This research paper was commissioned by the Canada Transportation Act Review. It contains the findings and opinions of the author(s) and does not necessarily represent the views of the Review Panel or its members.

The Shipping Conferences Exemption Act: Review and Suggestions of Positions Appropriate for the Panel

Research conducted for the Canada Transportation Act Review

Report prepared by
Trevor Heaver

April 2001

THE SHIPPING CONFERENCES EXEMPTION ACT:

Review and Suggestions of Positions Appropriate for the Panel

A Paper by Trevor D. Heaver·

for the Canada Transportation Act Review Panel

Outline of the Paper

 

The original intent of SCEA  

Outline of the Attachment

I. Introduction 

II. The evolution of arguments for and against shipping conferences

III. The international regime to legalize and regulate conferences 

IV. Recent changes in shipping and international logistics

Appendix 1

The Shipping Conferences Exemption Act (SCEA) was enacted in 1970 to deal with a type of collusion practiced in the liner shipping industry for close to 100 years. Changes that have occurred in the liner industry and in the needs of shippers since 1970 leave the current SCEA flawed.

The original intent of SCEA

The original intent of SCEA was to provide exemption from the Competition Act for liner companies when engaged in collective pricing and other practices laid down in Section 4(1) of the Act. Within constraints set down in SCEA, shippers basically supported these practices. They were not completely satisfied with the details of the legislation or the working of the pricing practices but they were supportive of the principles present in the legislation and industry practices. "Regulated collusion" among lines was the norm, as it was for each mode of transport.

Current attitudes to the old structures and practices

The liner shipping industry is very different today than it was in 1970. For shippers, the practice of "traffic management" has given way to the needs of logistics management in the context of supply chains. Section 4.1 of the Attachment to this paper reviews these changes.

The results of the changes are:

Shipper support for the conference system ended for at least three reasons. First, changes in the structure and economics of the liner industry were making the likely variability of rates in shipping similar to, not greater than, that in other industries. Second, shippers had learned from the deregulation of other industries (especially the railways) that removal of the collective pricing practices was beneficial to the efficiency of transportation arrangements and to the rate and service conditions they could negotiate. Third, business practices had evolved so that the effects of rate volatility in deregulated markets was less of a threat than it had once been. Firms had greater experience with contracts and more hedging opportunities were available.

The current regulatory issues

Public discussion today reflects the on-going debate about potential changes to SCEA in the context of the content of Part 15 of Bill C-14. The issues presented here are long term. There are two issues with the regulation of liner services.

The treatment of operating agreements. Uncertainty exists among shippers and lines about the application of SCEA to the wide range of operating agreements. The lines fear that without SCEA operating agreements could become subject to the Competition Act. This fear is important to their view that without SCEA Canadian ports may suffer a loss of services.

While it may be argued that efficiency-enhancing agreements among suppliers of goods and services are widespread and legal under the Competition Act, lines say they might not be willing to run the risk of threatening an alliance, legal elsewhere, because of a challenge arising from serving a Canadian port. Since liner shipping companies depend on operational agreements among lines (ranging from slot charters to global alliances) to conduct their business, they view SCEA as indispensable to their existence in Canadian trades. They view uncertainties of the type associated with occasional investigations by the Competition Bureau as unacceptable and inappropriate. Shippers appear to agree in principle.

The current dispute about SCEA is influenced by confusion about the argument of the lines that Canadian ports (and shippers) would suffer if SCEA were repealed. The confusion might be deliberate. I have found it difficult to find individuals able to explain the rationale for the lines' assertion.1 The suggestion that Canadian ports would lose traffic and services solely in the face of removal of the right of lines to collude on price is implausible. This is argued in section 4.3 of the Attachment. Their assertion that loss of protection for operating agreements might lead to their withdrawal of service is plausible although unlikely but, in the light of the international regime for liner shipping, is a risk not desirable or necessary for Canada to run.2 It might be that opposition now heard from ports and some other interests would disappear if the lines' argument had been based only on the effects of mandated independent pricing.3

It is difficult to make regulations specific without recognition of the variety of collective structures and practices in liner shipping. The diversity of conditions is recognized in the Ocean Shipping Reform Act (OSRA) of the U.S. and in the regulations of the European Commission, notably 4056/86 and 870/95. Sooner or later Canada needs to deal explicitly with the various types of agreements entered into by lines. Only in this way will the interests of various parties in particular types of agreement be identified effectively, trade-offs made and appropriate legislation passed.

