US president Joe Biden has signed into law a bipartisan bill designed to lower ocean shipping costs and reduce inflation.
The new law seeks to bring down shipping costs by forcing ships that drop off cargo at US ports to fill their remaining cargo space with US exports, instead of racing back to Asia or Europe with empty containers onboard. It also directs the Federal Maritime Commission to investigate the late fees shipping lines charge their customers when cargo gets stuck in gridlocked ports.
Both Biden and Congress seek to blame an anti-competitive oligopoly of foreign shipping lines for colluding to artificially raise prices on American consumers. “They raked in the profits and the costs got passed on, as you might guess, directly to consumers,” Biden said at a June 16 signing ceremony for the law. “Sticking it to American families and businesses because they could.”
But the law—and the narrative the Biden administration is crafting around it—offer a simplistic and inaccurate narrative about what caused shipping rates to rise during the pandemic and what might cause them to come back down.
US companies are paying sky-high shipping prices because US ports can’t bring in cargo fast enough to satisfy the demand of US consumers.
Americans, flush with an extra $957 billion in disposable income in 2020 thanks to US fiscal stimulus, spent 15% more on goods in 2021 than they did pre-pandemic. Many of those goods are manufactured in Asia, resulting in record-high demand for shipping from Asian ports to the US west coast in 2021.
But America’s west coast ports, built at the start of the 20th century, don’t have the capacity to handle such high volumes of cargo. By September 2021, ships were waiting weeks for a turn to dock at the ports of Los Angeles and Long Beach, California, and containers were piling up in shipyards and the surrounding streets. There was, in other words, a shortage of shipping capacity.
That shortage allowed shipping lines to raise their prices. US retailers, desperate to stock their shelves ahead of the 2021 holiday season, were willing to outbid each other to buy space on cargo ships. As a result, shipping rates rose nearly 10-fold from pre-pandemic levels, and shipping lines made record profits totaling more than $110 billion in 2021.
Biden argued that shipping prices rose because of an anti-competitive scheme by monopolistic shipping lines. “One of the factors affecting prices is this: Nine major shipping companies consolidated into three alliances control the vast majority of ocean shipping in the world,” Biden said. “And each of these nine is foreign-owned. During the pandemic, these carriers increased their prices by as much as 1,000% while families and businesses struggled around the world.”
But that line of argument isn’t very convincing to US economists. “Consumers are paying higher prices this holiday season for a variety of reasons, but not because of some sinister plot from freight companies to exploit consumers,” as Eric Jessup, director of the Freight Policy Transportation Institute at Washington State University’s School of Economic Sciences, told Quartz in November 2021.
“Introductory economics argues that when demand exceeds some constrained supply, then the market has to ration,” Northwestern University economist Ian Savage explained at the time.”[W]hat we are seeing in freight and also warehousing is no different in principle from Superbowl tickets, surge pricing by ride-hailing companies when a concert lets out, [or] airline tickets on the day before Thanksgiving.”
“Whether we call it profiteering or just the free market system might be a matter of semantics,” Savage added.
As for the late fees on stuck cargo, the extra charges grievously annoy importers, but don’t make up the majority of increased shipping costs.
Shipping rates won’t fall until US consumer demand for goods balances out with the US’s capacity to import goods. There are two ways that can happen.
First, the US could update its aging ports to increase the amount of cargo they can handle. The US infrastructure law passed in 2021 includes $17 billion to do exactly that, but infrastructure upgrades take years to complete.
The new US shipping law won’t address either of these root causes of high shipping costs. But it could prompt shipping lines to lower their prices a bit, if only to appease US lawmakers and avoid further regulatory scrutiny. At the very least, it will give lawmakers a chance to pass blame for inflation onto a foreign enemy and tell voters in an election year that they’re doing something about rising prices.