Executive Summary | PDF version (803kb) The Report Introduction This paper outlines two complaints made to theCouncil alleging anti-competitive conduct engaged in by a collective group ofshipping lines providing container liner shipping services to Hong Kong shippers(importers/exporters). The Consumer Council is putting forward its assessment ofthe complaints, in addition to suggestions, to assist the Competition PolicyAdvisory Group in determining what if any measures should be taken either by theGovernment or industry in dealing with similar complaints that may arise in thefuture.   Complaint by Hong Kong Auto (Parts & Machinery)Association The HK Auto (Parts & Machinery) Association(HKAPM) lodged a complaint with the Council in October 2000, complaining about a'Yen Appreciation Surcharge' (YAS) imposed by a container liner APL Co P/L (APL)on cargo shipments from Japan to hedge against exchange rate risks. HKAPM had been informed by APL that thesurcharge was a uniform charge laid down by an association of shippingcompanies, known as the 'Intra-Asia Discussion Agreement' (IADA) of which APLwas a partner. The complaint was that: the imposition of the surcharge was notdetermined through lines competing against each other, but as the result of a'cartel'; and the surcharge did not reflect contemporarymovements in the exchange rate, and as a result this lead to losses by HKAPMmembers because tariffs were higher than they should have been, taking intoaccount the exchange rate that applied at the time of transportation.   Complaint by Hong Kong Shippers Council In the course of making inquiries with regard tothe complaint by HKAPM, the Council held discussions with the Hong Kong ShippersCouncil. The Shippers Council subsequently raised another complaint regardingthe manner in which Terminal Handling Charges (THC) are applied in the trade.The concern was that: THCs have been set at a uniform rate betweenmembers of agreements between shipping lines (IADA and the TranspacificStabilization Agreement were specifically mentioned); that the rates had been increasing uncheckedsince their introduction in 1990; and that Hong Kong shippers are now paying thehighest THCs in the world.   Yen Appreciation Surcharge Complaint Council staff met with HKAPM on 1 December 2000;to obtain further details about the uniform exchange rate adjustment mechanismadopted by the shipping lines, and subsequently approached the Hong KongShippers' Council on 15 December 2000 to ascertain the facts of the allegedcartel arrangement. The Shippers Council, which represents importers andexporters in Hong Kong, but not HKAPM members, confirmed the existence of thesurcharge. However, the Shippers Council was not aware of the allegation thatthe surcharge was not aligned with contemporary exchange rate movements, largelybecause none of their members had complained. The Council wrote to the local Secretariat ofIADA seeking comments on the complaint. IADA's reply provided information on thecurrent formula and format of the surcharge. IADA considered that the surchargemechanism was transparent to the Shippers Council, which was the body to whichit provided information on IADA's terms and conditions, including the surcharge.The explanation was that the surcharge did not relate to contemporary movementsof the exchange rate because the surcharge quantum is a historical averageexchange rate calculated over a period of four months that is also subject to aone-month notification period.   The Yen Appreciation Surcharge mechanism The YAS mechanism begins with the constructionof a table identifying a range of monthly average 'Telex Transfer Selling' (TTS)rates. A copy of the relevant table, which applied at the time of the complaintat Annex A. The table determines that if a TTS is above 120 yen to the US dollarat the time an importer is billed, and then no surcharge is applied. If the TTSat the time of billing is below 120, then a surcharge, on an increasing scale,is applied. The rationale is that the Japanese shipping lines will want to becompensated by the importers who customarily give US dollars as payment for theshipping service, in circumstances when the yen has appreciated against the USdollar. The IADA Secretariat claimed that the reason fornot making changes more frequently than four months was that changing thequantum more frequently would create the potential for confusion. Moreover, anydifferences that occur could be recovered in subsequent periods. The IADA Secretariat, (which also services othershipping agreements between lines operating in the region) also stated that thepreference for shipping companies was to rely more on holding discussionsbetween each other, on matters such as routing and shipping charges, rather thanenter into formal agreements. This was a reference to the distinction betweenwhat are commonly referred to as 'discussion agreements' and 'conferenceagreements'. An explanation of the differences between these types of shippingagreements is found in further sections of this paper. The IADA Secretariat have stated that therationale behind setting a regular review period on the exchange rate, ratherthan using daily exchange rates, is that the former lessens the risk ofconfusion on the part of shippers. The Council accepts that having a regularreview period, where a rate is maintained at a constant rate will reduceconfusion. However, whether confusion actually arises is largely a function ofhow adequately timely information can be transmitted to shippers, and agreementreached on the exchange rate between both parties. Improvements in the way inwhich information is transmitted between parties, and agreement reached wouldalso reduce the risk of confusion. The Secretariat also suggested that anydifferences in exchange rates that occur throughout the year, which result inhigher rates paid than what may at any one time be on offer, could be recoveredin subsequent averaging periods. The Council accepts that for some shippers,with regular and constant usage of shipping services, this may well be the case;insofar as the yen fluctuates below the established rates in the TTS table.However, the mechanism is a one-sided surcharge in that there is no reduction onthe fee for yen depreciation, when the exchange rate moves above the TTSthreshold of 120 (JPY/USD). For example, if the TTS selling rate rises to 130JPY/USD, the benefit derived to the Japanese shipping lines in receiving USdollars is not factored into a lower shipping charge for importers. As a matter of principle, the Council considersthat whether the YAS and the threshold of 120 is acceptable to any individual orclass of shippers is a matter that should ideally be settled by parties throughnegotiation, where: the particular requirements of individual orclass of shippers can be taken into account; and the negotiations take place with reference tocompeting services available from other service providers who may choose tonegotiate, for example, different exchange rate appreciation adjustmentmechanisms.   