The challenges of economic integration: the case of shipping in ASEAN countries

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1 The Pacific Review ISSN: (Print) (Online) Journal homepage: The challenges of economic integration: the case of shipping in ASEAN countries Jose L. Tongzon & Sang-Yoon Lee To cite this article: Jose L. Tongzon & Sang-Yoon Lee (2015) The challenges of economic integration: the case of shipping in ASEAN countries, The Pacific Review, 28:4, , DOI: / To link to this article: Published online: 16 Feb Submit your article to this journal Article views: 1067 View related articles View Crossmark data Citing articles: 2 View citing articles Full Terms & Conditions of access and use can be found at

2 The Pacific Review, 2015 Vol. 28, No. 4, , The challenges of economic integration: the case of shipping in ASEAN countries Jose L. Tongzon 1 and Sang-Yoon Lee 2 Abstract The Association of Southeast Asian Nations (ASEAN) has agreed to establish an ASEAN single-shipping market (ASSM) by This paper aims to assess the impediments in achieving this vision and how they can affect the pace of integration. These impediments include the differences in their national shipping capacity, national shipping policies and regulations, and in their quality of shippingrelated infrastructure and institutions. Due to these differences, the economic implications are likely to vary and raise important conceptual and implementation issues. The ASEAN experience could contribute to the understanding of shipping market integration and provide some lessons for other countries. Keywords ASEAN; single shipping market; impediments; economic integration 1 Dr Jose L. Tongzon is currently an Inha fellow professor of logistics at the Graduate School of Logistics, Inha University, South Korea. Prior to his current appointment, he was associate professor at the National University of Singapore (from 1992 to 2006), chief economist of the Port of Melbourne (from 1988 to 1992) and special assistant to the then Deputy Minister for Trade of the Philippine government (from 1976 to 1979). He has authored and co-authored over 100 articles in refereed international journals, chapters in books and books in the area of international trade and maritime issues. He has served as an international trade and port consultant for international and regional agencies such as the United Nations Development Program (UNDP), United Conference on Trade and Development (UNCTAD), World Bank (WB), Asian Development Bank (ADB), Inter-American Development Bank (IDB), AusAid, the ASEAN Secretariat and other private organizations. Address: Graduate School of Logistics, Inha University, 253 Yonghyun-dong, Nam-gu, Incheon, South Korea jtongzon@hotmail.com 2 Sang-Yoon Lee is an associate professor at the Asia Pacific School of Logistics (APSL) and also at the Graduate School of Logistics (GSL) at Inha University, Korea. He is currently the head of APSL at Inha University. He received his PhD degree at Cardiff University in UK majored in logistics and operations management. His research focuses on international logistics and supply chain management. He had worked for Korea Maritime Institute, one of the government research institutes in Korea, for approximately twelve years prior to moving to Inha University and has consulted widely for governments, industries, and international organizations. His current research interest includes international logistics and transport, shipping and port management, and green logistics. His recent works have been published in Marine Policy, International Journal of Production Economics and Journal of International Logistics and Trade among others. Address: Graduate School of Logistics, Inha University, 253 Yonghyun-dong, Nam-gu, Incheon, South Korea sylee@inha.ac.kr Ó 2015 Taylor & Francis

3 484 The Pacific Review Introduction Shipping has played a critical role in Association of Southeast Asian Nations (ASEAN) countries economic development. With an exportdriven industrialization strategy, shipping has provided these countries an efficient way of delivering their exports to their trading partners particularly for their primary and manufactured products as well as for their imports essential for their continued industrialization and economic development. Apart from being a facilitator of trade, shipping has also been a significant generator of government revenue and major contributor to national output and employment for most of the ASEAN countries. Having recognized the importance of shipping to their national development and regional economic integration, the countries of ASEAN agreed to achieve an ASEAN single-shipping market (ASSM) by An ASSM was agreed to mean a free flow of intra-asean shipping services, where there will be substantially no restriction to ASEAN shipping services suppliers in providing shipping services and in establishing foreign branches across national borders within the region, subject to domestic regulations. This is in line with the vision of the ASEAN Economic Community (AEC) blueprint that is to transform ASEAN into a region with free movement of goods, services, investment, capital, and skilled labor (ASEAN Secretariat 2008). Although the economic integration of goods has been given priority by the ASEAN countries since the inception of its regional economic cooperation, the growing trade in services in Asia and the Pacific has provided further impetus for acceleration of the liberalization of services in the region (Stewart 1993). This liberalization does not however apply to domestic shipping services or flow of shipping services between ports in the same country. Cabotage, which prohibits foreign registered ships to operate in domestic shipping or carry cargo between domestic ports, is practized by most of the ASEAN countries for political and strategic reasons. Given the importance of this regional initiative, the objective of this paper is to assess the major impediments in achieving the goal of a regionally integrated shipping market and how they are likely to affect the pace of integration. Although there have been theoretical and empirical studies on the barriers and progress of the implementation of logistics services liberalization commitments of the ASEAN countries (De Souza et al. 2007; Tongzon 2011), no in-depth study has yet been undertaken on the impediments to economic integration of international shipping in the ASEAN region. Furthermore, there is very limited country study on the economic implications of services liberalization (Balestreri et al. 2009; Chiu 2007), particularly for emerging economies in the region. This study on ASEAN experience could contribute to the understanding of shipping market integration and provide some lessons for other countries in the process of economic integration. The rest of the paper is structured as follows: Section 2 discusses the concept of ASSM and their integration commitments. Section 3 reviews the

