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A focus on the Republic of China: an interview with Steven R. Blust, Chairman, Federal Maritime Commission.

The year 2004 marks the 25th anniversary of the resumption of ocean shipping between China and the United States. It is highlighted by the recent signing of the Agreement on Maritime Transport between the U.S. and China on maritime trade and regulatory issues. Three of the major liner ocean carriers are operated out of China and are controlled by the Chinese Government. These carriers are China Ocean Shipping Company (COSCO), China Shipping and Sinolines.


International ocean shipping between the United States and its trading partners is regulated by the Federal Maritime Commission (FMC). The FMC was established in 1961 as an independent government agency, responsible for the regulation of shipping in the foreign trades of the United States. The Commission's five members are appointed by the President of the United States, with the advice and consent of the U.S. Senate.

Among other responsibilities, the FMC:

* Protects U.S. shippers, carriers and others engaged in the foreign commerce of the U.S. from restrictive rules and regulations of foreign governments and from the practices of foreign-flag carriers that have an adverse effect on shipping in U.S. trades;

* Investigates, upon its own motion or upon filing of a complaint, discriminatory, unfair, or unreasonable rates, charges, classifications and practices of ocean common carriers, terminal operators and freight forwarders operating in the foreign commerce of the U.S.;

* Receives agreements among ocean common carriers or marine terminal operators and monitors them to assure that they are not substantially anticompetitive or otherwise violative of the Shipping Act of 1984, as amended;

* Reviews tariff publications under the access and accuracy standards of the Shipping Act of 1984, as amended;

* Monitors rates, charges, classifications, rules and regulations contained in tariffs of carriers controlled by foreign governments and operating in U.S. trades to ensure that such matters are just and reasonable;

* Licenses U.S. based international ocean transportation intermediaries (OTIs); and

* Requires bonds of U.S. and foreign based OTIs.

The FMC's jurisdiction encompasses many facets of the maritime industry. The principal shipping statutes administered by the FMC are the Shipping Act of 1984 (46 USC app. 1710 et seq), the Foreign Shipping Practices Act of 1988 (46 USC app. 1701 et seq), and section 19 of the Merchant Marine Act, 1920 (46 USC app. 876).

Since the resumption of ocean trade between the U.S. and China, the Chinese ocean carriers calling in the U.S. have been subject to the Controlled Carrier Act. These companies are nearly the only controlled carriers remaining in the world, as many other shipping companies who have been government sponsored or government controlled have either been privatized or have gone out of business.

The Chinese shipping companies believed that they were at a competitive disadvantage, and sought relief, with COSCO filing a petition with the FMC as long ago as March 1998, to exempt COSCO from the statutory 30 day waiting period for implementing freight rate reductions. The FMC granted COSCO partial relief from the rate filing time requirements in 1998 and further relief in 1999. China Shipping and Sinolines followed COSCO, filing their own petitions in July 2003, and August 2003, respectively, to be granted similar exemptions as COSCO had requested in 1998.

Meanwhile, in the United States during this same time period, international ocean transportation companies, non-vessel operating common carriers (NVOCCs) and other Ocean Transport Intermediaries (OTIs) were looking to expand their operations into China. However, the Chinese government required joint ventures between Chinese and non-Chinese companies in order for the non-Chinese companies to be licensed. And the financial requirements for licensing NVOCCs to do business in China were stringent. American companies were at a competitive disadvantage.

During this timeframe, representatives from the State Department and the Maritime Administration (MARAD) were working on a diplomatic solution. Captain Bill Schubert, a 1974 graduate of the United States Merchant Marine Academy at Kings Point, NY, and the Maritime Administrator, made the implementation of this Agreement his priority. With the tireless assistance of Associate Administrator, Bruce Carlton, and Director of the Office of International Activities, Greg Hall, these efforts resulted in the Agreement on Maritime Transport between the United States and the People's Republic of China, a far reaching and important agreement on maritime trade and business issues.