The treatment of collusion in pricing liner services. The dispute between shippers and carriers about the carriers' freedom to exchange information and to set rates collectively (though, since 1987, carriers also have the right to independent actions) is the same dispute that has gone on for about 15 years but has a new wrinkle. The traditional role of conferences has been weakened by the market penetration of non-conference lines and the severe weakening of conference unity through rights of independent action, especially when in truly confidential contracts. The result has been the development of various agreements, for example the stabilization agreements.

The diversity of industry structures complicates the current discussion in Canada. Any agreement that is filed under SCEA is legally a "conference." Unfortunately, although in the discussion there is occasional recognition of the role of agreements which in the industry are regarded as "non-conference," the majority of viewpoints simply relate to "conferences." This makes uncertain the validity of generalizations. This is a problem for all those trying to come to grips with the issues of industry performance and government policy.4 In keeping with this, I do not here attempt to explore the specific features and possible results of pricing agreements executed in traditional conferences and in stabilization agreements.

There are assertions by lines but no evidence that collective pricing enhances the efficiency of services in Canadian trades. Shippers feel that conference and similar pricing agreements among lines are contrary to their interests. If it is accepted that the onus for an exemption from the Competition Act should rest on proof of benefit, the exemption given in SCEA to collective pricing should be repealed. Like the collective pricing of the railways prior to 1987, conference pricing detracts from a focus on specific individual shipper-carrier relationships. Such a focus is the source of better decision making by shippers and carriers. It affects both sides to transactions. To date, Canadian ports and shippers in the U.S. and Canada have actually benefited from the non-conference regime applicable to trans-border traffic.5

Since 1993, evolution of the liner industry and supply chain management practices have made the horizontal pricing agreements of the conferences anachronistic to the desired strengthening of vertical relationships between individual shippers (including freight forwarders) and lines. Shipping lines like many other carriers are enhancing their services and even diversifying into logistics to meet shippers' needs.

The relevance of the international regime that has evolved

The past leaves some legacies relevant to the Panel's consideration of recommendations.6 They are:

The focus on particular collective practices

Examination of current conditions leads to the following conclusions:

Recommendations

I recommend the Panel consider the following position:

ATTACHMENT TO

THE SHIPPING CONFERENCES EXEMPTION ACT:

Review and Suggestions of Positions Appropriate for the Panel

By

Trevor D. Heaver

I. Introduction

The Shipping Conferences Exemption Act (SCEA) is unique in Canadian transport as it exempts liner shipping from the Competition Act. This allows liner shipping to operate under cartel agreements called "conferences."8

The reasons for the continued exemption of the conferences from the Competition Act lie in the long and international history of conference agreements. However, the current issues for the Review Panel need to be set in the current context of liner shipping as a part of the international supply chains of manufacturers and distributors.

Therefore, this Attachment is in four further parts. The second part explains the evolution of arguments for and against the collective practices of shipping lines. The gradual adoption of policies by governments to legalize conferences is an important context for Canadian policy. The international pattern to legalize and regulate conferences is described in the third part. The recent and current changes in the shipping and international logistics businesses are described in the fourth part. These changes provide the immediate setting against which to consider the issues before the Panel.

II. The evolution of arguments for and against shipping conferences

Shipping conferences grew up following the successful model of the U.K. to Calcutta conference which in 1875 found that by collectively offering deferred rebates to shippers the member lines could get shipper loyalty. (The longevity of conferences has some bearing on the difficulty of changing practices today!) The shipper loyalty was highly valued in order to limit the effects of aggressive price competition that existed because of surplus ship capacity. The surplus was sustained by the rapid expansion of shipping with the introduction of steamships. The regime of conferences expanded rapidly.

The conferences are voluntary agreements among lines that have the purpose of constraining competition among members and limiting the influence of competition from non-members. The mechanics are collective pricing and a variety of commercial and operating arrangements. The benefit for shippers has been claimed to be more stable rates and services than would otherwise exist. Conferences are usually unidirectional on a route, as the same lines may not be offering services inbound and outbound. Some lines follow triangular routes or sail around the world. The detailed practices of conferences have come to vary according to the regulatory regime of countries in which they operate and the economic conditions of the trades they serve.