4 J.L. Tongzon and S.Y. Lee: The Challenges of Economic Integration 485 relevant literature. Section 4 briefly presents the methodology adopted. Section 5 analyzes the major impediments facing the ASEAN member countries in implementing their liberalization commitments, followed by a conclusion and policy implications. The concept of ASSM and integration commitments The decision to establish a single-shipping market in the region was based on the principles of liberalization and fair competition. Specifically, the following were agreed by the ASEAN countries to be the guiding principles in their process of implementing a single-shipping market (ASEAN Secretariat 2011): 1. Foster free and fair competition in international shipping market. 2. Adhere to the principle of free competition on a commercial basis for cargo movements between ASEAN member countries. 3. Remove or eliminate substantially all existing discriminatory measures to market access among ASEAN member countries. 4. Exclusion of shipping activities reserved by each of the Contracting Parties for their national flag vessels and/or shipping companies operating in their respective domestic waters (cabotage). 5. Prohibit new or more discriminatory measures and market access limitations. 6. Liberalize trade in maritime transport services by expanding the depth and scope of liberalization beyond those undertaken by member countries under the GATS with the aim to realize a free trade area in services. Although there are strong economic arguments for an abolition of cabotage, most of the ASEAN member countries, which have adopted a cabotage policy ranging from mild to severe forms of domestic shipping industry protectionism, are in favor of maintaining this policy under the ASSM for political and strategic reasons. For a detailed discussion of the negative economic implications of cabotage, see Tongzon (2012). To liberalize their respective shipping sectors, the following target commitments and their timelines were agreed on by the ASEAN countries: 1. No restrictions for Modes 1 and 2, with exceptions due to bona fide regulatory reasons (such as public safety) which are subject to agreement among all ASEAN Member States (AMS) on a case-by-case basis. 2. Allowing for foreign (ASEAN) equity participation of not less than 49% by 2008, 51% by 2010, and 70% by Progressive removal of Mode 3 market access limitations by Removal of Mode 4 market access limitations by 2015.

5 486 The Pacific Review It is expected that economic liberalization and fair competition in the ASEAN shipping market will result in lower shipping cost and improved quality of shipping throughout the region, and thus contribute to an improvement in the ASEAN members trade performance and international competiveness. Consistent with the objective of the AEC which is, among others, to improve the ASEAN region s international competitiveness and attractiveness to foreign investment, the ASEAN countries have further agreed that the ASSM should go beyond shipping to include those sectors, such as ports, customs authorities, and other shipping-related activities that have an impact on the performance of shipping services. Literature review The economic rationale for enhancing the efficiency of international shipping is well substantiated in the economic literature linking reduction in maritime transport costs directly to improvements in trade performance and economic growth (for example, Clark et al. 2004; Hummels 2000; Limao and Venables 2001; Radelet and Sachs 1998). There are also studies showing the importance of port infrastructure quality to transport costs (Fink et al. 2000) and quality of logistics and trade facilitation to trade performance (Wilson et al. 2003) and trade performance to income growth (Frankel and Romer 1999; Redding and Venables 2002; Wei and Yi 2001). However, there is very limited literature on the barriers to the integration of shipping services (for example, Chiu 2007), so far no in-depth study of these barriers has been undertaken in the context of the ASEAN economic integration. Most of these studies are concerned with the barriers to and implications of logistics services integration. De Souza et al. (2007) identified and assessed several barriers affecting integration of logistics services and showed how these barriers influence effective door-to-door delivery of goods within ASEAN. Tongzon (2011) later complemented this study by assessing the progress of liberalization of their logistics services and identifying the underlying factors affecting their implementation. In country-specific studies, Balestreri et al. (2009) and Andersson and Banomyong (2010) analyzed the implications of deregulation and liberalization on the logistics service industry in Laos and Kenya, respectively. Tongzon (2012) focused on implementation barriers and economic implications on the logistics industry in Indonesia. Although these studies are relevant to the current paper, they looked at the entire logistics industry and did not focus on shipping industry integration in the ASEAN countries. Methodology Data triangulation technique (involving three components) is utilized to obtain a more complete picture of the current shipping markets in ASEAN

