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June 22 2020

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June 22 2020 | The Journal of Commerce 29 Commentary Lars Jensen SINGAPORE-BASED PIL HAS become the sixth of the top-10 container carriers to engage in discussions relating to financial aid from its local government. As of late June, there is not a signed deal in place, but the development clearly brings to the fore the question of whether gov- ernment support — some would call it "interference" — helps or hurts the industry. If the container shipping indus- try is viewed purely through the prism of being a business no differ- ent than any other, there are clear arguments for simply letting the market play itself out and letting the weaker players go bust. However, viewing the industry through such a prism would be to severely misread how the industry de facto works. In today's globalized world, every country is highly dependent on access to reliable global shipping services. The majority of countries in the world do not have a strong national shipping line, relying instead on the efficiency of the mar- kets to provide such services. And for the most part, they get just that. Some countries, however, find it important to have a strong national shipping sector, a prefer- ence typically rooted in arguments relating to national security inter- ests, critical infrastructure, local job preservation, or partial self- reliance. These countries tend to be more active in terms of providing overt government support for their shipping lines when they are under financial strain. The current round of govern- ment support appears to have rekindled the debate over whether such influence is detrimental to the industry. From a pure free market perspective, the answer to this question can only be a resounding "yes," as in this perspective any type of government support would tend to skew the competitive balance, hindering the free market forces in finding the optimal setup. But this is a false image of the industry. Government support is all-pervasive in maritime shipping and has been for decades, and if we think beyond container shipping, even for centuries. And yet here we are with a highly efficient global net- work of container shipping services. Indirect advantages Government support comes in many other forms beyond the obvious. There tends to be much focus on state aid in the form of direct subsidies, favorable loans, or provision of additional investment capital, since these are very clear and visible examples of government sup- port. However, there are many other types of government support. Cabotage regulations, such as the Jones Act in the United States, are clear examples of indirect govern- ment support, skewing what would otherwise be a free competitive mar- ket. The creation of advantageous tax opportunities, such as tonnage tax, is another example. Even more interesting are the regulatory, operational, and tax advantages that can be obtained through deliberate choices of flag states for specific vessels. This can also be seen as de facto government support, although in this case it is the matter of a company located in country A using the advantages provided by country B to operate a service between countries C and D. Government subsidies to shipyards in country E will convey the benefits of those subsidies to a shipping line in country F if they choose to build their ships in that location. Contemplating a container ship- ping industry free of government support — or interference — can be an interesting academic pastime, but such a construct has little rele- vance in terms of the actual market landscape. The reality is that government support is widespread and per- vasive, especially in its indirect effects. That does not mean that the commercial competitive "game" is broken; as mentioned, we have seen the creation of a highly effi- cient global network of container shipping services over a scant few decades. But it does mean that one of the parameters within which the carriers compete is their ability to navigate and use this landscape to their advantage. Looking at the consolidation in the industry over the past 20 years, it would appear that the main carri- ers left standing are indeed the ones who are adept at competing in this "skewed" game. In other words, you do not need to like the rules of the game; you merely need to be good at playing the game given what the rules are. You can, of course, also attempt to change the rules. But in a world where national interests are increas- ingly taking precedence over global harmonization, this strategy does not appear likely to succeed. JOC email: Lars.Jensen@SeaIntelligence- Reindeer games You do not need to like the rules of the game; you merely need to be good at playing it.

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