Shipping Restrictions, Requirements and Practices of the People's Republic of China

FEDERAL MARITIME COMMISSION

[Docket No. 98-14]

Shipping Restrictions, Requirements and Practices of the People's

Republic of China

AGENCY: Federal Maritime Commission.

ACTION: Notice of Inquiry.

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SUMMARY: The Federal Maritime Commission has concerns about laws,

rules, and policies of the Government of the People's Republic of China

that appear to have an adverse impact on U.S. shipping, and which may

merit Commission attention under section 19 of the Merchant Marine Act,

1920 or the Foreign Shipping Practices Act of 1988. The Commission is

seeking information on a number of Chinese practices and restrictions

and their effects on U.S. oceanborne trade from interested parties,

including shippers, transportation intermediaries, vessel operators and

others in the shipping industry.

DATES: Comments due on or before October 2, 1998.

ADDRESSES: Send comments (original and 20 copies) to: Joseph C.

Polking, Secretary, Federal Maritime Commission, 800 North Capitol

Street, NW, Washington, DC 20573-0001, (202) 523-5725.

FOR FURTHER INFORMATION CONTACT: Thomas Panebianco, General Counsel,

Federal Maritime Commission, 800 North Capitol Street, NW, Washington,

DC 20573-0001 (202) 523-5740.

SUPPLEMENTARY INFORMATION:

Background

In recent months, a number of sources have expressed concerns to

the Federal Maritime Commission (``FMC'' or ``Commission'') about laws,

rules, and policies of the Government of the People's Republic of China

that appear to have an adverse impact on U.S. oceanborne commerce. The

Commission has initiated this proceeding to compile a record on these

matters in order to determine if further Commission action under

section 19 of the Merchant Marine Act, 1920 (``section 19'') or the

Foreign Shipping Practices Act of 1988 (``FSPA'') is

warranted.1 This Notice of Inquiry, directed at shippers,

transportation intermediaries, vessel operators and other interested

parties, inquires about the particular issues and restrictions they

face in China, and the effects of those restrictions on their business

operations.

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\1\ Section 19 of the Merchant Marine Act, 1920, 46 U.S.C. app.

sec. 876, authorizes the Commission, inter alia, to: make rules and

regulations affecting shipping in the foreign trade not in conflict

with law in order to adjust or meet general or special conditions

unfavorable to shipping in the foreign trade * * * which arise out

of or result from foreign laws, rules, or regulations or from

competitive methods or practices employed by owners, operators,

agents, or masters of vessels of a foreign country; * * *.

The Foreign Shipping Practices Act of 1988, 46 U.S.C. app. sec.

1710a, authorizes the Commission to investigate whether any laws,

rules, regulations, policies, or practices of foreign governments,

or any practices of foreign carriers or other persons providing

maritime or maritime related services in a foreign country result in

the existence of conditions that (1) adversely affect the operations

of United States carriers in the United States oceanborne trade; and

(2) do not exist for foreign carriers of that country in the United

States under the laws of the United States or as a result of acts of

United States carriers or other persons providing maritime or

maritime-related services in the United States. If the Commission

determines that such adverse conditions exist, it may take actions

including limitations on sailings, suspension of tariffs, suspension

of agreements, or fees not to exceed $1,000,000 per voyage.

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Executive Branch Agencies' Assessment

On July 22, 1998, John E. Graykowski, Acting Maritime

Administrator, U.S. Department of Transportation, wrote to Commission

Chairman Creel on behalf of the Departments of Transportation, State,

and Commerce, to provide the Commission with a description of the

maritime relationship between the United States and China. The

Executive Branch agencies first described in broad terms the apparent

policy differences that underlie many of the particular points of

contention in U.S.-Sino maritime relations:

The focal point for non-Chinese companies interested in maritime

trade with China and

[[Page 44260]]

accustomed to operating in a free market is the apparent Chinese

policy of seeking to control the trade rather than allow market

forces to operate. In practice, this policy has been characterized

by increasing restrictions imposed unilaterally by the Chinese

government on foreign carriers' operations. Efforts to expand the

scope of their business operations required extended

intergovernmental negotiations. * * * An important aspect of this

policy is a general lack of transparency. We believe U.S. carriers

in the China trade, as global intermodal transportation companies,

feel acutely the effects of Chinese restrictions. In addition, the

limitation, restriction or prevention of efficient shipping and

intermodal services by foreign companies negatively affects users of

shipping services as well.

In recent years, the Executive Branch agencies have met repeatedly

with their Chinese counterparts, led by the Ministry of Communications

(``MOC''), ``to persuade them to remove the restrictions that U.S.

carriers face in the China trade and, in so doing, to achieve operating

conditions for them in China that are equivalent to the open, market-

oriented treatment enjoyed by Chinese carriers in the United States.''

