Talk tariffs, but understand ocean freight and its impact on trade costs

Tariff cuts alone cannot boost exports; India needs larger, predictable cargo volumes to reduce freight costs and attract direct shipping services

As India moves ahead in trade negotiations with Canada and the United States (US), attention is again centred on tariff concessions. Lower tariffs can help reduce landed costs for buyers abroad. But tariffs are only one component of cost. Higher and uncertain ocean freight, insurance and surcharges can easily offset tariff preferences. The way to tackle that problem, in the medium run, is through larger and more predictable trade volumes. 

In recent years, India has focused on building better ports, more vessels, containers and all-round transport infrastructure, while merchandise exports have stagnated and imports have grown. These efforts have helped reduce logistics costs till export goods go on board a vessel and after imported goods are unloaded. A few Indian ports can handle large vessels of 16,000-24,000 TEU, i.e. twenty-foot equivalent units. Yet, such vessels do not call at Indian ports regularly. Shipping lines deploy them where they can get enough cargo to fill them regularly and profitably. 

China and East Asia offer large, concentrated and relatively balanced container flows to Americas, Oceania, Africa and Europe. India’s cargo remains fragmented across many ports, products and destinations. Therefore, direct mainline calls are fewer, sailings are less frequent, and many Indian containers move through hubs such as Colombo, Singapore or Port Klang before joining mother vessels. 

That extra leg is not costless. Trans-shipment means feeder freight, additional terminal handling, longer transit time, documentation, delay risk and more exposure to congestion or disruption at a foreign hub. For high-value cargo, the impact may be absorbed. For textiles, ceramics, rice, processed foods, engineering goods and other margin-sensitive exports, a freight increase of $1,000 per forty-foot container can be decisive. On a $100,000 container, it is 1 per cent. On a $25,000 container, it is 4 per cent. A war-risk, fuel or emergency surcharge can wipe out the exporter’s margin altogether. 

Imports suffer in the same way. Freight and insurance form part of the CIF value on which import duties are calculated. When freight rises, the landed cost of imported inputs increases, the Customs duty and IGST base also rise, and working capital gets blocked. The manufacturer then enters the export market with a higher cost structure. Thus, ocean freight does not hurt only exporters. It also raises the cost of production for import-dependent sectors. 

Direct sailings by large, well-loaded vessels lower unit transportation costs. Even if an Indian exporter matches the FOB price of a Chinese exporter, a fully loaded vessel from Shanghai may move to North America, South America or Oceania at a lower unit cost. Shipments to Rotterdam can often be quoted more competitively from East Asia than from Nhava Sheva or Mundra. Even for West Africa, where India should have some geographical advantage, East Asian exporters compete sharply because of higher volumes and regular sailings. 

The government’s emphasis on ports, ships and containers is necessary. But such infrastructure is useful only when enough cargo flows through the ports, regularly enough to justify direct mainline services at scale. India needs much larger export volumes, better cargo aggregation, reliable coastal feeder services, faster inland evacuation and route-specific efforts to create predictable loads. The focus must shift from capacity creation alone to cargo creation as well. A port policy cannot substitute for an export strategy. Large vessels go where cargo is assured; lower costs follow.

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Email: tncrajagopalan@gmail.com