Steven R. Blust, Chairman of the FMC, is a 1971 graduate of the United States Merchant Marine Academy at Kings Point, NY, and received a Master of Business Administration degree from Tulane University in New Orleans, in 1979. He is a longstanding member of the international transportation industry. He previously held the position of President/CEO of Tampa Bay International Terminals, Inc. Other prior experience included executive positions with Lykes Bros. Steamship Co., Inc. and management positions with the Jacksonville, FL Port Authority and Crowley Delta Lines, a shipping company. His experience includes ocean carrier liner trade management, marine terminal management, public port administration, tariff and service contract use and publication, and liner operations. He was nominated by President Bush to a five-year term on the Commission on March 14, 2002, and was confirmed by the United States Senate on August 1, 2002.

He believes it is important that the business community understands the key elements of the Agreement on Maritime Transport between the U.S. and China and its impact on business, so has provided his insights into this far-reaching agreement, and discussed the requirements of the FMC to act, in order to make the agreement effective.

Q: Economic theory suggests that international trade benefits almost all nations. Shipping is involved in approximately 95% of international trade. How does international shipping affect the U.S.?

A: U.S. exports and imports have more than doubled since 1990, and it is predicted that they will double again by the year 2020. As you noted, of the goods that are imported into and exported out of the U.S., 95% is transported by ocean liner shipping. This is the case because maritime transport is the most efficient and cost effective manner to transport these goods. The cost of transport is a very small percentage of the delivered cost to consumers of imported and exported goods.

The importance of international trade on our daily life in the United States should not be underestimated. Without that trade, and the international transport that makes it possible, a banana and coffee with your breakfast would be a rare treat. International shipping is absolutely essential to the flow of commerce and the market's ability to meet the expectations and needs of the U.S. consumer.

Q: The Agreement on Maritime Transport between the United States and the People's Republic of China, signed December 8, 2003, provides for equal access in several key areas of bilateral trade, shipping and intermodal services. Why do you believe this agreement was necessary to improve U.S. Maritime interests?

A: Because of the existing freedom of navigation, historically, bilateral maritime agreements between the United States and its trading partners are usually quite general and broad. Frequently, the U.S. and its trading partners are able to reach informal business solutions when one party has concerns about market access issues for its ocean transportation companies. However, it appears that China has been a special case for two reasons: First, the U.S.-China maritime bilateral signed in 1988 expired in 1998, and from that time until the signing of this agreement both countries had informally agreed to observe the terms of the expired bilateral, but the fact that no formal bilateral agreement existed was troubling to both countries. Also in this period, because of concerns raised by ocean common carriers, the Commission initiated a proceeding, Docket No. 98-14, Shipping Restrictions, Regulations and Practices of the People's Republic of China, to address certain Chinese regulatory practices, such as requiring Chinese joint venture partners for organizations and investment. These regulations also imposed limitations to do business, such as owning assets, which appeared to restrict the activities of U.S. participants in the shipping industry. There were genuine issues, not addressed by the expired bilateral agreement, for which the U.S. sought substantive relief, and which could not be addressed in an alternative, informal arrangement. I believe this Agreement may go a long way to leveling the playing field for U.S. companies interested in doing business in China. One section of the Agreement, the Annex, provides a long list of specific business activities U.S. companies will be permitted to do in China without geographic restrictions or restrictions on foreign ownership.

Q: As the U.S. regulatory agency for international shipping, what permissions or exemptions must the Federal Maritime Commission (FMC) grant for the Maritime Trade Agreement to be effective in the United States? What is the timing of your follow-up actions and will that timing be met? What about any timeline for the Chinese to act on what they have agreed?

