Marit Econ Logist

https://doi.org/10.1057/s41278-018-0112-1

ORIGINAL ARTICLE

Impact of cabotage relaxation in mainland China

on the transshipment hub of Hong Kong

W. H. Wong1 · E. Wong1 · D. Y. Mo1 · L. Leung1

© Springer Nature Limited 2018

Abstract  Hong Kong has benefited from China’s cabotage rule, as foreign ships
loading at a Chinese port can transit to Hong Kong and then call at another Chi-
nese port. However, in 2013, China’s cabotage policy was relaxed in Shanghai—
whereby China-owned, foreign-flagged vessels are allowed to operate out of Shang-
hai to other coastal ports of China. In this paper, we examine the potential loss of
transshipment traffic in Hong Kong due to cabotage relaxation. Via a transshipment
model and based on secondary data, we are able to derive a potential loss to Hong
Kong’s throughput, on the order of 14%. This effect is not unique to Hong Kong:
in general, in other parts of the world, there are also maritime hubs located near
the coastal ports of other countries, and the effects of cabotage relaxation are simi-
lar. From a regional collaboration perspective, such as that of the Belt and Road
Initiative, it is essential for different governments to review their cabotage policies
together.

Keywords  Cabotage · Policy · China maritime ports · Transshipment · Logistics

1 Introduction

According to the Maritime Code of China (Ministry of Commerce, People’s Repub-

lic of China 1992), only vessels registered in China, or hoisting the Chinese flag, can
engage in costal shipping. Foreign operators, or ships flying a non-Chinese flag, are
not allowed to load a container in a mainland port and unload it in another mainland

* W. H. Wong
collinwong@hsmc.edu.hk
1
Department of Supply Chain and Information Management, School of Decision Sciences,
Hang Seng Management College, Hang Shin Link, Siu Lek Yuen, Shatin, New Territories,
Hong Kong
 Marit Econ Logist

port. A Panama-registered ship, for example, having loaded cargo in Shanghai

cannot immediately unload that cargo in Shenzhen. These restrictions, commonly
known as cabotage, are not unique to China. There are countries, such as the US,
Indonesia, Philippines and many more, which have adopted similar practices, usually
for reasons (or pretexts) of protectionism, national security or public safety. With the
increasing shipping capacity, however, foreign ships would need to call at multiple
ports in China before being fully loaded or fully discharged. As Hong Kong is not
regarded as a Chinese port, it has benefited from China’s cabotage rule: a foreign
ship that has loaded a container in a Chinese port may transit to Hong Kong before
calling at another Chinese port. For more than a decade (from 1990s to early 2000s),
Hong Kong was the world’s number one container port, having the highest through-
put (Table 1). By 2011, Hong Kong’s throughput has dropped significantly while, in
2013, China’s cabotage policy was relaxed in Shanghai, being one of the mainland’s
free-trade zones (Ministry of Transport of the People’s Republic of China 2013). In
2016, Hong Kong ranked fifth, surpassed by Shanghai, Singapore, Shenzhen and
Ningbo (Marine Department HKSAR 2017). The structural reconfiguration of trans-
shipment from coastal mainland ports could decrease Hong Kong’s transshipment
traffic from these ports much more (Fig. 1).
Figure  1 shows the shipping routes connecting major coastal ports in mainland
China and international shipping routes from Hong Kong as a transshipment hub.
As already mentioned, in 2013, the newly established Shanghai Free Trade Zone
was officially exempted from cabotage restrictions. Chinese-owned but foreign-
flagged vessels are now allowed to transport goods between the Shanghai Free Trade
Pilot Area and other Chinese ports. Other Free Trade Zones and coastal ports, such
as Qingdao, Ningbo and Guangzhou, have also been lobbying hard for similar treat-
ment (Llanto and Navarro 2014). Obviously, if this intra-China transshipment does

Table 1  Ranking of container ports of the world (2001–2016)

Rank 2001 2006 2011 2016
Port *TEU Port *TEU Port *TEU Port *TEU

1 Hong Kong 17826 Singapore 24792 Shanghai 31739 Shanghai 37133

2 Singapore 15571 Hong Kong 23539 Singapore 29938 Singapore 30904
3 Busan 8073 Shanghai 21719 Hong Kong 24384 Shenzhen 23979
4 Kaohsiung 7541 Shenzhen 18470 Shenzhen 22571 Ningbo- 21561
Zhoushan
5 Shanghai 6340 Busan 12039 Busan 16185 Hong Kong 19813
6 Rotterdam 6120 Kaohsiung 9775 Ningbo- 14719 Busan 19456
Zhoushan
7 Los Angeles 5184 Rotterdam 9653 Guangzhou 14250 Guangzhou 18858
8 Shenzhen 5076 Dubai 8923 Dubai 13031 Qingdao 18050
9 Hamburg 4689 Hamburg 8862 Qingdao 13020 Dubai 14772
10 Long Beach 4463 Los Angeles 8470 Rotterdam 11877 Tianjin 14519