6 J.L. Tongzon and S.Y. Lee: The Challenges of Economic Integration 487 countries and to allow for cross verification. The first component draws on desktop research which entails a thorough examination of relevant information from previous studies and documents from the ASEAN Secretariat website in relation to the agreed ASEAN initiative to establish a singleshipping market and shipping market developments in the ASEAN countries. The second component relies on interviews with representatives of the relevant government agencies involved in the formulation and administration of port and shipping-related policies in their respective countries. The relevant government agencies interviewed include Indonesia s Ministry of Transportation and Port of Tanjung Priok; Malaysia s Ministry of International Trade and Industry and Ministry of Transport; Myanmar s Ministry of Transport and Port Authority; Philippines Maritime Industry Authority and Philippine Port Authority; Singapore s Maritime and Port Authority; Thailand s Marine Department; and Vietnam s Maritime Administration. The third component involves interviews with freight forwarders and ship-owners associations and other relevant agencies such as research institutes and think tanks: Indonesia s Logistics and Forwarders Association, National Ship Owners Association, Indonesia s Chamber of Commerce and Industry and ASEAN Business Advisory Council; Federation of Malaysian Freight Forwarders, Selangor Freight Forwarders and Logistics Association, Malaysian Ship Owners Association, Maritime Institute of Malaysia and Malaysia Institute of Transport; Myanmar International Freight Forwarders Association, Myanmar Mercantile Marine Development Association and Myanmar Five Star Line; Philippine Port Users Confederation, Filipino Ship Owners Association, Filipino Association of International Shipping Lines and Philippine Education and Institutional Development Foundation; Singapore Shipping Association, Singapore Logistics Institute, National University of Singapore Centre for Maritime Studies and Nanyang Technological University; Thailand s Freight Forwarders Association, Thai Ship Owners Association, Transport Institute of Chulalongkorn University and The World Bank; and Vietnam Freight Forwarders Association, Vietnam Ship Owners Association and Vietnam Shipping Lines. Although the commitment to establish a single-shipping market for international trade applies to all members of ASEAN, this study focuses only on its five founding members (i.e., Indonesia, Malaysia, the Philippines, Singapore and Thailand) and two transitional economies of Myanmar and Vietnam. The remaining member countries are excluded from the analysis because they have either no national shipping industry (such as Laos) or negligible national shipping industry dealing with international trade (such as Brunei and Cambodia). The interviews are based on a structured questionnaire with open-ended questions ranging from industry profile to identification of barriers and impediments to the integration of shipping services. Given the low response rates of online and mailed surveys as shown in previous studies

7 488 The Pacific Review (Nguyen and Tongzon 2010; Tongzon 2009), the choice of face-to-face interviews is appropriate for this study. Although this approach is more time consuming, it tends to have a better response since interviewees are guided through the questionnaire and allows one to raise follow-up questions and clarifications during the interviews. Major impediments in integrating international shipping in ASEAN countries The interviews supplemented with information from secondary sources indicated that the ASEAN market for international shipping is dominated by foreign shipping lines since the ASEAN countries national shipping industries are relatively less internationally competitive compared to their counterparts in North East Asia (i.e., Korea, Japan, Taiwan, and China), with the exception perhaps of Singapore, Malaysia and Indonesia. Although shipping is of immense importance to the ASEAN countries for their continued economic development, the international competitiveness of their respective shipping industries is generally low and significantly varies among the member countries due to (1) the differences in national shipping capacity, (2) different restrictive national shipping policies and regulations, and (3) differences in quality of port and shipping-related infrastructure and institutions. These underlying factors can pose as substantial barriers to a free and fair competition as they affect directly and indirectly their ability to take advantage of the greater market opportunities offered by a regionally integrated shipping market, and thus constraining the path towards shipping market integration. Differences in national shipping capacity The ASEAN countries are generally highly dependent on foreign shipping companies for the provision of international maritime services as their national shipping industries are constrained by limited capacities, with the exception of Singapore, Malaysia, and Indonesia. Hence, national shipping capacity in the region is not evenly distributed with most of the 10 ASEAN member countries highly dependent on foreign shipping. This is reflected in the ranking of the world s top 25 countries in terms of flag of registry in which Singapore, Malaysia, and Indonesia made to the list in 2010 (US Department of Transportation, Maritime Administration 2013). Singapore and Malaysia were also in the top 20 countries in terms of controlled fleets, i.e., fleets controlled by parent companies located in their respective countries in 2010 (Institute of Shipping Economics and Logistics 2012). The ranking of ASEAN countries in terms of the number of merchant ships was also quite uneven, as shown in Table 1.

8 J.L. Tongzon and S.Y. Lee: The Challenges of Economic Integration 489 Table 1 Ranking of ASEAN countries in terms of number of merchant ships (as of 2010) Country Total Rank By type Countryowned Foreign-owned Registered in other countries Brunei chemical tanker 1, liquefied gas (UK 2) Indonesia 1,340 8 bulk carrier 105, cargo 618, chemical tanker 69, container 120, liquefied gas 28, passenger 49, passenger/cargo 77, petroleum tanker 244, refrigerated cargo 6, roll on/ roll off 12, specialized tanker 1, vehicle carrier 11 Malaysia bulk carrier 11, cargo 83, carrier 2, chemical tanker 47, container 41, liquefied gas 34, passenger/cargo 4, petroleum tanker 86, roll on/roll off 2, vehicle carrier 5 Philippines bulk carrier 76, cargo 152, carrier 12, chemical tanker 27, container 17, liquefied gas 5, passenger 7, passenger/cargo 65, petroleum tanker 44, refrigerated cargo 20, roll on/ roll off 11, vehicle carrier 10 1, (China 1, France 1, Greece 1, Japan 8, Jordan 1, Malaysia 1, Norway 3, Singapore 46, South Korea 2, Taiwan 1, UK 2, US 2) (Denmark 1, Hong Kong 8, Japan 2, Russia 2, Singapore 13) (Bermuda 47, China 4, Denmark 2, Germany 2, Greece 5, Japan 77, Malaysia 1, Netherlands 17, Singapore 1, South Korea 1, Taiwan 1, UAE 1) 95 (Bahamas 2, Cambodia 2, China 2, Hong Kong 10, Liberia 4, Marshall Islands 1, Mongolia 2, Panama 10, Singapore 60, Tuvalu 1, unknown 1) 82 (Bahamas 13, India 1, Indonesia 1, Isle of Man 6, Malta 1, Marshall Islands 11, Panama 12, Papua New Guinea 1, Philippines 1, Saint Kitts and Nevis 1, Singapore 27, Thailand 3, US 2, unknown 2) 7 (Cyprus 1, Panama 5, unknown 1) (continued)

