Abusive practices of foreign shipping lines

For a country whose annual per capita income is $3,3484, the cost of living in the Philippines is just as expensive as it is in Poland and Hungary where per capita income is $15,595 and $17,463, respectively. Why is this?

At the heart of the problem is the atrociously high cost of freight for imported goods. Clandestinely and under the radar, foreign shipping lines have been abusing their privilege by charging local importers exorbitant fees that are manipulated, dictated and unilaterally controlled by themselves. This is the principal reason why landed costs of imported goods in the Philippines are more expensive than they are in Indonesia or Thailand.

For those unaware, the terms, conditions and fees that govern international shipping are standardized and enshrined in an international agreement called the International Commerce Terminology (INCOTERMS). These standards were formulated by the International Chamber of Commerce and have been in effect since 1936.

According to INCOTERMS guidelines, the shipper (the foreign exporter) is the liable party for all appertaining costs relating to freight should the shipping terms be on a CIF (pre-paid cost of insurance and freight) or CFR (pre-paid cost and freight) basis. This is because the contract, in this instance, is between the shipper and the shipping company.

But this is not the case for cargo destined for the Philippines. Most international shipping lines charge zero or negative freight to foreign exporters for their shipments to the Philippines under a CIF or CFR arrangement. (Negative freight is a pricing scheme where shipping lines do not charge the freight cost but instead, awards the shipper a commission for using their services.)

When the shipment arrives at our ports, the local consignee (the importer) is made to pay the cost of shipping and all other auxiliary charges (including the commission received by the shipper) through some 50 different fees collectively known as “destination charges.” These charges are exorbitant and arbitrarily levied upon the consignee even if the freight cost is supposedly prepaid. The scheme is manipulative in that it transfers the burden of payment to the consignee, whereas the shipper is contractually bound to pay for the freight cost and/or insurance.

“Destination charges” like Bunker Cost Recovery Surcharges and Carrier Security Surcharges are all unrecognized by INCOTERM rules. They were invented by the shipping lines to extract more payments from consignees.

What is unfortunate is that consignees on the Philippine side have no choice but to pay these destination charges, however unreasonable they are. Not to do so will cause the shipping lines to withhold the release of the shipment. Don’t forget, the longer the cargo stays in the port with fees unpaid, the more demurrage charges accrue. The system is extortive and designed to take advantage of the consignee’s desperation.

Again, the duplicity of freight costs plus destination charges is the reason why imported goods are more expensive in the Philippines than they are in other countries.

This is also a form of unfair competition. The practice makes it appear that imported goods (especially from China) are cheap given that freight charges are already included in the landed cost.

The Philippines is a prime target for this scheme since we are a net importing country with poor government regulation.

Adding to our importers’ woes is the Emergency Imbalance Surcharges (EIS). Since Philippine imports are greater than its exports, large quantities of empty containers accrue in our container yards. Shipping companies must transfer these containers to another port where they can be filled. The cost of container transfer is passed on to the local importer in the form of EIS.

Exacerbating matters further are the exorbitant demurrage charges consignees must pay if they do not collect their containers within the grace period allowed. Consignees are also charged detention charges for failure to return the empty containers to the shipping line within 72 hours from time of pick up. Both charges are computed on a daily basis.

By law, however, demurrage and detention charges are forms of compensatory damage. But shipping lines charge these as a matter of course without even proving that they suffered loss or damage. This makes both charges legally contentious.

As usual, the beleaguered consignee has no power to question the demurrage and detention charges. Shipping companies impose liens or put on hold the release of the consignee’s other shipments unless all charges are settled. They also withhold the refund of container deposits for past transactions. These acts are illegal and akin to extortion.

In theory, local traders should be up in arms about these abusive practices and demand government intervention. However, the practice has been so institutionalized that consignees’ complaints fall on deaf ears. Our traders have learned to live with their circumstances and simply pass all the costs to the consumer. Ultimately, it is the Filipino people who pay the price for this devious scheme.

Not only are the local importers the victims of international shipping lines, even the Philippine government itself is shortchanged. As we all know, the total cost of freight should be included in the dutiable value of imports. But if no amount of freight is indicated on the Bill of Lading and all the charges are deliberately hidden under “destination charges,” then government is deprived of the taxes it is due. The true value of imports, in effect, are underdeclared. Shipping companies also under-pay Value Added Tax for the destination charges they collect.

There is no denying the grave abuses of foreign shipping lines. It is incumbent upon government to protect Filipino interest by cracking-down on these  illegal practices and having the shipping lines justify each and every destination charge levied upon our traders.

But there is a problem – no particular government agency has been mandated to oversee and regulate the charging schemes of foreign shipping lines. Hence, Malacañang must hand down an executive order naming the agency responsible. I reckon this should fall under the purview of the Maritime Industry Authority, seconded by DTI’s Consumer Protection Office. In the meantime, the Office of the President must insist that the standardized shipping terms prescribed by INCOTERMS be followed to the letter.

The abuses of foreign shipping companies underscores the need for a Filipino-owned international shipping line to provide fair competition. But again, there are obstacles to this. Watch out for a full explanation in a future article.