September, 1988

Fruits of Thought

Conference Calls

Lately such normally esoteric terms as “Transpacific Westbound Rate Agreement” and “Shipping Conference” have filled the industry’s scuttlebutt. And with good reason: Several of the top names in the trade have settled charges of falsifying shipping documents by paying hundreds of thousands of dollars to the Federal Maritime Commission. And there is more to this situation than meets the eye. Multiples of these settlements might be due if the shipping lines look to rebill the companies for the freight that was really due to be paid.

This specific situation was simple. Shipping lines usually have different rates for different commodities. In this case, companies that were shipping to Hong Kong were shipping items that carried higher rates, such as grapes, and listing them as items that carried lower rates, such as oranges.

The settlements were accepted without anyone admitting guilt. In fact, many of the people involved in this settlement are highly reputable. So the interesting question is: Why did these people falsify the shipping documents?

Normally antitrust laws here in the United States would preclude shipping lines or anyone else from getting together to set rates. However, Congress had imbedded a special exemption to the antitrust statutes that allows shipping lines to sit down and agree on rates. The power is not unlimited. Under certain circumstances, shipping lines can and have been required to refund money because they were abusive in the use of this right to set rates jointly. But under normal circumstances, shipping lines are pretty free to charge what they will and to all agree to charge the same price for shipping a particular product. The organization established to set these joint rates is a “conference,” and it is made up of the shipping lines that service a given region. So there are different conferences for the North Atlantic, South Atlantic, etc.

For an exporter of produce, the conference offers one key benefit. Having all shipping lines operate at one price tends to create a level playing field in which all exporters and importers can compete fairly. In many markets where non-conference vessels operate (these are shipping lines that have chosen not to join the conference and thus set their rates independently), the ability to do the export business can be almost completely dependent on the ability to get space on a particular shipping line. With a conference, if one vessel has no containers available, you can often just ship on another boat.

But there are several things about a conference that can make them exceptionally frustrating to deal with. First, a conference is anonymous. People who want to export will make a request to the conference to ask for a rate to cover shipments of a particular commodity, for example, apples from Seattle to Hong Kong. Then the conference will accept, reject or modify the proposal. But the problem is that a conference is not a person. One by one, the salesman from each shipping line will assure you that his company is with you on this proposal, but although everyone says he voted with you, the proposal was still voted down! One of the things that makes exporters unhappy with conferences is that they serve as tools to avoid individual accountability. If you knew that an individual line was voting against your proposals, maybe you would boycott them or try to persuade them to vote for them. But under the conference system, you can get turned down and never know who turned you down, or why.

The second big frustration about dealing with a conference is that your livelihood, the export of produce — or in some cases something more specific, like the export of apples — can be held hostage to things you have no control over. Sometimes one shipping line wants a special rate for one item, say transporting frozen crawfish, and they won’t vote for the new rate for apples till their crawfish rate is put in. In this way, a conference can literally destroy the livelihood of people, particularly those who export only the one commodity they happen to grow or ship.

Now one of the complaints thrown out during the recent controversy is that conference rates are sometimes excessive. That the shipping lines look at the cargo they are carrying, check out the market, and as soon as anyone starts to make some money, the shipping lines look to take all the profit. There is something to this, but less than there seems. The first thing to note is that all the people who say this are not rushing out to buy shipping lines because the reality is that profits are not that easy. The shipping lines seem to have two situations concerning reefer cargo: Either all the vans are empty or all the vans are full. This can depend on which direction they are going, or how the dollar is that year. You can lay out millions of dollars years in advance for ships nobody has made any commitment to ship on. It is easy to lose millions of dollars in the shipping business. I also don’t attack the shipping lines for looking to make the most money they can on commodities that can carry that high freight. In fact, it is incumbent on the industry to teach the shipping lines a little about the trade. They know if they put too high a tariff on the shipment of cabbage to Puerto Rico, they will kill the business. But high-value fruits can usually pay a bit more.

The real problem with the conferences is not when they look to charge everyone high rates. It is when the rates get distorted due to illegal rebating. The whole idea behind not only a conference but also a common carrier is that everyone will be charged the same rate. In the United States, that is simply the law. Though discounts can be provided for volume shipping, prompt payment and a number of other things, these discounts must be made available openly to everyone who meets the applicable criteria.

But this is a U.S. law that does not apply to foreign countries. In many other countries, there is no such requirement of common carriers. Now supposedly, when a foreign flag carrier joins a conference, it becomes obligated not to charge any rate that is not on the published tariff. But the truth of the matter is that this is a very difficult, indeed impossible thing to trace.

It is well-known throughout the industry that many overseas companies get illegal rebates from the shipping lines. The money is usually paid by some subsidiary of a subsidiary to a small subsidiary of a subsidiary in another country on another continent. All designed to make tracing payments impossible.

When you understand that this illegal rebating is going on, the whole business that was just settled becomes a lot clearer. The first thing we understand is why rates were so high to begin with. If some customers can get an illegal rebate, it is in their interest to advise the shipping lines to keep rates high and their rebates high. This enables them to squeeze out competitors, particularly U.S. competitors who are not in a position to receive these rebates.

The second thing that becomes clear is that very honest people, confronted by an anonymous conference, with the deck stacked against them, are not about to just surrender and give up businesses they worked a lifetime to build. They are going to fight back. And if the letter of the law is unfairly burdening their businesses, they will obey the spirit of the law — fair play — and do what they must to make the playing field level.

I for one defend these people. They have shown that they are men, not meat, and the more you pound them, the tougher they get.

What is particularly aggravating to the produce exporters is that, in many cases, at least some of the shipping line personnel were fully aware of what was going on. Of course, it was always known that if the whole situation ever came to light, the shipping lines would have to deny any knowledge of what was happening. This winking at the rules is to be expected in this field.

You see, because the conference agreement precludes rate competition, it tends to encourage other forms of competition. Who can take you out to the best restaurant? Who has the most personable sales staff? Who is willing to look the other way when it comes to enforcing the rules? It’s just natural. You can’t stop competition, and if you preclude it in one area, it pops up in another.

Is there a solution? I don’t know. I do know that true justice has not been served in this case. In concentrating on settling with these people, the authorities were fighting a symptom, not the problem. The problem is that the Federal Maritime Commission just doesn’t have the capability to ensure that no foreign company gets an illegal rebate. And as long as that is the case, they are enforcing the rules against the little guy struggling for his business, yet allowing the overseas giants to go on operating under a different set of rules.

Some companies are chartering boats to ship their produce. Indeed, for people with large amounts of steady volumes, this is an alternative. Particularly growers, who have steady crops to market, can use this method. But for the trader, the exporter who helps the farmer move his crop overseas, charters are usually not practical. Already I know of some exporters on the West Coast who have just given up on the business. Perhaps this will mean just a little less fruit is exported than would have been exported before. This might make our balance of trade just a little more negative and a few farmers just a little poorer.

The financial cost we can pay, but can we ever regain the trust in our national institutions when they attack the little guy, the easy target, and proclaim victory — while the real problem continues undiminished?  pb