9 490 The Pacific Review Table 1 (Continued ) Country Total Rank By type Singapore 1,599 6 bulk carrier 247, cargo 109, carrier 6, chemical tanker 256, container 339, liquefied gas 131, petroleum tanker 436, refrigerated cargo 13, roll on/ roll off 5, vehicle carrier 57 Thailand bulk carrier 31, cargo 99, chemical tanker 28, container 18, liquefied gas 36, passenger 1, passenger/cargo 10, petroleum tanker 114, refrigerated cargo 24, roll on/ roll off 1, vehicle carrier 1 Countryowned Foreign-owned Registered in other countries (Australia 12, Bangladesh 1, Belgium 1, Bermuda 25, Brazil 9, Chile 6, China 29, Cyprus 6, Denmark 149, France 3, Germany 32, Greece 22, Hong Kong 46, India 21, Indonesia 60, Italy 5, Japan 164, Malaysia 27, Netherlands 1, Norway 153, Russia 2, South Africa 13, South Korea 3, Sweden 11, Switzerland 3, Taiwan 77, Thailand 33, UAE 10, UK 6, US 36) (China 1, Hong Kong 1, Malaysia 3, Singapore 1, Taiwan 1, UK 6) 344 (Australia 2, Bahamas 7, Bangladesh 7, Belize 4, Cambodia 3, Cyprus 1, France 3, Honduras 11, Hong Kong 13, Indonesia 46, Italy 1, Kiribati 9, Liberia 22, Malaysia 13, Maldives 4, Malta 4, Marshall Islands 30, Mongolia 3, North Korea 1, Panama 92, Philippines 1, Saint Kitts and Nevis 10, Saint Vincent and the Grenadines 5, Sierra Leone 9, Thailand 1, Tuvalu 19, US 16, Vanuatu 2, unknown 5) 46 (Bahamas 4, Belize 1, Honduras 2, Panama 6, Singapore 33) (continued)

10 J.L. Tongzon and S.Y. Lee: The Challenges of Economic Integration 491 Table 1 (Continued ) Country Total Rank By type Countryowned Foreign-owned Registered in other countries Cambodia bulk carrier 38, cargo 459, carrier 7,chemical tanker 4, container 4, liquefied gas 1, passenger 1, passenger/cargo 6, petroleum tanker 8, refrigerated cargo 11, roll on/roll off 4, vehicle carrier 1 Vietnam barge carrier 1, bulk carrier 142, cargo 335, chemical tanker 23, container 19, liquefied gas 7, passenger/cargo 1, petroleum tanker 48, refrigerated cargo 1, roll on/roll off 1, specialized tanker (Belgium 1, Canada 2, China 177, Cyprus 4, Egypt 4, Estonia 1, French Polynesia 1, Gabon 1, Greece 2, Hong Kong 10, Indonesia 2, Ireland 1, Japan 1, Lebanon 5, Russia 50, Singapore 3, South Korea 10, Syria 22, Taiwan 1, Turkey 15, UAE 2, UK 1, Ukraine 35, Vietnam 1) (Cambodia 1, Kiribati 2, Mongolia 33, Panama 43, Taiwan 1, Tuvalu 6) Notes: No corresponding data were available for Laos and Myanmar. Source: CIA ( accessed on 15 October 2013).

