TRADE, INVESTMENT AND COMPETITIVENESS E Q U I TA B L E G R O W T H , F I N A N C E & I N S T I T U T I O N S N OT E S Global Supply Chain Disruptions: Competition Policy Implications 1818 H Street NW Washington DC 20433 Telephone: 202-473-1000 Internet: www.worldbank.org This work is a product of the staff of The World Bank with external contributions. The findings, interpretations, and conclusions expressed in this work do not necessarily reflect the views of The World Bank, its Board of Executive Directors, or the governments they represent. The World Bank does not guarantee the accuracy, completeness, or currency of the data included in this work and does not assume responsibility for any errors, omissions, or discrepancies in the information, or liability with respect to the use of or failure to use the information, methods, processes, or conclusions set forth. 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Cover photo: Rob Beechey / World Bank >>> Executive Summary Global Supply Chain Disruptions: Competition Policy Implications ● This note complements prior World Bank work analyzing the technical drivers of supply chain disruptions from 2021 onwards (Arvis et al. 2021—see special insert here for a summary). The focus of this note is to shed light on the role of market structure and dynamics by (a) analyzing how market dynamics and industry structure may have contributed to the current situation, (b) outlining implications for value chains in developing countries, and (c) suggesting further policy and research priorities. ● On the demand side, as highlighted in the prior briefing note, unexpected demand spikes in the United States have created disruptions due to the sheer volume of logistics throughput needed and the sudden, unexpected rebound in demand that is contributing to the “bullwhip effect.” ● On the supply side, capacity constraints with respect to port-hinterland connections have been the main bottleneck rather than maritime shipping per se. However, this note raises the concern that industry structure and alliance practices within the maritime shipping, shipbuilding, and container manufacturing sectors may be contributing to the extreme reaction of shipping prices. ● In the short term, policy makers in developing countries can help mitigate the effects of rising shipping costs and decreasing service levels by extending the timeframes of trade finance and removing barriers to overland trade. Although there is little that governments outside of China, Europe, and the United States can do to directly solve the process bottlenecks, market characteristics suggest that the global logistics industry may be susceptible to collusive outcomes, which exacerbate price spikes. Thus, governments could pay closer attention to potential anticompetitive behavior, especially in maritime shipping and hinterland logistics. ● In the medium to long term, policy makers, regulators, and researchers should more carefully consider efficiency–resilience tradeoffs in the global logistics industry. Key topics to explore include investigations into potential anticompetitive behavior by shipping lines and increased scrutiny over mergers and alliance practices among logistics service providers and the supplying manufacturing industries. Public-private and private initiatives to facilitate data sharing may also help improve forecasting, which could help mitigate the effects of demand volatility. ● This note was predominantly prepared before the invasion of Ukraine by the Russian Federation, which started in February 2022. In the short term, the war is likely to exacerbate the congestion at European ports and disrupt Asia-Europe rail links, potentially leading to higher shipping prices. In the long term, it remains to be seen whether decreases in global demand due to the war will lower shipping demand and prices. Nevertheless, the long-term structural constraints to competition in the sector highlighted in this note remain the same overall. This note was prepared by the Markets, Competition, and Technology Global Unit (ETIMT) of the World Bank’s Finance, Competitiveness, and Innovation Global Practice under the guidance of Martha Licetti (Practice Manager, ETIMT) and Mona Haddad (Global Director, TIC), with the contributions of Emiliano Duch (Lead Private Sector Specialist), Ryan Kuo (Young Professional), Guilherme Falco (Economist), Seidu Dauda (Economist), and Sandra Cordova Solis (Consultant). The team also thanks Jean Francois Arvis, Russell Pittman, and Morris Cohen for their input and guidance. >>> Contents Introduction 5 Diagnosis: Consumer and Firm Behavior and Industry Regulations 6 Demand: An Unexpectedly Sharp Rebound in the United States 6 Supply: Policy-Related Capacity Constraints and Price Reactions 10 Maritime Shipping Industry 10 Port and Hinterland Connections 17 Industry Vertical Integration 19 Implications for Developing Countries and Policy Makers 20 Short-Term Interventions: Mitigation of Effects for Firms 20 Medium- to Long-Term Interventions: An Opportunity for Improved Regulations and Oversight 21 Increased Regulatory Oversight over and Research on Maritime Shipping and Related Industries 21 Port and Hinterland Improvements: Learning from US Bottlenecks 22 Vertical Data-Sharing through Public-Private and Private Initiatives 23 Conclusion 23 References 24 Appendix A 28 >>> Introduction This note builds upon existing notes and research by the World Bank and other researchers by analyzing the root causes of disruptions and policy priorities in more detail, using a value chain and competition lens. Existing research has documented the disruptions to global supply chains from a technical perspective by identifying key process bottlenecks (Arvis et al. 2021). This note supplements previous work by (a) analyzing how consumer and firm behavior and industry regulations may have contributed to the current situation, (b) outlining implications for value chains in developing countries, and (c) suggesting policy and research priorities based on these findings. This note was predominantly prepared prior to the invasion of Ukraine by Russia, which started in February 2022, but the main findings remain applicable. At the time of writing, several major maritime shipping lines have suspended service to and from Russia and Ukraine and sanctions have been placed on Russian Railways. Although Russia and Ukraine account for less than 1 percent of port calls and less than 1.5 percent of maritime fleet ownership (Rabobank 2022), re-routing and increased inspection of Russia-bound cargo are already increasing congestion at European ports such as Rotterdam (Miller 2022). Tanker shipping rates and fuel prices have also increased, given Russia’s importance in oil markets (Miller 2022). Finally, air freight requiring flight over Russian and Ukrainian territory has been severely disrupted, and while rail links through Russia—which accounted for roughly 4 percent of China-Europe rail freight in 2021—remain open as of March 7,1 many analysts expect further disruptions to come (Rabobank 2022). All these factors will likely contribute to further shipping price increases for European services, as evidenced by the settled rates for European service rising slightly over the first week of March 2022 while rates for American services dropped. In the long term, it remains to be seen whether this will be offset by lower shipping demand overall due to the war. Nevertheless, the long-term structural and policy impediments to market dynamism and competition that are highlighted in this note remain unchanged and highly relevant to the situation. EQUITABLE GROWTH, FINANCE & INSTITUTIONS NOTE <<< 5 >>> Diagnosis: Consumer and Firm Behavior and Industry Regulations The current situation reflects the confluence of rapid growth and volatility in consumer spending and firm orders in the United States, from a demand perspective, and logistics capacity constraints in the United States and China, from a supply perspective. To a certain extent, the volatility in demand was unique to the context of COVID-19 and was difficult for policy makers and firms to predict.2 However, lack of competition and inadequately developed logistics value chains were likely key drivers of capacity constraints and adverse price reactions on the supply side. Demand: An Unexpectedly Sharp Rebound in the United States When the COVID-19 pandemic first spread globally, there was an initial drop in business-to-business (B2B) and consumer demand in the United States, but demand recovered very quickly thereafter. In particular, demand for goods rebounded as consumers reallocated some of their spending from services to goods in light of pandemic restrictions on services—after dropping 13 percent in real seasonally adjusted terms between January and April 2020, spending on goods recovered to January 2020 levels (pre-pandemic levels) by June 2020 (figure 1a). Critically, spending rose even further thereafter, settling in at 10–15 percent above pre-pandemic levels in the third quarter of 2021. New orders for US manufacturers—and, by extension, their demand for intermediate goods—have followed a similar pattern of rapid recovery (figure 1b). This trend mirrors global patterns of output and economic activity, which also saw rapid swings from contraction to expansion, albeit to a slightly lesser extent (figure 2). Final US consumer demand for durable goods and apparel—many of which depend on imports—has experienced particularly sharp swings from pandemic-driven drops in Q1 2020 to record highs in late 2020 and 2021. Notably, many of the major spending categories that fall under those overarching categories are highly import-dependent—apparel consumed in the United States is predominantly manufactured abroad in East and South Asia, and imports accounted for over 30 percent of automotive and furniture supply in 2019 (figure 3) (Bureau of Economic Analysis 2019). >>> Figure 1. Consumer Spending and Manufacturing Output Have Grown Rapidly after the Pandemic Dip a. US personal consumption b. ISM Manufacturing New Orders Index 140 (seasonally adjusted; Jan. 2020 = 100) US real personal consumption index 120 100 80 60 40 20 0 Aug. 2020 Sep. 2020 Aug. 2021 Sep. 2021 Jan. 2020 May 2020 Jun. 2020 Jul. 2020 Nov. 2020 Dec. 2020 Jan. 2021 May 2021 Jun. 2021 Jul. 2021 Apr. 2020 Apr. 2021 Feb. 2020 Mar. 2020 Oct. 2020 Feb. 2021 Mar. 2021 Total personal consumption Goods Services Source: World Bank staff analysis based on data from the US Bureau of Economic Analysis Source: Institute for Supply Management. Note: Dashed line (52.8 percent) represents Census Bureau manufacturing breakeven line. ISM = Institute for Supply Management. EQUITABLE GROWTH, FINANCE & INSTITUTIONS NOTE <<< 6 >>> Figure 2. JPMorgan/IHS Global Purchasing Managers’ Index (Global Output) Sources: JPMorgan, IHS Markit. >>> Figure 3. Demand for Durable Goods and Apparel Experienced the Greatest Swings from Trough to Peak 50 40 % change relative to Jan 2020 30 (Seasonally adjusted) 20 10 0 -10 -20 -30 -40 -50 household equipment Motor vehicles and Other nondurable Recreational goods and Clothing and footwear Gasoline and other o ceries Other durable goods Furnishings, durable energy goods goods Gr parts vehicles 2020 trough 2021 peak Source: World Bank staff analysis based on data from the US Bureau of Economic Analysis. Note: Groceries never experienced a 2020 trough because grocery demand increased amid the pandemic. Data as of December 9, 2021. The drop and rapid rebound in US firm and consumer demand—especially for consumer goods and motor vehicle parts imported from China—has coincided with corresponding drops and rebounds in imports into the United States, especially at key ports on the US West Coast. From a product perspective, the sources of import volatility have mostly been finished consumer goods such as furniture and apparel rather than intermediate goods (with the notable exception of parts for motor vehicles) (figure 4). Given that China is a major source of imports in these product categories, import volumes from China dropped precipitously in early 2020 and then dramatically rose thereafter (figure 5). In turn, this pattern led to volatility at the key West Coast Ports of Los Angeles and Long Beach, contributing to port disruptions (figure 6). EQUITABLE GROWTH, FINANCE & INSTITUTIONS NOTE <<< 7 >>> Figure 4. US Import Volumes at the Product Level Mirrored Consumer Spending Trends in Terms of Volatility among Consumer Durables and Motor Vehicles and Parts (monthly US import by HS code at the four-digit level expressed in TEU, Jan. 2018 to Dec. 2021) Source: World Bank staff analysis based on Panjiva. Note: The Panjiva database was used for the period of January 1, 2018, to December 2, 2021, consisting of a total of 84,646,635 shipments and 178 million TEUs. HS = harmonized system; K = thousand; TEU = twenty-foot equivalent unit. >>> Figure 5. Container Import Volumes from China Dropped Quickly, Then Rebounded Dramatically (number of monthly containers imported by country of lading in TEU, Jan. 2018 to Nov. 2021) Source: World Bank staff analysis based on Panjiva. Note: K = thousand; M = million; TEU = twenty-foot equivalent unit. EQUITABLE GROWTH, FINANCE & INSTITUTIONS NOTE <<< 8 >>> Figure 6. Fluctuations at the Ports of Los Angeles and Long Beach Reflect Volatility in Imports from Asia (US monthly imports by port of unlading, expressed in TEU, Jan. 2018 to Nov. 2021) Source: World Bank staff analysis based on Panjiva. Note: K = thousand; TEU = twenty-foot equivalent unit. This rapid recovery has contributed to congestion via increased demand for shipping services and the “bullwhip effect.” General demand for containerized exports has been high (Arvis et al. 2021). In addition, the sudden, unexpected reversal from trough to peak has created operational disruptions due to a phenomenon—known as the “bullwhip effect” in the field of operations management—wherein unexpected variability in orders creates even greater volatility in demand up the supply chain (such as for shipping and ports) (Cohen 2021; Metters 1997). During the initial months of the pandemic, many retailers and manufacturers expected demand to decline in the medium term, leading them to cancel orders. They were then caught off guard as demand quickly recovered and grew, prompting a surge of orders (Sheffi 2020). This volatility in orders has resulted in disruptions of even greater magnitudes for the logistics system as demand for containerized shipping has snapped back. US inventory data provide strong evidence that the bullwhip effect occurred: In the early stages of the pandemic, inventory levels (relative to sales) spiked as spending dropped. The combination of rapid recovery in spending and cancelled orders then sent inventory levels crashing, and they remained low as of Q3 2021 (figure 7).3 Although both retailers and manufacturers exhibit the same overall pattern, the drop in inventories (relative to sales) has been more extreme for retailers due to their dependence on imports of finished goods from Asia. EQUITABLE GROWTH, FINANCE & INSTITUTIONS NOTE <<< 9 >>> Figure 7. Inventory Levels Suggest a Bullwhip Effect 2.00 1.80 US inventory-to-sales ratio 1.60 (seasonally adjusted) 1.40 1.20 1.00 0.80 0.60 0.40 0.20 0.00 n. 1 b. 0 n. 0 J u 020 b. 1 J u 021 g. 0 g. 1 0 p. 0 0 1 p. 1 21 r. 0 ec 20 n. 0 r. 1 ay 0 ay 1 ov 0 J u 02 F e 02 J u 02 F e 02 Au 202 Au 202 M 02 Se 02 O 02 M 02 Se 02 Ap 2 J a 02 Ap 2 M 02 M 02 N 02 20 0 0 0 2 2 2 2 2 2 2 2 2 2 2 .2 .2 2 2 .2 .2 .2 n. l. l. ct ar ar Ja D US ret ailers US manufacturers Source: World Bank staff analysis based on data from the US Bureau of Economic Analysis. Supply: Policy-Related Capacity Constraints and Price Reactions The supply side of the global logistics value chain has been amply studied in the previous work of the Trade team; this note focuses on the policy implications of competition and regulation in the evolution of the industry structure. Maritime Shipping Industry It is unlikely that lack of capacity in maritime shipping and supporting manufacturing industries has been a first-order cause of congestion, although the extreme price reaction in maritime shipping may reflect constraints to competition in the industry. Unlike the case of US railways—which will be discussed later—recent consolidation in the shipping, shipbuilding, and container manufacturing industries has not coincided with systemwide capacity reductions. On the contrary, maritime shipping capacity has generally grown faster than trade volumes in recent years, and idle ship4 capacity—which can serve as a buffer for demand spikes—was near a record high prior to the pandemic (figure 8, figure 9). Indeed, it is possible that excess capacity could itself be a symptom of consolidation and lack of competition, because excess capacity can be used to deter new entrants or deviations from cartel pricing. Neither is