The Acting Maritime Administrator attached to this letter a copy of the

Agreed Minutes of the most recent negotiating rounds, in Beijing, June,

25-28, 1997, and in Washington, December 3-11, 1997. The talks covered

ten main areas: access by U.S. carriers to Chinese ports on 24-hour

approval; Shanghai Shipping Exchange; Chinese multimodal regulation;

shipping between Hong Kong, China, and mainland China; shipping across

the Taiwan Strait; limitations on carriers' branch offices in China;

exclusion of foreign carriers from vessel agency operations in China;

the Port of Tianjin/Sea-Land joint venture to operate a marine

terminal; the Controlled Carrier Act (section 9 of the Shipping Act of

1984); and COSCO's efforts to lease a marine terminal at a former U.S.

Navy facility in Long Beach, California.

The Executive Branch agencies also reported on an unwritten

agreement the U.S. and Chinese delegation came to in December, 1997.

This agreement reportedly had three parts:

The Maritime Administration and the U.S. carriers would

support in writing a China Ocean Shipping (Group) Company, Inc.

(``COSCO'') petition to the Commission for permission to match

competitors' rates on 24 hours' notice (as opposed to the statutory 30-

day period for controlled carriers);

The MOC would approve American President Lines, Ltd. and

Sea-Land Service, Inc.'s pending port access requests and would act

expeditiously (i.e., within 10 days) on their future requests; and

The MOC would approve Sea-Land's joint venture with the

Port of Tianjin.

Although the Commission granted the relief sought by

COSCO,2 the Executive Branch agencies reported, MOC has not

yet given the necessary approval for the Sea-Land terminal venture in

Tianjin. The agencies said that some U.S. carrier applications now have

been approved, some have not yet been acted upon, and at least one has

been rejected.

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\2\ By Final Order dated March 27, 1998, in Petition No. P1-98,

the Commission granted COSCO an exemption from the statutory waiting

period for rate changes for a controlled carrier under the

Controlled Carrier Act. COSCO's petition was supported in writing by

U.S. carriers Sea-Land Service, Inc. and American President Lines,

Ltd., MARAD, and a number of shippers. The Commission granted

COSCO's request for an exemption from the 30-day delay in tariff

effectiveness on the basis that such an exemption met the four

criteria in section 16 of the 1984 Act. Despite COSCO's

representations in that proceeding that the expedited filing was

important to their ability to compete, it has not once used the

authority granted it in the exemption.

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The Executive Branch agencies noted new Chinese regulations

prescribing penalties for operators of unapproved liner services,

including fines and confiscation of revenues and business licenses.

They also observed that ``access by foreign vessels to ostensibly open

ports in China is now solely at the discretion of MOC,'' and ``a

variety of normal commercial activities, including, for example, rate-

setting and use of intermodal through bills of lading, are subject to

monitoring, approval or denial by MOC.''

Other Recent Communications Regarding China Maritime Policy

The Commission received a letter, dated June 24, 1998, from Owen G.

Glenn, Chairman of Direct Container Line, an U.S.-based non-vessel-

operating common carrier (``NVOCC''), raising the issue of Chinese

restrictions on foreign NVOCCs. Mr. Glenn took note of the Commission's

efforts in support of Direct's successful attempts to enter the Korean

market,3 and the Commission's support for Executive Branch

agencies' efforts to open the Brazilian market to U.S. NVOCCs, and

asked what action the Commission might consider taking with regard to

current Chinese restrictions.

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\3\ See Docket No. 92-42, Actions to Adjust or Meet Conditions

Unfavorable to Shipping in the United States/Korea Trade, 26 S.R.R.

591. In response to a Petition (No. P2-92) filed by Direct Container

Line, the Commission issued a Final Rule on November 13, 1992, under

section 19(1)(b) of the Merchant Marine Act, 1920. The Commission

found that the Korean Maritime Transportation Business Act created

conditions which, inter alia, precluded or tended to preclude non-

Korean NVOCCs and freight forwarders from competing in the U.S./

Korean trade, and denied NVOCCs and freight forwarders owned and

operated by non-Korean nationals equal access to cargo moving from

Korea to the United States.

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FMC Chairman Creel also received a letter, dated June 16, 1998,

from Senator Ernest F. Hollings, expressing his concern for the

deterioration of the U.S.-China maritime relationship and the

limitations imposed by MOC on U.S. carriers in the Chinese trade.

Specifically, the Senator observed that U.S. carriers are subject to a

cumbersome approval process for routine vessel and itinerary changes,

restrictions on number and location of their branch offices in China,

limits on their intermodal services to inland customers in China, and a

complete prohibition on their operation of vessel agency services.

Senator Hollings reminded the Chairman that COSCO, now one of the

largest and most successful carriers in the U.S. trades, does not face

these same restrictions in the United States.

