Commissioner Cordero’s Keynote Address at Capital Link’s 11th Annual International Shipping & Offshore Forum

Capital Link’s 11th Annual International Shipping & Offshore Forum Keynote Address
March 20, 2017 | Metropolitan Club in New York City

Thank you for your kind introduction. I am honored to deliver the Keynote here at the 11th Annual Capital Link International Shipping Forum in New York City. The international shipping community has experienced some dramatic challenges in the last decade. These challenges are twofold: first, the 2008 economic global recession and its severe impact on the international maritime transportation carriers who continue to struggle with unsustainable transportation rates; and second, what many today regard as a geopolitical recession, evoking a global dialogue on protectionism and isolationism.

Before I speak further about these issues, allow me to tell you about the Federal Maritime Commission (FMC), where I currently serve as a Commissioner and previously served as Chairman. The FMC is an independent federal agency responsible for regulating the U.S. international ocean transportation system for the benefit of U.S. exporters, importers, and consumers. We do that by fostering a fair, efficient, reliable, and competitive international ocean transportation system and by protecting the shipping public from unfair and deceptive practices. The FMC does this in several ways, including, but not limited to: (1) monitoring activities of ocean common carriers, marine terminal operators (MTOs), and ports that operate in the U.S. foreign commerce to ensure just and reasonable practices; (2) reviewing competitive activities, such as rate discussion agreements, carrier alliances, and other agreements among common carriers and/or MTOs; and (3) maintaining trade monitoring, enforcement and dispute resolution programs to assist regulated entities in achieving compliance, and to detect and remedy unreasonable practices and violations of the Shipping Act. In essence, we are the federal agency responsible for monitoring containerized shipping for the benefit of American commerce.

The FMC can trace it origins back to 1916, when President Woodrow Wilson signed the Shipping Act into law. This legislation established the United States Shipping Board, the founding agency from which the Federal Maritime Commission is descended.

The impetus for this legislation was a concern among policymakers about the state of the American maritime industry. With its passing, Congress sought to achieve two key goals: first, to reinvigorate the U.S. Merchant Marine, creating a merchant fleet capable of meeting the Nation’s defense and trade requirements; and second, to regulate foreign and domestic shipping to ensure competitiveness and protect the interests of shippers and consumers. Both of these objectives were to be achieved through the work of the Shipping Board.

With the 1917 entrance of the United States into World War One, the U.S. Shipping Board undertook an ambitious vessel construction program to establish oceangoing tonnage sufficient to support the transportation and supply of American troops overseas.

I give you this historical perspective because I believe the time has come for the United States to once again invest intelligently and generously into its maritime transportation system. I suggest the questions of competitiveness and protecting the American shipper are key concerns today, just as they were one hundred years ago. We should heed the example of what Congress did in 1916. Today, international trade is an integral and critical part of the U.S. economy. More than one-third of our Nation’s GDP is tied to global commerce and this figure is only predicted to become more significant in the coming years. Ocean transportation of goods and commodities is the backbone of our trading system and the FMC ensures that exporters and importers enjoy access to international maritime carriage services. Indeed, vessels carry 53% and 38% of U.S. imports and exports, respectively, and 90% of world trade is carried by the international shipping industry. Each of us, as consumers or investors, benefit from the competitive marketplace the Commission works to maintain. As a nation we need to continue to invest in maritime infrastructure at our ports in order for our ports to become more efficient, cleaner, and sustainable, with capability of receiving today’s mega-vessels. Then, our cost savings can be reinvested.

One year ago, March 15, 2016, I testified before a Congressional Subcommittee on the paramount concern of having a well-funded and resourced Federal Maritime Commission. I explained then that the FMC’s statutory mandate to regulate the international ocean transportation system for the benefit of domestic exporters and importers was ever more important in the second decade of the 21st century. I noted that international trade accounts for approximately 1/3 of the U.S. GDP, and many economists forecast that by 2029, it will compose approximately 2/3 of our GDP. In sum, I emphasized in my testimony that international trade is a significant component of the American economy.

