Long before there were trucks, trains, and planes, there were ships. Ships transformed travel and warfare, enabling humans to see beyond their villages and into the world. Most importantly, they unlocked global trade.
In today’s Information Age, the world’s pace has accelerated. It is hard to imagine that not so long ago people once waited for the morning paper to see how stocks closed the day before. Today, trading is a micro-second game, with real-time stock quotes. Freight has not been impervious. Modes of transportation and communication evolved, culminating today in instant-gratification last-mile/last-touch, in a world of one-hour delivery and online bookings.
In many ways though, the regulation of ocean freight in the United States is still playing catch-up, functioning as an obstacle instead of an enabler. While regulations were once thought to promote free competition, it is now generally believed that fewer and simpler regulations lead to a “perfect market” of competitiveness, increased efficiency, and lower prices. On that basis, most of the transportation industry in the United States was deregulated in the 1970s and 1980s. However, ocean freight remained fraught with regulation, with the Federal Maritime Commission (FMC) a lone regulator dictating archaic contract rules to the ocean freight market.
An old world regulatory ecosystem
As the oldest mode of global transportation, shipping has a history of tradition and aversion to change. Shipowners and charterers regularly use charterparty forms written 70 years ago and transact in their own unique language. Maritime lawyers have their own courts and sets of international rules and treaties, overriding local legislation. Much of this dates back to the early 1800s, when merchants and shipowners met in coffee houses and devised rules and regulations that started the modern Baltic Market.
It was in this world that, at the cusp of the 1960s intermodal container revolution, the FMC was established to regulate US ocean freight. At first, rates had to be filed and published, until the 1984 Act introduced contract carriage under service contracts. The switch from public tariffs to negotiated contracts increased ocean pricing flexibility and competitiveness (according to a 2001 United States Federal Maritime Commission), but left ocean freight lagging behind most free markets.
On the cusp of change
In a very important step to reduce regulatory burdens for non-vessel operating common carriers (NVOCC of NVO) contracts for shipping in and out of the United States, the FMC recently ruled that, as of August 22, 2018, some of the FMC’s more restrictive requirements will be lifted. The new rules lift filing and time requirements for NVOCC service arrangements (NSAs) and relax substantive restrictions regarding what could be included in Negotiated Rate Agreements (NRAs). They also accept and allow for the inherent need to amend NRAs. This is critical to an industry predominantly based on physical aspects, whether they’re late factory deliveries, port changes, or changing economic elements, such as general rate increases (GRI) and bunker fuel adjustments.
The previous FMC NSA and NRA regulations had largely been a bureaucratic burden, preventing parties from contracting as they please, and impeding use of dynamic or floating prices and other financial instruments demanded by a rapidly changing market. Through these latest changes, the FMC has perceptibly shifted from hindering advances in the ocean freight market toward actively enabling them.
The introduction of digitalization and enhanced information flow are bringing ocean freight closer to an era of “perfect market conditions.” Large numbers of NVOCCs, ocean carriers, and shippers, combined with a greater breadth of available information, all promote fair competition and market efficiency far better than regulation ever could. While there is much work to be done to enable trade without cumbersome regulation, this is an important first step, since it creates the potential for further progress.
Moving forward with transparent freight
I’m a strong believer in the role freight data should play in informed decision-making. This was a major driver for the creation of the Freightos Baltic Index, the only international freight index based on transparent, non-polled business data, augmented by external oversight from the Baltic Exchange.
The new FMC regulatory measures are a key enabling factor for more sophisticated financial solutions, unlocking the advantages of competitive pricing and new financial tools. Other industries have proven that information transparency and new manners of trade can make industries more transparent and efficient. These changes are critical steps in the right direction, but future steps must be taken to improve the container freight market as an increasingly modernized industry.
Jodi Patt is general counsel, Freightos. Contact Patt at firstname.lastname@example.org