Internationally regarded container shipping expert, John D McCown, has slammed the U.S. Trade Representative’s proposal to heavily penalise China-connected shipping in the United States, arguing that it appears that whoever wrote the proposal doesn’t know, or care, how maritime supply chains work.
The USTR proposal is to add a series of accumulating penalties on ships that are sailed by Chinese operators, or are ship operators of any nationality that have ships on order in Chinese yards or are sailing China-built vessels into the U.S. Potentially, it seems that ships could be subject to penalties of up to USD$4m per port call in the U.S. which, some have argued, would be catastrophic for U.S. trade and the economy. If the proposal goes ahead it would almost certainly lead to widespread supply chain disruption. Funds raised will in theory be used to revitalise a U.S. shipbuilding sector.
Purpose not limited
Mr McCown, a Harvard Business School MBA-grad and a co-founder and CEO of a U.S. flagged container ship operator, has critiqued the USTR proposal.
Firstly, he argues, any fees raised should be used solely to benefit the U.S. maritime sector through the set up of a trust fund; he criticises the USTR proposal on the basis that it does not limit the purpose to which the fees will be used. Secondly, he says, it is necessary to clarify exactly what the fees would be.
Don’t know, don’t care
In a stinging comment he wrote: “it is my view that whomever crafted the proposed actions either does not know as much as they should about how maritime supply chains operate or worse yet does not care about how or if they operate… one could conclude from the proposed actions that one goal is to be an actual barrier to trade by erecting punitive fees that make trade under those conditions in many situations uneconomical. In their current form, these fees are little more than a different form of tariff but with a bluntness and an array of adverse consequences that makes them worse”.
Arguing that the primary consequence of the proposal would be to immediately hurt exports and American jobs by rendering overseas competition more, well, competitive, he also argues that the proposal could well be unlawful under U.S. law and he citied the 1998 United States Shoe Corporation case (which relates to the U.S. Harbour Maintenance Tax being defeated on U.S. Constitutional grounds).
Unclear terms
He also challenged the undefined wording in the draft Executive Order. Terms like “operator”, “Chinese-built”, “vessel entrance”, “to be charged”, appear to be undefined. He argues that is it not clear if “operator” is to be determined by flag registry or ownership, or, in relation to chartered vessels, whether the test is based on the charteree or the charterer? It is also unknown how the Draft Executive Order would apply to Hong Kong based operators, or if shipping companies participate vessel sharing agreements then whether that extends the concept of “Chinese operator” to all vessel operators in the agreement. Also, he points out, it is not clear if “China-built” means ships that have had significant work done at a Chinese shipyard, or have been drydocked in Chinese yards. The term “vessel entrance” is unclear as to whether it means ports or individual terminals, or to when a ship calls at a U.S. port to be re-fuelled. It is also not clear who has to pay and, if the payer does not in fact pay, then it is not known who is responsible for the fee … and so on and so on and so on.
“The foregoing questions are just a few that come to mind related to the imprecise definitions in the current proposal and undoubtedly there are others needing clarification,” Mr McCown writes.
Potential container shipping fees in the hundreds of millions each year
Mr McCown points out that the fee is three pronged and cumulative (see comments above) with fees levied on China-built ships, Chinese-operators, and operators with ships on order in Chines yards. Noting that “most media” are focusing on fees for Chinese operators, he gives a case study of how one container ship could rack up fees of over USD$100m a year.
He considers a Chinese operator running a weekly Asia-US service with five ships on a 35-day return voyage, using ships of 10,000 TEU. One ship in the loop would typically call at three different U.S. West Coast ports. Assuming such a Chinese operator had ships built in China and had more ships on order in Chinese yards (both of which are very reasonable assumptions) then one ship in the service would attract a USD$3.5m penalty per port call, and USD$10.5m per U.S. West Coast trip.
“With ten 35 day voyages per year, that would translate into USD$105m million in annual fees for just that one… vessel,” Mr McCown writes. He adds that, on a per TEU basis, the penalties would equate to about USD1,050 per TEU, which is equal to about 72% of the (then) current freight rate of USD$2,906 per TEU on the Asia-U.S. trades.
“Clearly that fee would make that … ship non-competitive and trade involving such a ship would be constrained,” Mr McCown writes.
He also points out that non-Chinese shipping companies could also incur similar fees, pointing out that non-Chinese international carriers might be in an alliance with Chinese companies, operate vessels under the Hong Kong flag, and charter vessels from China-controlled leasing companies. In these circumstances, the argument that such a carrier should be deemed to be a “Chinese maritime transport company” could be persuasive. With large volumes of the world shipping fleet built in China, and with large volumes of the order book in China, that non-Chinese operator could also be on the hook for millions of dollars of penalties for each call in the U.S.
“The competitiveness of that [non-Chinese] ship in today’s market is also constrained,” Mr McCown considers.
Billions of dollar of revenues; regressive taxes for Americans
Noting that there are just over 39,000 port calls by container ships in the U.S., the Draft Executive Order could, in theory, raise just under USD$59 billion each year, which would equate to about 3.8% of the value of the USD$1.54 trillion worth of inbound containerized cargo into the U.S.
However, he points out, if the Draft Executive Order is applied then everyone’s costs would go up similarly and the costs would be passed on. “The bad news is that all the additional costs would ultimately be paid by American consumers in what in effect is a regressive tax,” he writes, later adding that, “Any and all cost increases resulting from these maritime supply chain changes and the disruption that follows will ultimately be paid by American consumers”.
Widespread supply chain disruption
There is further bad news in that the USD$59 billion each year will almost certainly not be collected.
“The imposition of such massive fees will disrupt the status quo and immediately lead to carriers adapting their deployments to minimize any fees. Diversion to other North American ports outside of the U.S. would occur immediately,” he writes, adding that using Mexican or Canadian ports would add both costs and time (but would be worth it to avoid U.S. penalties). That would cut demand for U.S. dockworkers, railroads, truckers, and the array of vendors in the U.S. supply chain.
He believes that there would be an immediate reduction in port calls in the U.S. as carriers would opt to call at a single U.S. port rather than multiple U.S. ports. In turn that will lead to more costs for re-routed cargo, congestion at the chosen ports and less activity at the non-chosen ports.
