Review of Cabotage LawBy Raul J. Palabrica
Philippine Daily Inquirer
In his state of the Nation Address last Monday, President Aquino asked Congress to, among others, amend the Cabotage Law to help maintain the growth momentum of the country’s economy.
Cabotage is defined as “trade or navigation in coastal waters.”
The provision in our Tariff and Customs Code which states that maritime transportation of goods and passengers within the country is reserved to Philippine registered marine vessels is generally regarded as the Cabotage Law.
Passengers or goods arriving from abroad on foreign vessels may be carried by the same vessel to any port in the Philippines, and passengers departing from the Philippines or articles intended for export may be carried in a foreign vessel through a Philippine port, only with the approval of the Commissioner of Customs.
The right of domestic vessels to exclusively engage in coastwise transportation dates back to the 1900s when the country was under American rule.
The authorities then believed the protectionist policy was necessary to promote the development of the local shipping industry.
They also felt that, as against foreign sailors, the familiarity of Filipino ship operators with maritime and weather conditions in the country contributes to safety in local sea travel.
There were several attempts in the past to either repeal the law or allow foreign-registered vessels to engage in coastwise transportation, depending on their load capacity or the point of origin of the goods or passengers they carry.
Strong opposition from local shipping operators and maritime workers, including arrastre workers have, however, stymied these moves.
The oppositors contend that the foreign operators, with their modern facilities and strong financial position, can slash their tariffs to kill the competition or bring local operators to the ground.
This could result in the closure of shipping companies and, in the process, displace thousands of Filipino workers.
Sometime ago, the Maritime Industry Authority (Marina), when asked to comment on the proposal to repeal the law, expressed apprehension that the country may go the way of Indonesia whose local shipping industry nearly collapsed after foreigners were allowed to engage in coastwise transportation.
The Indonesian government averted the disaster by immediately restoring exclusivity to Indonesian registered vessels in coastwise operation.
In its position paper, Marina stated that, although in theory, the lifting of the restriction is an essential element of free market competition, “the Philippine situation still embodies certain distortions that would prevent the free interplay of market forces towards the objective of ideal competition.”
Those in favor of repealing the law argue that the entry of foreign vessels in domestic shipping would upgrade the quality of shipping facilities and, with the attendant efficiency, bring down transportation costs.
According to the proponents, the country’s shipping magnates are hesitant to acquire new bottoms because of their prohibitive costs, not to mention the accompanying high operating expenses.
This has resulted in the stagnation of the industry.
The disinterest in investment is aggravated by the resurgence of budget airlines that offer airfares below those charged by domestic ships, in addition to being able to get to destinations in a matter of hours, not days, as is the case in sea travel.
Weighing on the issue, exporters and importers claim that the restriction on foreign vessels in the movement of goods in Philippine ports increases their costs as cargoes have to be loaded and unloaded to and from foreign and local vessels and vice versa.
And like all other businesses, the additional financial burden is invariably passed on to or shouldered by the consumers.
Rounding up the arguments in support of the law’s repeal is the mantra of globalization that multinational companies (and the countries where they are based) have been pushing the developing countries to adopt and implement.
The arguments for and against the repeal of the law have their respective merits. They represent legitimate concerns that cannot be ignored.
Assuming Congress takes a second look at the law as suggested by President Aquino, it has to do a balancing act in weighing the interests of the local shipping industry and the people who depend on it for their livelihood, the exporters and importers whose products contribute to the national economy, and the consumers who will ultimately bear the costs of coastwise transportation.
The objective and scope of the Cabotage Law may be likened to those of Republic Act 1180, or Retail Trade Nationalization Act, which gave to Filipino citizens the exclusive right to engage in retail trade.
Enacted in 1954, this law sought to ensure that the sale and distribution of basic food commodities remained in Filipino hands.
Four decades later, after realizing that the protectionist policy was no longer practical, Congress repealed this law and replaced it with Republic Act 8762, or Retail Trade Liberalization Act of 2000.
Under the new law, foreigners were allowed to engage in retail trade depending on their companies’ paid-up capital in equivalent Philippine pesos: if foreign participation does not exceed 60 percent of total equity, $2.5 million; if the capital is $7.5 million or more, no foreign participation limit; and if engaged in high-end or luxury products, $250,000 per store.
Outside of the cases mentioned above, retail trade remains exclusively in the hands of Filipino citizens.
A similar approach may be taken by Congress in reviewing the Cabotage Law.
Certain tonnages or passenger load factors may be reserved to local vessels. Foreign ships may be allowed coastwise travel if their cargoes are all imported or intended for export. Restrictions may be imposed on the kinds of products that can be carried by foreign vessels in our ports.
With the changes in the global economy, this law is clearly behind the times. It has to be retooled or adjusted to meet present challenges.
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