Transportation policy analyst Arnav Rao writes on how ocean freight carriers are exploiting their monopolistic control to hike prices and boost profits, harming U.S. importers, exporters, and small businesses, necessitating stronger regulatory oversight to restore fair pricing.

As corporations released their quarterly earnings reports at the end of September, one industry drew considerable attention for its successes — ocean freight carriers. One stunning figure came from South Korean ocean carrier HMM, which noted a 1,664 percent increase in profit compared with the same quarter a year ago. French carrier CMA CGM announced that its profits grew sixfold. Japanese carrier ONE also reported a 969 percent increase in profit.

 These staggering rises in profit are the result of skyrocketing freight rates, which the carriers have justified mainly by pointing to the disruption of normal trade lanes caused by attacks on commercial vessels in the Red Sea by Yemen’s Houthi rebels. Carriers claimed that rerouting vessels around Africa’s Cape of Good Hope has increased fuel and operational costs, necessitating increases in freight rates. 

The Houthi disruptions have certainly marginally raised costs for the industry by lengthening voyages. But the primary reason for increased rates and profitability appears to be nothing more than price gouging and manipulation of U.S. importers and exporters little different than the worst days of the pandemic supply chain crisis. Addressing ocean carriers’ price-gouging provides the incoming Trump administration an early key test of its promise to keep inflation under control.

Evidence for the price gouging lies in the speculative language carriers used to justify ballooning freight rates and profits. For instance, in its earnings release CMA CGM cited the “prospect” of port strikes on the U.S. east coast as a driver of freight rates and profitability. ONE pointed to the “uncertainty” around the U.S. elections, alluding to the possibility of U.S. businesses frontloading volumes to avoid increased tariffs under a Trump administration. Thus far, neither factor has played any discernible role in increasing the carriers’ cost to deliver ocean freight service, yet they nevertheless exploited their monopolistic control over ocean shipping to dramatically hike prices. 

Take for example the Danish carrier Maersk, which reported a 456 percent increase in profit. Despite only a 3.9 percent increase in unit costs, and a 0.3 percent increase in volumes, Maersk increased average freight rates by 54 percent. Japanese carrier ONE also raised rates by nearly 79 percent despite only a 16-percent increase in total fuel costs and a 3-percent increase in volumes.

 The harms go far beyond higher costs for imports. Higher prices also threaten the operations of many U.S. companies — including exporters — especially smaller ones with tighter margins. Many small companies pre-negotiate vessel space allotments with carriers, to ensure stable freight rates and space allocation. But many carriers have used their fear mongering to force smaller shippers to pay high “spot” market prices or special surcharges and handling fees. Such charges can easily increase the cost of shipping by 200 percent. “It’s pay a [surcharge] or there’s no space,” a transportation consultant told the Journal of Commerce.

 The ability of ocean freight carriers to routinely extract exorbitant profits from U.S. importers and exporters is a result of a radical deregulation of the maritime sector during the Reagan and Clinton administrations. Prior to deregulation, the U.S. government regulated ocean shipping as a form of essential service. Under this regulatory paradigm, the government allowed ocean carriers to form regulated cartels to fix prices and capacity as long as they adhered to the principles of “common carriage” and kept prices reasonable.

Under common carriage principles, ocean carriers were required to publicly post prices and other essential terms of service. Additionally, they were required to ensure that all “similarly situated” shippers were offered roughly equal terms of service. This system ensured stable profitability and democratized control within the ocean carrier industry while also preventing ocean carriers from squeezing shippers during times of disruption. Prices were predictable, and from 1966 to 1983, there was only one major ocean carrier merger.

After President Ronald Reagan signed legislation that weakened ocean freight regulation, the industry rapidly consolidated. Between 1984 and 1990, seven major carriers were bought by larger competitors. This trend was accelerated by further deregulation during the Clinton administration in 1998; since then, carriers have finalized at least 35 additional takeovers. This rapid consolidation has led to a one-two punch of oligopolistic domination combined with little to no regulation of services or pricing. Today, just three major ocean carrier “alliances” composed of entirely foreign carriers control 91 percent of transpacific trade and 89 percent of transatlantic trade. These foreign carriers are largely free to exploit their positions to squeeze particular U.S. retailers, manufacturers, and farmers.  

After the pandemic, the Biden administration signed a bipartisan bill that aimed to curb some of the most egregious ocean carrier practices. But much more can be done. Congress and the incoming Trump administration must restore regulatory oversight to the Federal Maritime Commission and restore common carriage obligations to ocean shippers to ensure that all U.S. businesses — big and small — have equal access to these essential transportation services.

This article was featured in The Corner Newsletter: November 21, 2024.
SUBSCRIBE to The Corner below.