Extent of economic loss According to government statistics, there was atotal of 13.5 millions of inward TEUs containers (standardized container of 20ftx 8ft x 8ft) throughput by container terminals over the period between July 1997- March 2001. Based on the proportion of imports from Japan [1], around 1.91million of containers probably were affected by the YAS. Over the same period,the average yen/dollar rate was 118. Without the means to negotiate a cut offthe TTS threshold rate, instead of the 120 as is currently used, it is estimatedthat importers will have to pay the surcharge of total HK$158 millions under thepredetermined surcharge rate. If the TTS threshold rate were set at 118 forthe above period, the surcharge total would have been HK$146 millions.Accordingly, because the rate has been set at 120 for that period, importers ofcontainers from Japan have had to pay approximately HK$12 millions extra.   Terminal Handling Charge Complaint Terminal Handling Charges (THCs) are levied byshipping lines against shippers as an additional charge to ocean freight rates.According to shipping lines THCs are to help recover the costs of shore sideoperations that are not covered by their ocean freight rates [2]. THCs are container port charges levied bycontainer shipping lines for the service of moving a container from a ship to aposition some distance away within the confines of the container terminal at theport of discharge to enable clearance from the port. The containers, eithertwenty foot equivalent units (known as TEUs) or forty foot equivalent units(known as FEUs) are placed within an area of the terminal that allows consigneesor their agents to pick them up and deliver them to their next destination. The introduction over the years of containerterminals utilising sophisticated cranes and moving equipment has changed portlayouts so that private vehicles are prohibited from travelling to and from theship's side. On conventional wharves, consignees are able to place theirvehicles alongside the ship and receive goods, generally known as 'break bulkcargoes', directly onto their vehicle. The dangers inherent in allowing publicaccess to the ship's side within container ports have prevented similar accessto container ships. Schematically, the range of services involvedin moving containers at the port of discharge can be represented (in general) asfollows: from ship to a terminal stack, by crane andmoveable chassis; from the terminal stack out of the port throughthe terminal gate, by consignee. The question of which of the above services areincorporated within the THC and their relation with the ocean freight rate isimportant to an understanding of the Shippers Council's complaint. In itscomplaint, the Shippers Council provided correspondence from IADA and theTranspacific Stabilization Agreement that listed a large range of cost itemsassociated with how the quantum of THCs, as applied by the agreement members,was calculated. An example of the cost items is as follows: Lift-on for empty containers Lift-off for laden containers Storage at terminal Lift-on to ports Haulage from terminal to ports Lift-off at port CYStorage at port within free period Passage at port Lift-on at port for loading Haulage at pier Barge ChargesM & R per container Monitoring and rental for reefer equipment Stevedoring for CFS cargo Container Inspection Charges Pre-trip Reefer Inspection Charge Electrical Supply Risk at terminal (typhoon, etc)   Terminal handling charge costs The major concern of the Hong Kong ShippersCouncil is that members are required to pay the same level of THCs without anycompetitive choices, reflecting the collective agreement nature of IADA, andother collective agreements between shipping lines. Moreover, there is a concernat the lack of transparency as to how the THCs are calculated, as no costingfigures are provided. The Shippers Council was concerned that the quantum of theTHC fee had evolved over a period of time where it was now considered to be themain source of revenue for carriers. In correspondence from the shipping lines tothe Shippers Council, copies of which were provided to the Consumer Council,shipping lines have stated that the THC is intended to cover them for variousshore side operations that are not recovered by their ocean freight tariffs. Intheir letter to the Shippers Council they have also noted that in theirexperience the charges rarely provide full cost recovery. In discussions with the Consumer Council, theShippers Council noted that different shipping lines should have differentcosts, but the THCs by members of the shipping line agreements are all the same.Moreover, since the THCs were introduced in 1990, increases have been at doubledigits almost every year. It stands to reason that the actual costs tomove containers from a ship to a stacking location within the terminal fordelivery to consignees can vary between different ports, and between differentcontainer handling terminals. The Shippers Council stated that Hong Kong had thehighest THCs in the world. In this regard the Council has obtained anInformation Paper submitted to the LegCo Panel on Economic Services 'Terminalhandling charges in major Asian ports' [CB(1)1830/00-01(01) 9 April 2001]. Acopy is attached as Annex B. The document provides a comparison of charges fordifferent shipping line agreements between different ports in the region andsupports the contention that Hong Kong has comparatively high THCs. Notwithstanding charges applied for other portsin the region, the costs of the various elements now considered to make up theTHCs in Hong Kong should be a function of the actual costs that are leviedagainst shipping lines for loading and unloading containers and making themavailable for delivery to consignees. Moreover, given the expectation thatdifferent shipping lines would have different costs of operation and differentprofit levels, the extent to which those terminal costs would be passed on toshippers should ideally be a function of the competition that exists betweenshipping lines to attract the custom of shippers. Due to the uniform nature of the THCs asapplied to shippers, this does not appear to be the case. As a result, there isno information on which a competitive market price for THCs could beascertained. It is impossible therefore to ascertain the extent to which THCs inHong Kong are either in excess of a competitive market standard, or below such astandard.   Council's View on the Complaints With regard to the YAS complaint, the Councilnotes that IADA's reasoning behind the current YAS mechanism is that having auniform mechanism reduces confusion in the industry. However, leaving aside thequestion as to whether confusion might be overcome through applying uniformity,there was no indication from IADA on what, if any formal process is carried outfor seeking the views of individual shippers or classes of shippers on themechanism. For example, the level of TTS threshold or any problems that mightarise from all classes of shippers. With regard to the THC complaint, the Councilhas not been able to carry out an extensive inquiry into the quantum of the THCapplied by IADA members. However, it does appear: from the list of different factors that aretaken into account in calculating the amount of the THC; and that competition between shipping lines issupposed to play a part in the way in which shipping tariffs are quoted toshippers, that charges could in theory vary between shippinglines. However, the approach taken by members of theshipping line agreements complained of is to apply a 'cost plus' methodology tothe recovery of terminal handling costs, and to apply a uniform charge betweenthose members. The lack of formal processes to requirecollective associations of shipping