Klochubar and Thune introduce Ocean Shipping Reform Act in the Senate

Following the passing of the Ocean Shipping Reform Act (OSRA) in December 2021 by the United States House of Representatives by a convincing 364-40 vote, the bill was introduced yesterday in the Senate by Senator Amy Klochubar (D-Minn.) and Senator John Thune (R-S.D.).

The main objectives of the bill, according to Klochubar and Thune, are to update federal regulations for the global shipping industry, adding that the bill “would level the playing field for American exporters by making it harder for ocean carriers to unreasonably refuse goods ready to export at ports, and it would give the Federal Maritime Commission (FMC) greater rulemaking authority to regulate harmful practices by carriers.”

Key components of the Ocean Shipping Reform Act of 2021 include:

• requiring ocean carriers to certify that late fees —“detention and demurrage” charges—comply with federal regulations or face penalties;
• shifting burden of proof regarding the reasonableness of “detention or demurrage” charges from the invoiced party to the ocean carrier;
• prohibiting ocean carriers from unreasonably declining shipping opportunities for U.S. exports, as determined by the FMC in new required rulemaking;
• requiring ocean common carriers to report to the FMC each calendar quarter on total import/export tonnage and 20-foot equivalent units (loaded/empty) per vessel that makes port in the United States;
• authorizing the FMC to self-initiate investigations of ocean common carrier’s business practices and apply enforcement measures, as appropriate;
• establishing new authority for the FMC to register shipping exchanges;
• allowing for third parties to participate in legal cases brought by the FMC against ocean carriers for anticompetitive harm; and
• letting successful third parties in those legal cases receive money damages, with additional financial penalties designed to deter anticompetitive conduct

“Congestion at ports and increased shipping costs pose unique challenges for U.S. exporters, who have seen the price of shipping containers increase four-fold in just two years. Meanwhile, ocean carriers have reported record profits,” said Klobuchar in a statement. “This legislation will help level the playing field for American exporters so they can get their goods to market in a timely manner for a fair price. As we work to improve our supply chains, I’ll keep fighting to establish trade opportunities for the U.S.”

And Thune said in a statement that South Dakota producers expect that ocean carriers operate under fair and transparent rules, but unfortunately, that is not always the case, and producers across America are paying the price.

“The improvements made by this bill would provide the FMC with the tools necessary to address unreasonable practices by ocean carriers, holding them accountable for their bad-faith efforts that disenfranchise American producers, including those throughout South Dakota, who feed the world,” he said. “Especially with record inflation in prices of goods, this legislation would also benefit consumers by promoting the fluidity and efficiency of the supply chain.”

The House’s passing of the OSRA and this week’s introduction of the legislation in the Senate follow a November endorsement issued by the White House, amid various federal efforts to help curtail the ongoing port congestion and global supply challenges, stemming from the pandemic. At the time, the White House noted that Congress needs to provide the FMC with an updated toolbox needed to protect exporters, importers, and consumers from what it called unfair practices, adding that this bill serves as a good first step on the path to the “longer-term reform to shipping laws that would strengthen America’ global competitiveness.

This legislation represents the first type of its kind going back to the Ocean Shipping Reform Act of 1998.

Since then, China was granted permanent normal trade relations, or “most-favored nation” status with the U.S. in December 2001 after it was admitted to the World Trade Organization. In 2001, the U.S. trade imbalance with China stood at around $83 billion, based on U.S. Census Bureau data, with the trade imbalance at $310 billion in 2020.  

This bill was strongly endorsed by Steve Lamar, president and CEO of the American Apparel & Footwear Association.

“The shipping crisis has seen excessive costs passed onto American companies by international carriers looking to take advantage of the situation,” said Lamar. “The Ocean Shipping Reform Act meets a dire need for increased enforcement by the Federal Maritime Commission, and the apparel and footwear industry strongly encourages the Senate to pass this bill quickly so that President Biden can sign it into law and end these predatory practices.”

Paul Bingham, Director, IHS Markit Economics and Country Risk / Transportation Consulting, said that there were not any big surprises in the House version of the OSRA.

“However, this legislation will bear watching as it evolves, as it could force helpful changes in some of the practices under current law that have so upset BCOs, especially exporters during the pandemic,” he said. “Carriers may not be happy with this legislation, but they can’t be shocked by the reaction to the consequences of the situation they’ve benefitted from financially so strongly this past year.”

And he added that the final language of what would pass the Senate, go through reconciliation and then be signed by the President in to law is what really matters to the industry.

“If the language from the House bill survives in the final law passed, it will change how the FMC approaches their role with the added responsibility to promote exports and consider carriers services standards from a public interest perspective,” he said.  “The annoying detention and demurrage charges having the burden of proof shifted to the ocean carriers would help shippers.  The required quarterly reporting by the carriers to the FMC sounds useful but in reality likely to do little since that information is already available through commercial data vendors such as PIERS and Panjiva.”

Brian Whitlock, Senior Director Analyst with Gartner’s Supply Chain practice, explained that the most positive impacts will come from the bill’s provisions directing the FMC to establish rules prohibiting unjust and unreasonable detention and demurrage fees, as well as rules requiring carriers to meet minimum service standards.

“The bill also shifts the burden of proof for reasonableness of detention and demurrage to carriers, meaning many more cases will likely be brought to the FMC,” he said. “The requirement to meet minimum service standards will finally bring relief to U.S. exporters who have seen a decline in exports of 22% (according to MarketWatch). No longer will carriers be able to take advantage of the U.S.’s highly profitable eastbound trade while ignoring westbound exports.”

As for how OSRA could make the FMC a more effective regulator, Whitlock explained that that the FMC has had a more passive role in ensuring fair trade given the limitations of its directives.

“Going forward, it will be much more active in defining how carriers must behave and holding them accountable through their rules making process and remedies, including refunding overcharges and issuing penalties,” he said. “It’s likely that, once this bill passes in the Senate, we will see an immediate change in how carriers treat detention and demurrage charges, as well as how they support exports, even without knowing the rules the FMC may set.”

With the expectation that the impact of the OSRA on supply chain delays and port congestion is likely to be limited, Whitlock pointed out that global ocean markets are highly disrupted due to significant increases in demand combined with major disruptions that have had the result of reducing supply of ships and containers. And he added that disruptions have also caused a precision network to no longer be reliable, having to operate with surges in volumes between ports globally.

“This has been the main cause of U.S. port congestion, combined with increased volume and port inefficiencies,” he said. “This bill will not impact the variables of demand and supply nor will it change how disruption impacts the market.”

On a longer-term basis, Whitlock said the FMC should consider how ocean carriers and terminal operators at U.S. ports combine to deliver minimum service standards.

“For example, in Los Angeles and Long Beach ports, five of the 13 terminals are owned or operated by carriers,” he said. “This combination should be looked at closely to ensure they are operating efficiently and in ways that reduce or avoid detention and support timely exports.”

American Associations of Port Authorities (AAPA) President & CEO Chris Connor told LM late last year that when the original drafting of this bill was being done, the AAPA could not support the bill as written.

“It is addressing a lot of issues that have come to light through the pandemic and supply chain crisis in this one bill,” he said. “There are provisions insight the bill that undermine freight mobility, meaning it is putting requirements on ports and marine terminal operators, as well as carriers, to pre-certify the legitimacy of charges for demurrage and detention. In this environment, where the freight system is already congested and there are bottlenecks across the entire freight mobility network, we are just uncomfortable and reluctant to endorse something, which may undercut the very issue that is plaguing us already by putting more requirements on the operators to pre-certify these charges in advance.”