The Lex Newsletter: high drama on the high seas

Unlock the Editor’s Digest for free

Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.

Dear reader, 

By and large, in conversations with companies, bankers and consultants, Brexit comes up as a bugbear or a disappointment. So I was intrigued to learn there is at least one sector that still believes a post-EU Britain could “take back control”. 

Shipping companies are pressing the UK to continue to protect them from competition rules after the EU said it would axe its own exemption. The word “sovereign” has been bandied about. References to Britain’s naval history abound, together with the importance of maritime transport for this little island. Britannia, it seems, is still called upon to rule the waves. 

The maritime tussle centres on “consortia block exemptions”. Under such rules, shipping companies can strike deals to swap space, or even pool several ships on a particular route and operate them jointly.

Co-operation in a competitive industry would ordinarily raise eyebrows at any anti-monopoly watchdog. Yet in this case, as long as a consortium’s market share remains below 30 per cent, it gets a free pass. Indeed, given the market share dominance of shipping giants such as MSC, Maersk and CMA CGM, regulators hoped that the ability to club together might help the small fry compete.

This exemption is set to expire in the EU in April next year. After this time, companies will still be able to co-operate, but they will not receive automatic relief from ordinary rules.

The UK, which has inherited the same legislation, is considering whether or not to follow suit. If it pursued a different path, it would still have to comply with EU rules for goods transported to and from the bloc, but not for goods transported directly from, say, east Asia.

The fact that block antitrust exemptions exist at all underscores the special nature of business on the high seas. Ships are expensive and require a lot of upfront financing. They are quite slow-moving, too, which means you need a big fleet to operate a weekly service from Shanghai to Rotterdam. The bigger the ship, the lower the cost per tonne of transported goods. But empty space aboard benefits no one. 

That helps explain why liners have long sought to co-operate, rather than compete. The current block exemption rules are a remnant of agreements that date back to the 19th century. The first of these, the Far Eastern Freight Conference, was established in 1879 to govern routes from China and Japan to European ports. It was disbanded only in 2008. 

Competition authorities long judged that the benefits of co-operation would outweigh the potential cost of lower competition. Indeed, before 2020, the expense of shipping goods trended downward while maintaining quality standards. It is hard to prove that co-operation was the reason why maritime transport became more affordable. But if it was not, it clearly caused too little damage for anyone to feel strongly about banning it. 

This changed, in a spectacular fashion, after the pandemic. With demand switching from services to goods, there were suddenly not enough ships in the right places. 

The impact of shipping constraints on global trade is hard to overestimate. Spot rates were about six times higher on average by the end of 2021 compared with 2020, said the International Transport Forum. Two out of three ships arrived in port at least one day behind schedule, and pressed ships skipped port calls. Inflation galloped away.

That experience flipped the burden of proof. The EU has not decided to axe the competition exemption because it believes shipowners conspired to raise rates. It just feels that, with the data it has, it cannot isolate evidence that the exemption truly benefits consumers. 

That seems the right sort of lens through which to view antitrust exemptions. It isn’t hard to see why shipowners would squeal. The rule change comes at a time when the sector’s profitability is sinking on the back of a capacity glut.

Yet the potential pitfalls of anti-competitive behaviour are clear. It should be allowed — unchecked — only if there is clear evidence that it is needed and that it will help consumers in the end. The UK’s competition authority should follow in the EU’s wake.

Things I enjoyed this week

I am a carbon-capture optimist and was encouraged to learn that BlackRock will invest $550mn in a direct air capture project.

Elsewhere, as a frequent flyer disgruntled by rising fares, I have been following reports that politicians are looking into airlines’ high summer prices with interest.

Have a good week,

Camilla Palladino
Lex writer

*This story corrects a reference to the article about the BlackRock investment.