For many years, the majority of shippers supported the arguments of lines that overall, conferences enhance the efficiency of trade. That was the position of shippers into the 1980s. There are several reasons for the long period of wide support for conferences. The essence of the argument has been that without intervention of some sort, efficient liner services are not sustainable because of the propensity of the industry to periods of cutthroat rate competition.9 The features of liner services leading to support for conferences were:

These views, or ones like them, carried the day. They ignore the following points.

The later part of the 1980s witnessed a dramatic shift in the perception of shippers. In Canada, prior to the passage of the revised Shipping Conferences Exemption Act in 1979, shippers thought that the opposition of the Department of Consumer and Corporate Affairs to conferences was naïve. By the late 1980s, shippers were opposed to conferences.10 What caused the change in the position of shippers?

The result is the wide opposition of shippers to the collective pricing discussions of lines in conferences and the evolving use of wider pricing agreements. However, ending the practice has been much harder to achieve in international shipping than in domestic transport. The long and complex international regulation of conferences, discussed in the next part of the paper, contribute to the difficulty.

III. The international regime to legalize and regulate conferences

There are four points to be made about the international regime to legalize and regulate conferences. First, the history of investigations into conferences is very long and the regulation extends over many decades. Acceptance of collusion among suppliers is deeply rooted in attitudes. Second, the regulations differ in important ways among countries and reflect the particular interests of countries. The U.S. legislation is used as an example. Third, the jurisdiction of countries in international matters can give rise to disputes. Fourth, the particular existing contrasts between Canadian and American regulation of shipping deserve recognition.

3.1 The history of conference regulation.

From the earliest times, the cartels were not without their critics. Investigations into their affairs have been conducted periodically. The first substantial investigation reported in the U.K. in 1909. The investigation into shipping rings concluded that overall the conferences were desirable because of the increased price stability they brought to trades. This position was supported by the majority of shippers as well as by the carriers. The report recommended strengthening the countervailing powers of shippers to reduce the risk of conferences abusing their power. However, nothing was done. Conferences continued to have a free hand in spite of the occasional use of practices widely recognized as undesirable, such as the use of "fighting ships."11

The support of shippers for policies to allow but constrain the powers of conferences was present in all countries. An investigation into conference practices in the U.S. trades led to the Shipping Act of 1916. This statute took a similar approach as the Interstate Commerce Act had for railways by requiring the filing and adherence to filed rates. It also required certain structural features and operating practices. For example, the conferences were required to be open and were disallowed from certain practices such as deferred rebates and fighting ships. The U.S. legislation has been applied to inbound and outbound conferences. Concerns with the conduct of conferences in Australia led to a different approach. The essence of the Australian policy, developed in 1929, was to rely on the countervailing power of shippers acting collectively. This was formalized with the passage of Part X of the Trade Practices Act in 1966. In Canada, in spite of an investigation into the abuse of conference power in 1959, it was not until 1970 that the Shipping Conference Exemption Act was passed. It came into effect in 1971. It followed a similar model to the U.S. legislation. Legislative action in Europe in the 1970s was triggered by two developments. First, the European Commission needed to deal with the conflict between the competition principles of the Treaty of Rome and the allowance of collusion in air transport and liner shipping. Only for shipping has the exemption continued and this is under Council Regulation 4056/86. Second, the European countries were concerned about potential actions of developing countries under the United Nations Conference on Trade and Development's Code of Conduct for Liner Conferences agreed to in 1974 and coming into force in 1983. The Code was poorly structured and never operable. However, it led to various legislative initiatives, for example, the British Merchant Shipping (Liner Conferences) Act of 1982. At this time there were also many discussions on shipping policy in the context of the Organization for Economic Cooperation and Development (OECD).12

Important revisions to shipping policies have occurred during and since the 1980s. They are most easily documented for the U.S. where they are marked by the passage of the Shipping Act of 1984 and the Ocean Shipping Reform Act of 1998, effective, 1999. Each act increased the requirements on the conferences to allow member lines greater freedom to price independently. In 1984, this was to set rates independently on notice. In 1998, this was extended by requiring conferences to allow shippers and carriers to sign confidential contracts independently.13 The latter has resulted in the cessation of a number of conference agreements. However, in their place formal mechanisms have evolved for the exchange of information on pricing matters among lines through various "agreements," for example, the Westbound Transpacific Stabilization Agreement. Participation in the agreements is wider than was the case in the former conferences.

