Everything from children’s toys and furniture to guacamole has gone up in price, so it’s no surprise that inflation is top of mind for many Americans. But with the midterm elections approaching — and Republicans hammering the White House over rising consumer prices — President Joe Biden thinks voters should channel their frustrations elsewhere. He says they should be angry about a critical but often forgotten part of the American economy: the ocean shipping industry.
“There are nine — nine — major ocean shipping companies that ship from Asia to the United States. Nine. They form three consortia. These companies have raised their prices by as much as 1,000 percent,” Biden said in a speech at the Port of Los Angeles, the nation’s largest port, in June. “There’s no better place to start than right here in port and let those nine foreign shippers know the robbery is over.”
Currently, the cost of shipping goods across the Pacific is still more expensive than it was before the pandemic. This spike in prices is a product not only of the delays and bottlenecks in the supply chain created by Covid-19, but also of the massive increase in demand for consumer goods that followed. This demand was far beyond what shipping companies or American ports could handle. As a result, the cost of shipping has increased, leading to increased costs for importers and retailers within the United States. Those costs have now been passed on to consumers, which is partly why many everyday things have become more expensive recently. (Rising gas prices, the war in Ukraine, and pandemic-era financial policies may also be driving inflation.)
Experts told Recode that Biden’s attack on the shipping industry is unlikely to significantly reduce the cost of the product, even if it does bring some significant improvements to operations at U.S. ports. The small group of companies that dominate the shipping industry remain extremely powerful: they still benefit from long-standing exemptions from antitrust laws and continue to wield enormous power.
The situation serves as a reminder that while specific segments like the ocean shipping industry can play a large role in influencing the prices of everyday goods, they also participate in a much broader economic system of supply and demand. This system includes everyone from the companies that build the ocean liners used by the shipping companies to parents desperately trying to buy Barbie Dreamhouses for their children. This complexity can make price increases extremely difficult to contain, even if you are the president.
Maritime transport, explained
By design, the shipping industry should not have a significant impact on the price of everyday goods. Many companies manufacture their products outside the United States, in places where manufacturing is cheaper. This approach only makes economic sense if these companies know they can deliver finished goods to their customers at a low cost.
That’s where the major ocean carriers come in: nine companies, including firms such as Maersk, Cosco and Hapag-Lloyd, handle the vast majority of shipping across the Pacific Ocean. These companies have been granted limited immunity from certain antitrust laws and form powerful shipping alliances that coordinate routes and even share their vessels. One ship can stretch hundreds of meters, and some can carry more than 20,000 containers. These ships can travel between ports in several countries, picking up raw materials, parts, supplies and finished products along their entire route on behalf of different carriers.
To make sure these ships are filled to the brim, porters play their own version of Tetris. Because carriers share their vessels, several companies can sell transportation services on the same vessel. Companies need to figure out which shipping containers should go, based on where they’re coming from and where they’re going. When the cargo arrives at its destination, powerful cranes lift these containers off the ships so they can be loaded onto trucks and trains traveling inland, and quickly fill the open space on the ship with a new container. Typically, this makes international freight shipping a skillfully choreographed operation, one that has made shipping an item across the Pacific a negligible fraction of the cost of many of the products we buy every day.
But then came the pandemic. Factories have, understandably, shut down due to Covid-19, which has led to production delays, thrown schedules off course, and ultimately led to shortages of all kinds of products. The pandemic also meant people spent more time at home, stopped buying services and cut back on travel. As a result, they began to spend much more on consumer goods, goods that usually had to be shipped to the US from overseas, primarily Asian countries. Shipping has become harder to provide and much more in demand — causing shipping prices to skyrocket.
Now these shipping companies face much more scrutiny, as well as growing concerns that they used their long-standing antitrust immunity to profit during the crisis. Before the pandemic, these carriers had an average operating margin of just under 4 percent, but during the third quarter of last year, that margin rose to more than 50 percent. This has made importing goods to the U.S. much more expensive: At the end of June, it cost nearly $7,600 to charter a 40-foot container traveling across the Pacific, compared with about $1,300 in early 2020, according to one shipping industry index.
