Shipping reform backed by South Dakota delegation makes rapid impact on supply chain, local businesses say
The Ocean Shipping Reform Act, a bipartisan bill backed by U.S. Rep. Dusty Johnson and U.S. Sen. John Thune among others in Washington, made the first major alterations to federal maritime rules in more than 20 years, potentially handing down more severe fines on ocean shippers discriminating against businesses.
SIOUX FALLS, S.D. — While references to pandemic-related supply chain issues have become a mainstay in any conversation about economic development or inflation, the particulars of exactly how those issues came about can quickly turn confusing.
But for South Dakota businesses, the effects of a logistical slowdown were easily seen. Earlier this year, Valley Queen Cheese, a dairy company based in Milbank, had 2 million pounds of lactose sitting in their warehouse ready for shipment to New Zealand. All they needed was an available container.
“The product had already been sold to a buyer in Asia and it just sat around because they couldn't get a spot on these vessels that were going back empty,” U.S. Rep. Dusty Johnson, R-S.D., told Forum News Service. “60% of the container loads that went back to Asia last year went back empty.”
Why would ocean carriers cross the Pacific Ocean without any product? The reason for that stems from unexpectedly high American consumer demand in the second half of 2020.
This demand strained the supply of empty containers, raising shipping prices and making ocean carriers think harder about exactly which products to carry.
Combined with the comparable lack of demand in other countries, ocean shipping companies faced a strong set of incentives to bring foreign goods into America and little reason to take American products back out.
Thus, container ships were leaving American ports empty-handed, heading to east Asia to return with another load of high-value electronics rather than waiting for farm or manufacturing products from domestic businesses.
This set of circumstances and their immediate impact on American farmers and manufacturers made Congress take notice, eventually leading to the Ocean Shipping Reform Act, a bipartisan, relatively under-the-radar piece of legislation spearheaded in part by Johnson and one of his delegation colleagues, U.S. Sen. John Thune, R-S.D.
On the Democratic side of the aisle, major backers included Rep. John Garamendi of California and Sen. Amy Klobuchar of Minnesota. The bill was signed into law on June 16, 2022.
In short, the bill made major changes to the rules and enforcement tools at the disposal of the Federal Maritime Commission, the federal agency which seeks to regulate the ocean transportation system in a way that benefits American companies and consumers.
The bill calls for the commission to engage in new rulemaking to deter ocean shipping companies from assessing unreasonable fees against suppliers or discriminating against American products.
It also requires public reporting of several metrics, such as average wait times at major ports — which saw serious delays during the pandemic — and the number of empty containers leaving American harbors. These metrics will give business owners and government officials a regular snapshot of the health of American supply chains.
While the 70% drop in shipping rates over the past year is partially due to a smoothing out of global demand and the economic momentum of post-pandemic re-opening, Johnson says the bill has had an effect on the choices ocean carriers make and in turn helped bring rates down.
“I have had senior executives at these foreign flag ocean carriers sit in my office and admit that our legislation caused them to change how they treat American cargo dramatically,” Johnson said. “The system is not fully healed yet, but we know our bill sent a strong message.”
Those on the ground in the state’s agricultural industry have seen a rapid impact.
“What we've seen as far as container availability has increased dramatically,” said Jason Mischel, the vice president of sales and procurement at Valley Queen Cheese. “For the first half of this year we were significantly behind in being able to export products and it was because there just weren't empty containers in the Midwest. And that has improved dramatically.”
Outside of the effects on South Dakota’s agricultural products, the legislation also helped open supply chains for manufacturers.
Jordan Stoick, the vice president of government relations at the National Association of Manufacturers, a major trade organization that backed the bill, said he was glad Johnson and Thune “recognized a problem facing manufacturers and South Dakotans across multiple industries and worked in a bipartisan way to enact sensible solutions,” adding the law “would not have become law without their leadership.”
Ryan McFarland, the CEO of Strider Bikes in Rapid City, recalled that throughout 2021 his business had to be incredibly proactive about booking space on containers so they could get their bicycles, which are produced in China, into the country on time, often booking slots several months in advance.
Even so, McFarland said the major problem was unpredictable wait times at certain ports, as some of his inventory would sit for months while other times it would be moved through efficiently. Combining wait times and a huge spike in shipping costs — which still have not returned to their pre-pandemic level — McFarland estimates his company lost several million dollars in potential profit.
With general re-opening and the nascent enforcement of new rules under the Ocean Shipping Reform Act, McFarland has seen some improvement in the supply chain.
“It’s certainly much easier to get space booked now, so that's not an issue,” McFarland said, “Things seem to be moving through the ports pretty well, too.”
While the exact effects and enforcement of the law — and the reciprocal behavior of large ocean shipping companies — still remains to be seen over time, Johnson said the bill both sent a strong message to these companies and will help to better prepare the American supply chain for the next market shock.
“Once you have Congress speak with a strong bipartisan and bicameral voice in that way, people get the memo in a hurry. And while the [Federal Maritime Commission] rulemakings are not all completed yet, we have seen a change in carrier operations,” Johnson said. “These companies know that the cop on the beat has new marching orders.”