South Korea penalizes price-fixing shipping companies but vested interest fights back

Public interest v vested interest

On January 18, the South Korean antitrust regulator decided to impose a fine of 96.2 billion won (US$80 million) on shipping companies. The Korea Fair Trade Commission (KFTC) stated that a total of 23 companies, both Korean and non-Korean, are held responsible for fixing freight rates on Korea-Southeast Asia routes for 15 years.  This is the first time KFTC applied the Fair Trade Act to shipping companies to penalize their price-fixing practices. 

However, the Ministry of Oceans and Fisheries did not issue an official statement regarding the penalty but has previously said that a move in price-fixing among shipping companies is not a problem under the Maritime Transportation Act.

The Korea Shipowners’ Association (KSA) said in a statement that having minimum freight rates is protected under the Act, and added that the penalty can bring “negative impacts on the industry”, creating another “crisis” since the collapse of Hanjin Shipping.  

The gray area of price-fixing

According to South Korea’s Maritime Transportation Act, Korean shipping companies can readjust freight rates through a “collaborative action”. This is to take into account the requirement for a substantial amount of investment to operate regular shipping services (for example, building a ship and buying containers), and that intense price competition may cause the closure of financially weak but profitable companies.

To regard the adjustment in freight rates as a collaborative act protected under the law, the companies must report their new readjusted prices to the Ministry of Oceans and Fisheries and to consult with their consignors. 

KFTC said that the responsible shipping companies readjusted freight rates of routes to Southeast Asian countries 122 times without reporting to the Ministry from 2003 to 2018. The antitrust authority added that they did not discuss reasons for the raise with cargo owners too.

Nonetheless, despite the clear breach of the Act, the KSA still tried to defend the offending parties by criticizing that the KFTC should not define their price increases as “illegal” for they were only “procedural issues”. 

“Even if there is a procedural issue, the Maritime Transportation Act’s purpose to protect the collaborative action to fix prices should be acknowledged,” the association said in its statement. 

KSA said that it will bring the case to the administrative court to fight the KFTC’s decision, and will also file a petition with the Blue House (the presidential executive office) to revise the Maritime Transportation Act to exclude the authority of the KFTC to regulate shipping companies, and thereafter to push for the revised Act to pass the National Assembly. 

Shipowners’ interest v public interest

Last year, some media reports predicted that the KFTC might impose a penalty of 500 to 600 billion won (US$434 to US$521 million) on the shipping companies and now the actual amount is only one-eighth of the expected fine.  

But still, KSA said that this amount may have “devastating impacts” on the industry, such as “layoffs of port employees”. The association compared the penalty’s estimated impact with the collapse of Hanjin Shipping, previously one of the biggest shipping companies in the world.

“The KFTC decision also goes against the government’s policy of rebuilding shipping as the penalty seriously hits small shipping companies,” the association said. It added that the country’s competitiveness in the global shipping industry may also take a step back if price adjustment is considered illegal from now on.

However, in the public interest of upholding the rule of law and fair competition without fear or favor, it is noteworthy that the failure to inform the relevant Ministry of all price increases by the offending parties must also be addressed, and cannot simply be brushed aside as “procedural issues”.

Jeff Koo, a logistics professor at Baewha Women’s University, told Maritime Fairtrade that the amount of financial penalty will not be a huge burden on the responsible companies, such as HMM.

“The companies earned a record profit last year,” Prof. Koo said. 

“For example, HMM’s 2021 business profit is nearly eight trillion won ($US 6.7 billion). Companies that say they don’t have money to pay the KFTC’s financial penalty should know that such a statement can have a negative impact on them as it shows they are not managing their cash flow well.”

When the revised bill of the Maritime Transportation Act passes the National Assembly, the Ministry of Oceans and Fisheries will have the legal authority to regulate the price adjustment of shipping companies, instead of KFTC. 

Prof. Koo expressed concerns that the nature of this revised bill is like “asking the fox to guard the geese”. He urged for the establishment of a third-party independent watchdog organization instead to monitor and regulate the shipping companies’ price-fixing.

“What we need is an authoritative body like the Federal Maritime Commission in the United States,” Prof. Koo said. 

“This organization should be independent of the stakeholders in the industry and should apply the law and regulations on all illicit actions.”

Image credit: iStock/imongkolchai

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