Mission Creep: Why the FTC is Investigating Retail Supply Chain Distortions

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The Federal Trade Commission's mission is to protect consumers and businesses against anticompetitive, deceptive, and unfair business practices, but historically it hasn't touched ocean shipping.

Overseeing competition in sea freight is the primary jurisdiction of the Federal Maritime Commission. The Department of Justice gets involved if international container lines engage in anticompetitive behavior outside antitrust immunity that allows discussion about rate guidelines for individual service contracts and vessel sharing.

Yet the FTC, in late November, launched a study into the supply chain operations of nine major retailers, wholesalers, and packaged goods suppliers. The companies were asked to turn over detailed information to help the agency determine whether steps they took to ensure adequate inventories exacerbated widespread transportation bottlenecks, supply shortages, and inflationary pressures in ways that harmed smaller companies and consumers. The responses are due Wednesday.

The probe is part of a Biden administration effort to show that it is, at least symbolically, focused on issues driving up prices for food, gas, and merchandise, which are hitting people in their pocketbooks and contributing to lower confidence in the economy and the president. And torrid inflation — consumer prices jumped 6.8% in November, the biggest increase in 39 years — is giving the Biden team an opportunity to initiate a competition agenda aimed at reducing market consolidation based on a narrative, advanced by progressives, that inflation is caused by greedy big business. 

Today's inflation is the result of a bullwhip recovery from the pandemic, government stimulus programs that allowed people to order more goods, supply chain bottlenecks, and labor shortages, according to economists. Supply chain impediments are the result of port congestion and tight ocean capacity in the face of record U.S. import demand, which has resulted in a tenfold increase in shipping rates from Asia compared to pre-pandemic levels. 

The White House recently claimed its Port Action Plan was responsible for reducing shipping rates and backlogs at the ports of Los Angeles and Long Beach, although short-term container rates are rising again and logistics experts say there hasn't been any material improvement in cargo processing.

Critics say the FTC's scope expansion is misguided.

Retailers are "the wrong target," said Steve Lamar, president of the American Apparel & Footwear Association. "That's not where the bad behavior is being exhibited. It's at the carrier level. And if you are really looking at trying to reduce inflationary pressures, the administration has a handy tool they can use" — removing and refunding tariffs on imports from China to offset harmful freight costs.

Lawrence Summers, the head of the National Economic Council under President Barack Obama and Treasury secretary for President Bill Clinton, said on Twitter, "The emerging claim that antitrust can combat inflation reflects ‘science denial.' … Increases in prices and profit margins are what happen when competitive industries experience increases in demand. That is what calls forth increased supply. This is how a market system operates."

Other financial experts argue concentrations of power allow companies to arbitrarily price goods much higher than they would in a free market. In their view, inflation is the rate of change in prices and oligopolies more easily pass through higher costs, so antitrust action can lower prices.

In the crosshairs

The FTC supply chain review came after the White House, and port envoy John Porcari in particular pushed federal agencies to find tools they could leverage to alleviate chokepoints, said a Washington trade attorney who asked not to be named to protect access to the executive branch.

Without a jurisdictional hook to investigate the ocean freight industry, Chair Lina Khan — an advocate for curbing the dominance of big companies — told the White House the FTC could look at the trickle-down impact on the economy from how big companies are dealing with port congestion and downstream distribution bottlenecks, according to the source. 

The commission eventually invoked a provision of the FTC Act, which authorizes it to conduct wide-ranging studies that don't have a specific law enforcement purpose. The order, which gives the companies 45 days to respond, was fine-tuned after the two Republican members of the commission expressed concern about jurisdictional overreach.

The National Retail Federation expressed concern that the FTC inquiry is a distraction from investigating the behavior of ocean carriers and is an administrative headache for the companies involved. 

"The current supply chain crisis is affecting companies large and small who are being impacted by disruptions at every stage of the supply chain. Focusing on the practices of a few U.S. retailers who have been trying to address the shipping crisis will not help to solve the issues that persist today," Jonathan Gold, the NRF's vice president for supply chain and customs policy, said at an open FTC meeting on Dec. 16. 

Importers face a multitude of challenges, including shortages of materials; COVID outbreaks that threaten foreign factories and ports; shortages of empty containers and chassis to carry them over the road; and marine terminals restricting returns of empty containers, according to trade experts. 

Cargo owners complain ocean carriers regularly renege on container contracts so they can charge other shippers higher rates on the spot market; don't guarantee space on their vessels even when premiums are paid; refuse to negotiate service contracts; limit the amount of capacity they provide shippers, and unfairly charge rent for port storage and late return fees when full terminals are not accepting truck appointments.

Many retailers placed orders earlier, used alternate vendors and ports, and moved more cargo by air to get goods to stores in time for the holidays, but are still experiencing delays. 

Gold said the NRF supports White House efforts to collaborate with supply chain stakeholders on congestion solutions, FMC investigations into ocean carrier and terminal practices, and new legislation to regulate the maritime industry.

