Freight cost: Given that shipping rates are market driven, it is not going to be that easy to control rates – The Hindu
Can the government intervene in the matter of shooting shipping prices?
On July 9, the US President Joe Biden signed a sweeping order directing the Federal Maritime Commission (FMC) to crack down on ‘unjust and unreasonable fees’ in the ocean shipping industry. This was due to spiralling freight levied by global shipping lines due to various surcharges, which, in turn, was hurting American trade.
Trade in the pandemic
The Covid pandemic, followed by the Suez Canal blockage and suspension of operations at China’s Yantian port affected the global container trade resulting in huge congestion at certain ports in US, Europe and China. This, in turn, caused a huge shortage of containers forcing lines to levy various surcharges to compensate the loss they incurred. This hit the trade badly.
Pre-Covid, a 40-feet container freight rate for European Union was around $1,800 but today it is over $5,000. To the US, the freight has increased to $11,500 as against $4,000 due to the surcharges, said Tirupur Exporters’ Association President Raja M Shanmugham.
The US President has warned of cartelization and decided to take stringent measures. India should also do the same, he said.
Desperate to meet the export commitments, the trade was forced to agree for unheard of freight rates with premium to ensure connectivity in time. The upward spiralling did not ease even after almost a year, said AV Vijayakumar of Paramount Shipping.
Some regulatory mechanism to control the undue advantage enjoyed by one link in the supply chain (sea mode) will help the trade holistically and avoid the unhealthy situation. It is unfortunate that such a system or mechanism is unavailable in India despite desperations expressed by the industry, he said.
The effectiveness of the Biden administration caution to FMC is yet to be tested. However, at least the shipping industry is warned of the disapproval of the US Government about the sufferings of exporters, said G Raghu Sankar of International Clearing & Shipping Agency (India) Private Limited.
The DG Shipping can be empowered to handle the situation including regulating, if not restricting the freight rates. While the argument could be that market forces will decide the rates, if all market forces are on one side and industry is on the other, there will be an imbalance with no recourse for the users, he added.
Capt Kamal Chadha, Managing Director, The Marex Group, said shipping rates are cyclical in nature. By the time the government reacts and actually puts a system in place to control the freight rates, the market will most likely have taken a downward turn.
But the legacy of a new control system will have been established, which will later become a hurdle to the trade. In the long run, therefore, government interference, which is at best a myopic knee-jerk reaction, will prove detrimental to the trade and the carriers. Nobody stands to benefit from such controls, he said.
Capt Pankaj Kapoor, a maritime lawyer, says major shipping lines are offering multimodal (door-to-door) services. The government can enforce short-term measures like uniformity in port charges / Customs rules across the country and reduce the waiting period of containers in ports by quick clearances. This will send a message to the lines to cut transportation costs (freight) from origin to destination.
Even the FMC is mandated to bring about freight reduction through similar measures, he said.