The great freight swindle: “(Q)uestionable” surcharges imposed on Philippine importers and exporters by international shipping lines

The great freight swindle
BEN KRITZ, August 2, 2018 http://www.manilatimes.net/the-great-freight-swindle/425908/

THE Department of Trade and Industry (DTI) attempted to rekindle interest in a long-standing controversy when it asked the Philippine Competition Commission (PCC) this week to “act on the concerns of the business sector” regarding “questionable” surcharges imposed on local importers and exporters by international shipping lines.

While there’s ample justification for the “concerns,” the diffident nature of DTI’s request raises questions about whether or not the DTI, PCC, or any other government body has any idea just how big a can of worms a regulatory inquiry might open.

At issue are heavy origin and destination charges from foreign shipping lines to Philippine exporters and importers, which the DTI says are undermining the competitiveness of local businesses. A study conducted in 2017 and published at the end of January by the DTI’s Export Development Council and the National Competitiveness Council calculated that these charges accounted for an average of 61 percent of the total shipping cost of import shipments, and an average of 75 percent of the cost of export shipments. The report further estimated that the loss to the economy from excessive charges is between $2 billion and $5 billion annually.

The origin and destination charges differ from actual freight charges, and are considered a serious problem because they’re not well defined by international standards (whereas actual freight charges are), and are therefore somewhat opaque. Examples of these kinds of charges include terminal handling costs, container imbalance charges, emergency cost recovery surcharges, container deposit and cleaning fees, fees for container detention and demurrage, documentation fees, foreign currency adjustments, and fuel cost adjustments, among others.

There are legitimate reasons for most of these fees, but the EDC-NCC report is basically correct in characterizing them as “excessive,” because they’re widely abused, due to the intensely competitive nature of the shipping business.

For several years, the shipping industry has suffered from significant overcapacity — there simply isn’t enough freight moving around the world for the number of ships available to carry it. That has driven freight rates down to ridiculously low levels, and has given large exporters the upper hand in negotiating for even lower rates. In some instances, shipping companies will even offer big customers with large regular shipments negative freight rates just to keep ships full.

In order to recover costs not being met with freight charges alone, the shipping companies bury the excess in origin and destination charges. The practice affects importers more than exporters, but exporters who don’t have regular large shipments or don’t contract their shipping under International Commercial Terms (Incoterms) are also vulnerable to the surcharges.

The DTI is correct to say that Philippine businesses are seriously impacted because most importers and exporters here are small to medium enterprises. Whether or not it makes Philippine traders significantly less competitive than their peers in other countries is debatable. The swindle has been carried out for years, and is a global practice.

The scale of the issue is the first major problem the Philippines faces in trying to regulate surcharges by foreign shipping companies, whose capacity oversupply of their own making is being aggravated by increasing trade tensions.

While the Philippines might stand on the ethical high ground, as a small trade market, it should not necessarily expect satisfaction at the risk of the shippers’ continued financial viability. A response that would provoke even one or two major carriers to simply bypass the Philippines would have a far worse effect on local traders than excessive surcharges.

The second major problem for the government in trying to decide how to help its own business sector is that it’s not even clear which agency should be responsible for it. The DTI is raising the matter with the PCC because the PCC “appears to be the regulatory body that can best address the unfair practices by foreign shipping lines.”

That’s great, except the PCC’s regulatory functions are limited at best, and likely don’t extend to foreign shipping firms who are only subject to Philippine jurisdiction in terms of whether or not their ships are allowed to deliver and pick up cargo in Philippine ports.

A provision of the Customs Modernization and Tariff Act (CMTA) might permit the Department of Finance, through the administration of the Bureau of Customs, to impose rules addressing surcharges, except that the relevant section of CMTA (Section 1226) specifies those rules can “govern and regulate the conduct of all third parties dealing directly with the Bureau [of Customs]in the importation, export movement, storage, and clearance of goods for and on behalf of another person.” The shipping companies are generally not the third party in trade transactions. Most often, that’s a freight forwarder or logistics firm. Even in transactions where the consignor or consignee is dealing directly with the shipping company (in which case it would be a third party), the shipping companies virtually never deal directly with Customs. Therefore, the provision in the CMTA may not apply, and would certainly face a legal challenge if the government tried.

It’s an unfortunate situation, because the issue of Philippine importers and exporters — along with the rest of the world — being swindled by excessive shipping surcharges is indeed a problem that needs to be solved. As things stand right now, however, it’s a problem that’s clearly beyond this government’s capacity to solve it.