OVERVIEW OF WORLDWIDE CABOTAGE PRACTICES
5.2 DIFFERENT FORMS OF CABOTAGE REGIMES
A number of countries practise cabotage, but each country adapts the tone of cabotage to its own coastal market dynamics. For instance, the form of cabotage that a country chooses may be influenced by the stage of development of its merchant fleet; the type of commodity most prevalent on its coast; sources and ownership of such cargo;
proximity and size of its port facilities relative to regional ports (especially if its ports handle significant numbers of transshipments); and its geopolitical positioning (particularly if its policies have regional significance), among other factors. These factors form the basis of the country’s cabotage practice, which is normally designed to produce specific outcomes. As a result, cabotage practice can be distinguished from one jurisdiction to another. However, what remains consistent despite different approaches to cabotage is that reservation of coastal trade for the national flagged vessel is commonly intended to stimulate shipping capacity and to expand transport service range; to mitigate the effects of adverse freight expenditures on the country’s balance of payments; and to ensure strategic deliveries in areas of maritime expertise and in education.1
Apart from open cabotage, which simply means no cabotage restrictions, of which South Africa has been a prime example, this work identifies two forms or styles of cabotage: restrictive and liberal cabotage.
5.2.1 Restrictive cabotage
Usually restrictive cabotage imposes unconditional terms with regard to construction, ownership, crewing and flagging of vessels permitted to participate in the jurisdiction’s coastal trade. Therefore, in restrictive cabotage regimes, trading is reserved for nationally-built vessels, exclusively or predominantly owned and controlled by resident nationals and manned exclusively or by a high percentage of national crews. The
1 Structure, Ownership and Registration of the World Fleet Ch 2 (2017), available at http://unctad.org/en/PublicationChapters/rmt2017ch2_en.pdf. (Accessed 8 February 2018).
requirements of this type of cabotage could mean that a domestically-built vessel, owned by a locally-registered company that is controlled by nationals but is flagged elsewhere, will be excluded from domestic trade regardless of how it is manned. As a result, this excludes from coastal participation even nationals whose vessels may be registered on the so-called national second register (expanded on in the following discussion). Restrictive cabotage is often seen in coastal markets in which there are substantial volumes of government-related cargo and in circumstances where the country already possesses a sizeable merchant fleet. In instances where some form of waiver can be obtained for foreign flags to participate in restrictive cabotage trades, formalities and criteria are onerous and laden with procedures that are usually not transparent. The result is that barriers to entry in these coastal trades remain too high for foreign vessels, effectively making it impossible for them to participate in coastal trades. Typical examples of countries that practise restrictive cabotage are the US, Japan and China (excluding Hong Kong).
5.2.2 Liberal cabotage
This type of cabotage generally excludes or diminishes the application of the requirements of restrictive cabotage or may temporarily suspend most restrictions for a period of time. Liberal cabotage allows foreign participation, often places no restrictions on where cabotage vessels were built, places least emphasis on crewing by nationals; and ordinarily does not select vessels on the basis of flag registration. The liberal approach often places competition above the development of an indigenous fleet.
However, with this approach, foreign participation on cabotage trades is often introduced through licencing mechanisms. These mechanisms allow the designated authority, typically the transport ministry, to exercise discretion through waivers and to generally determine circumstances deemed appropriate for foreign participation. The usual prompts for waivers are factors relating to scarcity of resources such as tonnage shortages or lack of competent crews and low levels of capital expenditure for acquisitions, among other factors. In cases where the jurisdiction’s cabotage structure is underdeveloped, waivers become the norm. Waivers inevitably impose liberal cabotage on a jurisdiction that would otherwise practise restrictive cabotage if there was a choice.
However, waivers allow creation of avenues through which a jurisdiction can supplement shortages, provide suitable tonnages, or develop training for its crews, among others. Foreign involvement may be enlisted under strict conditions when and if justified by prevailing circumstances. However, specified conditions may often be attractive to foreign participants, while the jurisdiction itself in turn enjoys a measure of control over the manner in which foreign ships trade along its coast.
