Sabah United Chinese Chamber of Commerce (SUCCC) President Datuk Seri Gan Sau Wah said the policy has been the main reason for higher freight charges and directly causing the price of goods to rise steeply.
"It is the main reason for the prices of goods in Sabah being 30 per cent higher than in Semenajung," he said in his speech at the 68th Association Chinese Chamber of Commerce and Industry Malaysia (ACCCIM) in Shangri-La's Tanjung Aru Resort and Spa, Saturday.
Under the 30-year old policy only Malaysian-flagged ships are allowed to transport locally-manufactured goods from the peninsula to Sabah.
This means probably less than 200 containers a month may be coming into the state.
After numerous calls, the Federal Government finally agreed in 2009 to liberalise the cabotage policy for containerised transshipment cargoes for sectors between Sepanggar, Bintulu, Kuching and Tanjung Pelepas and vice-versa.
But this was only partially or selective liberalisation since foreign ships carrying containers meant for Sabah still have to go to Port Klang before being re-directed to the port in Sabah.
Gan said the policy not only caused problems to companies in Sabah to venture out to overseas markets but is also burdening the people who have to face a higher cost of living.
There was no doubt that the Cabotage Policy was formulated to protect the country's shipping industry but the chambers felt it was not suitable for Malaysia in view of the geographic differences between Peninsular Malaysia, Sabah and Sarawak.
"If the Peninsular and East Malaysia are located on the same land mass it is a different story but the problem is we are separated by the vast South China Sea whereby the distance between Port Klang is quite far from East Malaysia.
"If protecting the interest of shipping companies in the country means having to sacrifice East Malaysians' right to enjoy similar price of goods then this is not fair.
"For this reason, the Cabotage Policy must be abolished or rectified for the sake of all the people in the country," he said.
Gan said the business community also had apprehension over the planned implementation of the Goods and Services Tax (GST) next year.
"GST is actually a very good taxation system and about 160 countries have already implemented it in order to earn stable tax revenue. Malaysia is one of the countries in Asean that has yet to implement this taxation system.
"But to the public, especially people in Sabah who have to face a higher cost of living, they harbour doubts. What more our neighbours, Singapore had started with three per cent in the early stages of its GST implementation before gradually increasing it to six per cent today.
"Our government on the other hand decided to straightaway go to six per cent, a decision that has caused restlessness among the people," he said.
Gan said that although some of the daily goods might be exempted from GST this was still vague.
Based on the Lian Cang International Investment studies, it showed that a sudden increase of cost of living would result in the people having to reduce their spending.
This would result in a deflation that will not benefit traders at all, he said, adding it was clear that the GST was causing a negative implication to the traders and consumers.
Towards this end, he said the people must be given an adjustment period before the GST is fully implemented. "It must not be done hastily," he said.
Gan also reiterated the chambers call for the Federal Government to increase the security force presence in the East Coast to protect Sabah from the cross-border criminals.
"To me the security issues are no longer localised problems but have become a national problem that necessitates the authority of defence planning and elimination of armed intruders to be given directly to the Defence Ministry and assisted by the police," he said.
He said the kidnapping cases mostly in Semporna, which is his hometown, made him feel uneasy and unsafe.
The cases had paralysed the tourism industry in Semporna and the impact as described by the Federal Tourism Minister was much worse than that of the missing flight MH370.
"This not only caused losses to the traders and State tourism industry but also had a negative impact on the nation's tax collection and economy," he said.
Officiating at the AGM was Special Tasks Minister, Datuk Teo Chee Kang.
Also on hand was ACCCIM President Datuk Lim Kok Cheong.