Lobbying by the shipping industry on the legislative matters has been substantial and, often, coordinated in international organizations, for example, the Committee of European and Japanese National Shipowners' Association (CENSA). Shippers on the other hand have been less well organized. Formal shippers' groups have formed relatively late and on a national basis.14 Meetings among some of the national councils have only occurred since 1996. The councils initially focused on negotiations with conferences and lobbying governments in their own countries to get features they felt appropriate in governing legislation. It was only during the 1980s that their position changed to opposition to the existence of conferences.

These legislative developments are cited to illustrate four main features of the policy regime. First, the intervention of governments has resulted in a patchwork of policies under which liner conferences are allowed. Second, intervention in Canada is confined to the last 40 years, less in Europe. Third, the opposition of shippers to conferences is recent and is not well coordinated internationally. Finally, as conferences have weakened under regulatory and economic pressures, the practices of lines in exchanging information on rates has shifted into larger although weaker agreements, for example the stabilization agreements.

3.2 The national interest and the regulation of conferences

The regulation of shipping conferences is bound up with wider aspects of national policy, particularly in countries in which the protection of national-flag shipping is important. In the U.S., for example, the policy objective has long been not only to provide efficient and economic transport for U.S. ocean commerce but also to encourage the development of sound and efficient U.S.-flag shipping capable of meeting national security needs, see Appendix 1. The sale to foreign owners of deep-sea lines Lykes, Sea-Land and APL has diminished the case for the support of shipping although the protection of the U.S. interest still receives strong support from the marine community. The shift in the balance of interests in 1998 is evident by the addition of the fourth purpose of policy to promote the growth and development of U.S. exports by placing "greater" (than what is not said!) reliance on the marketplace.

National interests also lie behind the compromises that influence the passage of legislation. OSRA was compromise legislation. Shippers retreated from their position that the exemption of conferences should be ended in the face of opposition from two maritime interest groups. The first was the lines, notable APL and Sea-Land. The second was the concern from parts of the port community, especially labour that feared a more competitive regime would be detrimental.

The explanation for and the purposes of the U.S. legislation are not concurrent with Canada's interests. It is not surprising that Canadian policy and practices have differed from those in the U.S. in some important respects. The differences cast doubt on the necessity of Canada maintaining parity of treatment for lines with the U.S., even though harmonization of practices in an international regime is desirable.

3.3 Issues of national jurisdiction

The international nature of trade, liner shipping and conferences poses problems for their regulation. While the U.S. asserts its authority over inbound and outbound conferences, most countries assert authority only over outbound conferences.15 This reflects the general domicile of conference offices in the country of trade origin. It may also be influenced by the usual greater concern of countries with the treatment of their exports than their imports. In principle, SCEA applies to the transportation of goods into and out of Canada although NTARC concluded " ... Canada has no influence on inbound conference activities which originate outside the country." (Vol. II, p.110)

Various agreements have been reached from time to time to promote harmonized shipping policies and reliance on notions such as free and fair competition. The latest such initiative is the publication in 1998 by the Maritime Transport Committee of the OECD of "Conclusions on Promotion of Compatibility of Competition Policy Applied to International Liner Shipping." It acknowledges the need to promote compatibility of competition policies.

The following statement of J. Mensching of the Competition Directorate of the European Commission, also, places the goal of similarity with the laws of others in context.

It is sometimes argued that the Commission's enforcement of the EC competition rules leads to a conflict of laws with third countries, or at least could lead to such a conflict. Those who put forward such arguments appear to consider that the mere co-existence of different legal regimes constitutes a conflict of laws. However, that is not so. A "conflict" of laws would occur only if the EC rules required shipowners to behave in a way that is prohibited under the laws of a third country, or vice-versa. Such a conflict has never occurred. ...... Moreover, the OECD's maritime transport committee examined at great length the issue of compatibility between different competition regimes and was unable to identify a single example of a Commission decision or action that had led to a conflict of laws.16

3.4 Comparison of the Canadian and U.S. regulation of shipping

There are many important differences between the existing regulation of conferences in Canada and the U.S. Dealt with here are the greater rigidities traditional in U.S. regulation, the introduction of Confidential contracts by OSRA, the treatment of non-conference pricing agreements and the treatment of trans-border international traffic.

