Implemented on January 1 1980, the National Cabotage Policy governs maritime transport between Peninsular Malaysia and East Malaysia. The main objective of the policy was to safeguard and promote the domestic shipping industry and for Port Klang to be the container hub port in Malaysia. Under the policy, both foreign and Malaysian ships can discharge cargo at any port, but the parties must engage Malaysian-registered vessels to transport goods to Sabah and Sarawak.

Overview

Following its implementation, this protectionist policy has been liberalised throughout the years. In 2009 the carriage of containerised transhipment cargo between certain ports in Peninsular Malaysia and East Malaysia was allowed. In 2012 an exception to the cabotage laws was made for passenger cruise ships. Exceptions were also made through the issuance of temporary licences to allow foreign vessels to engage in domestic shipping when there were insufficient Malaysian vessels to meet shipping demands. However, foreign vessels had to be endorsed by the Malaysian Ship Owners' Association (MASA) before they could obtain a licence and this often left foreign vessels at the mercy of domestic ship owners.

Critics of the policy, mainly from East Malaysia, have claimed that it has led the costs of goods in Sabah, Sarawak and Labuan to surge, due to the high freight rates and additional transhipment rates. Foreign vessels must offload their goods at designated major ports in West Malaysia as they are not allowed to call directly at East Malaysia's ports.(1)

Proposed change

On May 7 2017 Prime Minister Datuk Seri Najib Tun Razak proposed that Sabah, Sarawak and Labuan be exempted from the cabotage policy, effective June 1 2017. Under the proposal, foreign ships can transport cargo domestically.

This announcement attracted differing opinions regarding its possible impact. The chief minister of Sarawak welcomed the exemption and is of the view that the cabotage rules are outdated. According to the minister, although the previous rules may have been acceptable in the past, the ports in East Malaysia are not better equipped.(2) The minister believes that the proposed exemption will have positive effects on East Malaysia, as consumer goods will be cheaper and thus more affordable.(3)

However, the Sarawak and Sabah Ship Owners Association (SSSA) is of the view that the Malaysian shipping industry will greatly suffer from the lifing of the cabotage policy, as neighbouring countries and foreign-owned vessels will now be able to service the domestic cargo route, especially the route to East Malaysia.(4) SSSA believes that local ships will now be unable to compete with their foreign counterparts and, as a result, local seafarers, the local marine training institutes and local shipyards will be hugely disadvantaged.(5)

MASA has vigorously defended the policy in the past, stating that it is the "last bastion of the maritime sector" and crediting it with the significant growth seen in the local shipping industry.(6) MASA noted that the exemption from the cabotage policy could lead to the potential dumping of old ships from neighbouring countries to trade in Malaysian waters and thus there should be a cap on the age of these vessels before they are allowed to trade in Malaysian waters.(7)

Finally, MASA had stressed that it is encouraging the government to consider a review of the policy, including restricting the exemption to international transhipment container trade in all East Malaysian ports.(8)

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For further information on this topic please contact Rajasingam Gothandapani or Aswath Ramakrishnan at Shearn Delamore & Co by telephone (+60 3 2070 0644) or email (rajasingam@shearndelamore.com or aswath@shearndelamore.com). The Shearn Delamore & Co website can be accessed at www.shearndelamore.com.

Endnotes

(1) Daily Express article "Let's have 30 years no Cabotage".

(2) Press statement by Ministry of Transport Malaysia.

(3) News article from PortStrategy.com, "Cabotage rules outdated in Malaysia".

(4) Borneo Post Online, "Lifting of Cabotage policy spells doom for shipping industry".

(5) Ibid, 10.

(6) For further information please see "Government Reviews National Cabotage Policy".

(7) Ibid, 16.

(8) The Star Online , "Maritime Industry Needs Clearer Picture Of Cabotage Policy - MASA".