lines such as IADA to negotiate withshippers on the YAS mechanism, and the quantum of THCs reinforces the sentimentexpressed by the complainants that shippers' interests are secondary to that ofthe lines. It is that approach which has given rise to this particularcomplaint. At the very least, the Council considers that shipping lines could: use the Shippers' Council to collect opinionson whether there should be a periodic review on the YAS charging mechanism andthe THC to reflect the current business environment and the market situation ofall users of the shipping lines' services so as to minimize the cost burden toHong Kong shippers; and make opportunity for shipping associations'representatives such as the HKAPM, who are not members of the Shipping Councilto discuss their concerns at meetings between members of formal shipping lineagreements. In its written response to HKAPM on itscomplaint about the YAS mechanism, the Council noted that the YAS surcharge wasin accordance with the mechanism discussed under the IADA forum in regard tomatters such as service rates and charges by IADA members. With regard to HKAPM's allegation that themechanism had been set under 'a cartel', the Council noted that there is nogeneral competition law in Hong Kong against which allegations of abuse ofmarket power (that could arise from competitors forming agreements amongst eachother) could be examined [3]. The Council also acknowledged that the exchangerate adjustment mechanism is not transparent to all parties as details of themechanism are only provided to the Hong Kong Shippers Council. Because HKAPM isnot a member of the Shippers Council, it is therefore not provided with detailsof the surcharge mechanism used by IADA members, even though HKAPM members usethe services of the lines and are subject to the surcharge. The Council informed the complainant that itwould pursue policy options for Government to consider, in addressing this lackof transparency, and providing safeguards against any possible anti-competitivedetriment arising from the collective actions of shipping lines.   Overseas Practices on Shipping Line Agreements The issue of shipping line agreements is onethat has attracted the attention of competition authorities in otherjurisdictions. Annex C of this report examines the nature of shippingagreements, for example, the difference between conference agreements anddiscussion agreements, and the manner in which competition authorities in otherjurisdictions place these forms of competitor agreement under examination. In December 2001, the OECD published its 'LinerShipping Competition Policy Report' in which it examined the rationale andimpacts of traditional conference price fixing, discussion agreements, andcapacity limitation agreements. The OECD's report included reference to theshipping agreements that are the subject of the two complaints made to theCouncil. The OECD stated that it did not find convincing evidence that thepractice of discussing and/or fixing rates and surcharges among competingcarriers offers more benefits than costs to shippers and consumers. Itrecommended that limited anti-trust exemptions not be allowed to coverprice-fixing and rate discussions. The full recommendations, as made by the OECDare reproduced at Annex D to this report. Unlike most other advanced economies, Hong Kongdoes not have a general competition law under which price fixing arrangementsand other inherently anti-competitive agreements between competitors can beassessed. Neither is there a transparent process whereby parties to inherentlyanti-competitive agreements are given the opportunity to publicly demonstratethat the agreements should be exempted because the agreements deliver publicbenefits that outweigh the detriment to competition.   Council Comment External trade plays a vital role in HongKong's economic development. The value of our total trade in goods and servicesamounted to around 282% of GDP in 2001. From 1996 to 2001, the value of theHKSAR's merchandise trade grew from HK$2,994 billion to HK$3,049 billion with anaverage annual growth rate of 0.3% [4]. In 1999, Hong Kong was the world'ssixth-largest leading exporter and the fifth-largest leading importer in termsof value of merchandise trade [5]. It is vital for Hong Kong's economy for it tohave a competitive shipping industry, which offers efficient services tofacilitate the flow of trade. Although it is generally understood that HongKong has high terminal efficiency and fast customs clearance, mainland ports arealso making improvements, which poses a challenge to Hong Kong's place as aworld leading trade entity in the region. Enhancing Hong Kong's competitivenessis necessary; otherwise shippers may direct their goods via mainland ports. TheCouncil believes that a high degree of market-based competition is the best wayto maintain our cost-effective shipping services for Hong Kong shippers. The Hong Kong Government's Statement onCompetition Policy indicates that price fixing arrangements between competitors"may warrant more thorough examination" to ascertain whether they doin fact limit market accessibility or contestability, or impair economicefficiency or fair trade [6]. Agreements between shipping lines, howevertermed, but collectively referred to as 'conference agreements', because oftheir price fixing characteristics, would therefore come within the category ofbusiness conduct that, according to the Government's Statement on CompetitionPolicy, may warrant further examination. The procedures followed by IADA, in itsdealings with the Hong Kong Shippers Council, appear to provide sometransparency in regard to the terms and conditions for use of its members'services. However, as indicated in the complaint by HKAPM the procedures do notsatisfy all the shippers who use those services. In addition, there is also thewider issue of whether the effect of the collaborative effort by the IADAmembers raises a concern as to the reasonableness of the terms and conditions ofthe conference tariffs and surcharge mechanism. In effect, whether they satisfythe economic efficiency and consumer welfare objectives of the Government, asoutlined in its Statement on Competition Policy [7] As noted above, othercomparable advanced economies have a regulatory mechanism to provide ongoingoversight of shipping line agreements, and a mechanism for handling competitioncomplaints, notwithstanding the limited application of anti-trust exemptions. In view of the Government's preferred sectorspecific policy approach to competition policy, there would seem to be a rolefor the Government (i.e. the Port and Maritime Board as the sector-specificagency with responsibility for this sector) to take on the role of facilitatingprocesses that: obligate negotiations between shippers andlines that have formed shipping agreements; and provide a mechanism whereby independentscrutiny of shipping agreements could be considered in terms of their effect oncompetition.   Council Recommendations The Council's first preference is that a law ofgeneral application administered by a competition authority is the correct meansof addressing the regulatory conundrum concerning competition oversight. TheGovernment's preference is for sector specific administrative oversight,utilising self-regulatory mechanisms where possible. In view of the Government'spreferred policy approach, the Council suggests the Port and Maritime Board (asthe sector-specific agency with responsibility for this sector) should take onthe role of facilitating the following processes.   