The Senator further recounted the making of the unwritten

``Gentlemen's Agreement'' between U.S. and Chinese negotiators in

December 1997, and the U.S. side's actions to honor that agreement. The

Chinese, he noted, had still failed to act on their agreement to

approve vessel registration applications and U.S. carrier port access,

and to approve a U.S. carrier's port operating joint venture. Senator

Hollings urged the Commission to investigate these matters and act to

encourage China to remove restrictions on U.S. carriers so they may

compete freely and openly in China.

The Commission also has been approached on a number of occasions by

U.S.-flag vessel operators, who have complained informally about the

matters raised by the Executive Branch agencies, and underscored their

desire for improvements.

COSCO's Recent Statements

COSCO issued a public statement addressing the criticism of Chinese

shipping policies by U.S. officials. The thrust of COSCO's position is

that it is subject to the same restrictions as U.S. carriers in China,

and that it is subject to discriminatory treatment under the controlled

carrier provisions of the Shipping Act. COSCO stated, in part:

4

\4\ ``COSCO's Response and Clarifications to Allegations Made by

the Honorable Senators: E. Hollings, C. Thomas, J. Helms, G. Smith

and J. Breaux,'' www.cosco-usa.com/ie4/news/sale.htm.

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Earlier this year, talks were held in both the United States and

China to try to reciprocally lessen regulations for Chinese carriers

in the U.S. and for U.S. carriers in China. The spirit and intent of

these talks were to enhance and encourage a more free and open trade

environment for the two

[[Page 44261]]

important trading partners. Recent comments made would lead public

opinion to believe that Chinese flag carriers receive complete

freedom to operate without any restrictions in the U.S. while U.S.

carriers are severely restricted in China. These statements are

inaccurate, as Chinese flag carriers operate under controlled

carrier restrictions in the United States. Although U.S. flag

carriers may be facing some restrictions in China, these

restrictions are universally applied and do not single out certain

carriers. Pursuant to the memorandum of U.S.-Sino Maritime

discussions signed in June of 1996, U.S. flag carriers were granted

important trade concessions not available to other countries.

Additional concessions were granted to the U.S. carriers recently

including permission to establish 6 additional shipping routes in

China.

Earlier this year, Chinese carriers were granted a limited

exemption from the controlled carrier restrictions by allowing them

to meet a filed rate of a competing ocean shipping line on one day's

notice. While we saw this as a good first step, most of the progress

that was made with this exemption would be negated if the current

deregulation bill S-414 is passed. COSCO will lose its flexibility

in tariff pricing if the current deregulation bill is passed. We

will be deprived our current right to file rates in China/Hong Kong-

US bilateral trade on one day's notice, thus making COSCO's

competitiveness reduced dramatically. The intent of the talks

between the two nations were to reduce restrictions on both sides,

granting Chinese shipping lines matching ability on the cross trades

while introducing new regulations on the bilateral trades

contradicts the intent of the discussions.

Discussion and Request for Comments

The Commission, in order to determine whether any of a number of

Chinese laws, rules, regulations, policies or practices merit further

Commission action under section 19 or the Foreign Shipping Practices

Act, is collecting information on the following specific areas at this

time.

1. NVOCC and Freight Forwarder Operations

As noted by Direct Container Line, U.S. NVOCCs and ocean freight

forwarders appear to face serious restrictions in obtaining the

necessary licenses and permissions to do business in China. Indeed, it

appears that wholly foreign-owned NVOCCs such as Direct Container Line

are barred from engaging in a number of commercial activities, such as

offering through transportation as an NVOCC. Other types of services

appear to be permitted, but only if a foreign firm enters a joint

venture with a Chinese entity. The Commission is seeking to establish a

clear record of what types of services U.S. NVOCCs or forwarders are

permitted to perform in China, what activities are prohibited, and what

requirements or prerequisites are imposed. We note that Chinese

forwarders and NVOCCs, in contrast, face no nationality-based

restrictions doing business in this country.

Therefore, it would be useful for the Commission to receive

comments describing, in detail, what types of transportation

intermediary activities are permitted, what are prohibited, and in what

instances are joint ventures or similar arrangements required. What

conditions, requirements or restrictions are placed on ocean

transportation intermediary activities (e.g., arranging inland or ocean

transportation, preparing documentation and issuing bills of lading,

consolidation, warehousing, cargo agency, logistics services, etc.)?

What types of licenses are required, and what restrictions are placed

on their issuance? Who issues the necessary licenses and permissions,

and what are the legal standards and procedures for granting them?

Also, what commercial partners are available in China for joint

ventures, and under what commercial conditions?

Individual companies' accounts of their efforts, successful or

otherwise, to establish operations in China, and their dealings with

Chinese authorities, would be useful. Any supporting documentation

would be welcomed.