A: The Agreement has become effective with the exchange of diplomatic notes indicating that both parties have fulfilled the obligations set out in the Memorandum of Consultations on April 21, 2004. The Memorandum of Consultations indicates the parties both expect that the Agreement would only come into force after the U.S. Government, specifically the FMC, had granted some kind of relief to Chinese carriers from the Controlled Carrier Act. As discussed above, the Chinese carriers requested relief from the waiting period required in the Controlled Carrier Act and the petitions are before the FMC for consideration.

Q: What companies does this Agreement affect?

The Agreement affects maritime interests doing business in U.S.--Chinese trade. U.S. ocean carriers are now allowed to establish their own branch offices anywhere in China and utilize shipping agents of their choice, without the requirement that they establish a joint venture with Chinese entities, or use Chinese monopoly agents.

A: U.S. Non-Vessel Operating Common Carriers (NVOCCs) are now free to open offices and conduct maritime business. Prior to the Agreement, U.S. NVOCCs were required to have a cash deposit in China to provide evidence of financial responsibility. Now, an increased amount on the bond currently required by the FMC for an NVOCC as evidence of financial responsibility will be considered for the same purpose in China; no additional cash will be required. Operating a business, quoting rates and terms, accepting cargo, warehousing and transportation are examples of specific business activities now permitted by the Agreement, which includes all of the functions necessary to operate in the international transportation business.

Vessel Operators have the following rights pursuant to this Agreement to:

* Establish and maintain any number of branch offices;

* Solicit and book freight;

* Prepare, authenticate, process and issue bills of lading, including "through bills of lading" that are generally accepted in international maritime transport;

* Assess, collect and remit freight and other charges arising out of their service contracts or tariffs;

* Negotiate and enter into service contracts;

* Contract for truck and rail transport, cargo handling and other ancillary services;

* Quote and publish tariffs;

* Conduct sales and marketing activities;

* Establish office facilities;

* Import and own vehicles and other equipment necessary to their operation;

* Employ local and foreign employees;

* Perform vessel agency services, including customs clearance and inspection, for vessels owned, chartered, or operated by shipping companies; and

* Conduct multimodal or combined transport activities using commercially customary bills of lading or combined transport documents.

Both Vessel Operators and Container Transport Service Companies, known in the U.S. as Freight Forwarders, have the right to establish branch offices and engage in business for vessels that they own, charter or operate and vessels of third parties and to conduct the following business:

* Solicit and book cargo and book space;

* Strip and stuff containers;

* Perform warehousing and storage;

* Sign and issue cargo receipts;

* Collect freight and other charges for approved services;

* Repair and maintain containers and other equipment; and

* Contract for truck and rail transport.

Q: What provision(s) of the Agreement do you believe will have the most impact on U.S. trade in the future, and will that impact be positive or negative?

A: The parties got an Agreement signed after a long period of time. This agreement is very positive for the U.S.- China maritime relationship generally, and something of which the U.S. negotiators should be very proud. From the Commission's perspective, I think the provisions that will have the most impact on U.S. trade specifically are those that enhance U.S. companies' ability to do business and investment in China. These provisions are addressed in the Annex to the agreement.

Q: How does the implementation of this agreement change the future of U.S. international shipping?

A: I am hopeful that the implementation of this Agreement will give U.S. companies greater ability to effectively and efficiently serve their U.S. and Chinese customers and will enable them to more fairly compete with Chinese companies. Shippers both in China and in the U.S. will likely benefit from this increased competition, as it should result in delivery and supply chain improvements and potentially reduced cost. I think providers of transportation will have greater access to potential customers in China, and exporters and importers in China will have more transportation service choices. It will also enhance transportation providers' ability to serve their already-established customers, regardless of whether the cargo they are moving is going to or coming out of China.

Q: What is your vision of the future of U.S. international shipping?