Prior to OSRA, two basic differences affected the tightness of constraints on market forces. First, while the U.S. places requirements on all lines, for example, in adherence to tariffs, Canada only regulates conference lines. Other lines are unregulated.17 This difference may be explained by the concern of the U.S. for competition that may adversely affect its flag-shipping. Second, in the U.S., the Federal Maritime Commission (FMC) applies rigorous policing, which is absent in Canada. The consequence is that, in Canada, rate concessions are often extended to shippers in contravention of tariffs and conference rules. Conference lines are not regulated; agreements are filed.18 The result of these differences is that, prior to OSRA, the regulation of conferences and of liner shipping in general was much less constraining in Canada than in the U.S.

An important liberalization of market forces was achieved in the U.S. in OSRA through the requirement that conferences allow individual lines the right to enter into confidential contracts without the conference being able to set out suggested terms and conditions. Canada had proposed such a condition for its revision to SCEA in 1987, but had backed off in the face of strong objections from international shipping lines. The freedom to enter confidential contracts is a valued attribute of the U.S. market, especially but not exclusively by shippers. It is a system that shippers desire in Canada and for which there is wide support.

Agreements among lines take various forms. Only some are recognized as being "conferences." The U.S. law protects explicitly a wide range of agreements including the so-called "stabilization" agreements that may involve non-marketing of capacity operated and pricing guidelines. When agreements are filed in Canada, they are regarded as being "conference" agreements. Some agreements among lines involve operating economies, such as slot chartering, space sharing agreements and current alliance arrangements. They serve to increase the efficiency of services and the range of services individual lines can afford to offer to shippers. All parties recognize their desirability and the expectation of their legal status should be clear. The possibility of agreements containing features contrary to efficiency exists so that care must be taken in extending exemptions. The role of so-called stabilization agreements is controversial. They organized the non-marketing of space operated and have gained wide acceptance of pricing guidelines. As they are generally acknowledged to involve non-conference as well as conference lines (using normal maritime terminology) they control a much larger percentage of the traffic on a route than is normally regarded as being "conference traffic." The European Union's provisions on agreements are set down in Regulation No. 870/95. It allows rationalization of services by means of technical, operating and commercial arrangements but not pricing. It is a model that Canada should monitor and may wish to follow. The regulation was reviewed after five years and reintroduced with minor modifications in April 2000.

Finally, it is appropriate to recognize here the status of trans-border traffic of conference lines. It is carried under non-conference conditions because different conference agreements apply in the U.S. and Canada. This has served lines using eastern Canadian ports well. To date, it has not allowed Vancouver to overcome traditional disadvantages in competing in U.S. markets but it may be of value as service characteristics through Vancouver improve. Transport Canada notes "that a sizeable portion of conference traffic is carried at non-conference rates since all cargo crossing the Canada - U.S. border moves at non-conference rates..."19 Of course, the rates are set in relation to conference rates in the U.S., now including confidential individual contracts. The existence of this non-conference traffic is very relevant to arguments that the elimination of conferences from Canada would affect the routing of traffic and be detrimental to Canadian interests. This is considered in section 4.3.

3.5 Implications of the international regime for the Panel

The international regime to legalize and regulate conferences gives rise to four implications for the Panel. They are:

IV. Recent changes in shipping and international logistics

Changes of importance to SCEA are those in the liner shipping industry and those in the needs of shippers. It is also important to consider how changes in provisions of SCEA may affect services to Canadian ports.

4.1 The changing characteristics of liner shipping

Liner shipping is changing in many ways, all of which are making the case for collective pricing less valid. The changes deal with the cost structure of lines, the size of individual lines, the quality of non-conference services, the operating relationships among lines and the nature of the business strategies of lines.

4.1.1 The cost structure of lines. The cost structure of the liner industry has changed radically over the last twenty years especially in North American trades. The percentage of lines' costs in ship operation has continued to fall to 20% or so as containerization has developed. As a consequence, the argument of lines about the effects on floor prices caused by very low marginal costs of ships on berth carries less weight. The shipping business has no greater problem in this respect than airlines, hotels and many other industries.

4.1.2 The size of lines. Responses of lines to the pressures of globalization and the increased competition that accompanies it have been to strive more aggressively to achieve economies of scale and to provide shippers with a wider geographical range of services. The result is illustrated by the strategy of CP Ships that has transformed itself from a niche carrier, important only on the North Atlantic, to the sixth largest carrier in the world. Its lines, still individually branded, form a global network. It has grown through a series of spectacular acquisitions (perhaps, aided by its position in CP Ltd.) Other examples of the major growth of lines are the merger of P&O and Nedlloyd and the acquisition of Sea-Land by Maersk and of APL by Neptune Orient Line (NOL). These are but the major examples of a wide trend. One result is that the number of lines on routes has generally declined, for example, Asia to North America had 40 lines in 1984, 20 in 1994.

