Talking Trade with World Shipping Council’s John Butler

   The international container carriers face waves of regulatory changes and there to represent this industry for nearly 20 years has been the Washington, D.C.-based World Shipping Council. Current and future regulations not only affect the way these asset-heavy enterprises operate, but how they interact with shippers worldwide. While regulatory change is inevitable with the continued evolution of global trade, the council provides a collective voice for the container carriers before myriad global standards bodies and national governments to ensure that the industry is represented at the table. The Adam Smith Project recently sat down with John Butler, the World Shipping Council’s president and CEO since 2015, to discuss those regulatory issues that are most pressing to the future of container shipping.

   Q: The topic of fuel has become front and center for the ocean container carriers. Hapag-Lloyd recently stated that the International Maritime Organization’s low-sulfur bunker fuel requirement will cost the ocean shipping industry a whopping $60 billion. What is WSC’s cost estimate for the industry starting in 2020? Are refiners stepping up to ensure that a sufficient volume of low-sulfur fuel will be accessible to the container shipping lines across the globe to comply in time with this rule, as well as maintain their scheduled services?

   A: In terms of the cost, WSC doesn’t have an independent cost estimate. We’ve seen numbers from various third parties. One that was kicking around, and it’s a broad range, was from the OECD last year. For liner shipping, they talked about a range between $5 billion and $30 billion a year in additional costs. If you take the rough midpoint of that — $15 billion a year in additional costs — that’s in the ballpark that we’ve seen people use. 
   Now, if you took that $15 billion number and put it in perspective, in 2017 the liner shipping industry had $6 billion or $7 billion in combined profit, and that was the best year in a long time. So we’re talking about a magnitude of cost that’s going to be quite noticeable in the supply chain.
   I don’t think it’s any exaggeration — and actually I don’t think anything else even comes close — this is the most expensive regulation that the international shipping industry has ever seen. And it will have a significant impact.
   As a trade association, we don’t interact with bunker suppliers. They interact with their customers, which are the carriers, and certainly it has been reported that those conversations are going on everywhere. Everyone knows they’re going to need this fuel, and obviously customers and suppliers are having these conversations. The refiners and bunker suppliers have made more public statements in the last couple of months than we had seen previously, and I think they’re seeking to reassure their customers that there will be enough supply.

   Q: What is expected to happen to those liner carriers that are found to be noncompliant with the low-sulfur fuel requirement? Are the IMO rules for noncompliance spelled out clearly in instances where low-sulfur fuel is not available? 

   A: Enforcement of this regulation, as is the case with all IMO regulations, will be done through the flag states and port states. The IMO itself, as an organization, doesn’t have an enforcement mechanism. And given the nature of this rule, enforcement is going to fall initially to port states, because that’s where you have an opportunity to inspect the vessels and see what fuel’s on board and what fuel was burned. 
   One of the big concerns for our industry is that we have a level playing field. We talked about the tremendous cost associated with this regulation, and that translates to the possibility for real economic distortion if some companies aren’t complying. So one of the things that we have been pushing as the World Shipping Council is the need for IMO-member states to step up and have solid oversight and enforcement to make sure that, in fact, we do have a commercial level playing field.
   Now, you always want to have fair and reasonable enforcement and in our experience with other IMO regulations that’s been the case. We want to make sure that member states, for example, recognize that testing for compliance has a margin of error, as any scientific test does. We don’t really expect governments to be taking enforcement actions based on marginal noncompliance. However, the big concern is on the other side. If there are companies which are consciously and willfully not complying, it’s extremely important that governments do take that enforcement step, not only in terms of maintaining that level playing field in the short term, but frankly it’s also important in the long term in maintaining the credibility of the IMO. It’s easy to adopt regulations, and if those regulations aren’t then implemented in a way that’s fair across the market, then people lose confidence in the organization. So it’s critical to get it right.

   Q: How realistic are scrubbers as the anecdote to complying with the IMO’s low-sulfur rule? While the shipyards are currently in a slump, shouldn’t they be bending over backwards to help carriers with this kind of modification work?

   A: In terms of what the shipyards may or may not be doing, it’s a little out of our wheelhouse, but in general there are three ways to comply with this regulation: low-sulfur fuel, LNG and scrubbers. And these are all approved mechanisms. However, they each have their issues.
   We talked about the cost with respect to low-sulfur fuel oil. With scrubbers, some carriers are finding that return on investment profile looks attractive, but there are upfront costs and timing issues in terms of getting those installed in time. We have seen reports that scrubber orders are up and continue to grow. So clearly carriers are looking at this option and coming to the conclusion that, at least for some vessels, it makes sense. There are questions whether there may be restrictions, particularly in enclosed waters, on effluent discharge, but you have to be a little careful in making generalizations about that because there are different types of scrubbers. There are open-loop scrubbers, closed-loop scrubbers and dry scrubbers, and the effluent profiles for all those things are different, so it’s really a case-by-case question with respect to those.

