Does OSRA benefit shippers in America? Big shippers definitely benefit. You just have to look at the rate levels today compared to a few years ago before OSRA and witness the bigger ships that are being built and coming on stream today. The next generation container ships are going to be 12 thousand TEU ships. That’s the equivalent of six thousand forty foot containers on one ship - double in capacity to the biggest ships today. Just to give you an idea of their size, if all the containers were put on single stack rail cars, it will be a train 50 miles long!

It’s the law of supply and demand at work. If rates drop by half, you need to carry twice as many units to make the same revenue and in order to do that, you need bigger ships. But the flip side of a free market system is that the strong gets stronger and the big gets bigger. As usual, at the expense of the little guys of course. In commerce, as in wrestling, size really does matter, doesn’t it? Can the little stores in, Smallville, Ontario survive if Walmart came into town? Hardly.

So what did the U.S. legislators do in response to the concerns of the SME shippers under OSRA? Well, they allowed the so-called “Shipper Associations” to be formed so that independent, unaffiliated companies can pool their volumes together and form buying blocs and negotiate a service contract with an ocean carrier as a group. If you want my opinion, it sounds more like a communal system than free market competition. But so be it. Many ocean carriers are just not interested to sign service contracts with a small importer who brings in a container or or two a month or a manufacturer that makes the occasional export sale. Not when they have to fill up a 6,000 TEU ship every week coming in and going out.

But how can the SME shipper compete with other SME’s in the same industry when they have to join shipper associations? Well, if survival means having to pool resources together against the big guys, that is what they have to do in order to have sufficient buying power. But there are problems with the idea of shipper associations. These are not conglomerates, nor affiliates, nor even partnerships. They are loose associations, with no assets, no equity - just a name on a piece of paper. What if some of the members don’t live up to their commitments? How long can competitors stand to work together?

The answer was the NVOCC. As an intermediary, the NVOCC negotiates a confidential service contract with carriers of their choice and then offers their services as a common carrier to the SME shipper, who otherwise may not be able to negotiate a meaningful service contract with an ocean carrier. By utilising the services of NVOCCs, the SME shipper could shop around for the best deal without having to commit to any service contracts or join shipper associations.

The drawback, however, is that the rates are not confidential. Anyone can find out what their transport cost is because NVOCCs must file their tariffs and any rate changes with the FMC and make them available to the public over the Internet for anyone who wants to look at them. So, while the SME shipper has the flexibility of shopping around for rates and not be locked into any contract, what they pay is an open secret to not only their competitors but you can bet the big shippers will use the lowest NVOCC rate published as the benchmark for their own service contract negotiations with their carriers of choice.

To give you an example, if an NVOCC had filed a rate of $500 for a container of garments from Hong Kong to Los Angeles, how could a big shipper agree to any service contract rate that will not be something substantially less than that lowest published NVOCC rate? The tariff filing requirement of the NVOCCs under OSRA has the triple negative effect of actually depressing market rate levels for the liner shipping indusry while denying the SME shipper confidentiality about his shipping costs and preventing NVOCCs from being able to make a good profit.

Let me explain why: First: depressing market rate levels. NVOCCs, like any shipper or shipper association, can enter into confidential service contracts with a carrier or carriers of their choice. So naturally, a carrier with excess capacity would go to an NVOCC and offer him a sweet deal. The NVOCC has to compete with other NVOCCs who would also be offered the same sweet deal, so he would mark up his cost according to what his customers could bear and then lower it constantly until everyone hits their rock bottom lowest possible rate in short order.

That lowest rate on file at the FMC then becomes the benchmark highest rate any big shipper would be willing to pay, or else why should he sign a service contract? So the rate filing has the undesirable effect of depressing rate levels for the ocean carriers whose customers are not supposed to know what others are paying. Well, it’s true that they may not know what other big shippers are paying under confidential service contracts but they certainly know what the little shippers are paying and can easily guess what NVOCCs are paying to the shipping lines.

This brings us to my 2^nd point: What the SME pays in freight costs is an open secret and he will never be able to enjoy an equal or better rate than a shipper who has a service contract with a carrier. His disadvantage in size is further exacerbated by his having to pay higher freight costs.

This is further compounded by point # 3: Because the ocean carrier knows that the rate he negotiates with an NVOCC will end up in publicly filed tariffs with anywhere from a $10 to $100 markup, they are careful not to let NVOCCs have low FAK rates because it will backfire on their negotiations with other shippers. So the NVOCC’s have a higher cost base than a big shipper, even for volumes that may be bigger than the shipper’s, which in turn translates into a higher rate for the SME shipper.

In fact, this NVOCC complaint of class discrimination is currently being investigated by the FMC, although, in my view, I can’t see how a discrimination case can be made about commercial decisions by carriers to protect their own market. Freedom of contract means just that.

So, the rate filing requirement under OSRA really protects no one: not the ocean carrier because he really cannot afford to give NVOCCs a low FAK rate; not the SME shipper because his shipping costs are an open book; not the NVOCC, who is at the mercy of the ocean carrier and who has to compete with other NVOCCs at rock bottom levels; not even the big shippers, whose logistics executive will only get buyer’s remorse, heartburn and a fear of losing his job if he sees a lower rate published than what he had just negotiated in a service contract.

The only thing tariff regulations seems to achieve is to provide funding for the FMC through the heavy fines that ultimately come out of the pockets of the shippers by way of higher shipping costs.