliance for Rail Competition, one group pushing for changes in the U.S., was formed in 1987. The view that railroads earn excessive profits while failing to deliver competitive price and service is a theme in both markets. It was a core conclusion in a report issued last month by the staff of the U.S. Senate Commerce, Science and Transportation Committee, which cited Warren Buffet’s 2009 acquisition of BNSF Railway, the doubling of dividends, and stock buybacks.

At September’s Canada Maritime Conference in Montreal, sponsored by The Journal of Commerce, Canadian Industrial Transportation Association President Robert Ballantyne quoted analyst reports noting railroads’ pricing power as evidence that too much money goes back to investors while too little is reinvested in service. It’s an issue that in these tough economic times has struck a nerve. What will come out of this, whether a U.S. legislative change to the 1980s Staggers Act or a deal with railroads in Canada to provide better service metrics (a distinct possibility), remains unclear.

But these are real issues attracting real attention from both governments.

That’s why there’s such a stark contrast between the railroad industry debates and the stirrings of deregulatory sentiment in the U.S. over ocean shipping. Ocean shippers have complaints, and some are legitimate. But the ocean shipping deregulatory effort has come seemingly out of nowhere. A Sept. 14 letter from 30 trade associations representing importers and exporters called on Congress to “end the legalized cartels that, under the current (Ocean Shipping Reform Act), are specifically allowed to engage in price fixing, cargo allocation among the carriers, and even agreements to restrict capacity.”

To me, this is almost entirely driven by shippers’ experience in the first half of 2010, not by long-simmering issues.

This year saw a save-the-company effort by carriers to restore profitability after container lines suffered historic losses in 2009. The carriers took an uncompromising stance in cutting capacity, limiting shippers’ allocations and demanding compensatory rates from shippers. The result was delays resulting in lost sales at the retail shelves. “It is important for our transportation partners to understand that goods not received on time do not mean that sales are delayed to a later date,” Ed Wyse, vice president for global procurement at Doral Industries, told the JOC Canada Maritime Conference. “They become permanent lost sales for our partners as well as ourselves.”

But where were the importers’ complaints before 2010? My understanding has been that the 1998 Ocean Shipping Reform Act has worked for the most part. Rates and capacity certainly have fluctuated at times, but this is the volatility you see in free markets, hardly a failure of regulation. U.S. exporters have admittedly complained for years about lack of container availability, but it’s difficult to see how stripping carriers of antitrust immunity would change the basic economics of container positioning and bring more containers to agricultural shippers at remote locations.

And what solution are the importers seeking? Are they saying rates are too high? If so, that’s surely a new one. No one was complaining about rates as they sank to record lows in 2009.

Has capacity been an issue other than this year? While imports skyrocketed for several years before the crash began in late 2008, rates and capacity were a minor story compared with the bigger issue of whether the infrastructure was there to handle the business.

Before the U.S. rushes headlong into another round of shipping deregulation, lawmakers and the shipping industry need to understand what problem they are trying to solve and how measures under debate in Washington solve them.

Peter Tirschwell is senior vice president for strategy UBM Global Trade. Contact him at ptirschwell@joc.com and follow him on Twitter at www.twitter.com/PeterTirschwell.