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Today I’m writing about supply chain disruptions at the ports, and the Bill Clinton-era law that caused it.

The Suez Canal and Our Big Dumb Ship Problem

With an overwhelming news cycle, it often seems like weird problems in the economy have been here forever. But the first time the supply chain crisis snarling imports hit the headlines was just eight months ago, when an ultra-large container ship called the Ever Given wedged itself into the side of the Suez Canal, blocking one of the busiest and most vital shipping lanes in the world. The Ever Given is the height of the Empire State Building, and many people mocked the situation, noting that big things tend to be hard to fit into small spaces. While hilarious at the time, it was a harbinger of things to come.

What’s happened since - the intense backlog at the ports and the possibility of a Christmas without presents - has shown that the Ever Given was not a one-off accident, but a sign of a systemic weakness in the transportation networks we rely on to move things. And while the trigger of this latest crisis was Covid, there have been signs of instability in shipping for decades. In 2017, a cyberattack at Danish shipping giant Maesk snarled supply chains for months. A few years earlier, the South Korean ocean carrier Hanjin went bankrupt, stranding boxes out at se as its mega-ships, bobbing in the waves, couldn’t be unloaded. In the early 2000s, West Coast port traffic nearly came to a standstill.

These traffic snarls and financial problems were accompanied by formal warnings. In 2001, Craig Philip, the Chair of the National Waterways Conference, testified to Congress, "Never before in this century, except during the two World Wars, has the country's transportation system been as stressed as it is now." The situation has only gotten worse over the last two decades. And finally, with Covid boosting imports, the whole network snapped. The net result is that at this point, more than half of Americans have experienced a shortage, and politicians are panicking over inflation.

To understand why we’re in crisis, it’s useful to start with what caused the Suez problem, the ultra-large container vessels that are essential to global shipping. Over the last 20 years, these too big to sail container ships have become pervasive, perhaps the “most burning issues in maritime transport.” Why does size matter? Well, such mega-ships are making the import bottlenecks much worse than they should be. Marc Levinson, an economist who wrote a book on container shipping called The Box, had a useful discussion on the podcast Odd Lots about why these ships have “generally fouled up the transportation system.”

You actually have fewer ships calling at most ports today than you used to have. They’re much bigger. And so think of what this does to the operation of the port. You don’t have a smooth flow of cargo going through the port. Now you’ve got nothing happening in the port. It’s dead today. And then tomorrow, a ship shows up and it wants to unload 3,000 containers in your port. What do you do with this? How do you get it unloaded? Where do you put the containers?
One thing that’s happened is that ships spend more time in port, which is very wasteful because it just takes more time to get so many containers on and off. The trucks are lined up at the gate because there’s so many containers to bring into, send out on these ships or so many containers to deliver. The railroads can’t handle this sudden flood of containers. So you have the cargo sitting around longer before it gets removed from the port.
All of these things have tended to make transit times longer and have made it harder for shippers to get their freight where it’s supposed to be on deadline. And that’s bad for everybody.

If ultra-large ships are so bad, then why do we use them? As is often the case, this business trend started with a good idea, which then was turned horribly wrong by unregulated monopolization. In the 1960s, ‘containerization’ - or standardizing the flow of cargo on shipping containers that can go over ships, rail, or truck - made shipping far more efficient. And with containerization came the growth in ship size, because larger ships can carry more stuff at a lower cost per container. As ship sizes gradually increased from the 1960s into the 1990s, shipping prices declined, and world trade boomed.

Starting in the 2000s, increases in ship size accelerated. But once you go from big ships to Empire State Building size ones, cost savings are minimal, and diseconomies of scale kick in. Efficiency gains from newer generations of mega-ships are four to six times lower than previous generations, and 60% of that gain has to do with better engines, not size. Ultra-large ships can be harder to steer, they create massive instability in scheduling, and they require lots of extra infrastructure. Loading and unloading containers for these behemoths can only be done at a small number of ports, and if a mega-ship is early or late, it can create what is in effect a traffic jam. And that’s what’s happening en masse.

