Recent U.S. port bottlenecks have revealed myriad systemic policy problems affecting U.S. coastal shipping. These problems include restrictive labor, immigration, and trade policies. Policymakers looking to improve U.S. port efficiency should look at how to fix these bad policies before considering more regulations.
Representatives John Garamendi (D‑CA) and Dusty Johnson (R‑SD) introduced the Ocean Shipping Reform Act of 2021 (OSRA) with the intent of “modernizing” shipping law to improve port efficiency.
The bill does nothing to address any of the systemic issues affecting U.S. ports, instead it expands government overreach and discriminates against ocean carriers.
OSRA increases the Federal Maritime Commission’s (FMC) authority to regulate shipping, including expanding the FMC’s enforcement options and penalties. The bill proposes amendments to current shipping law that strikes language such as, “minimum of government intervention and regulatory costs,” and “placing a greater reliance on the marketplace.” That’s a bad omen but the contents of the bill are worse.
OSRA also aims to give more leverage to shippers (the person/business that owns the products being transported) to complain about demurrage and detention fees which are basically late fees charged when cargo isn’t unloaded, or containers are not returned in the agreed time frame.
However, demurrage and detention charges are legitimate and important fees for maintaining fluidity in the supply chain as they incentivize shippers to pick up cargo in a timely manner. When there is a dispute about a charge, the contract terms are often settled amicably. The bill would undermine this incentive system and likely worsen the current port bottlenecks. If the incentive to promptly pick up cargo is removed, the time between when a container is unloaded and when the cargo is picked up would increase, thus exacerbating port congestion.
In determining the reasonableness of demurrage and detention charges, the bill proposes shifting the burden of proof from shippers to carriers. This shift means that the carriers would have to certify why the shippers did not return the equipment in the agreed time frame in order to charge a late fee. Furthermore, invoices would only be considered valid if carriers provide documentation that the charges comply with the relevant rules and regulations, including any subsequent rules and regulations.
This requirement would be the equivalent of the library having to certify why you returned a book late and illustrating that you violated the rules when they sent you an invoice. The librarian does not and cannot know your reasoning without you telling them. It does not make sense to shift the burden of proof to the carrier because they rarely know the reasoning for lateness and requiring proof of compliance increases costs, for example, by needing to hire lawyers. If the carriers cannot prove why a shipper returned equipment outside the time frame, or it is more costly to ensure compliance than the amount of the charges, this provision will prevent the use of this incentive system.
OSRA further penalizes carriers by mandating that they cannot decline export cargo if it can be loaded in a safe and timely manner. This provision stems from complaints made by U.S. exporters whose bookings were canceled. However, these cancellations were due to the scarcity of containers and carriers are choosing to return containers to Asia for reloading instead of sending them to export loading points within the U.S. Given the heightened demand for imports and scarcity of containers, carriers are essentially faced with the difficult decision of choosing between delaying imports or exports.
Nonetheless, the provision of the bill does not change the status quo. It’s a catch-22—mandating that carriers take exports would have the unintended consequence of delaying imports from Asia to the United States, but carriers right now are canceling exporter bookings which is also causing delays. Either way, there will be delays because currently there are not enough containers to meet demand. This provision of the bill is simply choosing U.S. exporters over U.S. importers, the opposite of what carriers are doing. OSRA does not solve the scarcity of containers or the other systemic problems causing delays and port inefficiency.
Minimal government intervention and reliance on the marketplace are not the cause of inefficient ports. In fact, the breadth of regulations currently in place are causing the problems. For example, the Jones Act prevents non‑U.S.-built, ‑crewed, and ‑flagged ships from picking up shipments in one U.S. port and unloading at another. This restriction reduces the frequency of service, slowing down trade. Prohibiting ships built abroad to be used in domestic trade also distorts prices. U.S.-built container ships cost five times the global price for a container ship, thus carriers must charge enough to cover these costs.
Other domestic policies and management issues have prevented the maximization of containerization. In particular, the Jones Act and the Foreign Dredging Act inhibit port improvements necessary to accommodate bigger container ships. These larger ships provide scale efficiencies that could lead to lower shipping prices and faster transportation as more cargo could be moved by a single ship. Labor unions have prevented port modernization by blocking efforts to automate cargo loading and unloading. As a result, U.S. ports are much less efficient than ports in Europe and Asia.
The pandemic revealed broader efficiency problems at U.S. ports. For years, a small number of beneficiaries have successfully lobbied the government for protection that has dispersed costs across the economy through higher prices, inefficiencies, and missed opportunities. Now, the United States is at an inflection point. Policymakers would do well to reduce rather than increase regulatory burden, which has artificially restricted essential inputs for port efficiency. Unfortunately, OSRA would worsen port efficiency.
Gabriella Beaumont‐Smith is a policy analyst at the Cato Institute’s Herbert A. Stiefel Center for Trade Policy Studies. Her research focuses on the economics of U.S. trade policy.