11 492 The Pacific Review Shipping is of critical importance to Indonesia as an archipelagic country but Indonesia s Ministry of Transport (2011, unpublished interview) estimated that only 9% of all Indonesian cargoes are carried by Indonesian shipping lines. There are only 12 to 13 Indonesian shipping companies operating mostly in the Asian region. Samudera Shipping Lines, which provides services for bulk and general cargoes, is considered Indonesia s largest domestically owned shipping line in terms of shipping capacity. The Malaysian Institute for Maritime Affairs (2011) estimated that between 95% and 98% of Malaysia s international trade in terms of volume is being carried by sea. As a trading nation, Malaysia depends on shipping as a facilitator of trade. It is also a good source of employment opportunities with substantial multiplier effects for the rest of the national economy especially in relation to its shipping auxiliary services, such as ship building, ship repair and others. The critical importance of shipping to the Malaysian economy has been recently highlighted by the Malaysian government by recognizing shipping as one of its strategic sectors in its Third Industrial Master Plan There are over 100 domestic shipping lines in Malaysia out of which 10 are container operators. One of them is MISC, which is owned and operated by the Malaysian state-owned enterprise Malaysia Petronas. However, Malaysia is still highly dependent on foreign shipping lines for container trades. MISC has scaled down its container operations after the 2008 global economic crisis. In the Philippines, international shipping services are mainly provided by foreign shipping lines connecting Manila port, Cebu or Davao port to the regional hub ports such as PTP in Malaysia, Singapore, Kaohsiung in Taiwan, and Hong Kong. Its national shipping industry is highly concentrated with only five Filipino shipping companies (e.g., Eastern Shipping Lines Inc., Loadstar Shipping Co. Inc., Montenegro Shipping Lines Inc., PNOC Shipping and Transport Corporation), mostly providing coastal liner services (accounting for 90% of domestic shipping) and international tramp services. Although the government has supported Filipino shipping companies to engage in international shipping through bareboat chartering program, investment incentives (such as accelerated depreciation, net loss carryover schemes for importation of ships and spare parts under its Domestic Shipping Policy Republic Act 9295), and tax exemptions (for modernization of the ships), Philippine-registered shipping fleet has continuously declined due to the lack of capital to develop and upgrade the fleet (US$ million per ship), high cost of money (5% 7% higher than Hong Kong), antiquated mortgage law (not recognized internationally), time-bound incentives (10 years), and discriminatory fiscal policies for ship purchase (locally built ships are subject to valued added tax (VAT) while imported ships are exempted). However, the Philippines is the largest supplier of highly qualified, competent and certificated seafarers in the world (more than 300,000 deployed seafarers; 20% of supply; roughly US$ 2 billion in remittances). Its leadership is being challenged by China, Vietnam, Russia, and India.

12 J.L. Tongzon and S.Y. Lee: The Challenges of Economic Integration 493 Singapore is probably the most shipping-dependent country in ASEAN as its economy most heavily relies on international trade for its continued economic growth and development. As an island economy with very limited domestic market and scarce natural resources, Singapore since its political independence has pursued a trade-oriented industrialization strategy and at the same time promoting itself as the region s maritime services hub capitalizing on its strategic location. It is estimated that maritime services account for 7% of its gross domestic product (GDP) and has been one of the leading pillars of the government s national logistics strategy to strengthen Singapore s role as a logistic hub in the region. As a tradedependent economy, the Singapore government has adopted liberal shipping policies and at the same time provided substantial financial incentives and subsidies to establish a relatively strong and highly competitive national maritime industry. The importance of shipping to Thailand s national economy is indicated by the fact that about 89% of Thailand s international trade in volume terms is carried by maritime transport (65.9% in value terms). There are no current estimates of the total output and employment the shipping sector has contributed to Thailand s national output and employment but estimates provided indicated that there are about 20,000 Thai seafarers and the level of employment in the shipping auxiliary industries is greater than the number of seafarers by the multiple of 5. The Thai government has recognized the importance of shipping to their national economy so that Thai seafarers are income tax exempt whether they are aboard Thai-flagged ships or not, while Thai-flagged vessels are also exempted from corporate income tax which is currently at 30%. Moreover, for Thai ship owners, the government has just approved a revolving fund for financing purchases of new ships; this fund was discontinued five years ago and has just been restored to provide more funding for ship acquisition. Despite its economic importance, the Thai authorities have indicated that there were 483 Thaiflagged vessels with a total capacity of 4.4 million deadweight tonnage (DWT) in 2010 (497 vessels with a capacity of 3.69 million DWT in 2007), out of which only 40 were Thai-owned, engaged mostly in intra-asean trading in container freight and with the minority of them engaged outside the region on tramp services (Thailand s Ministry of Transport 2011, unpublished interview). Vietnam s national fleet consists of 1,636 ships with 7.1 million DWT. It is dominated by Vietnam National Shipping Lines (VINALINES) a government-owned shipping company which was founded in 1995 and has since then expanded and diversified its scale of operations, including shipping, port construction, port operation and management, maritime service, and financial areas. Currently, VINALINES possesses 14 shipping companies; 17 port operating companies; 46 maritime servicing and associated companies. At the end of 2010, the total capacity of its fleet approached 3 million DWT, which consists of container vessels, bulk carriers and oil