This traffic jam has turned into a political crisis. The inability to export and import goods is far more impactful than the Trump tariffs on trade. It has caused firms to order more inventory than they otherwise would, tying up their working capital, since they don’t know when they will receive their next load of goods. I’ve talked to business leaders who have already planned to re-shore production, and politicians are beginning the conversation about policies to make that happen. But there is no consensus why the transportation grid is so inflexible, especially in the U.S. It just seems like a giant tangled up mess.

The easiest excuse is that we are in a boom of imports, and our system was simply not set up to handle it. With imports up 30% and now at a record high, our ports, ocean carriers, truckers, and railroads simply cannot handle the flow of stuff coming at us. But that argument doesn’t entirely wash. Sure it’s a boom, but transportation systems have *always* been boom and bust industries, because putting massive amounts of capital with a lead-in time of years is inherently unstable. There’s a strong argument that the first modern recessions in industrializing nations happened in the early 1800s as a result of the cyclicality of the railroad business. And yet, it’s virtually unprecedented to have a breakdown like what we’re seeing.

And there’s another problem with the import surge as the sole explanation. There’s substantial amounts of unused capacity in our transportation networks. If capacity were full, you’d expect to see everything maxed out to be as efficiently used as possible. But that’s not what’s happening. Boston’s port, for instance, is pretty much empty. Trucking giant J.B. Hunt announced on a recent earnings call that though its revenue is up, its intermodal shipping volumes are down. Despite the argument there’s a ‘trucker shortage,’ in California, one firm specializing in trucking from ports (‘drayage’) is actually laying off truckers because they simply can’t get to the terminals to load or unload containers.

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Naturally, different stakeholders in the shipping industry - ocean carriers, trucking firms, truckers, freight forwarders, shippers, ports, terminal operators, port commissioners, and regulators - are blaming each other for the bottlenecks.

But what is going unsaid is that these bottlenecks are actually excellent news for two sets of players: the highly consolidated container shipping firms, with names like Maersk, MSC, COSCO, Evergreen, and One. There are eight dominant firms, all foreign-owned, and this year they are on pace to hit $100 billion in profit. It is also good for terminal operators, which are the firms that lease space from ports and run the warehouses, cranes, and docks. Terminal operators are often owned by ocean carriers, who then can use their vertical integrated power to exclude competitive shipping lines, or they are owned by private equity giants like Brookfield Asset Management or Oaktree Capital’s Ports America.

Both carriers and terminal operators are bottlenecks in the system, and they profit not just by charging normal prices, but also by imposing a variety of surcharges on anyone who needs their service. This is similar to how airlines will offer a price for a ticket, but then also charge baggage fees, ticket change fees, or administrative fees on top of that. In 2009, for instance, roughly 50% of total freight charged came from surcharges. The ability to extract extra revenue, especially when demand is high, means that we’re not in an all-hands on deck situation, but a situation which is working quite well for some, and terribly for much of the industry and the public.

A Bottleneck for Me is a Profit Center for Thee

Who benefits from a bottleneck? As we’ve seen, the answer is those with market power. In fact, a monopolist in some sense be defined as a firm that drives its profit model by capturing control over a bottleneck, like a toll booth.

And in shipping, the dominant firms are ocean carriers, and getting a container slot on one of their ships is the bottleneck. These charts give a good idea of how consolidated the ocean lines have become. The top ten ocean lines in 1998 had a little over 40% of the market, today it’s over 80%. I’ve also included something called the Herfindahl-Hirschman index, which is a measure of market concentration.

Source: https://www.itf-oecd.org/sites/default/files/docs/impact-alliances-container-shipping.pdf

These numbers understate the actual level of concentration. Individual shipping routes often have just one or two carriers serving them. Moreover, carriers are exempt from certain parts of antitrust law, and can cooperate with loads and scheduling in what are known as alliances, with three alliances controlling over 80% of the global shipping market. High prices are one result. As Vespucci Maritime CEO Lars Jensen put it, “there is a de facto oligopoly, which means the carriers are able to somewhat better prevent the price wars we’ve seen in the past. This is the logical end point of 20 years of gradual consolidation.”