Today, a year later, many in the international trade community have grave concerns with not only the domestic debate questioning the benefits of international trade, but also the global debate.

Let me make clear, international trade is a two way street. Exports are as important as imports. True, there may be an imbalance on the export-import equation—and I am a supporter of maximizing export opportunities—yet, at the end of the day, the success of our U.S. exporters is dependent on a global consumer. For example, agriculture and grain commodities are a large component of future export growth. This year commenced with a report from the U.S. Department of Agriculture of significant growth in beef and pork exports for January 2017, highlighting a year-over-year 18% increase in beef and 26% increase in pork—Mexico being the leading destination for U.S. pork.

On the oil and gas side, we see exponential growth in LNG exports. Within the next three years the U.S. may be the third largest exporter of LNG. Coupled with projected increases in the exporting of American crude oil, our Nation is moving toward positive export growth of domestic energy. Overall, 2016 ended with growth in containerized exports, though a modest increase of 1%. However, the growth of containerized exports was the first in three years. The value of exports transported by vessel in 2016 was in excess of $475 billion.

Before I conclude my commentary on international trade, I want to provide you with a few statistics on U.S. and global performance in trade in 2016 and 2017. I should note that in January the IMF estimated 2016 global GDP growth at 3.1% and forecasted 2017 growth at 3.4%. Further, last month ALPHALINER forecasted global container (or TEU) growth for 2017 at 1.7%. I note that IHS Markit calculated that container exports rose 2.5% in 2016, and predicts those exports to expand only 0.8% in 2017 (about 11.9 million TEUs). Regarding imports, IHS also determined that imports were up by 4.3% in 2016, marking the 7th year of growth for U.S. imports. Looking forward, IHS expects a 6% expansion in imports in 2017 (compared to the National Retail Federation’s 4.7% prediction for the first half of 2017), totaling 21.8 million TEUs. If these last two predictions are correct, they would be higher rates of growth than in recent years—over the last 4 years, growth in container imports has ranged from between 1.4% and 2.9%. Finally, according to IHS, the U.S. real GDP will rise 2.3% in 2017.

I highlight these statistics, again, to make the point that international trade is a vital component to our Nation’s economy and the success of American enterprise is dependent on a global consumer.

Let me touch upon the issue of carrier alliances. Perhaps the most significant development in the international shipping industry is carrier consolidation. In 2011, the year I commenced my service at the FMC, there were 21 major global water transportation carriers. Today, we essentially have 13 carriers accounting for 70% of containerized global capacity with each belonging to one of three alliances set to commence operations in April 2017: 2M, OCEAN, or THE ALLIANCE. Frankly, I am not sure whether we have seen the end of carrier consolidation. In fact, one industry consultant, SeaIntelligence Consulting, has predicted that we will see only 6-8 global container lines by 2025.

An alliance agreement between carriers, which requires a filing with the FMC, essentially is a vessel sharing agreement. Motivated by economies of scale, the carriers focus on achieving cost savings given the challenge in securing sustainable transportation rates. The vessel sharing alliance concept is not new. However, the current level of debate and scrutiny within the industry commenced when the three largest carriers—Maersk, Mediterranean Shipping Company (MSC), and CMA-CGM—filed the P3 vessel sharing agreement with the Commission in October 2013. That filing began what I term as the second generation of alliance agreements. The P3 was vetoed by China’s regulatory agency, the Ministry of Transport, and thus the parties thereafter withdrew the alliance agreement. However, the two largest carriers, Maersk and MSC, subsequently filed and moved forward as the 2M Alliance and thus commenced the rush to achieve economies of scale by the major global water transportation carriers.

A question for the maritime shipping community and the supply chain is what will be the impact of the second generation of alliances? I believe it will be in cost savings and efficiencies. For the carriers, cost saving is a paramount concern, especially given the need for investment in cutting-edge technology.