Liberal cabotage is often seen in jurisdictions at the early stages of fleet development or where an already established merchant fleet exists but demand imbalances occur, for example, where under-tonnage or lack of suitable capacity for specific trades remains a challenge. In such circumstances, foreign interests may be granted permission to trade on the coast under some form of licence, either on the basis of a single engagement or for a fixed period of time, at the discretion of the designated authority. This practice does not normally require domestic registration of foreign interests under the national flag. India is a classic example of a country where this type of cabotage regime is practised, as will be seen in the discussion below.
Predictably, if the country’s strategic thrust involves retention and transfer of maritime skills, the form of cabotage would reflect this in the requirements regarding the engagement of the crew. Crewing requirements normally oblige participation of nationals. However, depending on the degree of availability of suitable crews, it is not unusual for foreign vessels trading on the coast to have a relatively larger contingent of foreign crews. However, pivotal positions such as the master or first officer may continue to be reserved for nationals. Nevertheless, a jurisdiction may still require engagement of a particular minimal percentage of its nationals which, if not met, would mean that the foreign vessel would not be issued with a licence to trade on the coast.
A cavalier application of waivers for manning foreign vessels can potentially divert from the objectives of cabotage where foreigners operate on a waiver license basis. A divergence of interests may arise since the licensed vessel commonly flies a different flag, which would often be a vessel registered under a flag of convenience (FOC). The foreign crew and remuneration arrangements often undercut what the national flag seeks to achieve with regard to working conditions and general wellbeing of its local crews. Therefore, in jurisdictions where protection of the rights of crew may be a sensitive subject, this would generally be reflected as a variable in the licence
conditions forming the basis of the waiver. The solution is normally to engage foreign crews on similar employment conditions to those applicable to local crews. This has the effect of discouraging foreign flags from employing non-nationals.
There are instances in which restrictions regarding vessel ownership or shareholding in vessel-owning companies receive attention. Under liberal cabotage, national shares in the vessel (or controlling company) need to be only 51%. Therefore, the remainder of the shareholding represents the degree to which foreigners can then participate in cabotage trade. Ownership by nationals may also be recognised, particularly if one or two general rules have been substantially met. For instance, a vessel owned by a national, but which flies a foreign flag, may be allowed to trade on the coast. This mainly occurs if the foreign flag concerned is on the country’s parallel or second ship register. If the vessel has been built locally or is manned by national crews, this would further make it easier for the foreign flag to obtain a licence for coastal operations.
However, waivers of this nature tend to be unpredictable; they usually depend on the requirement of the coastal state at the time of the issuing of the licence and may change soon after the particular need for them has been realised. They are therefore difficult to measure properly. Examples of these may be seen below in the discussion involving countries such as Greece, Norway and other European Union (EU) countries.
Countries that have low volumes of coastal cargo often do not to implement cabotage.
However, there are instances where high cargo volumes exist but cabotage does not apply. Owing to its flexibility and because liberal cabotage can accommodate moderate expressions of coastal restrictions, it is the regime of choice in a regional cabotage arrangement where a bloc of countries grant access to each other’s coastal trades in a mixture of coastal trades where some practice cabotage and others do not.
Under liberal cabotage there is often no requirement that the vessel must be domestically built. It must simply be registered under the domestic flag of the jurisdiction where it is trading or under the domestic flag of the reciprocating country.
Crews engaged on these vessels also come from various members of the bloc. However, in most instances, the master is required to be a national of the country where the vessel is trading.
The broadminded approach of liberal cabotage in a regional context may be further seen in the fact that members of the bloc that practise restrictive cabotage in their respective
jurisdictions cannot compel those in the bloc who have no cabotage rules to apply restrictions to reserve their coastal trade for the rest of the bloc. Countries are also free to conclude bilateral agreements and to grant access to their coastal trades on a reciprocal basis to countries that are outside the bloc. Therefore, countries in the bloc may still be “vulnerable” to foreign competition away from their coast in circumstances where the country that does not restrict cabotage (but belongs in the bloc) is guaranteed trade within the bloc of countries that have cabotage restrictions. The classic example of this can be seen in the UK coastal trade. The UK has the highest coastal volumes in the EU but does not have cabotage restrictions. Countries in the EU bloc are therefore exposed to foreign competition in the UK in circumstances where UK-registered vessels enjoy cargo reservations, for example, on the Italian coast and elsewhere in Europe.
The following discussion contains examples of jurisdictions of different forms of cabotage practices.