And it is the consolidation that led to the mega-ships - the biggest ships are four times the size of what they were 25 years ago. The reason is simple, and it’s not efficiency. Individual shipping lines simply don’t have enough cargo to load a mega-ship reliably, it’s only by being very large and cooperating with each other, as well as forcing ports to build the infrastructure to accommodate them, that they can do so. And then with their bargaining leverage, they can force other players, from ports to truckers to terminals, to build the infrastructure to deal with the costs of the ultra-large ships. Then, once the transportation system runs on such ships, the ships themselves, with their high financing costs, become a barrier to entry. A new ocean carrier could break into a business with medium sized boats, but who can afford to run and lease something so massive? Moreover, the ocean carriers now have buying power over the whole supply chain. Which terminal or port would dare anger massive customers to accept business from a competitor?

In other words, mega-ships like the Ever Given are a new phenomenon that are tied not to economic logic but to the consolidation of ocean carrier lines and their ability to offload risk onto counter parties. As Jensen observed, without the consolidation, “ships would likely not have grown above 12,000-14,000 TEUs [twenty-foot equivalent units].” So we’ve moved from a grid with lots of different size ships owned by different lines that could dock in lots of ports, to one dominated by hundreds of mega-ships that can only go to certain ports, all controlled by a de facto small cartel. The game in the business is to acquire market power and then use mega-ships to offload costs onto others and block new entrants.

The Confusing Debate

The market power of ocean carriers has largely escaped scrutiny as a key cause of the supply chain snarls. Earlier this week Joe Biden criticized reporters, scolding them for not explaining the crisis. “I haven't seen any of you explain the supply chain very well,” he said.

The situation is so fraught and high-profile, and the thirst for answers so intense, that transportation businessmen and workers are becoming internet influencers. For instance, this piece in Medium - “I’m A Twenty Year Truck Driver, I Will Tell You Why America’s “Shipping Crisis” Will Not End” - went viral. The driver explained all the unfair costs imposed on truckers, and how the firms causing the backlog are actually profiting from it. Meanwhile, Flexport CEO Ryan Peterson, perhaps the PR savviest of the bunch, has become an internet sensation with his tirades against poor port management and financial gamesmanship (and his adorable family pictures of his toddler dressed up as a containership captain). Peterson rented a boat to travel around the Long Beach port complex and showed how empty containers were clogging up the works.

“What caused all the supply chain bottlenecks?” Peterson asked in one Twitter thread. “Modern finance with its obsession with ‘Return on Equity,’” meaning the kind of financial models that prioritize hyper-efficiency over all forms of resiliency. Most leaders, Peterson said, “stripped their company of all but the bare minimum of assets. Just in time everything. No excess capacity. No strategic reserves. No cash on the balance sheet. Minimal R&D.” The shock absorbers of the economy, he argued, are gone.

Ryan Petersen @typesfast

The global logistics companies have no excess capacity, there are no reserves of chassis (trailers for hauling containers), no extra shipping containers, no extra yard space, no extra warehouse capacity.

The reason that someone like Peterson is getting famous in this moment is because his diagnosis makes sense. He is tracing the problem to the extreme power that financial capitalists have over legitimate shipping businesses. When we ramp up imports, according to Petersen, there was just no flexibility in the system to handle it.

How Did Shipping Work Before We Took Stupid Pills?

But there is a specific *policy* choice that led to the mess Peterson is explaining. Why did we build these unstable, just-in-time supply chains run on ultra-large ships and mediated by monopolies and private equity firms? The answer is, as usual, found in law. In the 1990s, Congress, at the behest of large importers and giant shipping lines, drove a radical change in how we regulate shipping, through a bill called the Ocean Shipping Reform Act of 1998.

The OSRA eliminated a system that had kept shipping relatively stable through booms and busts. Prior to the OSRA, the U.S. regulated ocean shipping as a public utility, based on the Shipping Act of 1916.

