There has been a lot happening over the last few months, where the word “cabotage” has been popping up everywhere, leading to a lot of misinterpretation. Here in this article, we have tried to explain what is was and how it is evolving.
The classic meaning of cabotage
Finding its origin in the French expression “caboter” which means to travel by coast, the term has since stood for the right of domestic coastal trade. Precisely cabotage defines the domestic transport of goods or people done by a foreign company. First regulations were developed in the 18th century to prevent foreign ships were threatening the local shipping industry. Today Cabotage laws exist globally not only to protect the domestic industries, but also to protect shipping infrastructure, keep the territorial seaways clear as well as for reasons of national security.
Although cabotage laws are present in most countries, the extent as to which they are enforced varies from country to country. The most well-known regulations are the “Jones Act”(1920) present in the USA, imposing an absolute ban on cabotage. This means all domestic transport along the US coastlines has to be carried out by US vessels with a US crew. Although currently at least 75% of the crew has to be made up of US seafarers, there is a strong push to increase this even further. Another prominent example of outright cabotage restrictions are in China, however even there the regulations have started to relax in recent years.
There are various reasons why cabotage restrictions are employed and to which extent it is done. Yet the most important reason is pricing. In most cases vessels coming from abroad offer lower prices for transport which the domestic market is unable to compete with. This can be due to lower labour costs, borrowing costs / interest rates, lower fuel prices or even due to the material and repair costs that they have abroad.
However, recently there has been debates in certain countries about the level of cabotage present and whether it is actually protecting or rather hurting the domestic industry. In countries like India where the number of domestic vessels is unable to cope with domestic transport demands, cabotage restrictions are slowing down the economy. It is a sensitive topic which poses the struggle of how to relax regulation without losing control / simultaneously strengthening the domestic shipping market while not slowing down growth.
The biggest exception is the case of the European Union. Due to trade regulations, coastal trade is admitted between all member states to support free trade. Although it can be argued that there are at times both winners and losers of the system, the goal is to increase the overall economic benefit by increasing trade and economic activity between all members.
Finally, cabotage restrictions have also been applied to other transport modes, namely the domestic transport of passengers and goods by road, rail or air. Again, there is a few notable exceptions to encourage overall economic benefit, but for the sake of analysing the term of cabotage in the shipping industry we will not get deeper into this.
What constitutes Maritime Cabotage?
Cabotage laws are framed in a way that helps keep employment opportunities available for the domestic workers and for economic purposes. These laws not just cover freight and passengers, but also dredging, towing, laying of submarine cables, seismic research and so on. Maritime cabotage can be broadly classified into three categories:
- Involving the transport of passengers and cargo
- Handling of the cargo, such as storage, warehousing and customs.
- Pilotage, shore-based operations.
When it comes to trade agreements, cabotage can be also classified as Petit and Grand Cabotage. Petit Cabotage is when the transports of goods take place between two ports on the same coastline, and Grand Cabotage is when the transport of goods take place between two ports on two different coastlines of the same country.
When taking about maritime cabotage, it may also be useful to know about maritime delimitation. It is possible that two countries might fall under the same maritime zone or have overlapping maritime territories. This is very similar to disputes between countries with controversial borders. Such issues are not to be confused with Cabotage.
An overview of Cabotage laws around the world
The way cabotage laws are framed doesn’t just influence the trade interests, but also the sustainability of the environment, and the carbon footprint the movement of goods leave.
The basis of cabotage laws comprises of the following requirements or restrictions for the foreign ships:
- Ship building and repair must be done in a domestic shipyard.
- Ship needs to be registered and documented in the cabotage country.
- Ship must be partially or wholly owned by a citizen of the cabotage country.
- The crew working on the ship need to be locals of the region.
All these rules can vary according to the needs and interests of the different countries. USA is one of the nations with the strictest rules to avoid cabotage in their ports, where almost no foreign ships can participate in cabotage. Similarly, Indonesia has also set out some stringent laws after some violation from foreign ships and ships need to be registered as “Indonesian Sea Carriage Companies” and the foreign ownership is limited to 49%.
India’s rules on cabotage may seem a bit relaxed as foreign flagged vessels can operate on local ports in the case, where a domestic ship is not available. China also has some strict cabotage laws, which is gradually relaxing where foreign-flagged but locally-owned ships are involved in domestic shipping. But there are also known cases of foreign-owned ships being moved around illegally. Hong-Kong, a region partially under the Chinese authority can potentially face a huge financial loss if China relaxes its cabotage laws affecting local Hong-Kong shipping companies. Australia’s domestic shipping laws doesn’t require the ship to be domestically built. In fact, Brazil, Indonesia, Peru, Spain, Egypt and USA are the only countries with the requirement for the ships to be domestically built.
A modern definition: Cabotage in container logistics
More recently another use of the word “cabotage” has become used in the container industry, which could be explained as “empty container repositioning”.
In container logistics, an all-too-common problem is having the right containers at the right location at the right time—something that very often involves moving empty containers from surplus to deficit locations. All container market participants (be it container liners, leasing companies or traders) face this issue and it is estimated that about every third container is being moved empty. Cabotage (or one-way cabotage) is an alternative to moving the boxes empty by providing the assets temporarily to a different company which use these for their own freight. The idea is, that the boxes will then be returned in a location where the container owner needs them again.
This domestic repositioning of containers offers mutual benefits for both parties
The user usually gets granted a certain free period to use the container and can thus keep the costs for their move at a minimum or optimally even eradicate them completely. The supplier on the other hand saves on the cost of repositioning plus improves his CO2 footprint.
Another common use case for cabotage is container traders or leasing companies providing their new or second-hand containers to liners or NVOs in order to move them to their ultimate customers in the most cost-efficient way possible. Oftentimes in such cases, the target destinations are highly specific with only limited inbound and outbound cargo, hence making it very attractive for the user to use such 3rd party equipment.
Why isn’t this used more frequently?
Unfortunately for potential cabotage users and suppliers, the market is not very transparent and inefficient: Finding partners, negotiating and administering contracts, tracking your containers, billing and invoicing… all of that is cumbersome and time consuming. That’s why we at Container xChange aim to make this market more accessible and efficient—by providing a neutral online platform where container users and suppliers can find, negotiate and execute one-way transactions. There is still a long road to travel—and too many containers are still moved empty—but we believe platforms such as xChange can support the transition to a more efficient cabotage market.