"These are the kind of solutions we need to see — not a study focused on a few retailers who are working to address these challenges," he told the FTC.

Agency watchers say it usually takes a year or two for it to issue a report resulting from a Section 6B order, but Kahn made clear in announcing the study that it needed to move quickly and gather as much information as possible.

"Focusing on the practices of a few U.S. retailers who have been trying to address the shipping crisis will not help to solve the issues that persist today."

Jonathan Gold, vice president supply chain and customs policy, national retail federation

"The FTC has a long history of pursuing market studies to deepen our understanding of economic conditions and business conduct, and we should continue to make nimble and timely use of these information-gathering tools and authorities," she said. 

After the FTC receives the requested documents, it will probably take another 45 to 60 days for staff to review them and make requests for any additional information. The agency will be under pressure to issue a preliminary report by March, the government affairs source predicted.

Busting up corporate trusts

The FTC's probe also fits within the Biden administration's worldview that antitrust rules need redefining to contain corporate power, especially tech giants like Amazon AMZN, Apple AAPL, Meta FB, and Google GOOGL. In recent weeks, officials have blamed food producers, retailers, and energy companies for anticompetitive behaviors and pushed for antitrust investigations. Officials say dominant corporations in uncompetitive markets are taking advantage of their market power to raise prices and increase profit margins. 

"Capitalism without competition is exploitation and I'm determined to end the exploitation," the president said in a televised address from the White House on Friday.

Brian Deese, the head of the White House's National Economic Council, in a recent blog post claimed that the primary factor behind rising grocery prices is that four multinational conglomerates dominate the meat processing industry. In the administration's view, these companies use their dominant position as middlemen to overcharge grocery stores and underpay growers. Profit margins for these companies have soared far beyond the higher cost paid for materials and operating expenses, undercutting claims that they are simply passing on input costs. The corporations, Deese argued, wouldn't be able to price so aggressively if they faced more competition. 

On Jan. 3, the White House issued an action plan to increase competition in the meat and poultry sector, primarily aimed at helping independent processors and leveling the playing field for farmers and ranchers. The plan includes a joint initiative between the Justice and Agriculture departments to coordinate enforcement of antitrust laws. 

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"One has to ask, if, as the administration asserts, consolidation in meat and other industries has been a problem for years and it is also driving the current surge in prices, then why didn't it drive prices higher before?" Neil Bradley, chief policy officer for the U.S. Chamber of Commerce, said in a Jan. 3 statement. "It is pretty clear that the administration is attempting to use higher prices to justify their preexisting agenda to overturn decades of bipartisan consensus around antitrust and competition policy in favor of a ‘government-knows-best' regulatory approach. That isn't economics, it is politics and sadly, such government intervention would likely further constrain supply and push prices even higher."

Summers said rising demand combined with capacity and labor are the reasons behind higher meat prices. "Breaking up meatpacking would in the short run lead to reduced supply, which would further increase prices. In general, when government goes to war with industries it discourages investment and subsequent capacity," he tweeted.

In July, the Federal Maritime Commission initiated an audit of nine major container lines operating in the U.S. market to determine if they are using their clout to overcharge shippers on detention and demurrage fees at ports. The audit covers carrier practices related to billing, appeals procedures, surcharges and other restrictive practices.  

The FMC also partnered with the Justice Department to ramp up economic oversight of international container lines, all of which are foreign companies, after the president ordered a dozen agencies to take initiatives to promote competition across the U.S. economy. The White House expressed concern about the growing concentration of the container shipping industry, in which three alliances control 80% of the market. The Justice Department is helping the FMC investigate and potentially fine ocean carriers charging shippers unreasonable rates and fees.

"There is no basis whatsoever in thinking that monopoly power has increased during the past year in which inflation has greatly accelerated," Summers tweeted. "The traditional approach to antitrust is based on consumer welfare. This means seeking the lowest possible prices for consumers. To the extent that alternative … approaches embraced by some in the Administration are different that will mean HIGHER prices. If, for example, Walmart had been stopped from expanding, or Amazon had been kept from entering new markets, prices would be higher not lower today."

Instead of treating inflation as a monopoly issue, he said the administration would do better to reduce barriers to entry in energy production, scale back tariffs and antidumping actions on imports, and reduce regulatory delays that slow industry from increasing capacity.

There is little evidence of corporate predatory behavior, Scott Galloway, professor of marketing at the New York University School of Business, concurred.

The job of CEOs is "to try and raise prices whenever they can. … The reality is we've had a very deflationary environment the last 30 or 40 years. So it has been difficult to raise prices and all of a sudden they can raise prices," he said on CNN's morning show "New Day" on Dec. 8. Companies have "more pricing power over consumers than ever before, which unfortunately has wiped out wage gains among lower and middle-income workers but increased corporate profits."

Click here for more FreightWaves/American Shipper stories by Eric Kulisch.

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This post contains sponsored advertising content. This content is for informational purposes only and not intended to be investing advice.

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