RELEGATED TO the sidelines during the signing of the Fair Competition Act in Malacañang two weeks ago was an important piece of legislation with a huge economic impact on trade and the local shipping sector.

Republic Act No. 10668, or the liberalized Cabotage Law, will allow foreign-flagged vessels to call at Philippine ports and enable importers and exporters to load cargoes in foreign ships going in and out of the country.

Previously, only domestic vessels were permitted to engage in coastwise trading, or the carrying of cargoes from one domestic port to another. This was a protectionist policy aimed at promoting the development of the local shipping industry that, sadly, did not happen.

A 2014 study by the state think tank Philippine Institute for Development Studies (PIDS) observed that the absence of competition in domestic shipping has resulted in the bloated cost of transporting raw materials to manufacturing sites, finished products and agricultural goods to various destinations, and imported products to distribution areas. These increased overall operating costs that were eventually passed on to consumers as high prices. PIDS argued that relaxing the Cabotage Law was necessary to bring down domestic shipping costs and, in turn, lower the prices of goods.

Another study, by the Joint Foreign Chambers of Commerce in the Philippines, provided a concrete example: A 40-foot container shipped domestically from Manila to Cagayan de Oro would cost $1,860 compared with foreign transshipment via Hong Kong of $1,144 or Kaohsiung at $1,044. A local trader, in effect, could save 43 percent in shipping costs through transshipment via Kaohsiung than directly using domestic shipping services. Senate President Franklin Drilon also had another example. He noted that shipping dry cargo from Davao to Taiwan cost about $450 per 20-foot equivalent unit (TEU) compared to $680 when shipped from Davao to Manila, which was much shorter in distance.

The aging and small domestic fleet of the maritime transport industry has also contributed to high local shipping costs. While the Philippines is the world’s fifth-biggest shipbuilding country, domestic shipping lines continued to use smaller and even older vessels in transporting cargo, which were uncompetitive compared to those of their foreign counterparts. The small capacity of cargo vessels implied longer transit and more turnaround times in ports, resulting in higher shipping costs, according to PIDS. It noted that domestic shipping was dominated by vessels with a capacity of 200-300 TEUs compared to those of foreign container ships that carried as much as 5,000 TEUs.

In his speech at the signing ceremony in Malacañang, President Aquino said allowing foreign vessels from a port outside the Philippines to carry cargo to their domestic port of final destination “will make the export and import of products faster and cheaper [and] lead to a more vibrant market. Stakeholders, from consumers to businessmen, will be able to save [money].”

As an added benefit, allowing foreign ships access to other ports in the country will stimulate economic activity in areas outside the capital and help free up space and congest the port in Manila, which earlier was the only place in the country where foreign ships could load and offload cargo.

Similar to the deregulation of the airline industry that drove ticket prices down and led to a surge in domestic tourism, relaxing shipping rules can also trigger a decline in costs and increase trade. It may, hopefully, also prod local shipowners to modernize and make their operations more cost-efficient.

Of course, much still needs to be done. Private shipowners have raised the need to develop port infrastructure—big foreign cargo ships need bigger berthing facilities—and for the government and the private sector to work on moving production areas closer to the provincial ports and highways to further increase efficiency.

More importantly, the government must ensure that Philippine ports of entry and exit are fully shielded against smuggling or dumping of goods. Otherwise, the relaxed Cabotage Law will only worsen the current situation where an assortment of commodities illegally enter the archipelago’s porous maritime borders. This is where the strengthening of the Bureau of Customs, the Coast Guard and the Philippine Ports Authority should come in.