Hong Kong’s position has been dropping over the years is indicated in bold
*Source: Marine Department HKSAR
Marit Econ Logist

Qingdao

Shanghai

Ningbo
Xiamen
Yanan
Kaohsiung
Shekou
Hong Kong

Cabotage coastal shipping

Internaonal shipping

Laem Cha Bang

Ho Chi Minh

Fig. 1  International and cabotage coastal shipping routes

not pass through Hong Kong any longer, this is bound to have a considerable impact
on Hong Kong’s maritime logistics industries. Therefore, before the Chinese gov-
ernment further relaxes its cabotage rule, it is important that it learns from similar
policies, adopted by various countries, and the consequences of such policy changes.
Hong Kong, as a container hub port, is thus severely under threat. In this paper,
we first review cabotage policies in general and outline the consequences of simi-
lar relaxations in other countries. We then discuss the contribution of logistics
industries to the Hong Kong’s economy and the current development of maritime
industries in Hong Kong. Next, we examine the impact of China’s cabotage relax-
ation on Hong Kong’s transshipment throughput. Our study shows that the main-
land’s changes could cut Hong Kong’s transshipment traffic by as much as 2.4 mil-
lion TEUs, or 14% of the current throughput. We discuss the long-term impacts of
cabotage relaxation on Hong Kong and on mainland coastal ports, as well as on
the domestic vessels trading along the coast. More importantly, the impact on Hong
Kong, as assessed here, could be a useful reference to other countries in a similar
situation, currently reassessing their cabotage policies as well as their port positions.
Finally, for purposes of regional economic integration, we discuss the significance
of having uniform cabotage policies along the Belt and Road Initiative.

2 Background: overview of cabotage rules impacts

“A maritime cabotage law is a legislation published by a particular coastal coun-

try, to exclusively conduct its domestic shipping operations” (Igbokwe 2001).
Various countries have legislated different types of cabotage rules, mostly aimed
 Marit Econ Logist

at protecting their interests in domestic maritime industry development (includ-

ing shipbuilding and local employment), as well as safeguarding safety, national
security and environmental protection.
Country maritime law often controls coastal shipping operations. The law
imposes various levels of restrictions on ship flag, crewing, ship construc-
tion and vessel ownership. One of the first cabotage laws, still in existence and
strongly enforced, is the one detailed in the Merchant Marine Act of 1920 (Jones
Act) in the United States (Jones 1921). Section 27 of the Act requires that trans-
portation between U.S. ports must be reserved to ships constructed in the United
States and flying the U.S. flag. Moreover, the ship must be owned and crewed
by the U.S citizens and/or the U.S. permanent residents. In the European Union,
cabotage was regulated by Council Regulation 3577/92. The regulation later lib-
eralised EU maritime cabotage, in 2014, with new guidelines facilitating free
rights among Member States (European Commission 2014). In China, cabotage
has been regulated by the Maritime Code of the People’s Republic of China. In
Article 4 (Li and Ingram 2002), the code indicates that “maritime transport and
towage services between the ports of the People’s Republic of China shall be
undertaken by ships flying the national flag of the People’s Republic of China,
except as may otherwise be provided by laws or administrative rules and regula-
tions”. Other countries, including Australia, India, Indonesia and Philippines,
have recently implemented changes to their maritime cabotage policies, with ref-
erence to economic, coastal traffic and security issues.

2.1 Recent cabotage policy in countries worldwide

Among the countries with cabotage rules, those with comparatively more
restrictive cabotage policies are the United States, Greece, Belgium, Sweden,
Turkey, Indonesia and Italy (United Nations 2017). In an effort to sustain its
domestic shipping industry, which nearly collapsed in 2008, Indonesia intro-
duced cabotage rules to support nationally flagged vessels with the introduction
of Maritime Law No. 17 of 2008 (Simbolon & Partners Law Firm 2017). Simi-
larly, Japan also implemented regulations in Article 3 of the Ships Act, where
foreign vessels cannot engage in domestic coastal shipping of cargo or passen-
gers (Law Business Research 2016).
Some countries do allow foreign-flagged ships to transport domestic cargo
between domestic ports. These countries include Denmark, Germany, the Neth-
erlands, the UK, Belgium, Iceland, Norway and Ireland. Such a policy pro-
motes short-sea-shipping, improves the efficacy of ports (Flitsch et  al. 2014),
and could attract foreign liners to choose these ports as their transshipment hub.
Other countries, including Australia, Philippines and India, tend to adopt a simi-
lar liberal approach. Relaxing cabotage rules may have a long-term impact on
domestic maritime logistics. Domestic shipowners and operators, local crews
and domestic distribution may be affected and dominated by the foreign-flagged
vessels and their logistics business (Reynolds 2015; Darwin 2014).
Marit Econ Logist