there evidence that shipping lines are currently holding back capacity in order to increase prices, as the idle fleet5 was at a record low of 2.4 percent of total industry capacity as of October 2021 (Szakonyi 2021) and ship orderbooks have been healthy as shipping lines attempt to grow capacity to match demand (Arvis et al. 2021). EQUITABLE GROWTH, FINANCE & INSTITUTIONS NOTE <<< 10 >>> Figure 8. Maritime Shipping Capacity Has Generally Grown Faster than Trade Volumes Source: Sanchez et al. 2021. Note: f = forecast. Rather, it is likely that shortages in ship and container capacity are the result of port congestion tying up the supply of ships, meaning more ships are required to serve the same amount of demand. Indeed, the presence of ships waiting to berth at ports suggests that the quantity of ships is not the binding constraint. Similarly, many experts, such as Drewry’s John Fossey, note that overall container supply remains adequate to serve existing demand, but there is a mismatch between where containers are needed and where they are, and port congestion is making reallocation more difficult (Miller 2021). EQUITABLE GROWTH, FINANCE & INSTITUTIONS NOTE <<< 11 >>> Figure 9. Idle Ship Capacity (Buffer for Demand Spikes) Was Near Record Highs before the Pandemic Source: Sea News, Alphaliner. Note: f = forecast; TEU = twenty-foot equivalent unit. Nevertheless, market structure and dynamics within the maritime shipping industry may be exacerbating shipping price increases caused by congestion and demand swings—the shipping liner market is highly concentrated and competitors regularly cooperate with one another via alliances. Starting in 2015, the 17 largest container lines consolidated into 9 companies through a series of mergers, acquisitions, and bankruptcies (figure 10). Beyond outright mergers, cross-firm alliances have been a feature of the market since its founding in the mid-19th century, and they have further intensified in recent years (box 1). As of 2021, three alliances—2M, Ocean Alliance, and THE Alliance—have a combined market share of about 83 percent. The extent of the concentration is even more pronounced on key East-West trade routes, where the three alliances account for 95 percent of the market. These trends have coincided with regulators’ taking fairly lax stances about approving mergers and granting antitrust exemptions to shipping alliances (box 1, table B1.1). >>> Figure 10. Recent Developments in Maritime Shipment: Global Alliances, Fleet and Market Consolidation Source: Hickin and Griffiths 2020 Note: TEU = twenty-foot equivalent unit. EQUITABLE GROWTH, FINANCE & INSTITUTIONS NOTE <<< 12 Box 1. Maritime Shipping Alliances and Antitrust Scrutiny What Are Alliances and What Can They Do? A shipping alliance is basically the pooling of ships by carriers to run joint regular liner services. Collaboration within alliances can cover a wide range of activities, from operational chores such as stowage and maintenance to joint capacity planning and scheduling. The purchasing power of a carrier alliance is much greater than that of an individual carrier, whether that power is directed at operational expenses like fuel and port-related fees or at the purchase or chartering of the vessels themselves. There is also the inherent advantage of commonality in size and equipment, which can lower not only the initial purchase price but also the maintenance costs over the commercial lifetime of the asset. However, the cornerstone of alliances is the capacity to jointly plan and use capacity, mainly assigned by two mechanisms—slot charter agreement (SCA) and vessel sharing agreement (VSA). The SCA is a contract arranging a defined allocation (space, weight) on a vessel on a “used” or “unused” basis at an agreed price, for a minimum defined time period, and often for a specific route. The VSA is a contract to operate a liner service along a specified route using a specified number of vessels. The capacity that each partner gets may vary from port to port and could depend on the number of vessels operated by the different partners. The History of Alliance Behavior Coordination among competitors has been a feature of the maritime shipping industry since at least the 19th century. Competitors first developed shipping conferences by providing joint international liner services for the carriage of cargo on particular routes under uniform or common freight rates, often organizing on-shore and off-shore activities (such as ancillary services and port facilities), allocating business volumes, and managing routes (UNCTAD 1975). As initially implemented, a maritime conference constituted what would otherwise be considered a cartel agreement (World Bank Group 2018). During the 1980s and 1990s, several jurisdictions started to limit the scope of activities of shipping conferences, mostly by reducing the number of activities that could be coordinated, leading to the development of the current shipping alliances (OECD 2019). Constituted in several waves of alliance agreements, mergers, and acquisitions, these structures shifted from primarily being the domain of smaller and mid-size carriers to bodies that also encompass the world’s largest carriers. In recent years, three main shipping alliances—2M, Ocean Alliance, and THE Alliance—have emerged to dominate the market, accounting together for the vast majority of the container shipping market in terms of capacity (figure B1.1) (OECD 2019). EQUITABLE GROWTH, FINANCE & INSTITUTIONS NOTE <<< 13 >>> Figure B1.1. TEU Market Share by Alliance Source: OECD (2019). Note: TEU = twenty-foot equivalent unit. How Competition Regulators Have Treated Shipping Alliances Alliances have been under legal scrutiny by several countries, as they often receive special treatment by antitrust legislations and other economic regulations. For example, in 2009, the European Union (EU) adopted a Consortia Block Exemption Regulation (Commission Regulation [EC] No 906/2009) allowing shipping companies to operate joint liner shipping services until 2024 without the risk of breaking antitrust rules. The EU regulation conditioned the exemption to consortia, whose combined market share does not exceed 30 percent for two consecutive calendar years and whose joint behavior does not lead to the (a) fixing of prices when selling liner shipping services to third parties, (b) limitation of capacity or sales, or (c) allocation of markets or customers.a Although direct price fixing, quantity limitation, and market allocation are not exempted, a great degree of information exchange and coordination is allowed, including:b • Fixing of sailing timetables and ports of call; • Exchange, sale, or cross-chartering of space or slots on vessels; • Pooling of vessels, port installations, or both; • Use of one or more joint operations offices; • Provision of containers, chassis, and other equipment; • Capacity adjustments in response to fluctuations in supply and demand; • Joint operation or use of port terminals and related services (such as lighterage or stevedoring services); and • Obligation to refrain from chartering space on vessels belonging to third parties or assigning space to other vessel- operating carriers, except with the prior consent of the other members of the consortium. Several other jurisdictions follow a similar path to the EU, some with even more lenient exemptions. Several jurisdictions, such as the United States, Europe, Australia, Japan, India, Malaysia, and Singapore have block exemptions for the container shipping industry in their competition laws (table B1.1), with some countries even exempting all agreements, including on prices (OECD 2021). EQUITABLE GROWTH, FINANCE & INSTITUTIONS NOTE <<< 14 >>> Table B1.1. Competition Law Treatment of Liner Shipping in Selected Economies Treatment in competition law Economies Chile; China; Brazil; Indonesia; Russian Federation; South No shipping-specific exemptions Africa; Turkey; Vietnam Block exemption for shipping alliances/ consortia China; EU; Hong Kong SAR, Israel; Malaysia; New Zealand Australia; Canada; Japan; Korea, Rep.; Singapore; Exemption for all agreements (including on prices) United States Source: Adopted from ITF 2018; OECD 2021; ACCC 2019. However, even under the current exemptions, market players could still engage in illicit agreements and other anticompetitive practices, requiring special attention from national competition authorities and sector regulators to monitor, detect, and