Shipowners Adjust Contracts Amid US Tax on China Vessels

The shipping industry is in turmoil as the U.S. government proposes steep fees on Chinese-built vessels entering American ports. The Office of the United States Trade Representative (USTR) has proposed charges of up to $1.5 million per port call for any shipping operator with Chinese-made vessels in their fleets or newbuilding orders with Chinese shipyards. This move, aimed at protecting America’s national security and combating China’s dominance in shipbuilding, has sparked intense criticism from industry experts and global shipping bodies, who argue that the fees will harm the competitiveness of America’s own maritime sector while failing to curtail China’s lead.



Shipowners are now strategically adjusting their contracts to mitigate the financial impact of these proposed taxes. One of the key adjustments is the restructuring of fleets to separate Chinese-built tonnage from non-Chinese vessels. This separation aims to avoid the steep fees and maintain operational efficiency. However, this strategy comes with its own set of challenges and potential disputes with charterers over cost allocation and operational risks.

The immediate financial implications of these adjustments include increased operational costs and potential disputes with charterers. Charterers may challenge fee applications if they believe that leased tonnage or affiliated companies are being unfairly classified. Additionally, delays at U.S. ports due to compliance checks and fee processing could lead to off-hire disputes, where charterers may attempt to place vessels off-hire if such delays disrupt operations. Owners, on the other hand, may argue that delays caused by government-imposed restrictions are outside their control and should not trigger off-hire claims.

In the long term, shipowners may face significant financial challenges if they are forced to pull their ships out of the U.S. trades and redirect them to other regions, such as Asia. This could lead to a loss of business and revenue, as well as potential job losses for employees in the U.S. For example, atlantic Container Line (ACL) has warned that if the U.S. government goes ahead with the fines, it "would render us totally uncompetitive versus the other carriers in the US trades" and may force the company to shut down its U.S. operations, impacting 300 employees and the supply chain pipeline that supports them.

The legal and regulatory challenges that shipowners may face when renegotiating contracts to account for the new U.S. port fees are multifaceted and could significantly impact the overall shipping industry. One of the most immediate consequences of these proposed fees will be the legal disputes between owners and charterers over cost allocation and operational risks. In time charters, charterers typically bear port costs, but given the extraordinary nature of these fees, disputes will likely arise over whether they qualify as standard port charges or as an unforeseen governmental levy that should be absorbed by the shipowner. The situation is even more complex for voyage charters, where freight rates may have been negotiated before the fees were announced, leading to potential conflicts over whether additional costs should be passed to cargo interests. The unprecedented nature of the fees allows for ambiguity in their definition and, as a result, it is unclear who will bear these costs. It may be that how they are invoiced will provide further clarity as to how they will be defined and whether they will form part of the ‘port fees and expenses’ which are for charterers’ account.

Delays at U.S. ports due to compliance checks and fee processing could also lead to off-hire disputes. Given the unprecedented nature of these fees and the scale of implementation, such delays are quite likely in the initial phase of any roll out. Charterers may attempt to place vessels off-hire if such delays disrupt operations. Owners, on the other hand, may argue that delays caused by government-imposed restrictions are outside their control and should not trigger off-hire claims. The question of deviation could further complicate matters. Some shipowners may seek to avoid U.S. ports altogether, which could lead to claims from charterers that such actions constitute an unjustified deviation or breach of employment obligations. In cases where avoiding U.S. ports becomes commercially necessary, charterers may push back, insisting that the owner either comply with the original voyage plan or provide an alternative solution. A further challenge arises from the vague definitions in the proposed rules. The U.S. has not clearly defined what constitutes a “fleet” or a “Chinese maritime operator.” It is unclear whether any decisions stemming from the proposed action will include such definitions, or whether regulatory authorities will look to other areas of U.S. law to divine these definitions. If the government applies these terms broadly, companies that do business with Chinese shipyards or operate mixed fleets could find themselves unexpectedly subject to the fees. Shipowners may consider restructuring their fleets to separate Chinese-built tonnage from non-Chinese vessels, while charterers may challenge fee applications if they believe that leased tonnage or affiliated companies are being unfairly classified. Charterers may also seek warranties or indemnities from shipowners to protect against the financial impact of these fees.

The proposed U.S. tax on Chinese-built vessels is a complex issue with far-reaching implications for the global shipping industry. While the U.S. government aims to protect its national security and combat China’s dominance in shipbuilding, the proposed fees could have unintended consequences, including increased operational costs, legal disputes, and potential job losses. Shipowners are adjusting their contracts to mitigate these challenges, but the long-term impact on the industry remains uncertain. As the U.S. Trade Representative continues to hold public hearings on the proposed fees, the shipping industry will be closely watching the developments and preparing for the potential implementation of these measures.

Ask Aime: What is the impact of the U.S. government's proposed steep fees on Chinese-built vessels entering American ports on the shipping industry and its players?