Container shipping lines currently active in Hong Kong may leave the city for other Asian ports rather than risking running afoul of a new competition ordinance schedule to take effect in early 2016.
If the law is implemented as now written, shipping lines in the world’s fourth-largest port could face a fine of 10% of their annual turnover due to a conflict between the ordinance’s antitrust regulations and the vessel-sharing agreements common in today’s container shipping alliance structure.
“Indeed, the Hong Kong competition ordinance will directly affect the current model of business used in the shipping world,” says Roberto Giannetta, secretary general of the Hong Kong Liner Shipping Association (HKLSA). “Without a clear exemption for carrier cooperative agreements, Hong Kong’s shipping will be impacted.”
Giannetta notes that the very nature of modern container liner business relies on cooperative agreements. “More than 90% of containerized cargo coming through Hong Kong today is on the back-bone of these cooperative agreements. While the application of the Competition Ordinance does not mean that all these agreements will automatically become ‘illegal’ overnight, the broad nature and wording of the ordinance does cast a legal question mark on their ability to operate,” he says. “There are allowances for a shipping line to be ‘self-regulated’ or to be exempted based on economic value-added criteria, but these determinations are subjective.”
Penalties for shipping lines that violate the new Competition Ordinance include fines of up to 10% of Hong Kong turnover for a maximum of three years; forced disposal of assets, operations or shares; disqualification of Directors in Hong Kong for up to five years; and criminal penalties for obstructing investigation or providing misleading information, among others, says Ernest Yang, a Hong Kong-based partner in law firm DLA Piper’s litigation and regulatory practice group.
Yang that says it is widely expected that the ordinance will to come into effect in early 2016.
“Even if a court eventually rules in favour of the shipping line, the company’s stockholders’ report would reflect a potential liability of millions of dollars, which is not a good scenario for that company’s stock prices,” Giannetta says.
Rather than facing such legal uncertainty, he says, individual shipping lines with service to and from Hong Kong would likely reconsider their services and, if deemed necessary, minimize this danger by reducing their services to and from Hong Kong to a bare minimum – or to simply avoid serving Hong Kong altogether.
“Seventy percent of cargo moving through Hong Kong’s ports are pure transhipment cargo,” he says. “This type of cargo is very flexible and can easily be transhipped in other ports where there is legal certainty, such as Shenzhen, Kaohsiung, Singapore, or Kuala Lumpur. Essentially, every other major shipping country within Asia grants exemption and legal certainty to these cooperative agreements.”
Of the remaining 30% of cargo, Giannetta says, a majority is ultimately destined to or from China. “This cargo, too, can easily be loaded or discharged in Shenzhen, Shanghai, or other Chinese ports,” he says.
To provide certainty for its members, Giannetta says the HKLSA is planning on cooperating with other government and industry stakeholders to apply for a block exemption with the Hong Kong Competition Commission for carrier cooperative agreements. “We have already begun consultation and dialogue with government stakeholders, industry stakeholders and the Competition Commission. It is too early to guess what the eventual outcome may be, but our hope is that sensibility and reason will see its way through to safeguarding Hong Kong’s maritime sector and overall economy.”
Many Pacific Rim economies – including China, Japan, South Korea, Taiwan and Singapore – do provide an exemption under competition laws for shipping lines. “In view of the presence of such an exemption in [other] Asian countries, it is not impossible for Hong Kong to adopt a similar practice and grant block exemption to cooperative agreements in liner shipping industry, at least in the short run,” Yang says.
Gianetta says that the application the HKLSA is seeking “is not a blanket exemption where industry wants everyone to just close their eyes and let shipping lines do whatever they please. Rather, we are seeking alternate regulation or oversight that will replace the competition law for shipping. In other countries with competition laws and where exemptions apply, these exemptions are either coupled with some sort of monitoring regulatory oversight or alternate legislation that supersedes the competition law for shipping alone. We are looking for Hong Kong to adopt the same standards and allowances that exist in virtually all other countries.”
Yang says that if Hong Kong fails to grant an exemption to shipping lines, those lines may simply leave the city altogether. “Given the fact that nearby Asian jurisdictions still have such block exemptions in place, I believe more shipping companies may move their business elsewhere, perhaps to Singapore, instead of risking a breach of the law and payment of huge fines,” he told Asia Cargo News.
By Gregory Glass
Managing Editor | Hong Kong