13 494 The Pacific Review product tankers. The Vietnamese government has implemented the development plan for VINALINES for the period (PM s Decision No.1366/QD-TTg) to make VINALINES a maritime group with major businesses including sea transport, port operation, and provision of maritime services. But VINALINES is the sole national shipping company participating in international shipping service in Vietnam, which accounts only for 20% share of the international freight market, with the remaining 80% dependent on foreign-based shipping lines. Like Vietnam, Myanmar s international shipping is dominated by foreign vessels. Its domestic shipping industry only accounts for 10% 15% of international containerized and general cargo market and only consists of three shipping companies. The most dominant and domestically owned shipping line is its semi-government owned Myanmar Five Star Line which currently has 22 ships (1 container ship and 21 conventional ships). In terms of exports, this shipping line accounts for 10% 15% and 25% 30% shares in containerized and tanker markets, respectively. In terms of imports, it accounts for 80% market share in cement trade and 15% market share (mostly containerized) in general cargo trade. There are other two small private shipping lines KMA (which owns two container ships) and Lanpyi, which only hires ships for its shipping operations. Due to lack of foreign investment mainly due to several years of economic sanctions imposed on the country by the international community and the shortage of domestic capital, its national shipping fleet needs substantial upgrading and improvements. The national fleet comprises very old ships (15 30 years old) and is not large enough to achieve the economies of scale (not more than 13,000 DWT). Restrictive national shipping policies and regulations Although the region s international shipping under Modes 1 and 2 is generally liberalized, the ASEAN countries, except Singapore, are still adopting restrictive national shipping policies and regulations under Modes 3 and 4, which can act as significant barriers to the establishment of a single-shipping market in the region. These restrictive policies and regulations are in the form of market access restrictions, limitations specific to the maritime sector and cross-sector foreign investment-related barriers which have hindered the free flow of maritime services across the region. Although Indonesia has liberalized Modes 1 and 2 for maritime services, its national shipping industry is shielded from foreign competition by certain restrictions imposed on the entry of foreign shipping services under Mode 3. These restrictions are in the form of a requirement for foreign shipping lines to appoint an Indonesian company as a shipping agent and a foreign equity participation limit of up to 49% of the total equity in the auxiliary shipping services sector, with the exception of stevedoring and international shipping where up to 60% of the equity can be held by ASEAN-based companies. In the case of customs brokerage, this is off

14 J.L. Tongzon and S.Y. Lee: The Challenges of Economic Integration 495 limits to foreigners and Indonesia has a negative investment list in accordance with its foreign investment law. In Malaysia there are no restrictions for foreign participation in international shipping in view of the establishment of the Malaysian International Ship Registry that requires the majority ownership to be foreign. Malaysia has autonomously liberalized all maritime services sectors (i.e., 100% foreign equity participation) except for maritime cargo handling, towing and pushing, port and waterway operation services, pilotage and berthing services, and navigation aid services. There are however restrictions on foreign equity participation for port ownership up to 49%. There is no uniformity of laws and regulations within Malaysia in relation to cargo liabilities. There is, for example, a significant discrepancy between the limitation of liabilities between East Malaysia and West Malaysia which contributes to the significant differences in terms of value-added and international competitiveness. Under the Malaysian merchant shipping laws, the applicable regime on limitation of shipowners liability is the 1957 Convention. This is currently enforced throughout Malaysia. Admittedly it is outdated. However, Malaysia has already acceded to the 1996 Limitation of Liability Maritime Claims (LLMC) protocol and the laws have been passed by the Parliament, and now awaiting the date of implementation. There is no single standard for recognition of qualifications for working in the shipping auxiliary industries such as freight forwarding, shipping agency and the like. This lack of mutual recognition could inhibit the movement of logistics professionals within the region; in the case of the movement of seafarers, there is no automatic recognition by the Malaysian government for the qualifications and certificates of competency in accordance to the STCW Convention, although Malaysia already has agreements in place for mutual recognition of certificates from Brunei Darussalam, Indonesia, Myanmar, Philippines, Singapore, Thailand, and Vietnam. The Philippines practices a cargo reservation scheme for government cargoes which should be carried by Philippine registered ships under the strict implementation of PD 1466, but foreign lines can be used when local players do not comply with the requirements. Currently, foreign equity in port operation is restricted to 40%, which is lower than other ASEAN states (e.g., Malaysia 49%). Foreign ships calling at Philippine ports are required to obtain tourist visas for their foreign crew before disembarking their vessels. Negative List B bans foreign seafarers from working domestically (except under certain circumstances). Many local manning companies have strict foreign equity provision of 75% 25% shares. Philippine registered ships in domestic and international trades are required to have a Filipino complement on board. Thailand s national shipping industry continues to receive protection through a cargo reservation policy which requires that goods imported directly or indirectly by government agencies or public enterprises must be transported by Thai-flagged vessels on designated shipping routes (for example, from USA and Europe) where such vessels are available for

15 496 The Pacific Review services. International shipping is open to Thai and foreign maritime transport operators, but in order to provide international shipping services under the Thai flag, ships must be at least 51% Thai-owned, registered for flying the Thai flag, meet the national safety and marine environmental requirements and be registered as a maritime transport operator with the Marine Department; however, there are no equity restrictions for non- Thai registered ships. There is a regulation that requires employment of Thai seafarers for Thai-flagged vessels engaged in international shipping. Under the Thai Vessels Act, the required proportion of Thai seafarers is 50% and in the case of domestic shipping all crew must be Thai nationals; The Multimodal Transport Act (2005) requires all multimodal transport operators (MTOs) to register in Thailand; there are three types of registration: (1) a limited company or public limited company incorporated under Thai law with its head office in Thailand; (2) an MTO registered in a foreign country recognized by Thailand under a treaty or international agreement, who must appoint an agent or set up a branch in Thailand; and (3) a foreign MTO who must appoint a Type 1 MTO to be its agent, even if it has already a branch office in Thailand. Reportedly, there has been a lack of clarity in the law on the treatment of foreign shipping firms and delays in issuing the implementation regulations. Foreign investment in port ownership is subject to 49% limit under its Foreign Business Act B.E. 2542; this limitation extends to other auxiliary shipping services such as freight forwarding, shipping agency, shipping brokerage, stevedoring and storage; the exemption applies to US MTOs under Thailand-US Friendship Agreement where 100% foreign equity ownership is allowed. In Vietnam, foreign equity share for Mode 3 is currently limited to 49%, although 100% foreign ownership will be allowed in 2014 regardless of nationality following Vietnam s WTO commitment; this means that by 2014 Vietnam s shipping industry will be fully accessible with no differentiation between ASEAN member and non-member states. This will be more than what other ASEAN members would have allowed 70% foreign equity in maritime transportation to other member nations. In terms of Mode 4, Vietnam s national shipping industry is still highly protected. Until now, VINAMARINE has only signed a Memorandum of Understanding for the recognition of certificates under STCW 78/95 with Singapore (Maritime and Port Authority), Indonesia (Directorate-General of Sea Communications), Malaysia (Marine Department), Brunei (Marine Department) and Myanmar (Department of Marine Administration) but not with the other member states. Differences in quality of port and shipping-related infrastructure and institutions In Indonesia, there are infrastructure-related barriers in the form of terminal and storage congestions, low productivity in cargo handling operation

