Backdoor tax on tonnage – Trump’s tariffs and other troubles

Investigations into China’s relevant sectors were launched during the Biden administration, in response to Chinese shipbuilders’ notable increase in ship production. According to USTR, Chinese shipbuilders saw remarkable growth in global market share, jumping from 5% in 2000 to over 50% by 2023. This growth, as USTR concluded, was fuelled by the Chinese government’s systematic deployment of anti-competitive practices, including massive state subsidies, which contributed to the decline of U.S. shipbuilders.

USTR’s proposed actions are comprehensive, including a substantial “Service Fee” on Chinese maritime operators and operators sending Chinese-built vessels on their U.S port calls. Additionally, the proposal offers incentives and restrictions propelling operators to deploy U.S.-built ships for handling U.S. imports and exports.

“Service Fee” on Chinese operators and Chinese-built vessels

USTR proposed a cumulative scheme of “Fee on Service” of Chinese maritime operators and operators using Chinese-built vessels for U.S. port calls.

• Vessel operators of China: Chinese operators will be charged a rate of up to $1,000,000 per entrance of their vessels into a U.S port, or at a rate of up to $1,000 per net ton of such vessel’s capacity.
• Vessel operators with fleets comprised of Chinese-built vessels: Vessels built by Chinese shipyards, regardless of the operator’s nationality, will incur a fee of up to $1,500,000 per U.S. port call. The exact fee is to be determined by the operator’s percentage of Chinese-built vessels in their fleet, with an additional $1,000,000 charged per U.S. port call if 25% or more of the operator’s fleet consists of Chinese-built vessels.
• Vessel operators with prospective orders for Chinese-built vessel: Vessel operators may be charged an additional fee based on the percentage of unfulfilled order from Chinese shipyards over the next 24 months.
• Remission of Service Fee: Nevertheless, each calendar year operators will be eligible for a refund of fees based on the number of U.S. port calls conducted by their U.S.-built vessels.

Restrictions on the Transport of U.S. Goods by U.S.-flagged or U.S.-built Vessels
USTR also proposed to implement a seven-year schedule to increase the percentage of international maritime transport of all U.S. goods, including capital goods, consumer goods, agricultural products, and chemical, petroleum, or gas products, by U.S-flagged vessels by U.S. operators. Ideally, at the seventh years following the date of USTR’s action, the international maritime transport of at least 15% of U.S. goods per calendar year can be restricted to export on U.S.-flagged vessels by U.S. operators, and of which 5 percent must be U.S.-flagged, U.S.-built vessels, operated by U.S. operators.

An exception may be granted for U.S. goods exported on a non-U.S.-built vessel, provided the operator can demonstrate that at least 20% of U.S. products transported each calendar year will be carried on U.S.-flagged, U.S.-built vessels.

USTR’s notice of proposed action has raised concerns within the industry, particularly due to the lack of clarity in its language and the approach to enforcement.

Questions regarding the Exact Nature of the “Service Fee”

Based on the context of the proposed actions, USTR’s “Service Fee” appear to be a penalty against any Chinese maritime transport operators, or maritime operators which have a fleet comprised of Chinese-built vessels for their services. According to the statutory language of Section 301, USTR may impose either “duties or other import restrictions on the goods” or “fees or restrictions on the services of [a] foreign country.” Therefore, the qualifying term “Service” to the USTR fees here is likely referring to the transportation services that are Chinese-related, rather than referring to any specific services that U.S. ports or customs provided.

We therefore do not think that the service fee constitutes a regular port fee. Therefore, the nature of “Service Fees” depends on USTR’s further guidance on the details of its enforcement. Without further guidance, at this stage, it is unclear the fee’s implication on maritime contracts, and perhaps even more importantly, the contractual allocation of the Service Fees.

Questions regarding “Maritime Transport Operator”
Although referenced several times in the purposed USTR action, “maritime transport operator” is not defined. In the context of the maritime industry, this wording can be interpreted as going beyond the vessel’s owner. Arguably the term could include registered ownership, beneficial ownership, commercial operation, and technical operation structures, etc. Should this be the case, it is not clear as to which entity involved in the voyage would be considered the “maritime transport operator.”

Depending on the entities involved, this could then have varying results as to whether a service fee would apply or not. That is, performing the analysis from the vessel operator being the maritime transport operator may provide one result, however, when performing the analysis from charterers being the maritime transport operator may provide another result.

Adding to the complexity is the question of whether a Hong Kong-based operator will be considered a vessel operator of China, despite Hong Kong’s special administrative status. While the USTR’s proposed actions do not explicitly reference Hong Kong, recent U.S. administrative measures indicate that Hong Kong may be treated as part of the People’s Republic of China (PRC) for these purposes. For example, recent retaliatory tariffs imposed on the PRC also apply to the Hong Kong Special Administrative Region. Additionally, USTR’s Section 301 report incorporates data from Hong Kong when outlining China’s dominance in shipbuilding and ship ownership. However, it remains to be seen whether Hong Kong will be subjected to the proposed actions.

Against whom the service fee would be levied.

The language of the proposed USTR action states for “a fee to be charged to that vessel’s operator.” This suggests that the fee would be owed by the relevant maritime transport operator, not the vessel itself. It still remains to be seen as to how USTR would apply these service fees. From an enforcement perspective, it would make sense that these service fees are applied against the particular vessel that is within US jurisdiction, as opposed to the maritime transport operator over which the US may have no jurisdiction.

Further guidance is expected following USTR’s public hearing

USTR’s notice of proposed action is currently under a notice and comment period. USTR is now inviting public comments on its proposed actions and has scheduled a public hearing on March 24, 2025. We expect more clarification on the aforementioned matters as the rulemaking process moves forward.