Competition analysis A process should be introduced whereby anyallegations of restrictive practices by members of shipping line agreements(such as conferences or discussion agreements) are able to be examined toascertain whether: a service provided by shipping lines incooperation with each other is subject to effective competition fromnon-conference lines; where a shipping agreement exists, the terms ofthe agreement preserve the right for each individual line to offer individualservices, outside the agreement, if the line so chooses; and where shipping lines are parties to anagreement, and the lines who take part in the agreement do not offer competinglevels of services on all or some aspects of their operations, that there is apublic benefit in the agreement that outweighs the detriment to competition.   Facilitating effective negotiation When competitors agree with each other onmatters that could otherwise be subject to competition, a concern naturallyarises that shippers will not be able to negotiate a better deal for themselves,in terms of a low cost service, wider product choices, and higher quality ofservice. In respect to the "Yen AppreciationSurcharge" mechanism, individual shippers, or classes of shippers, are notin a position where they are able to counter the market power exerted throughthe agreement under IADA to negotiate separate terms and conditions. Neither canthey press for changes to the mechanism (as suggested by the Council inparagraphs 13-14) to seek a better threshold to reflect the current state of theforeign exchange market. In view of the concern that arises from themarket power held by aggregations of competitors, a mechanism should beestablished that provides some countervailing power for shippers when attemptingto negotiate terms and conditions.   Introduce transparency As mentioned earlier in this report, theCouncil indicated to the HKAPM that it would pursue policy options forGovernment to consider in addressing the lack of transparency. During the courseof the preparation of this report, the Council met with the Hong Kong Port &Maritime Board and the Hong Kong Shippers Council to discuss ways to improvecommunication between IADA and Hong Kong shippers. The Port & Maritime Boardsubsequently informed the Council that improved arrangements to increasetransparency were facilitated and brokered through the mediation efforts of theBoard. This had resulted in the Hong Kong Shippers' Council agreeing todisseminate details of any new charges, or changes in the levels of currentcharges to their members and Hong Kong shippers in general through circulars andthe "Shippers Today" magazine, as and when IADA furnish them withdetails. The Secretary for IADA had also agreed and madea commitment to give the Hong Kong Shippers' Council due notification wheneverthere are changes in IADA's recommended surcharge items which may impact theHong Kong shipper/consignee. The Shippers Council advised the Council that it isin the process of redesigning its web page to show details of charges as well astheir advice to shippers on these charges. The Consumer Council believes thatthese measures will go a long way to help improve communication andtransparency, avoiding misunderstandings.   Self-regulation In the long run, so as to address the issue ofmarket power accruing from an aggregation of competitors, that arises withconference or discussion agreements, the Council considers that some selfregulatory safeguards in the form of an industry code of practice should beintroduced: to provide an appropriate degree oftransparency, and opportunity for those who use the services of lines party tothe agreements to negotiate terms and conditions; to obtain information that justifies anyclaimed cost recovery mechanisms built into service agreements; and to provide a complaint handling mechanism forany persons aggrieved with the actions of the members of shipping agreements. A complaints handling mechanism similar to thatsuggested above is a principle that has been espoused by the Hong Kong GeneralChamber of Commerce in its 'Chamber Statement on Competition'. The Statementencourages specific industries to develop, through their respectiveassociations, statements or codes of practice to promote competition withintheir own sectors, and where possible, to include a complaints handlingprocedure as well as provisions to deal with non compliance of their members.See < http://www.chamber.org.hk > In this regard, the liner shipping industrycould be requested to develop a code of practice that addresses the issue ofcompetition, along the self-regulatory lines preferred by Government, and whichprovides for the above safeguards and complaints handling mechanism. The basic approach taken by the Council in theabove recommendations is in conformance with the Government's Statement onCompetition Policy which states " "the Government is promoting economicefficiency and free trade through competition by working together with theConsumer Council to encourage the private sector to adopt pro-competitionmeasures, such as self-regulatory regimes that preserve and enhance freecompetition; and to monitor and review business practices in sectors prone toanti-competition behaviour" [8] In addition, leaving aside the self-regulatoryconcept, the Council's recommendations are also considered to be in line withthe general approach taken by Government's in other comparable advancedeconomies. They are also considered to be generally in line with the principlesbehind the recommendations that the OECD outlined in its recent Liner ShippingCompetition Policy Report, at Annex C to this report. The Council would be pleased to make itsresources available to work with government and industry in assisting with thedevelopment of such a code [9]. Consumer Council July 2002 Annex A: Yen Appreciation Surcharge Mechanism Annex B: Terminal Handling Charges in Major AsianPorts Annex C: Shipping Line Agreements & CompetitionOversight In Other Jurisdictions Shipping Line Agreements Shippers' interests are served by ensuring thatnot only are goods transported at the lowest possible price, but that adequatereturns are obtained by liners to ensure the long-term availability of efficientservices. In most markets this is brought about through open competition wheremarket participants compete with each other and prices for goods or services atbrought down, through the competitive process, to a level equal to or slightlyabove marginal cost. Historically, in international liner shipping,'conferences' have been created between liners for the purpose of ensuring thatappropriate returns are achieved to guarantee that long-run availability ofefficient shipping services is maintained. The conferences are in effect jointventure operations, and efficiencies are brought about through the poolingarrangements of participating lines that result in economies of scale. Another form of agreement commonly foundamongst shipping lines is that of a 'discussion' agreement. Discussionagreements, of which IADA is one, are commonly formed amongst shipping lines toallow for discussion amongst competing shipping lines. The purpose of theagreements may be stated as promoting service, stability and efficiency in linercargo shipping by authorising parties to discuss and exchange information withregard to matters of mutual interest and concern in the trade, and forming a nonbinding consensus. A scheme administered by the United StatesFederal Maritime Commission under the Shipping Act 1984 that requires theregistration of shipping agreements, defines by regulation various categories ofshipping agreements. For example: conference and rate agreements; joint service and consortium agreements; pooling agreements; sailing and space charter agreements; and co-operative working and discussion agreements.   