4.1.3 The quality of non-conference services. There used to be two types of non-conference lines. Both types needed full pricing flexibility to establish their market share. First, there were new lines aspiring to become major, quality carriers quickly, for example, Sea-Land. The other category was low cost carriers with inferior ships and services that were competing basically on price; Soviet lines fitted into this category. Over the last 20 years, a new category has emerged. Asian-owned lines, for example Evergreen, have been particularly successful in their expansion with good quality ships and reliable services. They have often retained their non-conference status. They have diminished the differences between non-conference and conference services. The presence of reliable non-conference services has served to diminish the absolute and percentage of traffic carried by conference lines between 1994 and 1997.21

4.1.4 Alliances and other operating agreements. Lines are under considerable pressure from large shippers to be able to serve their global needs. To extend their services rapidly without the need for huge capital investments, lines have entered into a variety of operating relationships with other carriers. These include slot charters by which one line simply contracts for a certain amount of space (container slots) from another line and space sharing by which lines "swap" space on routes. A more elaborate strategy is alliances among lines often global in scale under which lines participate in trades by sharing responsibility for providing ships. Each line retains separate marketing and pricing rights. These arrangements have contributed to the reduction in the number of vessels required and, often economize on equipment and terminal facilities. They have, also, narrowed the cost differences among lines and, therefore, although the lines market independently, lessened their scope for rate differentiation.

4.1.5 The business strategy of lines. The framework within which shippers purchase transport services has become progressively more sophisticated over the last forty years. The evolution to an integrated approach spanning different corporations has been slow to emerge but the concept of supply chain management is firmly rooted and its application growing. As the business strategy of shippers has changed, so has that of lines. They seek to position themselves as suppliers to shippers' supply chains. For CP Ships, this currently means a focus on the shipping business but where possible expanding to ensure door-to-door services. For many carriers, it means expanding into logistics services. Leaders in this development are Maersk Sealand, NOL and P&O Nedlloyd. As firms become larger and more sophisticated in their relationships with shippers, the probability of uniquely unstable rates in the liner shipping business becomes less.

4.2 The logistics needs of shippers

The shift of shippers to supply chain management practices means that their expectations of carriers change. Freight rates become of reduced importance and service levels of more importance. Long-term relationships become more important and short-term relationships less appropriate. It is true that the shift gets more recognition in writings and speech making than it may in making arrangements for routing cargo. The relevance of the changes also varies among commodities and with the values of firms and individuals. However, the trend is present.

Shippers certainly have strong interests in confidential contracts with individual carriers. Contracts are more likely to have a duration and rate and service conditions geared to their needs. Shippers are becoming more interested in vertical relationships with lines of types that are inconsistent with the horizontal pricing agreements promoted by conferences.22

The potential exists for shipping lines to benefit from the end to collective pricing as the presence of conference agreements encourages managers with the lines and shippers to think narrowly. The president of NOL, Flemming Jacobs, is quoted as having said recently that "Shippers and ocean carriers are `confused' when they focus on narrow yearly negotiations on freight rates, instead of looking for opportunities to increase overall supply chain efficiencies"23 A change in thinking by carriers and shippers was an important source of benefits from deregulated domestic transportation services. The same could be true for liner shipping.

It is also appropriate to note here that Canadian, European, and U.S. shippers (the latter with the exception of the compromise with maritime interests for OSRA as the best that they could get) oppose the continued allowance of collective pricing by shipping lines. Why are they wrong about shipping when they were right (when they became pro-competitive) about each of the other modes of transport?

4.3 Competition and the routing of cargo

Shippers including freight forwarders control the routing of cargo. They choose routes by carriers that offer the best combination of rate and service conditions. They exercise their control of routes through their choice of carrier and through specifying the port of discharge when alternate ports are possible. If a shipper does not specify the port of discharge then, subject to rate and service conditions, the line may select the port. How plausible, then, is the proposition that "to remove the exemption while others, particularly the U.S. do not, would in all likelihood result in a shift of some cargo being moved through U.S. ports rather than through Canadian ports due to the imbalance in antitrust protection. Significant economic harm to Canadian shippers, railway and trucking firms, and ports could result if the Act were to be abolished at this time. "24