Under the Shipping Act, ocean carriers had an exemption from the antitrust laws and were allowed to form cooperatives, known as ‘conferences,’ where they would jointly set prices and routes. But they had certain obligations when they did so. All prices had to be public, and any exporter or importer could get the same terms as any other “similarly situated” exporter or importer. Further, any ocean carrier could join any conference and offer the same prices, and carriers were not allowed to engage in behavior to undermine competitors, such as offering secret rebates or volume discounts to especially large customers, or retaliating against customers, allotting port slots, or engaging in exclusive agreements to disfavor smaller firms.

The Shipping Act was complemented by public subsidies for shipbuilding, as well as the Merchant Marine Act of 1920, aka ‘the Jones Act,’ both designed to protect the domestic ship production industry. The idea behind this framework was to make sure that American exporters and importers had equal access to international shipping, which is a high fixed cost industry requiring investments in ships, ports, warehousing, wharves, and transportation hubs.

Public utility regulation had multiple goals. The first was to protect smaller ocean carriers and smaller exporters and importers by making sure that the big guys couldn’t discriminate against them, price-gouge, or charge weird fees just because they lacked bargaining power. Public prices and no secret rebates established that. The second was to spread the shipping load among the many ports in the United States, rather than allowing dominant ocean carriers to play ports against one another and concentrate traffic in any one region. The third was national security, to ensure the U.S. didn’t have to depend on foreigners for vital shipping, and could support the Navy in times of war. And the fourth was to give ocean liners the ability to keep prices stable in a highly cyclical industry, to keep enough slack on hand to manage booms while preventing bankruptcies during periods of low shipping activity.

The price setting part of the law underwent multiple changes due to Congressional and court action, including some early deregulation in the 1980s, but the basic logic was the same as public utility regulation for railroads, airlines, and trucking. The idea is to avoid what was called ‘destructive competition’ (or ‘ruinous competition’) inherent in any transportation system with high upfront costs. Buying ships, airlines, a trucking fleet, or a railroad is expensive. However, after the network is built, the cost of an additional ticket or freight container slot to use that network is minimal. That means railroads, or ocean carriers, or airlines, once they have built their infrastructure, hope to charge high prices, but are willing to run at a loss simply to generate any revenue.

Think of a transportation system like buying a car to run an unregulated taxi service. Once a driver has a car payment every month, it doesn’t matter if he or she picks up an extra customer or not, that car payment is due. So every additional dollar from a customer is useful, since the car payment has to be paid no matter and selling an additional ride doesn’t cost the driver very much. If there’s competition with a bunch of people who all owe car payments, then every cab driver is willing to undercut everyone else even if they can’t make enough to pay the car payment, since it’s better to get some revenue than none at all. Ultimately, all but a few will miss their car payments, and leave the industry.

With destructive competition, entire high fixed cost industries first over-invest in capacity. Then firms become unprofitable as they undercut one another, undermining safety standards, system reliability, and worker pay. Eventually there are mass bankruptcies of weaker firms, and consolidation as the strong buy the weak and establish pricing power. That’s what happened with railroads in the 19th century and airlines in the 1980s. The remaining firms became monopolistic, cut less trafficked routes, raised prices, and discriminated against different classes and regions. (One of the most violent labor uprisings in American history, in 1877, occurred because such ‘ruinous competition’ among railroads led to mass cuts in worker pay).

The way to stop destructive competition is to allow some form of public price-setting, so that firms in such industries have enough to cover their fixed costs, make some profit to induce investment, and pay their workers and suppliers. Transparency in pricing helps everyone identify problems immediately. That’s what the Shipping Act did for ocean carriers. It stabilized the industry.