2.2 Positive impacts of cabotage relaxation

Relaxing cabotage rules has diverse ramifications for logistics stakeholders. Stake-
holders who would normally benefit from relaxing cabotage rules include shippers,
local government (at various levels), international shipping lines, shipbuilders, gov-
ernment officials from outlying islands and developing ports. Shippers in Australia,
suffering from high domestic shipping costs, often over 40% higher than foreign
transshipment, could benefit from relaxed cabotage rules (Grey 2016). In the US,
east-coast refineries want the government to reform the Jones Act, arguing that the
regulation puts them at a competitive disadvantage, in their fuel and petrochemical
businesses in the US, Canada and Europe, due to higher shipping costs (S&P Global
Platts 2016).
Recently, the Indian government relaxed cabotage restrictions, intending to
improve the economy and increase the country’s overall transshipment volumes
(JOC 2018). Initiated by Australia’s coalition government, a coastal shipping
reform was suggested in 2015, aimed to relax the maritime cabotage law, which was
adversely affecting the industry. The reform was expected to benefit the economy
by lowering transport costs for business, and boosting coastal trade vis a vis for-
eign imports (Grey 2016; Sexton 2018). Foreign-flagged international shipping lines
would be the main beneficiaries of a relaxation, as this could reduce their operat-
ing costs. For example, Shipping Australia Ltd., representing the interests of inter-
national shipping lines, supported the deregulation of cabotage rules in Australia
(Reynolds 2015). In 2015, Maersk Line indicated that it was willing to invest US$3
billion in Indonesia if the cabotage law was changed (Chambers 2015). From the
perspective of outlying islands and developing ports, any relaxation of regulations
would be beneficial. The governor of Puerto Rico called for the Caribbean island
(and the unincorporated US territory) to be exempted from the Jones Act in 2015,
considering its heavy debt burden of US$72 billion (Nina 2016; Carroll 2015).

2.3 Negative consequences of cabotage relaxation

Some stakeholders are concerned that the relaxation of cabotage could have a seri-
ous impact on the hub(s) port(s) of the country. Ports in Australia had warned that
such an aggressive deregulation would result in the loss of 1089 Australian seafarer
jobs, impacting 93% of the current workforce (Grey 2016). Another major impact
would be the loss of coastal business to local shipowners. For example, the Aus-
tralian National Line (ANL) (presently member of the CMA CGM Group) stressed
that local shipping companies and their operators would be affected. Workers in rail
and road transport businesses would be affected as well, since the cabotage relaxa-
tion would also allow maritime commerce to compete with rail and road transport.
Simply, international cargo ships with excess capacity will call at more ports, thus
encroaching railway business and employment. The peripheral logistics and ware-
housing activities in the country’s international hub would be adversely affected due
to the loss of business at the hub port (Reynolds 2015). In Indonesia, a cabotage
 Marit Econ Logist

rule was implemented in 2008, as the domestic shipping industry had almost col-
lapsed by the coastal transportation engagement of foreign vessels (Offshore Sup-
port Journal 2016). The rule has assisted shipping business recovery in Indonesia,
with the idling Indonesian-flagged vessels being reactivated (Offshore Support Jour-
nal 2016).

3 Hong Kong’s transshipment loss from China’s cabotage relaxation

In this section, we discuss the contribution of the logistics industry to the Hong
Kong economy in general, and the developments in transshipment traffic in recent
years. Subsequently, we analyse the short- and long-term effects of China’s cabotage
relaxation on Hong Kong’s transshipment business.