Joint service agreements Generally, all of the above are referred to inUS legislation as 'conference' agreements. However, notwithstanding their commonname, the agreements do not all share common elements. As such they havedifferent effects in the markets they serve. Some agreements, for example, arelong term agreements between a number of competitors achieving economies ofscale, that are formed with the intention of providing a joint service in atrade. They should be clearly distinguished and, where they face competitionwith other lines not party to the joint service agreement, could be encouraged.This obviously needs to be considered in terms of the market share of the jointservice providers and their collective market power.   Discussion agreements Agreements between a group of joint serviceproviders and lines not involved in the provision of joint services, but who gettogether under a 'discussion' agreement do not provide competitive services withimplied benefits of economies of scale. Their purpose could be to promoteindustry-wide efficiency through a range of matters such as resolving technicalissues related to cargo handling and terms and conditions for providing shippingservices; such as the exchange rate adjustment mechanism the subject of thiscomplaint. Discussion might also include issues of rationalisation, which inother circumstances would be determined through the process of attrition. Efficiencies in international liner shippingthrough technical co-operation, and by addressing matters such as rateinstability and managing capacity, may be brought about through discussionagreements in much the same way as through joint service agreements. The anti-competitive effects of discussionagreements may in some circumstances be seen as remote because, unlike jointventure agreements, they are stated to be non binding informal arrangements,with little if any capital investment, and that can be easily abandoned.However, discussion agreements can be seen as having a greater anti-competitiveeffect than joint service agreements. This is particularly the case where: notwithstanding the so called 'non binding'nature of the agreement, parties do actually agree on matters and uniformpositions are reached; the matters discussed and agreed upon cover awide range of issues that affect the level of competition; and the members of the agreement include lines witha large share of the overall market (or of specific commodity markets) in thetrade Discussion agreements might also act as animpediment to innovation, tending toward achieving consensus on matters thatmight otherwise be treated independently. The benefits that can be derived fromcompetition between shipping lines can therefore be diminished throughinvolvement by those lines in discussion agreements. It follows therefore thatin the interests of ensuring efficiency in the provision of shipping services,safeguards would need to be introduced to ensure that shippers' interests areprotected from the collusive nature of the agreements.   Competitive safeguards Safeguards for shippers in other advancedeconomies, where shippers are faced with collective agreements by shippinglines, are usually achieved by: providing government oversight on the contentand working of shipping line agreements; and imposing negotiation obligations on shippinglines. The general understanding is that effectivenegotiation can occur only when there are guarantees that adequate informationwill be made available to both parties so that both can maintain optimalefficiency. The information needs of the shipping linesare the short and long term service requirements and technical aspects of thecargo to be transported. The information needs of shippers have two aspects.First, they need to be assured that a service is provided with the rightcapacity and frequency. The second need has more to do with ensuring that thetariffs, and terms and conditions on offer do not take advantage of thediminished competition brought about by the collusive nature of the shippingline agreements. In this respect, shippers need to know the relationship betweenaspects of the quality of service and the costs.   Organisation for Economic Co-operation andDevelopment (OECD) In December 2001, the OECD published its'Liner Shipping Competition Policy Report' in which it examined the rationaleand impacts of traditional conference price fixing, discussion agreements, andcapacity limitation agreements. The analyses in the report were based oninformation collected through a survey completed in 2001, supplemented by otherpublicly available sources of information. The report investigated market share,freight rate, financial performance and regulatory trends in addition todifferent models of liner shipping markets. The OECD's report included referenceto the shipping agreements that are the subject of the two complaints made tothe Council [10]. Based on the results of its analysis, theOECD's report sought to determine whether the continuing existence of anti-trustexemptions for price fixing and rate discussions in liner shipping arepreferable to a move towards more competitive liner markets. The OECD statedthat it did not find convincing evidence that the practice of discussing and/orfixing rates and surcharges among competing carriers offers more benefits thancosts to shippers and consumers. Accordingly, it recommended that limitedanti-trust exemptions not be allowed to cover price-fixing and rate discussions.It also found that capacity agreements should be carefully scrutinized to ensurethat they do not distort the markets in which they are present. However, theOECD recognized that the high degree of polarization in the longstanding debaterelating to the topic, and set out a possible way forward based on points ofconvergence between shippers and carriers. It noted that the points serve toframe three principles that countries should use to guide when re-assessing thevalidity of anti-trust exemptions for price fixing, rate discussions andcapacity agreements between competitors in the liner shipping sector. The fullrecommendations, as made by the OECD are reproduced at Annex D to this report. In summary, the three principles identifiedin the recommendations are: Rates, surcharges and other terms of carriagein liner shipping should be freely negotiated between shippers and carriers onan individual and confidential basis. Carriers and shippers should be able tocontractually protect key terms of negotiated service contracts, includinginformation regarding rates. Carriers should be able to pursue operationalagreements with other carriers so long as these do not include price-fixing orconfer undue market power to the parties involved. Examples of how other jurisdictions incomparable advanced economies have applied competitive safeguards in this sectorare discussed in limited detail in the following section.   