deter such practices (World Bank Group 2018). Despite all the antitrust exemptions, many jurisdictions have punished illicit coordination by maritime shipping companies in the past decade (figure B1.2). >>> Figure B1.2. Sample of Hardcore Cartels Punished in Maritime Shipping (selected economies) Source: World Bank elaboration based on desk research, OECD international cartels database, and Consortia Block Exemption Regulation (Commission Regulation [EC] No. 906/2009). Note: Hardcore cartels are defined by agreements among competitors to either (i) fix prices, (ii) restrict output, (ii) allocate markets, or (iv) collude on tenders (bid rigging). These types of agreements are considered objectively illegal by most jurisdictions, meaning that authorities must only prove the existence of an agreement among competitors but not its negative impact on markets or consumers, which is already assumed by the legislation. Other types of agreements between market players are normally assessed on case-by-case approach; several of them can be considered pro-competitive and therefore legal. Note: Ro-ro = roll-on/roll-off. Source: World Bank elaboration. a. Articles 4 and 5, Commission Regulation (EC) No 906/2009, of September 28, 2009. b. Article 3, Commission Regulation (EC) No 906/2009, of September 28, 2009. EQUITABLE GROWTH, FINANCE & INSTITUTIONS NOTE <<< 15 Moreover, the shipping industry has several characteristics that can facilitate collusive outcomes. A high degree of concentration per se does not mean a market is not competitive. However, maritime shipping does show other characteristics that can facilitate coordination, such as (a) multimarket contact, (b) frequent interaction and exchange of sensitive information among market players through alliances, (c) high barriers to entry due to economies of scale and high capital investments, (d) symmetric market shares among market players (when alliances are considered as the effective competitors rather than individual firms), (e) mature markets in terms of technical requirements and business models, and (f) a history of overcapacity to punish cartel deviation (Ivaldi, et al. 2003, Sicotte 2001). Further up the value chain, there has also been significant consolidation in shipbuilding, container manufacturing and leasing, and intermodal chassis manufacturing. In shipbuilding, China has been actively encouraging mergers between state- owned shipyards to combat perceived overcapacity in shipbuilding (Mitchell 2015), prompting Republic of Korea shipyards to consider mergers of their own (Paris 2019).6 Similarly, the container manufacturing industry is also heavily consolidated, with three Chinese companies together accounting for 82 percent of the global market (figure 11). >>> Figure 11. The Shipping Container Manufacturing Industry Is Also Heavily Consolidated, China’s “Big 3” in Global Container Production, fourth quarter 2019–first quarter 2021 Source: FreightWaves. Note: Q = quarter; TEU = twenty-foot equivalent unit. In this context, market dynamics that constrain competition in the shipping industry may be exacerbating the extreme reaction of maritime shipping prices to congestion. Although alliances are not allowed to directly fix prices for shipping services, they are allowed to coordinate capacity among their members. As preliminary data and external analyses by sector specialists highlight, when the pandemic started in March 2020, alliances were able to move quickly to reduce overcapacity and prevent a sharp drop in freight rates. Collectively, they voided, or “blanked,” more than 400 sailings in 2020, removing 10 percent of TEU capacity from active service (Hickin and Griffiths 2020), such that no significant maritime shipping price drop occurred in 2020 amid the pandemic. In contrast to this relatively mild price reaction to the demand trough, when demand spiked, prices increased sharply. This asymmetric pricing dynamic could be linked to anticompetitive behavior—whether tacit or explicitly collusive—especially considering the market characteristics that facilitate collusive behavior (Hong and Lee 2020). Indeed, recent supply chain disruptions during the COVID-19 pandemic have brought allegations of anticompetitive behaviors to light. As container shipping rates have skyrocketed, shippers in the United States, EU, India, and the UK have alleged that shipping lines have engaged in potential anticompetitive behavior such as price gouging and collusion, and they have EQUITABLE GROWTH, FINANCE & INSTITUTIONS NOTE <<< 16 urged the competition authorities to investigate (Carlsen 2021). In addition, in a December 2021 briefing email to the media, the US White House raised concerns over alleged “price-gouging by the ocean shipping cartel,” although it did not provide further evidence or details about ongoing investigations (Pallini 2021). Port and Hinterland Connections Capacity constraints with ports and hinterland connections at key disruption nodes (the United States and China) have been the primary source of bottlenecks, from a process perspective (Arvis et al. 2021). On the Chinese side, capacity constraints have primarily been driven by COVID-19 containment measures and typhoons disrupting or even shutting down operations at ports (Arvis et al. 2021). In the United States, however, capacity constraints have been more structural in nature, as US port, railway, warehousing, and trucking systems have been unable to cope with the rapid rise in demand, even in the absence of exogenous constraints on their capacity utilization. For example, the adjacent Ports of Los Angeles and Long Beach—perhaps the biggest disruption hotspot in the United States—have experienced congestion despite operating at record-high throughput levels, pointing to an overall logistics system capacity constraint (Port of Long Beach 2021). Problems at ports reflect capacity issues away from docks and are more related to storage constraints at ports and issues with port-hinterland connections. Relative to ports in other countries, US ports have generally invested less in the latest automation technology and sometimes also have shorter working hours, owing to environmental and zoning regulations and labor agreements (Arvis et al. 2021). However, recent declines in port productivity can largely be explained by bottlenecks in terms of storage, trucking, and rail service rather than the ports’ ability to unload ships. Dwell times are rising and storage facilities are filling up at ports, both of which limit ports’ ability to unload ships (as there is nowhere to put containers). This process generates a vicious cycle wherein slow container pickup worsens storage constraints, which in turn slows down pickup and port productivity as containers are stacked higher and sometimes haphazardly (Burnson 2021). Thus, the current binding constraints are space at ports and the inability of truckers and railways to move containers out of ports quickly enough (Burnson 2021; Saraiva 2021). Lack of storage space at specific West Coast ports often reflects unavoidable space constraints, although increased inter- and intra-port competition could help alleviate long-run dependence on individual terminal facilities and could improve efficiency. To a certain extent, the key Ports of Los Angeles and Long Beach are unable to expand further because they are fenced in by major urban areas (LaRocco 2021). However, the US logistics system’s dependence on these two key ports reflects the lack of credible alternatives (that is, sea and inland ports with adequate capacity to act as release valves and strong links to US hinterland logistics systems) (Berger 2021). In recent years, inter-port competition, particularly from East Coast ports, has been on the rise—West Coast ports handled less than 60 percent of East Asia trade in 2020, compared to nearly 75 percent in 2006 (Paris 2020). However, the shift has not come quickly enough to ease congestion (Berger 2021) or to motivate sufficient investment in productivity enhancements at Los Angeles and Long Beach (Reinsch 2021). Lack of extra capacity via railways in the United States likely reflects cutbacks in infrastructure, which in turn may have resulted from lack of contestability and consolidation in the industry. In the United States, freight rail carriers are both private and vertically integrated, meaning rail track, yard, and car capacity is determined by the private market on an unregulated basis. Since