16 J.L. Tongzon and S.Y. Lee: The Challenges of Economic Integration 497 and insufficient drafts to accommodate larger mother vessels with more than 6,000 twenty-foot equivalent unit (TEU) shipping capacity. Although there have been significant improvements in customs processing time due to the successful introduction of the National Single Window in Indonesia s major ports and the 24/7 hour operation, there are still efficiency and capacity problems as demand continues to outpace the effective supply of services and facilities. Some concrete measures have been adopted to address these portrelated barriers at the port of Tanjung Priok. In the short term, optimizing the terminal and storage capacities and converting existing conventional terminals into container facilities have been implemented. In the long run, there has been an expansion of terminal and storage areas and deepening of existing berths to make their drafts at 14 meters deep. Furthermore, new berths are being constructed which should be completed by By this time, it is expected that the total port capacity would increase to 8 million containers. Port access remains a major challenge due to traffic congestion and poor port location; transporting cargoes to and from the port of Tanjung Priok takes unnecessarily long (for example, it takes 3 4 hours for a truck to travel a distance of 50 kilometers from the port) and finding a parking space for trucks is very difficult. Furthermore, Indonesia s industrial clusters are around 20 kilometers away from the city of Jakarta. Indonesia is highly dependent on road transport for freight due to insufficient rail transport capacity; Indonesia s railway system is relatively less developed to become a good alternative for road transport. Moreover, there is no railway link between Java and Surabaya for container freight and thus constraining the use of rail for the transport of cargoes between these two major cities of Indonesia. Due to insufficient cargo base and insufficient berth depth, there is lack of direct shipment between Indonesia and Western Europe and thus Indonesia relies on the use of Singapore and Malaysia as transshipment hubs; this reliance on transshipments has led to unnecessarily longer shipping time and higher costs than under direct shipments. In Malaysia, there is lack of government support for International Federation of Freight Forwarders Associations (FIATA)-endorsed program for freight forwarders; the Malaysian government is viewed to have shown insufficient leadership in the field of logistics education provision as most of the training for logistics workers is provided by the companies themselves. Moreover, there is no clear and integrated national shipping policy. There is so far no single document spelling out Malaysia s national shipping policy; nevertheless this has not inhibited the development of shipping in Malaysia. There is lack of consolidation of cargoes due to the dual port system adopted in Malaysia where the ports of Klang and Tanjung Pelepas are both promoted as hub ports for Malaysia and the region; this lack of consolidation has led to the absence of economies of scale for shipping lines

17 498 The Pacific Review that call at these ports. A number of agencies are involved in the administration of shipping services instead of having a one-stop agency to optimize the allocation of resources which may result in unnecessary long bureaucratic delays. There is no single platform or mechanism to share relevant shipping and port data (for example, origin and destination data), absence of data base and lack of usable and useful information; although the lack of relevant data base has already been identified and addressed collectively by the ASEAN countries, the effectiveness of the measures adopted remains to be seen. Furthermore, there is lack of platform for regular consultations between the industry and the government on matters of shipping policies and other shipping-related matters. Insufficient cargo base, insufficient berth depth at the port of Manila and poor port access due to traffic congestions are some of underlying factors for the lack of direct shipments between the port of Manila and US/Europe, and the use of Singapore, Malaysia, Hong Kong, and Taiwan as transshipment hubs; this reliance on transshipment has led to unnecessarily longer shipping time and higher costs than under direct shipments. Further, inadequate port infrastructure in other parts of the country and inefficient domestic transshipment system have led to excessively high domestic transshipment costs between the port of Manila and other domestic ports. Lack of efficient shipbuilding industry forces domestic ship owners to buy second hand vessels. There are eight major shipyards (85% of capacity) utilizing foreign equity (i.e., Keppel, Tsuneishi, Hanjin, Subic Bay). Domestic Shipping Development Act (RA 9295) provides related incentives on shipbuilding and ship repair. There are exemptions from VAT (for 10 years) on the importation of capital equipment, machinery, spare parts, steel plates and other metal plates (including marine-grade aluminum plates). However, buyers of imported second hand vessels are VATexempt while buyers of locally (newly) built ships are taxed. New ships are also costly and access to low-interest funds and longer payment periods is lacking, as mentioned previously (Development Bank of the Philippines terms and collateral requirements are prohibitive like those of commercial banks). Twenty agencies regulate the industry and the National Maritime Leasing Corporation fund for ship leasing is not adequate. The Philippines Technical Education Skills Development Authority no longer provides sustainable and regular training for future workers. With regards to customs clearance process, a single window system has been in operation but in practice, customs-related organizations still prefer offline submission of documents. Only few barriers currently exist in Singapore but they are still worth raising and need to be addressed to achieve the goal of a regionally integrated shipping market. The following barriers have been cited during the interviews with the relevant government agencies, research institutes and shipping community representatives. Employers need to pay levies for the employment of foreign labor; the foreign worker levy is a national pricing