A: The ocean shipping industry serving the U.S. foreign trades faces many challenges at this juncture--from the need to increase security, to the impact of globalization with resultant trade imbalances and the effects of economic recovery. Ideally, market forces will drive a solution to the trade imbalance. Closer relationships between carriers and shippers can help to create balance in vessel capacity versus demand for space, though inevitably that balance may not be perfect as ship construction cannot proceed as incrementally as the growth of trade. Also, better and faster information on the flow of goods should assist the industry in aiming toward a balanced supply and demand of transport.

I also believe we will see further specialization in the shipping industry. We are already seeing the growth of logistics and ocean transportation intermediary services that aim to provide solutions tailored to the shipper's needs. These entities and carriers will need to work in concert if each is to thrive. As well, each type of service provider must keep in the forefront the needs of their customers.

It is my belief that we are entering an era where the industry will come to value cooperation and collaboration over confrontation. Collaborative efforts among segments in the ocean shipping industry, or among maritime nations will work more effectively than what can be achieved alone. The Agreement effectively allows American international shipping and ocean transportation companies to operate freely in China. The Chinese-controlled carriers, now granted an exemption by the FMC, are free to make their ocean freight rate reductions effective as soon as they wish, just as their commercial competitors can.


Subsequent to this interview, which took place on February 27, 2004, the U.S. ocean carrier community has moved forward to undertake some of the business activities now available. Since the signing of the China Maritime Transport Agreement, the FMC has granted the exemptions discussed above to the three Chinese-government-controlled liner carriers. On April 1, 2004, the FMC issued an Order to each carrier, enabling the carriers to operate without the restrictions on filing of rates, terms and conditions. This action cleared the way for all of the other terms of the Agreement to become effective. Now, companies are moving to establish their own infrastructure within China.

American President Lines (APL), which operates U.S. Flag vessels, and whose traditional core business is in the trade between the U.S. West Coast and Asia, has filed applications to the Government of China to engage in many of the business practices listed in the agreement, including opening or converting representative offices to new branch offices. Many of these applications have been granted by the Chinese government. APL has also applied to own and operate intermodal equipment, such as trucks, chassis and cargo handling equipment, but, as of June 2004, is still awaiting approval from the Chinese, according to John DeCrosta, Director of Legislative Affairs for APL, in Washington, D.C.

The U.S. Flag operator, Maersk Sea Land, who has the largest share of the ocean transportation market between the U.S. West Coast and Asia, has indirectly benefited from the signing of this agreement, according to Eugene K. Pentimonti, Vice President, Government Relations, in the Government Affairs office of Maersk Lines. By being able to own assets in China in other than port locations, companies can now expand their operations, and own transportation assets such as trucking companies, gaining control over key areas of the logistics supply chain.

Eric C. Lindberg, District Director, Yellow GPS--San Francisco, mentioned that Ocean Transportation Intermediaries (OTIs), such as Freight Forwarders and NVOCCs are also determining the impact of the new flexibility in doing business with China, subsequent to implementation of the Agreement. While several of the old line forwarders and certain NVOCCs had already established their business in China with Chinese partners, the additional flexibility provided by the Agreement will be incorporated into evaluations on new and more efficient service offerings within the region. For those businesses newer to the region, the ability to open and control branch offices and offer sales and marketing capability, along with enhanced intermodal service, will generate new business.

For importers and exporters who are looking for more control over their cargo and visibility in the supply chain, the added capability of ocean carriers and OTIs will allow those improvements to occur.

Many maritime companies are in the process of evaluating various aspects of the Agreement, trying to determine if, and when, the different capabilities will be implemented. It appears that for many it is a matter of when, not if, the business with China will grow, but the real question is how fast.

Interviewed by Elizabeth A. Wetzel, U.S. Merchant Marine Academy
COPYRIGHT 2004 St. John's University, College of Business Administration
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Title Annotation:international shipping
Author:Wetzel, Elizabeth A.
Publication:Review of Business
Article Type:Interview
Geographic Code:1USA
Date:Sep 22, 2004
Previous Article:From the editor.
Next Article:From Adam Smith to the 21st century.

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