But starting in the 1970s, policymakers turned away from the basic public utility model in multiple industries, including trucking, rail, telecommunications, finance, and airlines. Prices indeed went down at first, seeming to prove the efficiency experts correct. But long-term, the change led to destructive competition in these sectors. Airlines, for instance, expanded rapidly and then went bankrupt, in turn cutting labor costs, ending air service to smaller and medium sized cities, and then consolidated into an oligopoly with pricing power. (This is still going on, by the way. United just announced it is cutting more flights to small towns across the midwest.) There were similar changes in the rail and trucking sectors.

The Ocean Shipping Reform Act of 1998 undid the Shipping Act, bringing deregulation in force to shipping. The goal was to induce the same “efficiency” gains to shipping, that policymakers imagined they saw in trucking, rail and airlines.

The Ocean Shipping Reform Act of 1998

From 1995-1998, Congress debated how to get rid of the public utility framework around shipping, with the encouragement of the Clinton administration. The key change they settled on was to eliminate the transparency provisions of the Shipping Act by allowing secret deals between ocean carriers and shippers, while retaining the antitrust exemption. Now carriers could discriminate against smaller exporters or importers, they could retaliate against anyone who complained or used a competitor, they could price-gouge without anyone knowing about it, and antitrust enforcers and regulators basically had to stand aside.

During the debate over the law, small shippers were apoplectic. “This bill,” said Geoffrey Giovanetti of the Wine and Spirits Shippers’ Association, “guarantees that the real marketplace in ocean shipping will be completely confidential shipping contracts to which no regulatory or legal constraints will apply.” The longshoremen similarly attacked deregulation, with the President of the International Longshoremen’s and Warehousemen’s Union saying that the bill would allow “large carriers and huge multi-national shippers easily and purposefully agree to bypass entire port communities in an attempt to monopolize the market and inflate profits.” There were warnings that the American fleet would disappear, that a boom and bust cycle would return, that dominant carriers would emerge, that the transportation grid would be stressed, and that the small would become prey for the big.

“This legislation, I would suggest, was conceived in darkness, it was written in the back rooms, it is a bill that addresses special interests, not the public interest,” said Louisiana Senator John Breaux at a hearing for the bill. “It was designed to help a narrow group of interests in the shipping business, it is supported not by logic, but mostly by threats.” Breaux was correct; the bill was largely supported by a few big ocean carriers, and top importers and exporters - 3M, Bechtel, DuPont, Nabisco, and JC Penny - who wanted to undermine their smaller competitors.

And the OSRA was accompanied other changes in the name of efficiency, like blocking the ability of states and public ports in 1994 from making rules around trucking (‘preemption’), or the elimination of subsidies for domestic shipbuilding. Mississippi Congressman Gene Taylor opposed these cuts, citing national security concerns. He asked a Clinton maritime official why the administration got rid of subsidies for building ships in Mississippi and he responded, “We tossed a coin and I lost.” This official explained that the White House was concerned about the impact of subsidies on “financial markets.” Taylor responded that getting rid of U.S. shipping would be like the U.S. military in 1939 deciding to become dependent on Japanese producers of landing craft. “I mean, that’s about as smart as this proposal,” he scoffed.

But the tide of deregulation, heavily supported by the Clinton administration, was too powerful to resist. Critics of the OSRA, such as current House Transportation Committee Chair Peter DeFazio, were ignored. For context, the OSRA was one of the bevy of deregulatory initiatives in the 1990s, which included the repeal of Glass-Steagall, the Telecommunications Act of 1996, the establishment of the World Trade Organization, and the procurement reform that led to the consolidation of defense contractors. Standing against deregulation was virtually impossible.

After OSRA passed, the dire warnings mostly came true. Ocean carriers immediately consolidated, and terminal operators consolidated in response. So did port traffic. In 1995, the top 10 U.S. container ports controlled 78% of traffic, by 2009 that was 85% of traffic. Smaller ports, especially those focused on exports, lost out. Remaining ports desperately spent money to dredge harbors and accommodate the mega-ships, for fear of being bypassed by the remaining giant carrier lines.