3.1 Contribution of logistics industry to Hong Kong economy

In 2015, Hong Kong ranked eighth as a transshipment port, in terms of world mer-
chandise trade (HKTDC 2016). In the same year, Hong Kong re-exported 87.9% of
its total import value, and this re-export value accounted for 98.7% of Hong Kong’s
total export value of USD 462 billion. Hong Kong’s trade with mainland China is
significant, being second only to that of the United States. In 2015, 8.7% of China’s
external trade was attributed to Hong Kong, with 49% of Hong Kong’s imports com-
ing from China and 53.7% of Hong Kong’s exports bound for mainland China (Cen-
sus and Statistics Department 2016). The volume of short-sea transshipment—from
Pearl River Delta (PRD) in China to and from US and Europe via Hong Kong—has
increased over the years (Lau and Ng 2017; Cochrane 2008). As a transshipment
hub, Hong Kong handled 326 million tons of cargo in 2014, 90% of which were
handled by the seaport. In terms of port throughput, over 85% related to China, and
majority of these cargoes were classified as transshipment.

3.2 Maritime transshipment development in recent years

Since 2001, the role of Hong Kong has declined as the dominant regional port.
Instead, one has seen strong growth in container volumes in Guangzhou (average
annual growth rate of 19%), Shanghai (13%) and Shenzhen (12%). In contrast, Hong
Kong grew with less than 1% during 2001-2015 (Census and Statistics Department
2017). From a regional perspective, the total throughput of Hong Kong and Shen-
zhen has surged in the past 15 years, from 22.9 million TEU in 2001 to 44.3 mil-
lion TEU in 2015, mainly due to China’s booming economy. Total throughput has
remained stable however, since 2010 (Fig. 2).
Since 1998, transshipment throughput in Hong Kong started to increase at a
double-digit growth, while direct shipments decreased. Based on the Census and
Statistics Department reports, from 1998 to 2015, the percentage of transship-
ment in Hong Kong’s total trade volume increased from 27 to 70%. However, the
Marit Econ Logist

'000 TEU
50000
45000
40000
35000
30000
25000
20000
15000
10000
5000
0
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Shenzhen Hong Kong

Fig. 2  Total throughput of Hong Kong and Shenzhen ports

16000
Laden Throughput ('000 TEU)

14000
12000
10000
8000
6000
4000
2000
0

Direct Shipment Transshipment

Fig. 3  Hong Kong’s laden container throughput (1998–2015)

total laden container throughput started to fall from 2011 onwards, from 20.7 mil-
lion TEU (2011) to 17.1 million TEU (in 2015) (Fig. 3).
In 2015, of the total Hong Kong transshipment throughput, China’s share
was the largest with 38.4%, Asia (excluding China) with 34.2%, and for Amer-
ica, West Europe and other countries, it was 27.5%. Hong Kong’s transshipment
related to China can be divided in two groups: 1. PRD transshipment; 2. Non-
PRD transshipment. Among the transshipment throughput from China, 74% is
from the PRD Region and 26% from elsewhere (Non-PRD). This means that, of
the total 11.9 million TEU transshipment, 4.6 million TEU were related to main-
land China (3.4 million TEU were PRD and 1.2 million Non-PRD).
 Marit Econ Logist

Transshipment
Region
Throughput %
China 38.4%
- PRD 28.4%
- Non-PRD 10.0%
Asia (excl China) 34.1%
America & West Europe 22.5%
Others 5.0%

Fig. 4  Breakdown of Hong Kong laden container throughput in 2015

Figure  4 shows a detailed breakdown of transshipment. However, secondary

statistics provided by the government are not sufficient to directly indicate the
origin and destination of cargo flows through Hong Kong. That is, from the sec-
ondary data, it is impossible to trace whether the 1.2 million TEU of Non-PRD
transshipment is shipped to America, Western Europe or to other Chinese ports.
Given such limitations, such a breakdown is important to evaluate the impact
of cabotage relaxation on Hong Kong’s transshipment. We will discuss how to

Fig. 5  Routes of PRD and non-PRD transshipment

Marit Econ Logist

determine the loss of Hong Kong transshipment using a transshipment model in

Sect. 3.3.
To illustrate the importance of distinguishing PRD and Non-PRD transshipment,
Fig. 5 shows the possible routes for the two types of transshipment. After the cabo-
tage relaxation, those Non-PRD cargoes will most likely be transshipped to other
mainland Chinese ports since operating costs are lower than those in Hong Kong.
Regarding PRD cargoes, the cabotage relaxation has the least effect on Hong Kong
transshipment because Hong Kong is the principal gateway among PRD ports. Car-
goes are shipped from PRD ports to Hong Kong by barge and transshipped to over-
seas ports. Such cargoes (originated from the hinterland of South China region) can
be considered as “captive” to Hong Kong. In the following section, through the use
of a transshipment model, we show that the amount that will be impacted is twice
the amount of 1.2 million TEU of Non-PRD transshipment. Next, we provide a brief
discussion on cabotage relaxation in mainland China, followed by a detailed discus-
sion of cabotage relaxation in other countries.