Cargo currently moving through Canadian ports on conference lines is either carried to and from Canadian locations under conference conditions or, as noted in section 3.4, is carried under non-conference conditions to and from a U.S. point. What would be the effects of Canada abolishing the conference exemption for collective pricing? The U.S. traffic currently moving through a Canadian port would be unaffected; it is already non-conference. Even making the unrealistic assumption that those controlling the routing of traffic Canadian preferred a conference regime, there would be no incentive for shippers to switch the routing of traffic. It would be non-conference in Canada because of the removal of exempt collective pricing and it would be non-conference through the U.S. because of its trans-border status. Since shippers dominantly control the routing of traffic and are opposed to collective pricing, it is illogical to expect them to search out ways to put traffic into a conference regime.25 I conclude that the proposition presented by Transport Canada, cannot be based on the re-routing of traffic by shippers. And, it is shippers who control the routing of cargo. Lines go to ports where they can offer attractive services and rates to shippers.

The argument of Transport Canada differs from that made by NTARC. Its report states, "There is speculation that the abolition of the SCEA would force major conference carriers to use U.S. ports for their North American calls, at the expense of Canadian ports. While this is a possibility, there is no firm evidence available on this matter." (NTARC, Vol II, p.110.) Since there is no basis for expecting shippers to shift the routing of their cargo away from Canadian ports, what would "force" major conference carriers to use U.S. ports?

There are two potential reasons for a line to be "forced" to stop serving a Canadian port. The first would be an increase in competition leading to lower rates and or a lower market share. Since trades are already open to entry, a significant increase in the number of lines seems most unlikely. Lines can be expected to find entry into a conference trade more attractive than entry into a non-conference trade. If conference lines argue that rates would drop so much as to cause them to leave the trade, this seems to be an indication that indeed shippers are paying high rates for the retention of excess capacity. Shipping lines cannot have it both ways. Either, collective pricing does not seriously diminish competition and, therefore, its absence would not affect the lines. Or, collective pricing does affect competition and, as in other business, customers would be better off without it. Further, in the case that rates drop, shippers would benefit and the total traffic through Canadian ports could increase as a result of more U.S. traffic moving through them. This, then, is a good reason for Canadian policy to differ from American.

The second possible cause of the "forced" departure of lines is because of other effects of the "abolition of SCEA." Lines argue that it would throw into doubt the legality of a wide range of operating agreements. While it may be argued that efficiency-enhancing agreements among suppliers of goods and services are widespread and legal under the Competition Act, lines say they might not be willing to run the risk of threatening an alliance, legal elsewhere, because of a challenge arising as a result of serving a Canadian port. Since liner shipping companies depend on operational agreements among lines (ranging from slot charters to global alliances) to conduct their business, they view SCEA as indispensable to their existence in Canadian trades. They view uncertainties of the type associated with occasional investigations by the Competition Bureau as unacceptable and inappropriate. To the extent that concern for the effects on operating agreements lies behind the argument of conference lines, ports and shippers may be supportive of the lines. However, it might be that opposition now heard from ports and some other interests would disappear if the lines' argument had been based only on the effects of mandated independent pricing. So lines have an interest in not being specific and clear in their arguments. Removal from lines of the specific right to collude on price without impeding operating agreements might still cause the lines to venture arguments based on the threat of investigations by the Competition Bureau on pricing matters. That is a risk all firms face; it is intended to be that way! It seems unlikely to be a material argument.

Appendix 1

The U.S. Declaration of Policy as Amended by the Ocean Shipping Reform Act, 1998

The Purposes of this Act are -

1 The argument was noted but not explained by the National Transportation Act Review Commission, Competition in Transportation, Policy and Legislation in Review, 1993, Vol II, p.110 and by Transport Canada in Consultation Paper, 199, p. 10.

2 The distinct treatment of shipping would be warranted by the high incidence of cooperative arrangements in the liner shipping business, the high frequency with which the agreements change and the wide exemption they enjoy in other countries.

3 Removal from lines of the specific right to collude on price without impeding operating agreements might still cause the lines to venture arguments based on the threat of investigations by the Competition Bureau on pricing matters. That is a risk all firms face; it is intended to be that way!

4 There is wide use of terminology specific to the particular type of industry agreement in maritime circles and in government documents in other countries. The contrast complicates the comparison of Canada's policy and that of other countries.