the enactment of the Staggers Act in 1980, a wave of mergers has resulted in the US freight rail market’s being divided between five players (two each on the West and East Coasts and one running North-South) (table 1) (Pittman 2020).7 This consolidation coincided with a steep decline in freight rail track infrastructure (figure 12). More importantly, rail carriers’ increased market power may have been a contributing factor in their ability to pursue a strategy known as Precision Scheduled Railroading (PSR). Among other things, PSR involved the reduction of locomotives and closing of intermodal rail terminals (similar to inland ports), despite hesitance and even outright opposition from customers and labor (Ashe 2019; Gallagher 2019). Lack of railway infrastructure capacity in turn decreased railways’ ability to move containers from ports in 2021. For example, in 2019, railway carrier Union Pacific decided to close its intermodal terminal in Rochelle, Illinois, as part of its PSR strategy, diverting import traffic to another facility in Joliet, Illinois. In 2021, congestion at the Joliet facility led to Union Pacific EQUITABLE GROWTH, FINANCE & INSTITUTIONS NOTE <<< 17 curtailing train service from Los Angeles and Long Beach to Chicago, worsening the issue at West Coast ports (Lynch 2021).8 Indeed, intermodal railway traffic in general has not risen in line with import demand or port throughput, and has even declined at times (Burnson 2021). >>> Table 1. Significant Consolidation Has Occurred in the US Freight Rail Industry Predecessor Railroads Merged Railroad Burlington Northern Atchison, Topeka, & Sante Fe Burlington Northern Sante Fe (BNSF) Chicago & Northwestern Missouri Pacific Union Pacific Southern Pacific Union Pacific Illinois Central Gulf Canadian National (U.S.) Conrail (58 percent) Norfolk & Western Norfolk Southern Southern Conrail (42 percent) CSX Transportation Louisville & Nashville Milwaukee Candian Pacific (U.S.) Soo Source: US Department of Agriculture. Note: Q = quarter; TEU = twenty-foot equivalent unit. >>> Figure 12. Consolidation Coincided with a Large Decrease in Freight Rail Track Infrastructure, 1980–2018 Source: US Department of Transportation. Note: Data between 1980 and 1990 are only available for 1980, 1985, and 1990; evolution of system mileage in intervening years with missing data is imputed EQUITABLE GROWTH, FINANCE & INSTITUTIONS NOTE <<< 18 The trucking industry’s inability to rebound quickly enough with demand is largely attributable to labor shortages (Arvis et al. 2021). Shortages have been particularly severe in the drayage segment, which is short-haul trucking that takes containerized cargo from ports to warehouses and terminals for other modes of transport (such as rail yards) (Modi 2021). To a certain extent, labor shortages reflect the tight labor market in general in the United States, particularly for blue-collar jobs with undesirable work conditions, such as drayage. However, some commentators have argued that restrictions on commercial driving licenses such as the minimum age of 21 have exacerbated shortages (Gallagher 2021). Additionally, drivers tend to either increase their fees or disengage from a particular gateway because they know cargo movement will take longer amid congestion. In contrast to railways and maritime shipping, competition issues are less likely to be found in drayage because of market characteristics such as the presence of numerous small, homogenous players; low barriers to entry; and frequent switching between drayage carriers by shippers (Federal Maritime Commission 2015). Industry Vertical Integration The container logistics industry is not only concentrated horizontally but also is vertically integrated, further boosting the market power of carriers providing fully integrated end-to-end services. To better cope with poor market conditions and generate other streams of revenue, some leading shipping lines have begun to provide fully integrated services by expanding their services to include terminal operations and end-to-end inland logistic solutions (UNCTAD 2019). Currently, most of the present members of three global alliances own, operate, or hold stakes in several terminals at key container ports, including Los Angeles and Long Beach (see table 2). While some of the terminals are dedicated to the exclusive use of specific carriers, others are nonexclusive and are available for competitors to use. Some members also operate inland or dry ports, as well as provide end- to-end inland logistic solutions such as transport, logistics, and freight-forwarding services in several countries (see figure 13 and table A.1 in appendix A). >>> Table 2. Vertical Integration in the Port of Los Angeles Shipping liners attended Shareholder Container terminal Individual alliance Independent Full Alliance members shipping liners Source: World Bank elaboration based on the official website of the Port of Los Angeles and respective terminal websites. Note: NA = North America. EQUITABLE GROWTH, FINANCE & INSTITUTIONS NOTE <<< 19 >>> Figure 13. Vertical Integration Promoted by the Largest Maritime Shipping Companies—Terminal and Logistics Services Group Shipping Activity Terminal Activity Logistics AP Moller China Cosco Group NYK Group MSC CMA CGM Source: Adapted from Notteboom, Pallis, and Rodrigue 2021. Vertically integrated logistics service providers may possess market power by virtue of their business models. To allocate slots and capacity, port terminals may (a) employ queues, (b) direct negotiations and contracts between market participants, or (c) employ centralized allocation on a first-come, first-served basis. For instance, the Ports of Los Angeles and Long Beach, which together handle about 40 percent of US containerized imports, mostly lease their container terminals on a long-term basis to private terminal operators, some of which are owned by the shipping lines. Depending on the arrangement, commercial departments in port terminals may give preferential access to freight forwarders, shippers, or carriers that have vertical relationships with the terminal, which hampers efficient allocation (World Bank Group 2018). Being able to offer end-to-end service may also increase switching costs among shippers, increasing the pricing power of vertically integrated shipping lines and contributing to port stickiness that may hamper the reallocation of ships from congested ports to less busy ones. >>> Implications for Developing Countries and Policy Makers Short-Term Interventions: Mitigation of Effects for Firms Competition watchdogs and sector regulators should also be alert to the fact that anticompetitive behavior may be aggravating the crisis. The risks that collusion is driving price hikes—or that vertical integration is leading to discrimination in accessing terminal facilities, other transport modes, or logistics services—should not be ruled out. Providing clear messages to the public and key sectoral stakeholders that the market is under close scrutiny may help cool off potential anticompetitive appetites. Further datapoints on differential effects would facilitate more tailored responses. This note provides some indicative data points with respect to how the effect of shipping prices differs across sectors and firms. A more comprehensive view by product and analyses specific to individual exporting countries would further aid governments in tailoring policy responses and support to maximize their effect. EQUITABLE GROWTH, FINANCE & INSTITUTIONS NOTE <<< 20 Medium- to Long-Term Interventions: An Opportunity for Improved Regulations and Oversight In the medium to long term, the ongoing crisis offers lessons for regulators all over the world to rethink supply chain resilience and efficiency as well as regulatory modalities over key logistics. These solutions are unlikely to offer short- term fixes for ongoing disruptions—although they may help put downward pressure on prices—as key pieces of equipment for infrastructure may take years to build. However, they may contribute to the speed of recovery as well as long-term resilience by increasing competition and capacity and relieving upward pressure on prices. Increased Regulatory Oversight over and Research on Maritime Shipping and Related Industries Under current regulatory structures, country-level and regional regulators have a key role to play in promoting competition. Regulatory issues related to port and hinterland logistics