Other Jurisdictions' Policies on ShippingAgreements Collective agreements between shipping lineshave been a focus of attention, insofar as their effect on competition isconcerned, for governments in other comparable advanced economies. This sectionof the Council's study examines three different approaches to competition policyfor the sector in the United States, the European Union, and Australia.   The United States Federal Maritime Commission (FMC) The FMC administers the Shipping Act of 1984which is aimed at protecting shippers, carriers and others engaged in theforeign commerce of the US from, amongst other things, practices of shippinglines that have an adverse effect on shipping in U.S. trades. The FMC: investigates, upon its own motion or uponfiling of a complaint, discriminatory, unfair, or unreasonable rates, charges,classifications, and investigates, upon its own motion or uponfiling of a complaint, discriminatory, unfair, or unreasonable rates, charges,classifications, and practices of ocean common carriers, terminal operators, andfreight forwarders operating in the foreign commerce of the U.S.; and receives agreements among ocean common carriersor marine terminal operators and monitors them to assure that they are notsubstantially anti-competitive or otherwise in violation of the Shipping Act of1984; The FMC also registers agreements among oceancommon carriers or marine terminal operators and monitors them to assure thatthey are not substantially anti-competitive or otherwise in violation of theShipping Act of 1984. In this regard, the interests of shippers,when dealing with members of shipping agreements would be protected by virtue ofthe combined tariff examination and prohibition powers that the FMC has at itsdisposal. The recent OECD report referred to earlier,noted that the passage of the United States Ocean Shipping and Reform Act (OSRA)in 1998 allowed shippers and carriers active in the US trades to enter intoconfidential contracts without prior notice. The result of this was said to havebeen a rapid and massive switch (200% increase) to such confidential agreements,which had the potential to undermine the dominance of conference tariffs (atleast for shippers with the power to negotiate lower rates). The report noted that very little traffic(e.g. less than 10% of the USA-Europe traffic) now takes place directly underConference terms and that this movement towards service contracting betweenindividual shippers and carriers underscored a general erosion of Conferencepower. This decline was supported by data from individual trades and was said tobe the result not only of the regulatory changes governing conferences in manyOECD countries, but also from the arrival of large and efficient independentoperators. The report also noted, however, thatconferences still remain an important factor in many trades and the growth inalternative forms of organization (consortia, alliances, discussion agreements)have raised the potential for sensitive trade data to "bleed" acrossconference boundaries and to other market actors. In particular, the reportnoted "that a decline in conference share (and a corresponding rise innon-Conference market share) does not necessarily translate into appreciablygreater competition since many independent operators have every incentive toprice off Conference rates rather than competing vigorously and independentlywith Conferences on price (see section 4). Furthermore, many smaller independentoperator services may be inferior to those offered by Conference lines in termsof geographic scope and frequency of service." [11]   Australia - Part X of the Trade Practices Act Part X of the Australian general competitionlaw, the Trade Practices Act (TPA), is headed 'International Liner CargoShipping'. It contains a wide range of provisions controlling and regulating theactivities of ship owners in, and in relation to, the carriage of goods whollyor partly by sea from a place in Australia or place outside Australia (outwardscargo shipping). It draws a broad distinction between outwards cargo shippingunder what are referred to as 'conference agreements' and the activities ofindividual ship owners in relation to outwards cargo shipping. Part X has separate provisions: establishing a filing system of agreements thatform a public register available for inspection; regulating and controlling outwards cargoshipping activities both under conference agreements and by individual shippers(those who may be deemed to have substantial market power); obligating conferences to negotiate and providetransparency as to tariff terms and conditions with shippers bodies (e.g.shippers councils or associations); allowing for the prosecution of offencesagainst the Part dealing with misuse of market power; and providing civil remedies for shippers inrespect of a contravention. In general, Part X of the TPA requires thatparties to registered conference agreements negotiate with relevant designatedshipper bodies when requested in relation to negotiable shipping arrangements. Specifically, the legislation requires thatparties to shipping conferences: take part in negotiations whenever reasonablyrequested and consider matters raised; make available to shipper bodies informationreasonably necessary for the purposes of negotiation; provide a duly authorised officer of theDepartment of Transport with information the officer requires relating to thenegotiations; and give each relevant designated shipper body atleast 30 days notice of any change in negotiable shipping arrangements. Failure to abide by the negotiationobligations could result in de-registration of the conference agreement andexposure to penalty. In March 2000, the Australian Competition andConsumer Commission (ACCC) which administers the TPA, investigated complaintsfrom exporters against a conference agreement registered under Part X, known asthe Australian/South East Asia Trade Facilitation Agreement. The ACCC noted thatthe Agreement allowed parties to discuss and exchange information on matters ofinterest, such as freight rates. The exporters had complained about excessiveand rapid rate rises being imposed by the shipping lines covering the route. The ACCC was required to assess if theservices of the lines were 'economic' and 'efficient'. The ACCC noted that insuch investigations the concepts had to be translated into meaningfulquantitative indicators, requiring quality data. The ACCC noted that it hadparticular difficulty in getting adequate data from the Secretariat for theAgreement and that in testing the data that was obtained against other availabledata the ACCC was forced to question the veracity of data related to freightcapacity. I n terms of the criteria of economic andefficient services, the ACCC noted that it did not have evidence to prove thatthe costs of the shipping lines belonging to the Agreement were excessive.According to information received by the ACCC, the Agreement member linesincurred losses on the northbound South East Asian trade in the nine months toMarch 2000 and that after freight rates had been at an historic low in 1999 theconference agreed on a rate restoration program. The ACCC was concerned about the speed andsize of the proposed rate restoration program. However, in reaching its finalview on this issue, the ACCC gave some weight to the fact that the actual rates,at the time, were presently below the minimum benchmark agreed in January 2000and that further planned rises were not applied. The ACCC noted that it may havereached a different position had additional rises been implemented.   