3.3 Determining loss of Hong Kong transshipment: a transshipment model

and secondary data

To determine the amount of transshipment affected by cabotage relaxation in main-

land China, one would need to know the origin and destination of all cargo flows
that transship through Hong Kong. However, such specific secondary data are not
available. Instead, the Hong Kong Census and Statistics Department only reports
aggregate data that shows either origins or destinations of transshipment through
Hong Kong. In other words, while we do have access to reliable secondary data
from the Hong Kong Government, unfortunately these data do not directly serve our
purpose. We thus need to formulate our problem so that we can identify the loss of
Hong Kong’s transshipment due to the cabotage relaxation using the existing sec-
ondary data.
As the effect of cabotage relaxation on Hong Kong transshipment throughput
comes from Non-PRD transshipment, we need to separate PRD transshipment and
Non-PRD transshipment that will be handled alternative coastal ports after cabotage
relaxation. To do this, we formulate a transshipment flow model (Malakooti 2013)
to identify the effect of cabotage relaxation of a coastal port on a hub. In a transship-
ment model, containers are shipped on a maritime network G = (N, A), where N is
a set of nodes (ports) and A is a set of arcs (shipment routes). In this transshipment
network, Chinese ports are represented by node i = 1, 2, …, m and non-Chinese ports
by node j = m + 1, m + 2, …, n. We also denote Non-PRD ports as port i = 1, 2,… k,
whereas k < m. The transshipment hub of Hong Kong is represented by node h, with
a transshipment network as shown in Fig. 6.
Figure  6 shows all transshipment flows between Chinese- and Non-Chinese
coastal ports. Let Xi,j,h be the transshipment flow from port i to port j via hub h, and
Yi,j,h be the transshipment throughput due to Xi,j,h for hub h. For a hub, where trans-
shipment purely transits the port, Yi,j,h = 2 Xi,j,h. That is, the transshipment flow is
counted twice, once for going in and once for going out. With the relaxation of
 Marit Econ Logist

Fig. 6  Transshipment network for a hub

cabotage, liners can choose to pick-up, consolidate and deconsolidate shipments at

various ports in China (instead of Hong Kong) and ship the cargoes to other Chinese
ports. With many new possibilities, there is no need to bring shipments to Hong
Kong in order to conduct these operations. In the worst-case scenario, all cargoes
flow, �
originating from PRD� ports and non-China ports, and destined to Non-PRD
ports j=1 i,j,h could be transshipped at an alternative Chinese coastal
∑n ∑k
i=k+1
X

port (either PRD or Non-PRD) without passing through Hong Kong. This means
that Hong Kong will lose a throughput of i=1 j=k+1 Yi,j,h = i=1 j=k+1 2Xi,j,h .
∑k ∑n ∑k ∑n

Similarly, cargo flow originating

�∑ ∑ from Non-PRD � ports and destined to PRD
ports and Non-China ports j=k+1 i,j,h  , could be transshipped at an alter-
k n
i=1
X
native coastal port without passing through Hong Kong. In the worst-case sce-
nario, Hong Kong could lose all of the corresponding throughput:
2Xi,j,h . In sum, Hong Kong could therefore lose a
∑n ∑k ∑n ∑k
i=k+1
Y = i=k+1 j=1
j=1 i,j,h �∑ �
total cargo throughput of 2Xi,j,h + i=k+1 j=1 2Xi,j,h  . Unfortu-
k ∑n ∑n ∑k
i=1 j=k+1
nately, as already mentioned above, the Hong Kong Census and Statistics Depart-
ment (HKCSD) does not provide individual statistics on transshipment flows
(Xi,j,h ) . Instead, HKCSD provides origins (inflow) or destinations (outflow) of
Hong Kong transshipment. That is, we can obtain secondary data on the total
amount of cargo inflow from Non-PRD ports and the total amount of cargo out-
flow to Non-PRD ports, but we do not know the destinations of the inflows, or the
origins of the outflows. At the appendix, we illustrate how to extract the tranship-
ment volumes to and from Hong Kong, which will be affected by cabotage
relaxation.
Marit Econ Logist