generally fall within the purview of country-level, regional, or subnational regulators, given the geography-specific nature of these industries. In addition, although maritime shipping is often global in nature, there are currently no global rules on competition and no corresponding global regulator. As such, it falls upon country- level authorities or regional bodies such as the European Commission to open competition investigations and initiate enforcement action when anticompetitive effects occur within their territorial jurisdictions. Nevertheless, increased international cooperation and coordination could also play an important role, as will be discussed. Policy makers should—and have already begun to—investigate price increases and other allegations of anticompetitive behaviors among international shipping lines and associated industries. For instance, competition authorities in the Philippines and Australia recently initiated investigations into whether anticompetitive practices by shipping carriers and port operators have contributed to the steep increases in ocean freight rates.9 In addition, US regulators are investigating accusations of competition law violations in the container shipping industry and its supply chain (such as allegations of coordinated reneging on long-term service contracts, as well as price fixing for intermodal chassis) (Li 2021).10 In addition to specific investigations, the strengthened monitoring of pricing, capacity, and market structure in the container shipping industry and its supply chain in general by competition authorities across the world will be critical going forward, given the numerous ongoing competition risks generated by the sector’s market structure and practices. In addition, policy makers should apply greater scrutiny toward mergers and alliances in key logistics industries. Efficiency- resilience tradeoffs are also a key priority for future research. To date, many regulators have approved mergers in the maritime shipping, railway, freight-forwarding, and associated industries (albeit sometimes with remedies and conditions11) and have granted antitrust exemptions to alliance behavior on short-term efficiency grounds. While short-term efficiency should remain an important consideration, policy makers should also consider the implications exemptions have on long-run resilience and slack capacity, both with respect to merger and alliance review and in terms of the role of regulation in general. Relatedly, the ways in which regulators might balance efficiency, potential to exercise significant market power, and resilience (such as through simulations that take potential volatility into account) are a key priority for research. As the transport and logistics sector evolves and shows increasing verticalization and network efficiencies, there may also be room for reconsidering how market dynamics between different segments (such as maritime and freight forwarding, and maritime and terminal activities) are changing, and in turn affecting, competition dynamics. Thus, the implications of verticalization in logistics should also be a key topic for future research. In practice, this may translate into increased scrutiny over mergers and alliances or imposition of more structural and behavioral remedies for approved deals. For example, the European Commission’s current investigation into a proposed merger of two top Korean shipbuilders might take the current situation into account. With regard to alliances, ahead of the renewal processes for block antitrust exemptions in select countries (such as Singapore), it may be time to consider whether the risk to competition from block exemptions outweighs welfare benefits. Alternately, further ex ante regulation could be necessary to offset the exercise of market power generated by efficiency-enhancing antitrust exemptions, such as further limiting the scope of alliances. As it stands, the nature and scope of some of the liner shipping block exemptions in several countries raises significant competition concerns (table B1.1), and some carriers may use jurisdictions with block exemptions as hubs for exchanging prices or other strategic information (Braakman 2017).12 For example, the Australian Competition and Consumer Commission (ACCC) is reviewing its EQUITABLE GROWTH, FINANCE & INSTITUTIONS NOTE <<< 21 block exemption in favor of class exemptions that meet a minimum standard of pro-competitive features. Such features could allow ocean carrier agreements to coordinate scheduling and exchange of capacity but block rate coordination13 (ACCC 2019). From an institutional perspective, greater international cooperation and streamlining of regulations for maritime shipping among leading regulators would be helpful. All the key players in the international container shipping industry operate across several countries. As previously noted, different countries maintain different block exemptions for the container shipping industry, and some jurisdictions could act as focal points for carriers to engage in anticompetitive practices. Therefore, cooperation among the key regulators may be needed to harmonize the different regulatory systems as well as to monitor the industry to ensure full compliance with the existing regulations. Mechanisms for regulators to share knowledge and market information such as pricing and market structure are also key. In this regard, the recent meeting between the United States’ Federal Maritime Commission, the Water Transport Bureau of China’s Ministry of Transport, and the European Commission’s Directorate General for Competition is a welcome development, especially if it leads to deeper collaboration on investigations and sharing of market data. Similarly, the antitrust working group set up by the competition authorities of the “Five Eyes” nations (Australia, Canada, New Zealand, United Kingdom, and United States) represents a useful pathway for sharing information and intelligence. Port and Hinterland Improvements: Learning from US Bottlenecks Structural challenges with rail, road, and port infrastructure are not unique to the US; indeed, they are common in developing countries. Figure 14 summarizes some of the most common risks found in client countries. Given the varying nature of the market failures involved, interventions should be tailored to each segment and country. For example, risks of collusion in retail and wholesale segments can be addressed most effectively through anticartel enforcement. However, countries often consider it necessary to implement ex ante regulation in multimodal nodes of transport to mitigate the high risk of abusive practices on the part of operators with significant market power, such as in railway services. Additionally, several of the services provided at the port often suffer from restrictive regulations, such as legal monopolies in stevedoring and pilotage. Governments can play an important role in continuing to encourage competition along several segments of the transport and logistics value chain, improving market outcomes, and ultimately eliminating chokepoints to support supply chain connectivity. >>> Figure 14. Competition Risks along the Transport and Logistics Value Chain Source: World Bank elaboration. EQUITABLE GROWTH, FINANCE & INSTITUTIONS NOTE <<< 22 Vertical Data-Sharing through Public-Private and Private Initiatives Public-private and private initiatives like the development of data-sharing platforms could help improve market dynamics and forecasting accuracy. Better end-to-end sharing of information—especially between different vertical steps of the supply chain—may improve forecasting models and lower the likelihood of unexpected swings leading to the bullwhip effect (Leonard 2020). For example, the US Federal Maritime Commission has recently initiated an effort to establish common data standards for supply chain data, and to access policies and protocols. However, care should be taken in the design of such data-sharing initiatives so that they do not facilitate coordination between competitors on prices (Borenstein 2004). >>> Conclusion Ongoing supply chain disruptions and logistics price increases reflect a complex and interlocking set of issues related to consumer demand trends and the ability of different steps of the global logistics system to react. On the demand side, unexpected demand spikes in the US have created disruptions, owing to both the sheer volume of logistics throughput