Hong Kong's dilemma: antitrust immunity for liner agreements

Opinions mixed on whether Hong Kong should adopt a Singapore-style block exemption

It's hard to imagine that Hong Kong, home to the world's fourth busiest container port, would risk that status by putting operational agreements among container shipping lines on the blacklist of its new competition law.

Although there is likely to be an exemption, the question is how generous it will be.

The Hong Kong Competition Ordinance has come into force. One key question is how shipping alliances will be treated under the law as in whether current operations will be regarded as anti-competitive and therefore illegal. If that is the case, will the government allow container shipping companies to enjoy a Singapore-style block exemption?

A matter of economy

Regulators are looking at the issue from many perspectives. They need to decide whether the various agreements, including those for conference, rate discussion, alliance and vessel sharing, are engaged in concerted practices that will or have harmed the competition in Hong Kong.

But essentially the government has to make the decision based on economic impact such as gains and losses for local consumers, the port industry, and even the city’s wider economy. 

"It's really an issue of economics, not law," said Dr Jonathan Beard, vice-president of ICF International, an economic and public policy consulting firm in Hong Kong.

Few jurisdictions, where shipping and port industries are major contributors to the local economy, have prohibited carriers' joint agreements en bloc as the subsequent penalties of up to 10% of company turnover could be substantial enough to drive liner players away from their territorial waters.

Nevertheless, the degree of antitrust immunities granted to carriers varies in different jurisdictions and regulators appear increasingly reluctant to make such exemptions.

Alliance and vessel sharing agreements are generally allowed in the European Union, for example, so long as the combined market share of the shipping lines is kept below 30%, according to the EU Consortia Block Exemption, which was extended last year until April 2020. Pricing agreements, however, are a much more sensitive issue.

The block exemption for liner conferences, involving common tariffs and surcharges, was repealed in 2008. EU competition rules still permit the exchange of information, including freight rates, but shipping companies are forbidden to use the exchange to facilitate collusion on price fixing or signalling future price intentions.

The European Commission in 2013 even opened antitrust proceedings against 14 liner shipping companies to investigate whether their operations had engaged in concerted general rate increases (GRI), thus breaching antitrust regulations.

In Australia, regulators are considering replacing current liner shipping exemptions, which allow operators to discuss and fix prices, pool revenues and losses and co-ordinate schedules with a block exemption for consortia alone.

In China, the world's largest trading nation, local competition authorities last year voted against the proposed P3 alliance, despite clearance from the US Federal Maritime Commission, due to antitrust concerns.

Today, although most of liner operator agreements are still legitimate in the country, discontent has been growing rapidly in recent years amid China's flagging exports. Opponents are contending that the monopolistic activities of shipping lines are hurting their customers, the shippers, and the government should narrow down the scope of the exemptions.

Hong Kong Shippers' Council executive director Sunny Ho supports the argument. In his view, the pricing agreements between the liner firms, such as conference and GRI, do not benefit his colleagues.

"This kind of behaviour has totally violated any modern business ethics. Why will shipping companies be treated differently from other major industries," he said.

A better reference

But Hong Kong, a special administrative region of China, has a different economic matrix from the other jurisdictions, some have argued.

Unlike the EU or China, where there is huge capacity in both production and consumption, Hong Kong is a trading hub of much smaller economic size. As a result, about 70% of the throughput in the city's port come from transhipment boxes.

To shipping lines, these cargoes can easily be transhipped elsewhere if necessary.

"It is not difficult to achieve, particularly as many other neighbouring ports would be very eager to have a piece of the pie Hong Kong currently carries," said Hong Kong Liner Shipping Association secretary general Roberto Giannetta.

"Shipping lines are not physically tied to Hong Kong. They will deploy their vessels wherever there is demand for cargo, where service costs make financial sense, and where legal certainty is assured," he added.

A more relevant counterpart for Hong Kong, in his eyes, would probably be Singapore: both are ocean transhipment hubs and both have a relative small and open economy that thrives on international business.

The block exemption granted by the Singapore Competition Commission for liner shipping agreements has been a generous one since it was first issued in 2006. The ordinance permits a wide range of liner activities including agreement between the operators on detailed capacity decisions and price discussions, though subject to certain conditions.

Last month, the city state's trade ministry decided to extend the exemption for another five years until December 2020. Among the key justifications were the size of the country's economy and the fact that Singapore was not yet a major port of origin or destination of transhipment.

The move is logical, given the fact that nearly 90% of the liftings in world's second busiest container port are transhipment cargoes, while the maritime industry contributes about 7% to Singapore's GDP.

Concessions

So should Hong Kong, which shares many similarities with the Lion City, follow suit?

DLA Piper partner and head of the litigation and regulatory group for Hong Kong Ernest Yang said a "no" answer would not be easy to justify.

"It would be fair to say that if Hong Kong were to take a very different approach to Singapore, then it would probably require substantial economic data and evidence to justify such a departure," he said.

Trade and Logistics makes about one-fourth of Hong Kong's gross domestic product in terms of value added and one-fifth of employment, yet much of the activity under 'trade and logistics' has negligible links to the port and shipping industries, according to Dr Beard.

However, Mr Ho argues that the answer is not strictly a yes or no affair. While strongly opposing a Singapore-style block exemption, he admits that some liner shipping agreements, such as vessels sharing, could be beneficial to shippers and thus should be allowed.

"There are concessions that can be made," he said.

On the other hand, Mr Giannetta said his organisation will request a block exemption for liner co-operative agreements in order for the industry to maintain the same modus operandi in Hong Kong.

But "in exchange, shipping lines would be willing to be guided by alternate regulatory oversight".

He also added that the conference agreement would not be an issue this time as the practice is "out of date".

The HKLSA has planned to submit its application to the Competition Commission this week when the Hong Kong Competition Ordinance comes into effect, according to Mr Giannetta.