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July 08, 2021

Biden Order to Combat ‘Anticompetitive’ Ocean Shipping, Rail Lines

The executive order may have some longer-term benefits for promo, but immediate relief from shipping/rail cost pressures isn’t anticipated.

By  Christopher Ruvo

*UPDATED FRIDAY, July 9, Noon eastern to reflect that President Biden has formally issued the order. An earlier version of the article reported that the order would be issued.

President Joe Biden has issued an executive order aimed at combatting what his administration says is unhealthy consolidation and alleged anticompetitive pricing in the ocean shipping and railroad industries – a development of interest for the promotional products industry considering recent supply chain issues and skyrocketing ocean freight costs.

The focus on shipping and railroads is a component of a much broader order intended to curtail the power of big business and promote what Biden says is healthy competition in the American economy, with measures including a proposed crackdown on noncompete agreements.

Issued Friday, July 9, the order essentially asks the Federal Maritime Commission and the Surface Transportation Board to take steps to correct a pattern of consolidation and aggressive pricing that has made it exorbitantly expensive for U.S. companies to “transport goods to market,” The Wall Street Journal reported.

A big question for the promo industry – and all industries that transport freight over the ocean by ship – will be whether or not the order will have any meaningful impact on the cost of shipping containers/ocean freight, which has increased dramatically due to soaring demand amid the booming economic recovery following COVID-caused societal shutdowns. That’s driven up pricing in promo and is related to other issues, like inventory shortfalls.

As yet, it wasn’t definitively clear if the order could help curb the cost pressures anytime soon. Still, while some executives in promo think there could be longer-term benefits and limited short-term pluses, they don’t foresee immediate deep relief from the shipping-related challenges plaguing the industry.

“These actions may help importers long-term, but I don’t see any way this changes the current dynamic over the next six to 12 months,” said David Nicholson, vice chairman of Polyconcept, the parent company Top 40 supplier Polyconcept North America (PCNA, asi/78897).

Nicholson explained that there’s more demand for ocean and rail shipping services than there is capacity, which is further exacerbated by the marketplace being dominated by a select few large players. The shipping companies have limited ability – and little incentive – to expand capacity in the short-term, and with few competitors, there isn’t much to keep pricing in check, the PCNA executive noted.

Speaking on Biden’s order, he continued: “I don’t suspect this will have a meaningful effect in terms of reducing shipping costs. That will require long-term capital investments for more containers, ships and rail lines – ultimately bringing supply and demand back into balance. So, for our industry, we are unfortunately going to be enduring at least another few quarters of higher costs and supply disruptions.”

According to officials, 80% of the shipping market is controlled by the 10 largest firms, whereas in the year 2000 the 10 largest firms controlled 12% of the ocean shipping market. That’s hurt U.S. exporters, Biden believes, because the shipping companies are empowered to charge higher rates, leaving little room for negotiation, and have the ability to hand down additional fees like charges for failing to pick up shipments from terminals on time.

“The order will ask the maritime commission to crack down on such fees, and to take all other steps to protect American exporters from high fees,” WSJ said. “The order also asks the commission to work with the Justice Department to enforce its actions. The commission and the Justice Department are expected to sign a new memorandum of understanding to improve their cooperation on such investigations soon.”

Meanwhile, promo companies and other businesses that move product domestically by rail could possibly, over the long term, benefit from actions that Biden’s anticipated order is calling for. It’s the administration’s position that freight-moving railroads operate as duopolies in many areas of the U.S., and as monopolies locally.

To help counteract that and make it possible for freight shippers to better negotiate pricing with railroads and lower costs, Biden’s order asks the Surface Transportation Board to enforce a proposed rule in which shippers (like promo suppliers looking to move product) that are serviced by one railroad can ask for bids from a close-by competing railroad. “The competitor railroad would pay access fees to the monopoly railroad, but could win the shipper’s business by offering a lower price,” WSJ reported.

Additionally, the order intends to prompt the STB to adopt proposals that would make it easier for shippers to initiate cases before the STB that challenge railroad rates. The order also prompts STB officials to look at proposals that would make it simpler for companies that move product by rail to transport across competing rail lines, thereby possibly lowering the companies’ rail transport costs. Rail companies and trade association officials are expected to resist such moves.

Meanwhile, the order encourages the Federal Trade Commission to adopt regulations that would ban or limit on noncompete agreements. If implemented, the rules would likely impact promotional products companies that use noncompete agreements, while also making it easier for promo professionals currently affected by such agreements to move to different companies within the industry. Some 30 million workers in America are impacted by noncompete agreements.