   Q: What is the World Shipping Council’s view regarding complaints that have been recently lodged by the Global Shippers’ Forum, European Shippers’ Council and British International Trade Association about the lack of transparency for bunker surcharges? Are these criticisms fair or not?

   A: Well, it confounds me a bit, because the compliance date with the low-sulfur fuel requirement is just over a year away. We and others in the industry have been talking about the fact that this rule will be entering into force for years now. Similarly, there have been cost estimates conducted by third parties that have been out for years. And carriers are now going to their customers and saying to them, “Look, this is what we see coming in terms of cost. This is what we are proposing to do in terms of sharing that cost through the supply chain.” It seems to me that it’s incredibly transparent. So, in terms of the transparency criticism, I don’t find that very well-founded. 
   Clearly, nobody likes to pay. And I think that’s probably more at the heart of the complaints than anything else, but this is a regulation that’s designed to make substantial improvements to human health and to the environment. As a society, we need to recognize that the things we need to do have costs. At the end of the day, as a part of the supply chain, shippers and carriers and everyone else for that matter must ask themselves, “Are we willing to pay for clean air?”

   Q: What other air pollution-control issues will the containers carriers be impacted by in the future?

   A: The other big debate at the IMO is what to do about greenhouse gas or CO2. Earlier this year, the IMO set some ambitious targets for the mid-century and beyond. One of those objectives is a reduction in absolute terms of 50 percent in CO2 emissions by 2050 from 2008 levels. That declaration goes on to call for a zero-carbon industry by the end of the century. The fact of the matter is that today, while there have been some interesting developments with respect to ferries and short-sea shipping, for transoceanic vessels there is no technology that you could buy today and put on your ships that would get you anywhere close to those reductions. 
   We have made some dramatic efficiency gains in the container fleet over that past 10 years with larger vessels. But these are still fossil-fuel-powered vessels. To get to a zero-carbon world by the end of the century, and hit the intermediate steps along the way, we are going to have to make major steps toward alternative fuels and changes in vessel propulsion systems. You’re not going to get there with a fossil-fuel-based system.
   So one of the things that we think hasn’t been talked about enough yet are the fundamental changes needed in technology to reach these goals. There’s a lot of discussion at the IMO about things that can be done in the short term to gain additional efficiencies from the existing fleet. While that’s a worthwhile discussion, we must be careful it doesn’t distract us from the much larger and more critical question of how we get from where we are today to this future that’s foreseen by these objectives. 
    The World Shipping Council, along with other shipping industry associations, believes that in order to get from where we are today to the technological place that we have to be to comply with these regulations, the industry and the IMO have to commit to and stand up a substantial research and development effort. No single country or company is in a position to make the R&D investments necessary to figure out how we get to low-carbon and eventually zero-carbon transoceanic vessels. That needs to be a shared responsibility, and the IMO is in a perfect position to help organize that effort. And frankly the sooner we start that, the less time, effort and money we potentially waste just nibbling around the edges. The other important thing about starting this effort sooner is that you have more clarity on what the viable options are for future technologies and reduce the chance of making investments that could end up being stranded. 

   Q: Let’s take a moment to discuss ballast water treatment systems. Are there enough of these approved systems for the liner carriers to deploy and meet those requirements? The Japanese classification society ClassNK recently expressed concern about this.

   A: What I saw from ClassNK is the concern over timing for the phase-in dates for when carriers need to install these treatment systems in order to be compliant. ClassNK identified a potential for bunching due to peak demand for these systems in 2022. And so the message as I understood it was, if you’ve got vessels with compliance dates around that time, you need to be making arrangements now to make sure that you don’t run into a situation where it may be difficult to do the engineering or get the shipyards to do the installations. I think that’s good advice with respect to anyone looking at complying with a regulation that’s going to require hardware installation. And I think carriers are doing that. They’re looking at their fleets, their compliance deadlines and figuring out how to space this work out both in terms of investment and the practicalities of getting the installations done to meet those deadlines. 
   In terms of the number of available ballast water treatment systems, new ones are being type-approved every day, unlike where we were quite recently. In addition to the certifications by IMO-member states under the IMO protocols, the U.S. Coast Guard has type-approved a number of systems. The U.S. is not a signatory to the [IMO Ballast Water Management Convention] and there was a lot of criticism about that, as well as the fact that the U.S. hadn’t type-approved any systems. That logjam has fortunately been broken, and there are quite a number of systems that are now available for installation and are in parallel compliance both internationally and with the U.S.

   Q: Taking a broader look at global trade impacts, how harmful have tariffs been this year for the container carriers? Drewry recently stated that the latest round of U.S. tariffs means “eastbound traffic flows could be hit with an opportunity cost of approximately 1 million TEUs next year.” Is the WCS concerned about the effect of Chinese tariffs on the container trades, and are there other acts of trade protectionism in the world that liner carriers currently have on their radar?

