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China gets a grip on ships
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June 27, 1997: 2:06 p.m. ET
Control of the world's biggest port increases rate tampering worries
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NEW YORK (CNNfn) - With Hong Kong's handover, the Chinese government gets a firm grip on a business that touches almost every major industry doing business there--shipping.
That development has gone relatively unnoticed in the July 1 hoopla. And some executives believe non-Chinese companies and governments may come to regret the change.
That's because China doesn't just watch the prices for moving goods in and out of the country -- it sets them as well. So the government can influence the final price of goods moving into its domestic market as well as the cost of Chinese goods in overseas markets.
China started getting involved in setting ocean freight rates early this year through a newly created agency called the Shanghai Shipping Exchange. So far, the agency only controls shipping through Shanghai, China's chief port. But there are fears that China will expand the agency's operations or create clones in other port cities -- like Hong Kong, the world's largest general cargo port.
"It's a strange situation to have one set of regulations in one port and not in others, isn't it?" said Mark Page, a senior consultant with Drewry Shipping Consultants in London.
Hong Kong traditionally has been a back door for cargo in and out of China. It's served by most of the world's shipping lines. That competition has left prices relatively low, especially since a glut of shipbuilding activity has left the market oversupplied. However, businesses that rely on shipping to get goods to and from Chinese markets fear that equation could change.
"We're concerned for two reasons," said Chris Welsh, managing director of the European Shippers Council, a group representing importers and exporters in Western Europe. "There could be copycat activity (of the exchange) in other ports and countries. Also, there are clear indications already that the exchange is having an effect in the China-Far East/Europe trade lane on rates and tariffs."
Others argue the Chinese government could not only use shipping prices to control market access and competitiveness for various goods, but also to favor Chinese ship lines over those controlled by other nations. Theoretically, the exchange could let the country's two major shipping lines, government-controlled China Ocean Shipping Co. (Cosco) and Sinotrans, charge more attractive prices and win more business.
"It's rate regulation in a particularly nefarious form," said Chris Koch, general counsel for Sea-Land Service Inc., the largest U.S. carrier. "The Shanghai exchange is controlled by the same people who control Cosco...The exchange might also be used to control export markets."
Shipping can account for anywhere from 3 to 10 percent of the landed cost of most consumer and manufactured goods. As a result, adjusting the transport cost component can result in a price advantage in some markets.
Welsh said the Shanghai exchange officials already have been meeting with ship lines to arrange rate increases on various cargoes destined for Europe. With shipping rates at an all-time low, some ship lines are receptive to the action.
In reaction, Welsh's group last week lodged a complaint about the Shanghai Shipping Exchange's activities with the European Commission.
European businesses so far are the only ones that will feel the effect of China's shipping activities. That's because its shipping exchange has declared it will oversee only European and Asian routes leading to and from Shanghai. North American routes are not monitored.
When it established the Shanghai Shipping Exchange, China said it didn't need to review North American trade lanes because a U.S. agency, the Federal Maritime Commission, already did so. However, Congress currently is debating whether or not to kill or curtail that agency. That, some shipping executives believe, would give China an opening to start tampering with rates on North American shipping lanes as well.
When China established the exchange Sea-Land and American President Lines, the two major U.S. carriers, protested and claimed it was an unreasonable intrusion by the government into a commercial activity. The Chinese government said any carrier refusing to cooperate with the exchange would be banned from Shanghai. Asian and European carriers quickly signed on. The U.S. carriers, out of fear of losing critical business to their competitors, signed on as well, but only after some diplomatic assurances that rates would not be dictated by the agency.
Communications concerning the exchange have been channeled through China's state press. So far there has been no indication the government plans to extend its activities to Hong Kong or North American trade lanes. But executives note the ability to do so is there.
"I wouldn't be surprised to see the Shanghai Shipping Exchange spread throughout China, if they want it too," said Koch.
- Allen Wastler 
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