European Union The Treaty establishing the EuropeanCommunity includes Articles 81 and 82, which prohibit, in generalanti-competitive agreements and conduct. Article 81, which prohibitsanti-competitive price fixing agreements, would have prima facie application toshipping conferences. The Article reads as follows:   Article 81 (ex Article 85) The following shall be prohibited asincompatible with the common market: all agreements between undertakings,decisions by associations of undertakings and concerted practices which mayaffect trade between Member States and which have as their object or effect theprevention, restriction or distortion of competition within the common market,and in particular those which: directly or indirectly fix purchase or sellingprices or any other trading conditions; limit or control production, markets, technicaldevelopment, or investment; share markets or sources of supply; apply dissimilar conditions to equivalenttransactions with other trading parties, thereby placing them at a competitivedisadvantage; make the conclusion of contracts subject toacceptance by the other parties of supplementary obligations which, by theirnature or according to commercial usage, have no connection with the subject ofsuch contracts. Any agreements or decisions prohibited pursuantto this Article shall be automatically void. The provisions of paragraph 1 may, however, bedeclared inapplicable in the case of: any agreement or category of agreements betweenundertakings; - any decision or category of decisions byassociations of undertakings; any concerted practice or category of concertedpractices, which contributes to improving the production ordistribution of goods or to promoting technical or economic progress, whileallowing consumers a fair share of the resulting benefit, and which does not: impose on the undertakings concernedrestrictions which are not indispensable to the attainment of these objectives; afford such undertakings the possibility ofeliminating competition in respect of a substantial part of the products inquestion.   In 1986 the Council of the European Union (EU),in recognition of the perceived stabilising effects on service reliability thatcould accrue from such competitor agreements, adopted a special Regulation (EEC)No 4056/86 laying down detailed rules for the application of Articles 81 and 82which provided block exemption to 'liner conferences' from the application ofArticle 81(3). In order to prevent liner conferences fromengaging in practices which would be incompatible with Article 85(3) and inparticular, to prevent the imposition of restrictions on competition which arenot indispensable to the attainment of the objectives on the basis of whichexemption is granted, certain conditions and obligations to the block exemptionwere made. First, Article 4 of the regulationprovided that the exemption is to be granted subject to the mandatory conditionthat agreements did not cause detriment to certain ports, transport users orcarriers by applying differentiated conditions of carriage. Second, Article 5 ofthe Regulation attached to the exemption certain obligations relating, inparticular, to loyalty arrangements and to services not covered by the freightcharges. Furthermore, it was noted 'there can be no exemption if the conditionsset out in Article 85(3) of the Treaty are not satisfied. For that purpose, Article 7 of Regulation No4056/86 provided a mechanism for monitoring exempted agreements. Where personsconcerned are in breach of an obligation laid down in Article 5 of thatregulation or where, owing to 'special circumstances', agreements, which qualifyfor an exemption, have effects incompatible with the conditions laid down inArticle 85(3), the European Commission is able to take certain measures. Specialcircumstances expressly include those created by 'acts of conferences or achange of market conditions in a given trade resulting in the absence orelimination of actual or potential competition. In that case, Article 7 of theRegulation provides that the Commission is to withdraw the benefit of the blockexemption. An example of how the conduct of shippingconferences can come under scrutiny in the European context can be found in acomplaint lodged with the European Commission by the German Shippers Council. Inthat matter the German Shippers Council alleged anti-competitive price fixing bymembers of the Far Eastern Freight Conference in relation to intermodal(maritime and land) transport services. The German Shippers Council noted thatthere were five activities that made up the intermodal service: Inland transport to the port; cargo handling in the port (transfer from themode of inland transport to the vessel); sea transport (maritime transport from the portof origin to the port of destination); cargo handling in the port of destination(transfer from the vessel to the mode of inland transport); and inland transport from the port of destinationto the place of final destination. The German Shippers Council complained thatthe block exemption provided under Article 3 of Regulation No 4056/86 onlycovered the third of the above elements, i.e., the maritime element of ashipping conference tariff, whereas the conference agreement extended to all thefive elements. In 1994 the European Commission made a decision (confirmed onappeal in February 2002 by the Court of First Instance of the EuropeanCommunities) that the conference had infringed the provisions of Article 81 byagreeing on prices for inland transport services, in combination with otherservices. In its confirmation of the Commission'sdecision, the Court noted "the scope of Regulation No 4056/86 is limited tomaritime transport services properly so called, that is, to transport by seafrom port to port, and does not cover the inland on-or off-carriage of cargosupplied in combination with other services as part of an intermodal transportoperation" [12]   Annex D: Recommendations from OECD RECOMMENDATIONS EXTRACTED FROM ORGANISATION FORECONOMIC CO-OPERATION AND DEVELOPMENT LINER SHIPPING COMPETITION POLICY REPORT -6 NOVEMBER 2001 　 Countries, when reviewing the application ofcompetition policy in the liner-shipping sector should remove anti-trustexemptions for common pricing and rate discussions. Exemptions for otheroperational arrangements may be retained so long as these do not result inexcessive market power. Carriers may have legitimate operational needsthat require co-operation with other (sometimes competing) carriers. These needsmay involve closer working synergies through global alliances and consortia ormore trade-specific requirements such as the sharing of ship capacity throughslot sharing/chartering arrangements. Countries have in the past recognized thisneed and have offered carriers protection from domestic anti-trust laws in thoseinstances where these arrangements are not grossly anticompetitive. This reportalso recognizes that some of these arrangements may be necessary and indeed,beneficial, and does not call into question the principle of limited anti-trustexemptions for operational arrangements in liner shipping. This review, however,has not found convincing