Page 348 - The Principle of Economics

354 PART FIVE FIRM BEHAVIOR AND THE ORGANIZATION OF INDUSTRY
IN THE NEWS
Modern Pirates
CARTELS ARE RARE, IN PART BECAUSE THE antitrust laws make them illegal. As the following article describes, however, ocean shipping firms enjoy an unusual exemption from these laws and, as a re- sult, charge higher prices than they oth- erwise would.
As U.S. Trade Grows, Shipping Cartels Get a Bit More Scrutiny
BY ANNA WILDE MATTHEWS RUTHERFORD, N.J.—Every two weeks, in an unobtrusive office building here, about 20 shipping-line managers gather for their usual meeting. They sit around a long conference table, exchange small talk over bagels and coffee and then be- gin discussing what they will charge to move cargo across the Atlantic Ocean.
All very routine, except for one de- tail: They don’t work for the same com- pany. Each represents a different shipping line, supposedly competing for business. Under U.S. antitrust law, most people doing this would end up in court.
But shipping isn’t like other busi- nesses. Many of the world’s big shipping lines, from Sea-Land Service Inc. of the U.S. to A. P. Moller/Maersk Line of Den- mark, are members of a little-noticed cartel that for many decades has set rates on tens of billions of dollars of cargo.
Most U.S. consumer goods ex- ported or imported by sea are affected
to some degree. The cartel—really a series of cartels, one for each major shipping route—can tell importers and exporters when shipping contracts start and when they end. They can favor one port over another, enough to swing badly needed trade away from an entire city. And because the shipping industry has an antitrust exemption from Congress, all of this is legal.
“This is one of the last legalized price-setting arrangements in exis- tence,” says Robert Litan, a former Justice Department antitrust official. Air- lines and banks couldn’t do this, he says, “but if you’re an ocean shipping line, there’s nothing to stop you from price fixing.”
You could call them the OPEC of shipping, though not quite as powerful because they can’t keep members from building too many ships. To get more business, some of the shipping cartels’ own members undercut cartel rates or make special deals with big customers. They also face the emergence of new competitors, which are keeping rates down in some markets.
Nonetheless, the industry is playing a bigger role now in the U.S. economy as American companies plunge more deeply into world trade. Exports over the seas have jumped 26% in the past two years and 50% since the start of the decade.
For consumers, the impact is hard to measure. Transportation costs make up 5% to 10% of the price of most goods, and increases in shipping rates are usually passed on to consumers. A limited 1993 survey by the Agriculture Department, examining $5 billion of U.S. farm exports, concluded that the cartels were raising ocean shipping rates as much as 18%. A different report, by the Federal Trade Commission in 1995, found that when shipping lines broke
free of cartel rates, contract prices were about 19% lower.
“The cartels’ whole makeup is anti- consumer,” says John Taylor, a trans- portation professor at Wayne State University in Detroit. “They’re designed to keep prices up.”
Some moves are afoot to change all this. The U.S. Senate is considering a bill that, for the first time in a decade, would weaken the cartels, by reducing their power to police their members. The bill, sponsored by Sen. Kay Bailey Hutchison of Texas, has the support of some other high-ranking Republicans, including Ma- jority Leader Trent Lott. . . .
For eight decades, shipping cartels have been protected by Congress under the Shipping Act of 1916, passed at the behest of American shipping customers, who thought cartels would guarantee re- liable service. The law was revised sig- nificantly only twice, in 1961 and 1984, but both times the industry’s antitrust im- munity was left intact.
The most recent major review was done in 1991 by a congressional commission. It heard more than 100 witnesses, produced a 250-page re- port—and offered no conclusions or recommendations. . . .
The real reasons for years of inac- tion in Congress may be apathy and the lobbying by various groups. Dockside la- bor, for example, fears that secret con- tracts would enable ship lines to divert cargo to nonunion workers without the union knowing it. David Butz, a Univer- sity of Michigan economist who has studied shipping, thinks voters aren’t likely to weigh in; the cartels aren’t a hot topic. “It’s below the radar screen,” he says. “Consumers don’t realize the im- pact they have.”
SOURCE: The Wall Street Journal, October 7, 1997, p. A1.