There were other serious consequences. The American shipping fleet disappeared, and U.S. shipping is now run by foreign ocean carriers (one of which is controlled by the Chinese government). The boom and bust cycle returned, with huge overcapacity leading to bankruptcies like that of Hanjin in 2016. And in a trend that started earlier but accelerated during Covid, U.S. agricultural exporters gradually lost access to shipping, because the shipping oligopoly made more money returning empty containers to Asia than filling them with bulk commodities from the U.S. first. Earlier this month, for instance, one large domestic milk producer testified to the House Agricultural Committee that “we’ve been told it is more cost effective to skip the Port of Oakland (one of our primary export ports) than to accept exports.”

Finally, big importers, firms such as Walmart, got better pricing on shipping than independent stores. The difference in what big importers get versus the little guy has gotten so bad during Covid that shipping industry consultants are directly recommending big importers use their cost advantage to monopolize their industries. “If I were a large importer, I would look at this as a strategic opportunity,” said Jensen, and use it “to drive my competitors out of business.”

Most outside the industry didn’t notice what eliminating public utility rules meant. But now it’s becoming clearer.

Concentration Creep

Another result of the concentration in ocean carriers is that the entire supply chain in shipping has become far more consolidated across the board. Greg Miller of American Shipper, for instance, has noted an oligopoly of container producers, with the top three Chinese builders making 83% of all new boxes. Container leasing is also concentrated, with the top five players having 82% of the world’s leasing capacity. As Miller put it, “Add it all up and it equates to a grand total of just 16 companies — eight liners, three factory groups and five box lessors — that control over 80% of container-ship capacity, box-production capacity and box-leasing capacity.”

The net effect is a massive consolidated industry with little interest in change, and no desire to undo the bottlenecks inducing outsized profits. As Miller noted, “shareholders of each of these 16 companies would benefit financially if today’s high pricing persists.”

And the concentration explains why the situation at the ports is a mess. When those in power are doing well, and they can hide their dealings behind secret contracts, they don’t have responsibility for problems like too many empty containers crowding the yard, a lack of chassis, poor management of trucking appointments, problems for towage or barge operators, or anything else. They just raise fees and collect monopoly profits.

There is a path forward. To address the immediate crisis, the Biden administration has pushed ports to offload boxes faster (with incredible whining from the carriers), and is seeking investment in port infrastructure. Congress should get involved, and investigate the shipping industry the way it did big tech a few years ago. To this end, restoring transparency in pricing across the board by making most contracts and pricing public would help problems and bottlenecks become apparent. (Federal Maritime Commissioner Dan Maffei has noted this.)

Finally, we have to restore mid-sized ships and ports. In Portland, Maine, a mid-size port that serves mid-size ships is now thriving, serving both exporters and importers in a reasonably smooth manner. That’s a good model. Public investment in new shipping firms would be useful here. Of course, we can’t undo 20 years of ultra-large container ship construction, but we can end incentives for building more of them by charging harbor maintenance fees based on ship size, or otherwise forcing carriers to internalize the full cost of big ships. This will have to be on a national scale, with the threat of antitrust, so carriers can’t play U.S. ports off one another.

More fundamentally, it’s time to start to talk about re-regulating the sector with transparent pricing to facilitate new entrants and end price discrimination. That way, we will stop the wild swings and monopolization in the industry, ensure that access to shipping is more equal, help small exporters and importers, and protect our sovereignty.

If we actually govern once again with clear rules to tame the power of the shipping barons, then we’ll never have to deal with a shipping crisis like this again.

Thanks for reading. I’ll be covering more of the crisis in our transportation systems, and the aftermath of deregulation, but I want to hear from you. What did I miss? What did I get right or wrong? And where should I look to find more answers?

And please send me tips on weird monopolies, stories I’ve missed, or comments by clicking on the title of this newsletter. And if you liked this issue of BIG, you can sign up here for more issues, a newsletter on how to restore fair commerce, innovation and democracy. And consider becoming a paying subscriber to support this work, or if you are a paying subscriber, giving a gift subscription to a friend, colleague, or family member.

cheers,

Matt Stoller

BIG by Matt Stoller

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