evidence that the practice of discussing and/or fixingrates and surcharges among competing carriers offers more benefits than costs toshippers and consumers and recommends that limited anti-trust exemptions not beextended to price-fixing and rate discussions. It would be naive, however, to think that thisfinding will change carriers' minds and/or that carrier counter-arguments tothese findings will change shippers' views. Given the degree of polarity in thedebate, it is also unlikely that countries will be able to continue the statusquo or, alternatively, radically change it. And yet any commercial arena wheresuch a disconnect exists between service providers and customers calls forresolution. Perhaps a way forward out of this impasse canbe built on those points that are mutually agreeable and or recognized by bothsides. In light of the findings of this report, countries should review theirexisting regulations and anti-trust exemptions, as appropriate; to ensure thatthey best take into account changed market circumstances. Such a review shouldfocus on those points that are mutually agreeable and/or recognized by bothsides. In particular four points stand out: Both sides agree to the concept of directnegotiations between shippers and carriers. Both sides, based on their acceptance of OSRAand individually negotiated rates and conditions, are not averse tocontractually protecting (and rendering confidential) key elements of thosenegotiations. Both sides are relying less on collectivelyagreed rates and conditions. Both sides view that carriers can and shouldseek to co-ordinate with each other on the operational aspects of providingliner services. These four points of agreement serve to framethe following principles that represent the "second-best" way forwardon the matter of the organization of liner markets.   Principle 1: Freedom to negotiate Rates, surcharges and other terms of carriagein liner shipping should be freely negotiated between shippers and carriers onan individual and confidential basis. Shippers should be able to seek directone-on-one negotiations with carriers. One form or other of individual contractnegotiation should replace Conference collective agreements. Conferences, in thepast, have rendered such negotiations more difficult and in some cases haveactively worked against this goal. The freedom for shippers and carriers tofreely meet and discuss the terms of their relationship should not beconstrained by outside parties.   Principle 2: Freedom to protect Contracts Carriers and shippers should be able tocontractually protect key terms of negotiated service contracts, includinginformation regarding rates. Carriers and shippers should be able tostipulate which details of their negotiations they wish to protect from otherparties. Carriers should be able to agree that shippers will not revealnegotiated rates to other shippers and shippers should be able to ensure thatcarriers will not divulge or discuss negotiated rates with other carriers. Ifboth parties can contractually agree on confidentiality terms, theseconfidentiality terms should be given robust protection. Breach of contractuallyagreed confidentiality terms should be treated with credible and deterringsanctions. Shippers and Carriers should have the freedom to protect theirprivacy. In this way, discussion agreements can still operate by focusing onmatters that are not considered confidential by shippers or carriers.   Principle 3: Freedom to co-ordinate operations Carriers should be able to pursue operationalagreements with other carriers so long as these do not include price-fixing orconfer undue market power to the parties involved. Carriers should be able torationalize their operations in order better to deliver services. However,capacity agreements beyond those necessary for operational reasons aretantamount to price-fixing. While capacity agreements within an existingoperational grouping such as a Conference and/or Alliance, can be seen to havean operational character, arrangements further outside of such groupings can beseen to be increasingly anti-competitive. The ultimate expression of thepotential anti-competitive impact of these arrangements would be a capacityagreement that covered all (or virtually all) of a trade. Such an agreementwould be tantamount to manipulating an entire market and should not be allowed.Countries, therefore, should develop protocols (like the EU's market share testfor Alliances and Consortia) to determine the acceptability of sucharrangements. The freedom for carriers to manage their affairs should not leadto abuses of market power. The approach encapsulated in the threeprinciples would go far to remedy the fact that shippers do not have the powerto manipulate demand in the way in which carriers can potentially manipulatesupply. Of course, an alternative solution to this problem would be to grantshippers anti-trust exemptions allowing them to rig prices in liner shippingmarkets thus paralleling carriers' ability to discuss and/or set rates. This,however, is the worst possible solution. In our view, it is far preferable toremove from carriers the ability to discuss and/or set rates without shippersexpress consent than to grant parallel powers to shippers.   Footnote: 1.       The ratio of imports from Japan to total imports was estimated using data fromvarious issues of 'Hong Kong Monthly Digest of Statistics' Census and StatisticsDepartment. 2.       Sourced from a copy of a letter from the Transpacific Stabilization Agreement toHong Kong Shippers Council 18 October 1999, provided to the Consumer Council. 3.       It might be argued by some that there are legal remedies in Hong Kong to counter'cartel' type activities under the common law doctrine of restraint of trade.However, the common law doctrine of restraint of trade presents problems as thedoctrine has been applied to support price fixing agreements betweencompetitors, e.g. English Hop Growers v Dering [1928] 2 KB 174. Moreover, theconsequence of the Courts approach to competitor agreements under the doctrinehas led to the introduction of specific competition law. See E McEndrick'Contract Law' Macmillan Press Ltd. 1997, page 298. 4.       The ratios was estimated using data from 2002 May issues of 'Hong Kong MonthlyDigest of Statistics' Census and Statistics Department. 5.       Based on International Trade Statistics 2000 by World Trade Organization. 6.       Hong Kong Government, Statement on Competition Policy, May 1998, paragraph 7. 7.       Hong Kong Government Statement on Competition Policy, paragraph 2. 8.       Hong Kong Government Statement on Competition Policy, paragraph 10 (f) 9.       The Council has developed a 'Competition and Consumer Protection Model Code'that has a set of suggested competition rules (based on existing sector specificcompetition legislation in Hong Kong) and suggested complaint handlingprocedures. The Model Code could serve as the basis for development of a code ofpractice for the shipping industry. 10.       Organisation for Economic Co-operation and Development, Directorate for Science,Technology and Industry, Division of Transport 'Liner Shipping CompetitionPolicy Report' DSTI/DOT (2001)1, 06 Nov 2001. 11.       OECD Report, paragraph 44. 12.       Far Eastern Freight Conference v Commission [2002] The Court of First Instanceof the European Communities (Third Chamber) T-86/95, Clause 241.