The Commission also seeks to determine the effects on shippers of

any such restrictions; that is, do restrictions on foreign

transportation intermediaries have any adverse effects on shippers'

ability to secure efficient and economical intermodal transportation

services in U.S. oceanborne commerce?

2. Port Access and Licensing of Liner Services

The Commission has concerns about apparent Chinese restrictions on

port access or the licensing of liner services. Despite the fact that

the U.S.-China bilateral agreement authorizes vessel calls on 24 hours'

notice for national flag vessels, it appears that MOC requires foreign

carriers to obtain licenses or pre-approvals to offer liner services at

Chinese ports. It appears that this licensing procedure can take up to

90 days or more. Details of the approval process are not apparent; it

is unclear whether permissions are granted by service string, by port,

by company or consortium, or by vessel. Moreover, it is not clear what

the criteria are by which requests can be withheld or denied, and what,

if any, appeal rights carriers enjoy.

By separate order, the Commission has requested more information on

these matters from U.S. and Chinese shipping lines. However, the

Commission would welcome comments from any other carrier, shipper, or

other party that could shed light on these practices and their effects

on U.S.-China oceanborne trade.

3. Carrier Branch Offices and Multimodal Transport Operations

U.S. carriers appear to face a number of restrictions in operating

branch offices in China. Chinese authorities have denied carrier

requests to increase the number of branch offices in China. The

addition of branch offices for foreign carriers apparently has required

direct government-to-government appeals and negotiations; such

impediments certainly do not exist for Chinese lines. For the branch

offices that do exist, it appears that there may be serious

restrictions on their operations, both in terms of the geographic area

they may serve and the scope of services they may offer. A number of

these may be the same as, or similar to, the restrictions faced by

NVOCCs and forwarders in China, as described above. Apparently, there

are certain narrowly prescribed business areas in which U.S. carriers

are allowed to operate; however, it is unclear just what those areas

are.

We are particularly concerned about restrictions that may limit

carriers' ability to offer multimodal transportation services. It is

our understanding that new regulations over such services have been

proposed, and carriers wishing to offer them are required, or may soon

be required, to seek central government permission. The Commission

requires more information on such restrictions on carriers' branch

office or multimodal operations.

Chinese authorities have advocated a ``most-favored-nation''

approach to shipping regulation. Under such an approach, the subject

country treats all foreign business concerns operating therein the same

in terms of rights and restrictions. It would appear, however, that the

most-favored-nation approach advocated by Chinese authorities bestows

on Chinese shipping lines an extraordinary commercial advantage; they

(unlike their competitors) can reap the benefits of the important and

expanding Chinese market with a more extensive and unrestricted network

of branch offices and multimodal operations, while taking advantage of

the relative lack of restrictions on offices, marketing, and inland

transport in the United States.5

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\5\ Indeed, it is no defense under section 19 and the FSPA to

suggest that U.S. companies are treated no worse than other foreign

firms. Under section 19, the Commission is directed to address

conditions unfavorable to shipping in the foreign trade; that all

non-Chinese carriers in the trade are subject to the same

unfavorable conditions would appear to augment rather than lessen

the effect of those conditions. Under the FSPA, the Commission is

specifically directed to compare the treatment of U.S. carriers in a

foreign country to the treatment of that country's carriers in the

U.S., not to the treatment of other foreign lines abroad.

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[[Page 44262]]

The Commission would welcome comments from any carrier, shipper, or

other party on the details or effects of these issues.

4. Vessel Agency Services

The Commission would also benefit from comments on the apparent

Chinese restriction on foreign firms offering vessel agency services.

It appears that China requires U.S. carriers to deal with PENAVICO (a

subsidiary of COSCO) or China Marine Service (a subsidiary of China

National Foreign Trade Transportation (Group) Corporation

(``Sinotrans'')). The fact that ``[f]oreign shipping companies may

select freely any shipping agencies for services, provided that these

agencies are entitled to perform their services for foreign vessels,''

as the Chinese delegation remarked, appears to be of little consequence

if only Chinese government-owned vessel agency services have such

approval. Similarly, our concerns are not allayed by the Chinese

assertions in bilateral maritime discussions that Chinese vessel agency

companies are ``entirely independent from their parent companies,'' as

Chinese carriers face no similar restrictions in the United States.

It would be beneficial to determine exactly what the legal bases

are for the exclusion of U.S. carriers from this market in China; what

specific services are at issue; what the commercial impact of the

restrictions may be; and whether Chinese carriers perform such services

for themselves in this country.

Now Therefore, it is Ordered, that this Notice of Inquiry be

published in the Federal Register.

By the Commission.

Joseph C. Polking,

Secretary.

[FR Doc. 98-22112 Filed 8-17-98; 8:45 am]

BILLING CODE 6730-01-P