April 30, 2010    Volume 17, No. 7

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High-Tech U.S. Exporters Run Into Problems With Foreign Shipping Firms; Federal Maritime Commission Initiates An Investigation

By Richard A. McCormack

The Obama administration's goal of doubling exports over the next five years might run into trouble because shipping companies are refusing to ship American exports overseas. These foreign companies make most of their money on high-value manufactured imports from Asia and have little incentive to load America's low-value exports: commodities like bulk food and feed, bulk chemicals, raw materials, scrap metal and waste paper.

The situation has gotten so bad that the Federal Maritime Commission has initiated a "fact finding investigation" to determine why shipping companies are cancelling shipments or refusing to carry American exports.

"My fellow Commissioners and I have personally met with and expressed our concerns with Mr. Young Min Kim, the CEO of Hanjin Shipping and new chairman of the Transpacific Stabilization Agreement, as well as executives of other carriers," Federal Maritime Commission (FMC) chairman Richard Lidinsky told a House of Representatives hearing in March. "I have communicated to Mr. Kim a number of grievances we have heard from shippers." Heading up the investigation is FMC commissioner Rebecca Dye, who said: "If a U.S. exporter has goods to sell overseas, that exporter must be able to get them delivered."

For many American exporters, that is not happening. The global shipping industry is in a period of readjustment after suffering the most severe downturn in 70 years. Shippers took 500 container vessels off the oceans. Between March 2009 and March 2010 capacity at the three ports in the Pacific Northwest has been reduced by 45 percent. Having collectively lost as much as $20 billion last year, many shipping companies just stopped calling on U.S. ports, according to Hayden Swofford, executive director of the Pacific Northwest Asia Shippers Association.

As the economy has strengthen in the last five months, shipping companies have been reluctant to add capacity, due in part to the sense that the uptick has more to do with restocking inventories rather than being a sustainable recovery.

There is also growing concern over collusion between shipping companies, which is allowed under U.S. laws. The carriers have been jointly setting rates and conditions since the Merchant Marine Act of 1920 provided them with antitrust immunity. Given recent huge "emergency" increases in fees adopted by the 15 major transpacific shipping companies, U.S. exporting organizations say that the U.S. government must now step in.

"It would be appropriate for Congress to review the existing international shipping regulatory structure to determine if additional reforms are needed," said Michael Berzon of the National Industrial Transportation League. "Regulation of the international shipping industry must evolve to ensure that it is meeting the pro-competitive policies of the free-market economy in the U.S."

U.S. companies are having difficulty finding shipping containers in the parts of the country where U.S. exports originate. These containers are owned by the shipping companies that do not want them to be transported thousands of miles into the heartland of the United States to be filled with America's bulk exports.

Instead, "ocean carriers have chosen to simply send them back empty by rail to the U.S. West Coast shipping ports where they are then put on the vessels still empty, in order to support the needs of foreign exporters, mainly the Asian markets for importing their finished goods to the United States," said Chris Mullally, chairman of the United States Hide, Skin & Leather Association in Washington, D.C., and president of Mohawk Trading Co.

The transpacific shipping capacity is driven by import demand, says Robert Sappio, senior vice president for Pan American Trades, a division of Singapore-based NOL Group. U.S. exports of low-value raw materials, agricultural commodities and waste "command significantly lower freight rates than higher-value goods imported from Asia, such as electronics goods, furniture and clothing," he says. "The value of a commodity does make a difference in rates; low-priced export cargo cannot afford to pay the same level of freight rates as higher value import cargo. In fact, the head haul (import) rates in effect subsidize much of the cost of the backhaul (export) and exporters benefit from this fact. If export rates were raised to a level that were compensatory, buyers of American goods would likely look for other sources for their needs."

The United States imported almost 11 million 20-foot-equivalent containers of goods last year, but exported only six million loaded containers of cargo. Shipping companies are "compelled to move empty containers westbound [to Asia] in order to keep the system in balance," says Sappio. "There must be the same number of containers moving in both directions. If there are no containers in Asia, U.S. importers cannot bring their goods to market."

Moreover, a typical 40-foot equivalent container coming from Asia weighs 10.3 metric tons, whereas a westbound container of American raw materials, commodities and junk typically weighs 21.3 metric tons, making it impossible for a ship to return all of the containers needed for imports. Containers of American products are also not going to the same ports in Asia that are exporting manufactured goods to the United States.

Further impacting U.S. exports has been the dramatic increase in bulk shipping of commodities to China from Australia and Brazil. This has taken bulk ships off U.S. routes, forcing American exporters to ship via container. "As a result, there has been a dramatic increase in agricultural products carried in containers," says Sappio. "Agricultural exports are displacing other traditional containerized export products, such as forest products."

This is not a good situation for companies that sell things like cattle hides to Asia, which are then manufactured into handbags, coats, shoes and baseball mitts and shipped back for sale to American consumers. More than 90 percent of all cow hides are exported to foreign factories, "because the ability to produce leather in the United States has now dropped to less than 10 percent of United States cattle slaughter production," says Mullally of Mohawk Trading Co.

That means the United States must ship 31 million out of 34 million cow hides produced each year to overseas manufacturers. It's enough to fill 48,000 containers, the vast majority of which go to China.

"Even if we are able to secure the empty equipment in order to load our product, getting those containers to actually be loaded on board an ocean vessel has become a literal nightmare," says Mullally. "Since late December 2009, this has become the single most difficult situation that I have ever faced as an exporter."

Without a substantial increase in the number of vessels serving U.S. exporters, there is no way for American companies to get their products to Asian markets, adds Mullally. Foreign manufacturers blame the American companies for not being able to supply them and they start looking elsewhere for their raw materials. After describing numerous cases of shipping companies not loading containers that were already booked for passage, Mullally asked: "Where is an exporter to turn in a case like this? Who is going to protect the rights of our business, our employees and our company? We do not have any rights whatsoever as an exporter. I have reached the end of my rope. I have no place else to go and no place else to turn now but to you gentlemen of the United States Congress. You are the only ones who can help restore some respect to the exporters of America. You are our only hope of obtaining any semblance of exporting rights from these foreign ocean carriers."

Rep. Elijah Cummings (D-Md.), chairman of the House subcommittee on maritime transportation, said the virtually complete dependence on foreign shipping companies is now impacting the national and economic security of the United States. "In 1975, there were 857 ocean-going U.S.-flag ships with a carrying capacity of more than 17.6 million deadweight tons," he says. "At the end of 2007, there were 89 U.S.-flagged ships operating in the foreign trades and these ships were highly dependent on U.S. government-impelled cargos" -- military personnel and equipment. U.S. flagged ships carry less than 2 percent of U.S. foreign trade. U.S. exporters, Cummings said, "are subject to the business decisions and practices of foreign-flagged carriers when they move their products."

The Top 15 Carriers In The Trans-Pacific Trade
- Hanjin, Korea
- Maersk Line, Danish
- Hanjin, Korea
- Hyundai, Korea
- China Shipping, China
- MOL, Japan
- CMA-CGM, France
- Evergreen Marine, Taiwan
- Mediterranean Shipping, Switzerland
- OOCL, Hong Kong
- K Line, Japan
- Yang Ming, Taiwan
- APL, Singapore
- COSCO, China
- NYK, Japan
- Hapag Lloyd, German

(Source: Hayden Swofford, Executive Director Pacific Northwest Asia Shippers Association, and the Journal of Commerce.)

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