April 18, 2000, Seoul, Korea
I welcome this opportunity to speak to you today on the topic of freight rates and charges. It is a subject that I work with on a day to day basis in my capacity as executive director of two trans-Pacific discussion agreements - and one that has been the subject of considerable misunderstanding in press reports and other public forums.
Let me begin with a brief description of how discussion agreements function, in order to frame our discussion of rates and charges, at least in the trans-Pacific market.
The trans-Pacific container freight market between the US and Asia is the world’s largest, amounting to approximately six million 20-foot containers annually in both directions. There is a discussion agreement covering each direction across the Pacific - TSA, with 13 members, eastbound; and WTSA, with 12 members, westbound.
Discussion agreements grew out of the old rate conference system, which officially disappeared in the Pacific last April 30, the day before the Ocean Shipping Reform Act (OSRA) took effect in the US trade lanes. Conferences have been in existence since the 1870s, and have been expressly permitted and regulated under US law since 1916. They recognize an essential, unique reality of the shipping business: importers and exporters want reliable, predictable sailing schedules… scheduled service means more ships and higher fixed costs per voyage… and shipowners won’t make that investment without some mechanism to encourage a stable revenue stream across seasons and business cycles.
It is instructive for us here today to look at the evolution over time from traditional conferences to the discussion agreements operating today. Conferences are primarily a joint price-setting mechanism. They maintain common tariffs on behalf of members. Votes taken on rate or service actions are binding on all members. Only in 1984 was US law changed to allow independent action by an individual conference line. Until that time, a line’s only recourse was to go along with the majority decision, or resign.
Conferences set the pricing benchmarks for the trade, against which non-conference lines often maintain discounts, usually based on service differences - lower rates in exchange for, say, slower transit time, less frequent sailings, and so on.
Today’s system tends to be freer, more flexible, and allows carriers and shippers to negotiate whatever creative service and price packages meet their individual needs - confidentially, with less interference from competing shippers, competing carriers, or intrusive regulation. That is not to say that the system is completely unregulated, and I’ll come back to that point in a minute.
Member lines in TSA and WTSA meet; exchange market information; jointly undertake market research, analysis and forecasting on a shared cost basis; and adopt non-binding policy recommendations for the trade. Better trend analysis and demand forecasting enables carriers to more accurately allocate assets and price their services to meet specific shipper needs - by country market, by commodity, etc. Similarly, carriers are better able to track industry-wide costs in order to improve productivity and ensure a reasonable rate of return.
There is no common tariff for TSA or WTSA. Neither agreement jointly negotiates service contracts on behalf of members. Individual member lines conduct their own, separate pricing and service negotiations with shipper customers. Those negotiations, and the service contracts that follow, are confidential. Neither I nor any TSA or WTSA member knows the details of any other carrier’s service contracts, as we did in the pre-OSRA days when rates were transparent. All that remains public information are the most general “essential terms” - commodity, volume, port origin/destination points, contract duration.
Discussion agreements do recommend service and pricing adjustments based on their market analysis and supply-demand forecasting. For example, the members of TSA have proposed a rate increase of $400 per 40-fo