However, legitimate concerns about the alliances do remain. For example, the P3 agreement introduced us to the concept of operations centers. These centers were of concern mostly because staffers from each alliance would be conducting business at arm’s length—literally. Thus the potential for information sharing—another concern that could be violative of the antitrust laws—increased significantly. Further, joint contracting authority has appeared in many agreements filed with us in the last two years. This authority usually allows all members of an alliance to negotiate as one entity with a service provider, or 3rd party vendor. The concern I have with this authority is the potential power imbalance during negotiations with domestic harbor providers. Will the single service provider be forced to accept the alliance’s terms or be forced out? Will it have to compete against others to offer the lowest rate, essentially making little-to-no profit? I raise these concerns because I firmly believe that global free trade should benefit everybody in the supply chain—and it is partly the FMC’s role to ensure that happens.

In addition to the formation of new alliances, the year 2016 witnessed generational changes in the shipping industry. The notable significant changes included:

1. French company CMA-CGM purchased Singapore-based NOL/APL.
2. China Ocean Shipping Co. (COSCO) and China Shipping consolidated into one line.
3. Hapag Lloyd acquires United Arab Shipping Co.
4. Hanjin, a “top 10” carrier, collapsed and filed for bankruptcy.
5. The three top Japanese carriers—MOL, KLINE, and NYK—announced a joint venture of their container operations.
6. The government of Taiwan moved to shore up its carriers with loan assistance.
7. Maersk purchased Hamburg-Sud.

The international shipping industry will continue to evolve, whether as to structure, service delivery, or cost-saving efficiencies. In 2017, I believe we will have an escalation in the number of digital and e-commerce applications, with the objective of providing more visibility in the movement of containerized freight and implementing cost-effective solutions in the supply chain.

Allow me to elaborate on industry progress on the incorporation of technology, another way in which our industry partners have tried to save costs. The February 17 issue of Global Trade reports both Amazon and Alibaba are starting to establish themselves as movers of cross-border freight. Indeed, Amazon recently announced its intention of becoming an NVOCC. That is not to say that they will own or operate vessels, but rather that they will aim to increase buying power with ocean common carriers. I note that many ocean carriers are maintaining close links to cloud-based supply chain specialists like INTTRA, GT Nexus and CargoSmart who were all early adapters to e-commerce.

Currently, much of the focus on technology in containerized trade is in tracking logistics, such as real time information on container movements. These advancements further visibility and transparency in shipping. Recently, the JOC reported that Maersk and IBM are teaming up to digitalize the global container supply chain – using block chain technology to improve efficiency and cost. This technology will result in enhancing visibility in container transport. In addition, both Maersk and CMA-CGM have moved to partner with ecommerce entity Alibaba to integrate transportation and logistics. Actions such as these can reduce cost and improve the reliability of supply chain systems. And recently the New York Shipping Exchange launched its pilot online portal to book and monitor booking fulfillment.

Likewise, the Panama Canal Authority will be launching a new vessel scheduling and maritime resource management system, essentially an appointments system. The system will be used to streamline and schedule transit operations, including critical service providers such as tugboats, pilots, and line handlers. I strongly support these advancements, and I have advocated for similar technological upgrades at our marine terminals with regard to their night gate programs. The company that designed the Canal’s optimization software, Quintiq, utilized models, algorithms, and mathematical concepts to design the system. The Canal expects vessel scheduling capabilities to be operational by September 2017. By implementing this new system, shippers should be able to experience increased reliability and shortened vessel waiting times.

Undoubtedly, the technological advancements I’ve discussed here—with Amazon, Alibaba, NYSHEX, and Panama—will help to reduce costs by optimizing resource allocation. They are only a few examples of the shipping industry’s migration toward advanced technology and ecommerce platforms.

I will conclude with this: I genuinely believe these are interesting times, and I think there is ample room for optimism. Once we understand and agree on the American importer/exporter’s role in international trade, and international trade’s significant role in American commerce, we can focus on ways to promote all three. I strongly believe that promoting the American importer/exporter, international trade, and American commerce means investing in our maritime infrastructure—including the FMC.

Thank you.

Mario Cordero is a Commissioner with the U.S. Federal Maritime Commission. The thoughts and comments expressed here are his own and do not necessarily represent the position of the Commission.