�∑ �
However, note that the amount of j=1 i,j,h is the same as total out-
n ∑k
i=k+1
X
�ward transshipment � from Hong Kong to all Non-PRD ports and the amount of
j=k+1 i,j,h is the total inward transshipment from all Non-PRD ports to
∑ k ∑n
i=1
X
Hong Kong. Therefore, the total transshipment cargo flow (inflow + outflow) of
Non-PRD ports’ transshipment to Hong Kong is
𝜋 = i=1 j=k+1 Xi,j,h + i=k+1 j=1 Xi,j,h.
∑k ∑n ∑n ∑k
Figure 7 shows the transshipment cargo flow. The sum of transshipment cargo
flows: (1) from Non-PRD ports to PRD ports; (2) from PRD ports to Non-PRD
ports; (3) from Non-China ports to Non-PRD ports and; (4) from Non-PRD ports
to Non-China ports, is identical to total transshipment cargo flow (inflow and out-
flow) of Non-PRD ports’ transshipment to Hong Kong. Hence, the total cargo
�throughput
�∑ ∑ of Non-PRD ports’�� transshipment to Hong Kong
X + i=k+1 j=1 Xi,j,h is 2π, i.e., twice of total transshipment
k n ∑n ∑k
2 i=1 j=k+1 i,j,h
cargo flow (inflow + outflow) of Non-PRD ports’ transshipment to Hong Kong.
According to the shipping statistics of HKCSD, the amount of transshipment unre-
lated to PRD was 1.2 million TEU in 2015. Based on the above illustration, the cabo-
tage-affected throughput could be 2.4 million TEU if Hong Kong loses all Non-PRD
transshipment (in the worst-case scenario). Hence, total laden container throughput
could drop from 17.1 to 14.7 million TEU. In the worst-case scenario, Hong Kong
could lose all transshipment involving the Non-PRD region, resulting in a 14% decrease
in throughput.

π = Sum of transshipment inlow and

Non- outlow of Non-PRD ports Non-
PRD 4 China
Ports Ports

Hong
Kong

1 2

PRD
π= 1 + 2 + 3 + 4
Ports

Fig. 7  Transshipment cargo flow

 Marit Econ Logist

4 Discussion

Although cabotage relaxation in China does result in a drop in Hong Kong’s container
throughput, other stakeholders, for example, foreign lines, Chinese shipping compa-
nies, shippers and government, don’t fail to see desirable impacts in this policy change.
In this section, we discuss in general terms the long-term impacts of the policy change
on a maritime hub, and on the nearby coastal container ports, as well as on the opera-
tions of domestic vessels along the coast. We also explore the plausible policy change
implications in the context of China’s Belt and Road Initiative.

4.1 Hong Kong’s decline as a hub: long‑term impacts of loss of transshipment

In general, a decrease in transshipment could lead to a decrease in connectivity. In the

long run, such a decrease could severely impact Hong Kong’s capabilities as a hub, as
most shippers and logistics service providers might easily swap to other more competi-
tive hubs. One of the main reasons for Hong Kong’s major transshipment hub status in
Asia is due to its connectivity. Currently, there are about 340 containerships calling at
the port each week, connecting it to about 470 destinations around the world (Devel-
opment Bureau 2017). Yet, Hong Kong is facing strong competition from Shenzhen,
which has 226 containerships calling at the port each week, (The Port of Shenzhen
2017), connecting it to more than 300 destinations (Xinhuanet 2017). Half of these
routes are calling/covering both Hong Kong and Shenzhen. Because of the cabotage
rule, Hong Kong is still a crucial port for North East Asia transshipment to other inter-
national destinations. The relaxation may result in shipping lines’ shifting their trans-
shipment to Shenzhen. Container throughput in Shenzhen has increased from 5 million
TEU in 2001 to 24 million in 2015; Hong Kong, instead, only increased from 17.8 mil-
lion to 20 million TEU in the same period.

4.2 Cabotage relaxation and the prospects of hubs and coastal ports

China’s cabotage relaxation experiences could be applicable to other countries such

as Australia, India, Greece and Malaysia. One major objective in relaxing cabotage
laws is to boost the role of a port terminal to become an international transshipment
hub in the region. If China further relaxes a its cabotage law, to affect the termi-
nal operations and sea transport of other counties and/or cities. In November 2008,
China and Taiwan signed the “Cross-Strait Sea Transport Agreement”, for the devel-
opment of direct shipping links. On the one hand, this agreement generates eco-
nomic benefits, in terms of saving transport time and cost to Taiwan. On the other
hand, however, the agreement precludes Taiwan’s open registry ships from direct
transport between two places (Guo et  al. 2007). This reflects how a country can
shape the provision of shipping services among third countries and/or cities.
There have been countries that revised their cabotage regulations causing a cer-
tain impact to neighbouring ports. Major ports in Australia have expressed their con-
cerns to government. It has been argued that although the deregulation of cabotage
rules, foreseen in the Coastal Trading Act, allows both domestic and foreign vessels
Marit Econ Logist