demanded and the sudden, unexpected rebound in demand that is contributing to the “bullwhip effect.” On the supply side, capacity constraints with respect to on-port storage and port-hinterland connections have been the main bottleneck, rather than berthing at ports per se. While trucking capacity constraints have been primarily driven by labor and chassis shortages, underinvestment in rail capacity is likely attributable to reduced competition in the US market. A more viable competition from ports outside Southern California could offer a useful release valve for the congestion at Los Angeles and Long Beach. Although the process bottlenecks are largely in the United States and China, developing countries around the world have been affected by shipping price increases and delays and could also extract lessons from this experience. In the short term, policy makers in developing countries outside of the United States, China, and Europe can help firms mitigate the effects of rising shipping costs and decreasing service levels by extending the time frames of trade finance and removing barriers to overland trade. While there is little they can do to directly solve the congestion and process bottlenecks, market characteristics suggest that the global logistics industry may be susceptible to collusive outcomes, which are exacerbating price spikes. Thus, governments could pay closer attention to potential anticompetitive behavior, especially with respect to maritime shipping and hinterland logistics. In addition, while this note highlights some indicative data points, further research on differential effects across sectors and players could help governments tailor policy responses more precisely. In the medium to long term, policy makers, regulators, and researchers should more carefully consider efficiency- resilience tradeoffs in the global logistics industry. Key topics to explore include investigations into potential anticompetitive behavior by shipping lines and increased scrutiny over mergers and alliance practices among logistics service providers and supplying manufacturing industries. Relatedly, research on how to incorporate long-run resilience into efficiency calculations— potentially through simulations of demand volatility—would be helpful to guide policy decision-making on regulations of slack capacity and redundancy in key logistics services. Finally, public-private and private initiatives to facilitate data sharing may also help improve forecasting, which could help mitigate the effects of demand volatility. EQUITABLE GROWTH, FINANCE & INSTITUTIONS NOTE <<< 23 >>> References ACCC. 2019. “Propose Class Exemption for Ocean Liner Shipping.” ACCC Discussion Paper. Arvis, Jean Francois, Michael Ferrantino, Martin Humphreys, Cordula Rastogi, and Daria Ulybina. 2021. “Global Supply Chain Disruptions: Putting Trade Recovery at Risk.” World Bank Internal Briefing. 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EQUITABLE GROWTH, FINANCE & INSTITUTIONS NOTE <<< 24 >>> References Hong, Woo-Hyung, and Daeyong Lee. 2020. “Asymmetric pricing dynamics with market power: investigating island data of the retail gasoline market.” Empirical Economics 58: 2181-2221. ITF. 2018. The Impact of Alliances in Container Shipping. Paris: ITF. Ivaldi, Marc, Bruno Jullien, Patrick Rey, Paul Seabright, and Jean Tirole. 2003. The economics of tacit collusion. Brussels: European Commission. LaRocco, Lori Ann. 2021. “FMC Commissioner Bentzel’s grade on US logistics system: D-plus.” FreightWaves, December 6. https://www.freightwaves.com/news/fmc-commissioner-bentzels-grade-on-us-logistics-system-d-plus. Leonard, Matt. 2020. “Port of LA’s Seroka calls for nationwide data sharing portal.” Supply Chain Dive, June 12. https:// www.supplychaindive.com/news/port-los-angeles-nationwide-data-sharing-seroka/579625/. Li, Martina. 2021. “US furniture shipper files FMC complaint against MSC and COSCO.” Container News, August 3. https:// container-news.com/us-furniture-shipper-files-fmc-complaint-against-msc-and-cosco/. Longley, Alex, Catherine Bosley, and Deirdre Hipwell. 2021. “Out-of-Control Shipping Costs Fire Up Prices From Coffee to Toys.” Bloomberg, June 12. https://www.bloomberg.com/news/articles/2021-06-12/out-of-control-shipping-costs- fire-up-prices-from-coffee-to-toys. Lynch, David. 2021. “Inside America’s Broken Supply Chain.” Washington Post, October 2. https://www.washingtonpost. com/business/interactive/2021/supply-chain-issues/. Metters, Richard. 1997. “Quantifying the bullwhip effect in supply chains.” Journal of Operations Management (15): 89-100. Miller, Greg. 2022. “How invasion of Ukraine could ease shipping logjam off US ports.” Freightwaves, March 7. https:// www.freightwaves.com/news/how-invasion-of-ukraine-could-ease-shipping-logjam-off-us-ports. —. 2021. “How three Chinese companies cornered global container production.” FreightWaves, May 24. https://www. freightwaves.com/news/how-three-chinese-companies-cornered-global-container-production. —. 2021. “Shipping chaos gives top importers ‘massive competitive edge’.” FreightWaves, August 27. https://www. freightwaves.com/news/shipping-chaos-gives-largest-importers-massive-competitive-edge. Mitchell, Tom. 2015. “China shipbuilders urged to merge to stay afloat.” Financial Times, March 11. https://www.ft.com/ content/c1e062ae-c79e-11e4-8e1f-00144feab7de. Modi, Nimesh. 2021. “The driver shortage isn’t just a long-haul problem. It’s a drayage problem.” Journal of Commerce, July 27. https://www.transportdive.com/news/drayage-truck-drivers-shortage-ports-bookyourcargo/603937/. Mwita, Martin. 2021. “China, Europe container demand hits Kenyan exports.” The Star, September 28. https://www.the- star.co.ke/business/kenya/2021-09-28-china-europe-container-demand-hits-kenyan-exports/. EQUITABLE GROWTH, FINANCE & INSTITUTIONS NOTE <<< 25 >>> References Notteboom, Theo, Thanos Pallis, and Jean-Paul Rodrigue. 2021. “Disruptions and resilience in global container shipping and ports: the COVID-19 pandemic versus the 2008-2009 financial crisis.” Maritime Economics and Logistics 23: 179-210. OECD. 2021. OECD Competition Assessment Reviews: Logistics Sector in Singapore. Paris: OECD. OECD. 2019. The Impact of Alliances in Container Shipping. Paris: OECD. Pallini, Thomas. 2021. “The White House is taking aim at ‘the cartel of shipping companies’ that control global trade amid supply chain chaos.” Business Insider, November 29. https://www.businessinsider.com/supply-chain-cartel- shipping-companies-white-house-inflation-price-growth-2021-11. Paris, Costas. 2020. “East Coast Ports Get More Shipping Volumes as Trade Routes Change.” Wall Street Journal, September 16. https://www.wsj.com/articles/east-coast-ports-get-more-shipping-volumes-as-trade-routes- change-11600289041. —. 2019. “Merger of Yards in South Korea, China Will Control Global Shipbuilding.” Wall Street Journal, August 1. https:// www.wsj.com/articles/merger-of-yards-in-south-korea-china-will-control-global-shipbuilding-11564653601. Pittman, Russell. 2020. “Railways and railways regulation in the United States: surely you don’t want Jones Back?” In Handbook on Railway Regulation, by Matthias Finger and Juan Montero, 225-237. London: Edward Elgar. Port of Long Beach. 2021. TEUS ARCHIVE: 1995 TO PRESENT BY YEAR. https://polb.com/business/port- statistics/#yearly-teus. Rabobank. 2022. “Russia-Ukraine War’s Impact on Global Logistics.” RaboResearch, March. https://research.rabobank. com/far/en/sectors/fa-supply-chains/russia-ukraine-war-impact-on-global-logistics.html. Reinsch, William Alan. 2021. “No Escape from LA: Lingering Supply Chain Insecurity at Los Angeles Ports.” Center for Strategic and International Studies, November 4. https://www.csis.org/analysis/no-escape-la-lingering-supply-chain- insecurity-los-angeles-ports. S&P Global. 2021. “Demand for shipper financing grows as congestion stalls container cargoe.” S&P Global, July 27. https://www.spglobal.com/platts/en/market-insights/latest-news/shipping/072721-demand-for-shipper-financing- grows-as-congestion-stalls-container-cargoes. Sanchez, Ricardo J., Daniel E. Perrotti, and Alejandra Gomez Paz Fort. 2021. “Looking into the future ten years later: big full containerships and their arrival to south American ports.” Journal of Shipping and Trade 6 (1). Saraiva, Augusta. 2021. “Port Snarls Could Be Worse Than Lehman Crash, Flexport CEO Says.” Bloomberg, October 22. https:// www.bloomberg.com/news/articles/2021-10-22/port-snarls-could-be-worse-than-lehman-crash-flexport-ceo-says. Sheffi, Yossi. 