5 Transport Canada notes "all cargo crossing the Canada - U.S. border moves at non-conference rates even if carried by conference carriers." Consultation Paper, July 1999, p. 5. Checking with two senior managers with lines heavily involved in the trans-border business, I only have tentative confirmation that traffic moving on a through bill of lading to or from the U.S. via a Canadian port is not subject to either SCEA or OSRA. Each manager indicated they would need to get a legal opinion to be certain of the status of the traffic with respect to SCEA. This says something about the relevance of SCEA.

6 For more details, see the Attachment sections II and III.

7 However, it might be noted that the current promotion of standardization with the U.S. by lines is very selective in its application and reinforces their interest in a largely status quo regime.

8 Agreements when filed under SCEA imply that those participating are members of a conference as defined by SCEA but some of the agreements would go under other names in business and under the legislation of other countries.

9 It should be remembered that there was wide support for the regulation of trucking for many years because of feared excesses of competition and collective pricing was allowed and in some cases required by law of Canadian railways until 1987.

10 This was an international change. For example, the British Shippers' Council stated in 1987 "...historical acceptance of and support for the conference system is gradually being replaced by a more market-oriented philosophy." U.S., Federal Maritime Commission, Section 18 Report on the Shipping Act of 1984, September 1989, p.144.

11 Fighting ships were placed on berth by conference members collectively to coincide with the schedule of an "outsider." Rates would be cut to ensure retention of traffic to the conference.

12 It is curious that shipping briefs in Canada are currently using accession to the Code by some 70 countries as evidence of the wide international support for conferences. In fact, the Code arose because of wide concern about conference practices and the interests of developing countries in a cargo -sharing clause intended to promote their national-flag shipping. Developed countries acceded to the Code in self-defense against cargo sharing. Canada did not become a signatory.

13 This brought U.S. law in accord with the view of the EU Competition Directorate that prohibition by conferences of individual service contracts was contrary to EC Reg 4056/86. Canada had proposed such a condition for its revision to SCEA in 1987, but had backed off in the face of strong objections from international shipping lines.

14 The years in which shippers' groups formed are: Australian Shippers' Council, 1972; Canadian Shippers' Council 1966; British Shippers' Council 1955 and the European Shippers' Council subsequently; the US National Industrial Transportation League assumed a strong leadership role in that country only the 1990s.

15 In 1964, the U.K. passed legislation that enabled the government to prohibit firms from meeting certain demands of the U.S. Federal Maritime Commission.

16 J. Mensching, Head of Unit, DG Competition, European Commission, Liner shipping: Examining the development and impact of European legislation, Speech at Containerisation International Conference, London, 22 March 2000.

17 There are no plans afoot to get parity by regulating non-conference lines!

18 There are no plans afoot to get parity by policing the rates of conference lines!

19 Transport Canada, Consultation Paper, SCEA, July 1999, p.5. The Briefing Paper of the Interested Carrier Working Group to the Standing Committee on Transportation, April 2001, notes "cargo from the U.S.A. outpaces Canadian at a rate of at least 65/35 on European routes..."

20 However, it might be noted that the current promotion of standardization with the U.S. by lines is very selective in its application and reinforces their interest in a largely status quo regime.

21 Transport Canada's Consultation Paper, 1999, has data in Table 1 that show the share of traffic carried by conference lines in 1994 at 54.5% and in 1997 at 46.3%. These figures overstate traffic moved at conference-set rates because conference lines carry much open-rated and trans-border (non-conference) traffic. In 1997 they could understate traffic carried by carriers under filed agreements, as it is probable the data are collected according to traditional definitions of conference and not according to filings under SCEA. In 1997, the latter situation may not be significant.

22 The vertical confidential contracts can also be of value to lines. Research prior to experience with the OSRA indicated that after initial opposition to confidential contracts, lines expected them to be beneficial to their interests, see, N. Shashikumar "The U.S. Ocean Shipping Reform Act," Liner Shipping: What's Next, Proceedings of the 1999 Halifax Conference, International Association of Maritime Economists, p. 16.

23 American Shipper (2001), "APL's Jacobs calls for wider, long-term logistics contracts," Shipper Newswire, ShippersNewsWire@shippers.com, 8 March 2001.

24 Transport Canada, Consultation Paper, SCEA, July 1999, p.10.

25 The only possibility for this to happen would be for U.S. traffic now moving through Canada to shift to the U.S. conference regime. But the traffic already moves in a non-conference regime through Canadian ports by choice!