access to cargoes and passengers, thus improving the economic performance of the
country, this would also affect existing hub business and its related workforce; a
cost–benefit analysis of cabotage deregulation is yet to be done (Sexton 2018; Grey
2016). At present, Greece permits only EU registered ships into coastal transporta-
tion. However, to sustain coastal services, ships under non-EU flags are allowed to
participate in Greek coastal shipping if the number of EU ships is not sufficient to
meet the required routes (United Nations 2017; Giannopoulos and Aifandopoulou‐
Klimis 2004). Relaxing cabotage policies has affected containers from international
ports routing through Port Klang (gateway of Malaysia), as well as other ports in
Malaysia. In India, the relaxed cabotage rules of 2016 have been a threat to Jawaha-
rial Nehru Port (JNPT), with cargo shifting to other ports in India (Hill et al. 2008;
Lee et al. 2008).
When there are changes in a country’s cabotage policy, the impacts and risks must
be carefully reviewed prior to implementation. For example Hong Kong, as a trans-
shipment hub for both overseas cargoes and neighbouring cities in China, would be
clearly affected by cabotage relaxation. Transshipment cargo could shift from Hong
Kong to neighbouring ports. As mentioned in Sect. 3, Non-PRD transshipment will
not ship through Hong Kong following relaxation. Instead, those cargoes will be
moved among Chinese coastal cities. If cabotage is further relaxed in China, the hub
effect and distribution network synergies of Hong Kong will be negatively impacted
(Zheng et al. 2014). This would be a grave development, for the number of container
hubs and their strategic locations affect economic growth, trade, logistics and gate-
way flows (Lee et al. 2008; Cullinane et al. 2004; Hayuth and Fleming 1994).

4.3 Cabotage relaxation impacts on domestic vessels

Domestic vessels are primarily engaged in coastal shipping. Under a regime of

cabotage, all domestic routes in China must be operated by Chinese-flagged ves-
sels. As already mentioned, the Non-PRD transshipment of 1.2 million TEU will
now be moving directly among Chinese coastal cities, instead of being trans-
shipped in Hong Kong. As reported in the China Ports Yearbook (2017), China’s
increase in domestic cargo also boosts coastal flows in the last decade. In 2013,
about 55 million TEU, or about one third of the total container throughput of
mainland China is domestic cargo.
Currently, with the cabotage relaxation at the Shanghai, foreign-flagged Chi-
nese companies can perform domestic shipping. These ships tend to recruit
employees from their home countries instead of locally. This could threaten the
job market of coastal ports, as some of the employees on these ships are hired
overseas. If cabotage is further relaxed, eventually foreign companies may replace
a significant part of domestic companies in the domestic shipping market. This
may have a significant impact on Chinese companies whose main business is in
domestic deliveries and it could be a major blow to China’s shipping industry,
which is currently at a growth stage (domestic volume was 18 million TEU in
2006, rising to 55 million TEU in 2013; see Port Yearbook, 2006–2013).
 Marit Econ Logist

Cabotage relaxation would increase competition among domestic and interna-

tional shipping, including shipowners, transport and feeder operators. Domestic
and foreign players are experiencing different business environments, for exam-
ple, fuel costs are different among different countries. Diesel oil is 50% more
expensive in Philippines compared to Singapore. Similarly, differences in interest
rates, insurance premiums, tax systems, other operating costs, efficiency and pro-
ductivity, as well as government support policies can result in large differences in
total operating costs borne by international and domestic vessels (Lorenzo 1998).
In Indonesia, since the cabotage relaxation was effected in 1980s, the domestic
shipping industry almost collapsed as a result of foreign vessels now engaging
in coastwise transportation. According to 2001 data, over half of the domestic
freight was now carried by foreign shipping companies (Simbolon & Partners
Law Firm 2017). The Indonesian government had to reintroduce cabotage restric-
tions (Maritime Law No 17 of 2008), to revive the domestic shipping industry
(Yee and Din 2015).
In the Philippines, and in order to promote competition in shipping, RA 10668
(the cabotage Act) was signed into law in 2015 (Santos and delos 2015); the real
impact on the domestic shipping industry is still unknown. In New Zealand, the
deregulation of coastal shipping took place on 1 February 1995. Although interna-
tional ship operators have currently captured about 10–15% of the domestic con-
tainer market, local operators have also seen an increase in their coastal shipping
business. It is because large international carriers call at one (e.g. Auckland) or a
few ports, and then rely on feeder services, to carry cargo to and from other parts of
the country (Cavana 2004).
In sum, as far as domestic shipping is concerned, there exist both positive and
negative effects, depending on a variety of factors. Obviously inefficient domestic
operators will bear the brunt of the reform. For a country with many potential hubs,
such as China, the impact can be severe, as foreign carriers can function as domestic
operators, trading from one coastal hub to another. For a country with few major
hubs, such as New Zealand (Cavana 2004), the impact is likely to be minimal.