   A: In terms of trying to quantify the impacts, that’s not something we have tried to do. There’s been a fair amount of reporting that the phase-in of tariffs may have accelerated the movement of some goods to an earlier time than they otherwise would have moved. Based on supply and demand for goods, there is going to be a certain amount of goods that move. The timing of those moves may shift in response to the tariffs. So what the long-term effect will be, of course, will depend in large part on how long the tariffs stay in effect.
   From the perspective of the liner shipping industry, as well as for our customers, the important thing is that in the long term we have free and fair trade that is predictable, where people know what the rules are. They can then make determinations about sourcing and production and transportation services in a context where things aren’t changing on a month-to-month basis in terms of what the trade rules will be. In the long term, the critical thing for all parts of the supply chain and everyone who’s affected by it, including the public, is that we get to a point where we have a lot more transparency and predictability.

   Q: Is WSC concerned about the European Commission’s recently announced block exemption review? Since shipper groups sought to end the block exemption five years ago, is WSC worried that the exemption might be eliminated for the liner carriers this time around?

   A: First, the commission’s regulation runs on a five-year period, so the review is something that is mandated by the structure of the regulation. There’s absolutely nothing unusual about that. 
   That said, the block exemption regulation for consortia or VSAs (vessel sharing agreements) has proven to be an extremely useful tool for carriers. It provides legal certainty with respect to those vessel-sharing agreements that fall within the four corners of the block exemption. And not every vessel-sharing agreement does. But for those that do, which have been determined to be agreements for which there’s no cause for concern with respect to competitive impacts, it allows the industry to be much more nimble in responding to market changes in terms of where to put vessels and respond to supply and demand. 
   The block exemption regulation is sufficiently detailed and clear that it can be employed not only by lawyers but by commercial people. And that means everyone is operating with a pretty clear sense of what the rules are.
   That’s not always the case when it comes to competition law. So it’s a great example of something that has worked quite well, and we’re very much advocating that the regulation be continued. 

   Q: The U.S. Federal Maritime Commission is pressing forward with a plan to finalize its fact-finding investigation report regarding the application demurrage and detention by Dec. 2, with an eye toward producing recommendations that it says will bring clarity for how and when these fees are assessed by carriers and marine terminal operators against shippers. Is the WSC satisfied with the way the FMC has approached this investigation so far? Do you believe the agency’s final recommendations will be reasonable for liner and carriers?

   A: Well, to start at the end, we don’t know what we think of their final recommendations, of course, until they make them available. We’ll be interested to continue participating in the proceeding. But, in terms of your question about how the FMC has proceeded to date, I think they’ve done a good job. They have collected a lot of information. They held two days of public hearings. And of course, Commissioner [Rebecca] Dye has reached out to all parts of the industry to try to get a better understanding of what the concerns are and how the FMC might be able to best address some of those concerns.
   I think the commission is taking a conservative approach in terms of regulations. This is quite a complex factual situation. Demurrage and detention rules differ among carriers, differ among ports, and frankly that’s a reflection of a very competitive marketplace. The commission has recognized this, and they’ve expressed that they don’t want to do anything to reduce the level of competition within the marketplace. At the same time, they’ve heard a certain number of concerns from shippers, truckers and others about transparency, making sure that people know what the rules are so that they can predict when they may incur costs and then plan to avoid those costs through the management of their operations. There have been questions raised about people being able to get answers to questions about charges, resolving disputes and that sort of thing. There’s probably some improvements that can be made in that regard. But in general, I think the commission has in the interim report accurately reflected the concerns that have been raised and is looking at these things in the right way.

   Q: Describe how WSC has evolved in recent years, not only in Washington but overseas, to address the current and future regulatory issues that impact the liner carrier industry?

   A: Founded in 2000, we’re getting close to being 20 years old. The organization began to address primarily U.S. regulatory issues, but that’s very much changed over the years. In 2007, we opened an office in Brussels to deal with EU issues, and that office continues to be deeply involved in customs and security issues, but we’re also involved in environmental and other issues in Europe as well.
   We are now in the process of standing up an office in Singapore to better deal with regulatory and competition law regulation issues in Asia. A significant portion of our membership is based and trades in that part of the world, and it’s a dynamic environment. Both commercially and from a regulatory standpoint, we’re beginning to see economic and competition regulation that didn’t exist in the past. The purpose in opening the Singapore office is to monitor and better participate in those issues. 
   Also, we’re a global industry, and the world’s getting smaller. So there are lots of issues where it’s important both to have good communication across jurisdictions, and with the regulators in various jurisdictions, but also to seek, to the extent possible, common approaches to regulation. When a vessel goes from one port to another, if it has different regulations each place it goes, that becomes very cumbersome, as well as a drag on trade.
   Part of that uniformity can come through the IMO. We’ve had consultative status at the IMO since 2009, and we participate very actively there. However, the IMO is not going to be the sole source of our push for consistent regulation. There are conversations that must be had with individual countries. So what we’re trying to do is to be a coordinated voice for liner shipping in all parts of the world.