“Today, the top nine companies control 85 percent of the trade. Go back 15 years ago, the top 10 companies controlled 50 percent of the trade. They basically ran companies out of business and from the bottom up,” said Sal Mercogliano, a professor of maritime history at Campbell University. “They were in a pretty vicious rate war and then suddenly Covid happens and rates go up.”
Importers and exporters have also accused these shipping companies of taking advantage of the chaos in the supply chain, causing them to pay exorbitant detention and demurrage fees – penalties levied on shippers who fail to pick up and dispose of containers on time. Normally, these fees act as an important incentive to ensure shipments stay on schedule, but some logistics companies and importers say ocean carriers have made it nearly impossible for them to pick up and deliver cargo on time. And finally, the costs associated with paying fees are passed on to customers.
Shipping costs are reduced
Inflation is not something that the president directly controls and it is not something that can be easily fixed. Meanwhile, a majority of Americans say the top problem facing the country is rising consumer prices, which means it will almost certainly become a major issue in the upcoming midterm elections. This election will determine whether Democrats retain control of the House and Senate, and will shape what Biden can accomplish in the second half of his presidency.
With voters acutely aware of the problem, the president seeks to shift the blame for inflation to entities far from the White House. In this case, he points the finger at a small but powerful group of international companies that control shipping in the Pacific. Biden also wants to appear to be taking action on the problem, especially since it’s one that consumers notice in their everyday purchases.
“We have socks and plastic buckets and things like that that are shipped all over the world because it costs next to nothing to ship them,” explained Marc Levinson, a historian of the container shipping industry. “Now, if the shipping cost of a pair of shoes went from 10 cents to 50 cents, that can actually be significant because there will be additional markups at every stage along the supply chain.”
Enter the Maritime Reform Act, which the president claims will reduce costs and help fight inflation. The law, signed by Biden in June, authorizes the Federal Maritime Commission, the agency that regulates US shipping, to investigate carrier practices and help draft new rules. The government will also create a more formalized way of tracking chassis, the metal frames used to transport containers at ports, and expand the commission’s powers when ports are extremely congested. Finally, the bill targets the increasingly common practice of ocean carriers carrying empty containers back across the Pacific rather than waiting to fill their cargoes with US exports, including agricultural products sold by US farmers to buyers in Asia.
While all of these measures sound like progress, there’s no guarantee they’ll do much to lower prices overall. Again, many other factors also drive inflation.
“It’s not like furniture will suddenly become cheaper overnight, right away. That’s not the way the system works, and frankly, the economy doesn’t work either,” said Daniel Maffei, chairman of the Federal Maritime Commission. “Everyone would like a silver bullet for inflation.”
The Maritime Reform Act lays the groundwork to address growing concerns that carriers are engaging in harmful, anti-competitive behavior. (A recent investigation by one of the agency’s commissioners found no evidence of wrongdoing or collusion that contributed to high shipping rates.) The legislation comes as the FMC ramps up its efforts to investigate carriers, including a crackdown on unfair fees that the commission started last year, and a new the partnership with the Ministry of Justice was announced in February.
But the bill, which was not as aggressive as another proposal in the House of Representatives, does not change the fact that shipping is still dominated by just three unions, despite increasing calls to reduce their power. Nor does it give FMC the ability to determine the shipping cost. Perhaps most importantly, it doesn’t address one of the primary problems that have led to high shipping costs: the growing demand for products that need to be shipped. Gene Seroka, CEO of the Port of Los Angeles, told Recode that “it remains to be seen whether the bill will help lower prices.”
“A reduction in demand will help,” said Willy Shih, a professor of management at Harvard Business School. “If we go into recession, demand will drop and that will give everyone time to catch up and even more.”
A global supply chain is made up of many different countries, companies and people, which means that the price of a single commodity is affected by countless factors that are incredibly difficult to control. That means that, for now, you shouldn’t expect Joe Biden’s increasing push to regulate the trucking industry to have an immediate impact on the price of the things you buy.
In reality, the best way to reduce shipping costs is for people to stop buying so many things that need to be shipped. Given that the economy doesn’t seem to be in a good place right now, that might happen sooner rather than later. For what it’s worth, US imports appear to be declining, and US consumers appear to be returning to their pre-Covid spending habits.