4.4 Impact of cabotage relaxation on foreign carriers

Relaxation of cabotage brings opportunities to foreign carriers, allowing them to

operate between coastal ports. Relaxing cabotage in China has been requested by
foreign carriers for years, especially by Maersk Line (Knowler 2015). When in
2015 Chinese carriers with foreign-flagged vessels were allowed to conduct trans-
shipment and coastal transport in identified free-trade zones, 41 vessels benefitted
from the relaxation, having carried about 5400 TEU among the coastal ports of
China (SISI 2016). Further relaxation would provide opportunities to more for-
eign business and facilitate more efficient supply plans.
With the reshuffling of global shipping alliances since 2016, the world’s largest
container carriers have reorganised themselves from four alliances (2M, Ocean
Three, G6 and CKYHE) to three (2M, THE Alliance, and the Ocean Alliance).
China Shipping, COSCO, and OOCL are grouped into the Ocean Alliance that
Marit Econ Logist

could affect further change in China’s cabotage policy. The share of China-owned
fleet has reached 10% of 49,223 world merchant ships, and 53% of this fleet is
registered under foreign flags (Statista 2017; United Nations 2016; Knowler
2015; International Shipping News 2015). Further relaxation of cabotage could
attract a larger number of foreign-flagged vessels in Intra-Asia, Trans-Pacific and
Asia–Europe trades, with additional cargo business along the coastal ports in
China.

4.5 Cabotage considerations within the belt and road initiative

In China’s Belt and Road Initiative (BRI), the “Road” covers a maritime network
of ports from South-East Asia to East Africa and the northern Mediterranean Sea.
The “Road” comprises ports in coastal China, Vietnam, Malaysia, Singapore, and
India, all the way to Piraeus and Venice (Escobar 2018). For BRI to be success-
ful, policy coordination and unimpeded trade are major success factors (National
Development and Reform Commission 2015). Such coordination includes inter-
governmental cooperation, macro-policy exchanges, etc. Cabotage laws would
apparently have to be part of such coordination. China’s development of ports and
hubs across the Indo-Pacific region is a key element of BRI. Purchases and con-
struction of port infrastructures and associated economic zones in countries along
the “Road” become inevitable. For example, China’s COSCO is now a major
shareholder of Piraeus, Greece’s major port. Other investments include develop-
ments along the China–Pakistan Corridor, Bangladesh–China–India–Myanmar
Corridor (The Economist 2017), etc.
There are many stakeholders in the Belt and Road Initiative including carriers,
hubs and coastal ports, domestic vessels, and local economies. What role could
cabotage relaxation play within the BRI context? Does China’s recent cabotage
relaxation show an intention to ‘convince’ other countries to follow suit? If so,
we expect major impacts on carriers, existing hubs, emergence of new hubs and
domestic vessels. These and many corresponding research and policy issues need
to be addressed. The stakes are extremely high and could cause major economic
impacts to many countries.

5 Conclusion

In this paper, we have examined how cabotage relaxation in China may affect trans-
shipment in Hong Kong. It is shown that the policy change would mean the loss
of Hong Kong’s transshipment involving the non-PRD region. Via a transshipment
model, we were able to derive the potential loss of Hong Kong’s throughput based
on secondary data. In the worst-case scenario, there could be a 14% decrease in the
throughput of Hong Kong. In the long term, such loss would decrease Hong Kong’s
connectivity and weaken its capability to function as an important regional hub.
 Marit Econ Logist

Beyond examining cargo throughput, we discuss cabotage relaxation’s impact on

the prospects of adjacent maritime hubs, domestic, foreign shipping, etc. We finally
point out that developing a coherent cabotage policy in countries along the Belt and
Road Initiative might be of importance for the success of the initiative.

Acknowledgements  Part of this paper’s findings was previously presented in a policy report written by
Collin WH Wong, Eugene Wong, Yue Wang, Daniel Y. Mo and Lawrence C. Leung, entitled “Impact of
Cabotage Relaxation and PRD Competition to Hong Kong’s Maritime Logistics Industry”, Hang Seng
Management College, 2016. The authors hereby declare that they themselves retain the copyright. They
are moreover thankful to the editor and two anonymous reviewers whose constructive comments and sug-
gestions have led to a large improvement of the paper.

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