Shipping Co.
6. Case Examples
Shipping Co.: Maritime Cabotage Complicates Logistics and Adds Costs
National restrictions on cabotage – the movement of goods between two points within a country’s borders – increase both the costs and environmental impact of those goods. Though justified for decades as national security measures, many cabotage regulations, particularly those affecting in-country transfers of imports and exports shipped by water, are motivated largely by protectionist concerns for local industries and employment. The United States Jones Act and China’s international relay regulations are examples of maritime cabotage that affect a significant share of global trade. While some countries have taken small steps toward liberalization, a mutual relaxation by the US and China of their regulations would set a global example for other nations to follow.
For centuries, nations have invoked their sovereign rights to restrict the movement of passengers and goods – or cabotage – within their borders. Although the historic justification for these restrictions has been national security, the clear intent of many cabotage regulations today, particularly those affecting transportation of goods by water, is to protect local industries and labour interests.
The most restrictive example is the United States Jones Merchant Marine Act of 1920, which states that merchandise can only be moved between American ports by vessels that are US-owned, US-crewed and US-built. China has similar restrictions (though it does not require ships to be of Chinese construction).
Despite the benefits to flag carriers or local shipyards, such barriers actually damage local economies and saddle businesses and consumers with significant costs. Lack of competition forces businesses to use high-cost logistics suppliers and requires international export/import businesses to use inefficient trans-shipment operations – which come with high environmental costs.
National security concerns and political interests make complete abolishment of cabotage regulations unlikely, but opportunities for reform exist to varying degrees among the two basic types of cabotage: domestic transport and international relay.
Domestic transport – Cabotage restrictions originally focused on the movement of goods that originated and ended within the country. These rules were motivated by the need to maintain a national merchant fleet, protect local waterways and other national security concerns, and their reform would likely be a slow process. However, a prudent approach that gradually relaxes the strictest regulations could help open markets to competition without putting security at risk. For example, the United States could continue mandating national flags but remove other Jones Act restrictions.
International relay – The regulation today of in-country transfers of imports or exports is largely motivated by commercial concerns. These rules create weak links in global trade lanes, and their negative impact on cost and efficiency is typically not balanced by their contribution to any nation’s individual security.
The US and China
The US and China offer examples of the opportunities for reform of international relay restrictions. Neither country is likely to deregulate unilaterally, but together they represent a significant share of the global trade volumes and could serve as role models for other nations if they were to jointly lift some restrictions.
The Jones Act is the most restrictive of global cabotage laws and an anomaly in an otherwise open market like the United States. Political advocacy for the Jones Act is unwavering, led primarily by shipyards and associated industries, maritime labour unions and congressional delegations from the non-contiguous states of Hawaii and Alaska. Critics of the law include domestic and foreign shippers (and their consumers) as well as international logistic companies.
US International Trade Commission studies have found that the Jones Act adds substantial costs,81 but Congress is unlikely to reconsider it without being prompted. Even if pressure for reform mounts, it would likely require small steps over a number of years.
Still, international relay reform offers a promising first step. The alternative to using international shipping services for relay in the United States is typically to move goods via land. Estimates suggest that more than 500,000 qualifying international containers moved over highway and rail in 2012.82 If these containers were allowed to stay on the water and trans-ship on international liner services, the economic benefit to supply chain participants – shippers, carriers and consumers – could exceed US$ 200 million. In addition, the potential reduction in road congestion and environmental impact would be significant: Trucks and rail are substantially less energy efficient than ocean vessels.83
China’s cabotage regulations largely mirror those of the US. It, too, has vocal supporters of the regulations, typically local transportation interests, as well as those who favour reform, notably trade interests seeking lower transportation costs for exports.
Were China to allow international relay, some 10 million standard shipping containers (TEU) that today must be re-routed via international ports (including Hong Kong SAR) would instead be trans-shipped through Chinese ports. That volume represents a potential income of some RMB 2 billion (US$ 321 million) for local ports, generating frustration among port operators over the regulatory favouritism shown to Chinese shipping lines.
Relaxing China’s international relay restrictions would also save logistics providers (and exporters) around US$ 500 to US$ 700 million per annum from lower port charges and optimized shipping networks. Furthermore, inefficient relay solutions add five to 10 days to the transportation time and carry significant costs for cargo owners. For example, trans-shipping the 10 million TEU through Chinese ports instead of rerouting them could save up to US$ 0.5-1 billion84 in inventory costs.
Taking steps toward reform
Several other nations have considered relaxing international relay regulations, particularly growth markets like Brazil, Indonesia and India, where efficient infrastructure is a key to the future development. In India, 50% to 70% of exports and imports are trans-shipped abroad.85 A September 2012 effort to relax relay rules hinted at progress, but this is supposed to affect only a single port86 – hardly a systemic solution and one that illustrates the challenges of appeasing competing interests.
In the European Union, cabotage was fully liberalized in 1998 among the EU15 and then in 2009 with the new member states,87 a possible model for other nations. The European Commission has confirmed that EU countries can still restrict national connections, but urged countries to consider the substantial cost savings that result from exempting international relay from such restrictions.88
Abolishing or relaxing cabotage regulations around the globe would reduce costs, but will require a gradual approach, particularly when it comes to the legitimate national security concerns that surround domestic transport. The wisest course will focus first on protectionist international relay restrictions, whose abolishment will bring economic and environmental benefits that clearly outweigh security concerns.