2020. The New Abnormal: Reshaping Business and Supply Chain Strategy Beyond Covid-19. Sicotte, Richard. 2001. “International Shipping Cartels.” EH.net Encyclopedia, August 14: http://eh.net/encyclopedia/ international-shipping-cartels/. EQUITABLE GROWTH, FINANCE & INSTITUTIONS NOTE <<< 26 >>> References Szakonyi, Mark. 2021. “Zim’s pivot to secondhand ships reflects capacity scramble.” Journal of Commerce, October 22. https://www.joc.com/maritime-news/container-lines/zim-integrated-shipping-services/zim%E2%80%99s-pivot- secondhand-ships-reflects-capacity-scramble_20211022.html. UNCTAD. 2019. Review of Maritime Transport 2020. Geneva: UNCTAD. UNCTAD. 1975. United Nations CONFERENCE OF PLENIPOTENTIARIES ON A CODE OF CONDUCT FOR LINER CONFERENCES, Volume II. New York: UNITED NATIONS. World Bank Group. 2007. Port Reform Toolkit PPIAF 2nd Edition, Module 6, Port Regulation: Overseeing the Economic Public Interest in Ports. Washington, DC: World Bank. World Bank Group. 2018. Promoting Open and Competitive Markets in Road Freight and Logistics Services : The World Bank Group’s Markets and Competition Policy Assessment Tool Applied in Peru, The Philippines and Vietnam. Washington, DC: World Bank. EQUITABLE GROWTH, FINANCE & INSTITUTIONS NOTE <<< 27 >>> Appendix A >>> Table A.1. Vertical and Horizontal Integration among Major Shipping Lines Has No. of Operate Inland Parent TEU Market Coun- Terminal integrated Carrier port inland/ transport company (mil.) share tries operator service / end- terminals dry port? logistics to-end? 2M (started operations in January 2015) 1. Maersk A.P.Moller- APM 4.25 17.0 130 75 Yes Damco Yes / Yes (Denmark) Maersk Terminals 2. Mediterranean Terminal Shipping Co. MSC Group 4.20 16.8 155 Investment 40 Yes MEDLOG Yes / Yes (MSC) Limited (TIL) (Switzerland, Italy) Ocean Alliance (started operations on April 1, 2017) 3. CMA CGM CMA CMA CGM CEVA Group 3.12 12.4 160 Terminals 13 Yes Yes / Yes Group Logistics (France) Holding COSCO COSCO 4. COSCO Group SHIPPING OOCL 2.95 11.8 103 SHIPPING 36 Yes Yes / Yes (China) Holdings (an Logistics Ports (CSP) SOE) 7. Evergreen Evergreen Evergreen Evergreen Partial / Line 1.46 5.8 80 Marine 5 - Logistics Group partial (Taiwan, China) Corporation Corp. THE Alliance (started operations in April 2017) Kuhne Holding Container Aratrans AG (30%), Terminal Transport 5. Hapag-Lloyd CSAV Germany 1.77 7.1 130 Altenwerder 1 Yes & Logistics Partial / Yes (Germany) Container GmbH Service Holding GmbH (25.1%) LLC (30%) 6. Ocean Ocean Yusen Express Network Network 1.57 6.3 120 - - Logistics Yes / Yes (ONE) Express Co. (Japan) Holdings, Ltd. Total Terminals 8. HMM Co. Ltd. Korea International Hyundai (Korea, Rep.) Development 0.83 3.3 Algeciras; 3 - Intermodal, — / Yes Joined the alliance Bank (KDB) PSA Hyundai Inc. in April 2020 (an SOE) Pusan New- Port Terminal Kao Ming Container YES 9. Yang Ming Terminal Logistics Yang Ming Marine Transport Corp; Corp.; Group, Co. 0.64 2.6 70 4 - Yes / — Corp. Honming Jing Ming Ltd. (Taiwan, China) Terminal & Transport Stevedoring Co. Co., Ltd. Source: World Bank staff analysis based on data from multiple sources, including carrier websites and TEU and market shares from https://alphaliner.axsmarine.com/PublicTop100/. Note: — = information not available. TEU = twenty-foot equivalent unit; mil. = millions. EQUITABLE GROWTH, FINANCE & INSTITUTIONS NOTE <<< 28 >>> Table A.2. Recent Ocean Carrier Mergers Year Month Consolidation activity Feb. COSCO merged with China Shipping Container Lines 2016 Sep. CMA CGM acquired American President Lines (APL) via acquisition of NOL Sep. Hanjin Shipping filed for bankruptcy Apr. Maersk Line acquired Hamburg Süd 2017 May. Hapag-Lloyd merged with United Arab Shipping Company (UASC) Jul. K' Line, MOL, and NYK merged into One Network Express (ONE) 2018 Jul. COSCO SHIPPING Holdings acquired Orient Overseas (International) Limited (OOIL) 2019 Oct. Sinokor Merchant Marine acquired Heung-A Line’s container business 2021 Mar. Hapag-Lloyd acquired Africa specialist NileDutch Source: Adopted from Green Worldwide Shipping, https://www.greenworldwide.com/cosco-acquires-perfect-bride-in-oocl-ocean-carrier-pool-shrinks/, and other web searches. Note: The European Commission (EC) approval of CMA CGM’s acquisition of NOL was conditional upon NOL leaving the G6 liner shipping alliance; EC clearance of Maersk Line’s acquisition of Hamburg Süd was conditional upon the withdrawal of Hamburg Süd from five consortia on trade routes where the merged entity would have faced insufficient competition after the transaction; and EC clearance of the Hapag-Lloyd merger with United Arab Shipping Company (UASC) was conditional upon the withdrawal of UASC from a consortium on the trade routes between Northern Europe and North America, where the merged entity would have faced insufficient competitive constraint. EQUITABLE GROWTH, FINANCE & INSTITUTIONS NOTE <<< 29 >>> Notes 1. Current sanctions on Russian Railways do not apply to goods flowing through Russia as of March 7, 2022 (Rabobank 2022). 2. The extent to which the order cancellations of the first quarter of 2020 were caused by the use of wrong parallelism with the 2008 crisis, or with previous natural disasters, would merit more research. 3. Relatedly, the low retailer and manufacturer inventory levels do not support the hypothesis that retailers are contributing to shortages and disruptions by hoarding inventory. 4. In this context, “idle fleet” refers to ships that are not in service, not to ships waiting to berth at ports, which may not be moving but are nevertheless in service. 5. That is, the ships not in service. 6. The proposed merger between Hyundai Heavy Industries and Daewoo Shipbuilding and Marine Engineering remains under regulatory review as of October 2021. 7. Table 1 displays six rows despite the text mentioning five major railways due to Canadian Pacific’s network being primarily in Canada, with smaller presence in the United States. 8. Union Pacific has since reopened the Rochelle facility to ease the pressure on Joliet, but it is operating under 100 percent utilization because of the inability to ramp up a shuttered facility quickly enough. 9. The Philippines’ case was disclosed by Philippine Competition Commission (PCC) Commissioner Johannes Bernabe in an interview with the local Business Mirror newspaper, https://splash247.com/philippine-authorities-suspect-collusion-among-container-carriers/. Australia’s case was disclosed by Australian Competition and Consumer Commission Chairman Rod Sims, https://www.abc.net. au/news/2021-09-14/prices-ports-transport-shopping-accc-covid-inflation/100458836; https://www.joc.com/maritime-news/high- demand-choked-supply-chains-behind-record-rates-shipping-australia_20210914.html; and https://splash247.com/australian- consumer-watchdog-initiates-liner-and-terminal-investigations/. 10. It is worth noting that the investigations by competition authorities are ongoing and no anticompetitive behavior has been proven. This is in part because such investigations just started and they take time, several years in some instances, to complete. 11. For example, the European Commission approvals of CMA CGM’s acquisition of NOL was conditional upon NOL leaving the G6 liner shipping alliance; Maersk Line’s acquisition of Hamburg Süd was conditional upon the withdrawal of Hamburg Süd from five consortia on trade routes where the merged entity would have faced insufficient competition after the transaction; and Hapag-Lloyd’s merger with United Arab Shipping Company (UASC) was conditional on the withdrawal of UASC from a consortium on the trade routes between Northern Europe and North America, where the merged entity would have faced insufficient competitive constraint. 12. For instance, Singapore’s block exemption allows shipping carriers to coordinate prices (OECD 2021). 13. Currently, Part X of the Competition and Consumer Act 2010 allows ocean carriers with registered agreements to (a) fix prices; (b) pool or apportion earnings, losses, or traffic; (c) regulate capacity; and (d) coordinate schedules. However, the Australian Government Competition Policy Review (the Harper Review) of 2015 recommended the repeal of Part X and for the ACCC to develop a class exemption for ocean carrier agreements that meet a minimum standard of pro-competitive features. EQUITABLE GROWTH, FINANCE & INSTITUTIONS NOTE <<< 30