18 J.L. Tongzon and S.Y. Lee: The Challenges of Economic Integration 499 mechanism applied across all industries in Singapore; however, this was seen as an obstacle to the free flow of human resources. As Singapore is an island state with limited land resources, it continues to maintain two public terminal operators to ensure sufficient economies of scale and optimize the limited land available. Notwithstanding this constraint, Singapore has allowed foreign equity participation in its cargo terminal sector through Joint Venture Agreements between the terminal operators and shipping lines, under which the latter can operate dedicated terminal facilities. For pilotage services, one single service provider PSA Marine Pte Ltd is licensed to provide the service to ensure safe movement of vessels in the port. There is lack of terminal capacity in the ports of Bangkok and Laem Chabang while congestion is a problem in Thailand s international container depots. Underdeveloped railway system in Thailand puts more pressure on road transport, which already faces serious road congestion. Unnecessary long procedures for business license application and the introduction of 7% VAT have discouraged shipping lines to register under the Thai flag. It takes a long time to change and update the implementing regulations since they have to go through various levels of the government; for example, it took seven years to amend the Thai Vessel Act; there is however no problem of coordination among the various agencies of the government. Customs clearance processing for multimodal transport operation is slow due to the requirement that the documents required for customs clearance must be signed by shipping agents; customs brokers are also allowed to sign but they are quite costly. Lack of understanding of what is meant by a single-shipping market especially in terms of its opportunities and threats among Thai shipping community and other logistics providers has slowed the implementation of the liberalization commitments under ASSM. Moreover, there is lack of automatic recognition for certificates of competency from seafarers in other ASEAN countries (with the exception of Malaysia and Singapore due to their mutual recognition agreement), although STCW Regulation 1/10 requires that parties to the convention must recognize the certificates issued by other member parties to the convention. There is lack of transparency of government regulations in terms of lack of consultation and announcement of new shipping regulations to the private sector. In many cases, cargo vessels in Vietnam are in poor condition. There are many aging vessels more than 40 years old. Sometimes, Vietnamese flags are not permitted to enter Singapore port by Singapore s Port State Control due to their poor physical conditions. VINALINES which is stateowned has been provided with government subsidies in the form of low interest loans. Due to this government support, it has a dominant position in domestic shipping; however, despite this government support, it only accounts for 20% market share in international shipping.

19 500 The Pacific Review The Vietnamese government has developed its single window system for import and export activities. However, the custom clearance process is not yet fully integrated and is highly fragmented. Thus, there still exist many small doors instead of just one door in reality due to traditions and human-oriented business aspects in Vietnam s logistics industry. Other foreign investment-related barriers cited include inefficient bureaucracy, lack of consistency in policies, weak enforcement of laws and regulations and shortage of skilled labor in terms of technical skills. Conclusion and policy implications Although there are economic opportunities offered by the integration of shipping in the ASEAN region in the context of the AEC, the challenges to implement their liberalization commitments are immense due to the significant differences in shipping capacity, restrictive government policies and regulations towards shipping, and quality of infrastructure and institutions resulting in significant differences in international competitiveness. These differences could further lead to different economic outcomes. Based on the Heckscher Ohlin model (Leamer 1995), Singapore, Thailand, Malaysia, and Indonesia should have a competitive advantage in the international shipping business as they are relatively endowed with shipping capacity and resources. Therefore, these countries are expected to benefit from a wider regional shipping market under the ASSM with Singapore benefitting most in the container shipping business, while the Philippines, Vietnam, and other newly emerging economies of ASEAN, with less developed shipping sectors should benefit less or at worst, lose from a liberalized regional shipping market. These economic benefits will be in the form of their ability to export their shipping services to the region under Mode 1 and under Mode 3 in terms of enhancing their regional commercial presence through greater investments in more liberalized regional market. These countries ability to export shipping and other shippingrelated services is further confirmed in Table 2 which shows these countries export performance in the field of transport services for the period of (the latest year for which data are available). Since the export data also reflect other types of transport, they are at best indicative of the countries ability to export shipping services. It is clear from Table 2 that Singapore has been the largest exporter of transport services among the ASEAN countries, followed by Thailand, Malaysia and Indonesia. Vietnam came out with relatively better export performance in transport services, but, due to Vietnam s ageing shipping fleet, it is unlikely that its shipping sector would be able to compete in a liberalized regional market. Although the shipping industry in these less-developed ASEAN member countries is expected to benefit less or at worst, lose in terms of market access under Modes 1 and 3, there are however positive spill-over effects of this liberalized regional shipping market for some of these countries in