“Unfortunately, USTR’s proposed port fees and restrictions on carriage of exports fail as a matter of policy and law. These proposed remedies would cause serious harm to wide swaths of the U.S. economy… The path to revitalizing the U.S. maritime industry is forward, and not backward through the imposition of retroactive fees that amount to ex post facto punishments on ocean carriers who, in good faith, purchased vessels fit to serve the U.S. trade,” is the effective summary of an extra-mammoth-sized submission from the World Shipping Council to the U.S. Trade Representative.
The World Shipping Council is the primary industry trade association that represents the international ocean-going liner sector; its members operate containerships and roll-on/roll-off (RoRo) vessels, including vehicle carriers.
USTR proposal
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.
Proposed penalties would be passed on
Because liner shipping is a low-margin business and, accordingly, costs are passed on. Passing on of costs is typically done through surcharges; the imposition of fees would have “downstream impacts on companies that transport goods by ocean, their customers, and their employees,” the WSC writes.
Noting, as other experts have noted, that the liner shipping industry would be required to pay the penalty fees many times each trip, the WSC observes that there would be thousands of dollars imposed on each container.
“Assuming $4,529.67, the high-end fee impact per container of ship capacity for a 6-port call, non-Chinese operated, voyage on a 6,623 TEU vessel, is an astronomical amount when compared against current spot rates for transportation on major trade routes to and from the United States.
- 535% of the current spot rate from New York to Rotterdam
- 196% of the current spot rate from Rotterdam to New York
- 170% of the current spot rate from Shanghai to Los Angeles
- 645% of the current spot rate from Los Angeles to Shanghai”
Moreover, as box ships don’t always sail fully loaded, the fees would have be be spread over the ACTUAL containers carried and not on the ship’s capacity, which would likely increase the impact.
Impacts on Americans
Prices for U.S. consumers and producers would raise, and the competitiveness of production in the U.S. would fall, the WSC reckons, if the proposed USTR policy goes ahead. Consumers will be subject to higher prices for imported goods at a time of high inflation “the fees could further stretch consumers’ wallets and place more goods out of reach for more Americans”.
Meanwhile, countless input costs for U.S. manufacturers would be affected and could require “difficult choices between decreased profit margins and increased sales prices, with resulting decreases in the competitiveness of the U.S.-made product as compared to alternative products”.
U.S. exporters would be adversely affected too, the WSC says, noting that there is no separate import system and export system as ships operate in one, continuous, loop using the same equipment. The fee would be borne at least in part by U.S. exporters and that would translate to higher shipping costs for companies exporting U.S. produced goods, which would render those goods less competitive on the global market, and would likely translate into lost sales, reduced U.S. production, reduced U.S. employment, and with “particularly severe” adverse impacts for businesses experiencing low margins and foreign competition. “U.S. producers in these circumstances could face pressure to close or to relocate production,” the WSC believes. It gives the examples of U.S. agricultural exporters being particularly adversely affected as they both have low profit margins and their products are easily replaceable by identical (or very similar) goods.
“As foreign producers would not face the same increase in shipping costs, U.S. agricultural exporters would have difficulty passing along increased transportation costs to their customers. Producers of low-margin agricultural export products could take a significant hit to their profitability,” the WSC says.
Indirect adverse impacts
As has been widely forecast by numerous other commentators, the WSC foresees a widespread re-routing of cargo to Mexico and Canada, with overland transportation being used to complete the leg. That would increase demand for Mexican and Canadian ports while decreasing demand for U.S. ports. The WSC foresees a reduction of employment at U.S. ports and at the “countless” businesses are linked to port operations.
Meanwhile, as (again) has been widely forecast, port fees would cut liner shipping competition as operators with China-built ships could chose to stop servicing routes that involve U.S. ports, leaving such routes to operators with non-Chinese tonnage.
“Reduced competition could allow remaining carriers to raise shipping prices, which, as noted above, could affect prices of both imports and of U.S. exports,” the WSC notes.
It also adds that port fee proposal could lead to port congestion at major ports, and decreased calls at smaller ports as liner carriers opt to call at only one or two ports in the U.S; such carriers would also have a strong incentive to use larger vessels (so as to keep the port fees down) and this would also encourage a switch to fewer, bigger, more capable ports.
Concentration of traffic at fewer ports will likely lead to congestion, less supply chain resilience and a lack of service for businesses that are not in proximity to the larger ports.
Policy goals cannot be achieved
As if causing global-scale supply chain disruption, inducing inflation, and putting Americans out of work isn’t bad enough, it is clear that the policy has goals that cannot be achieved.
“Satisfying the proposed requirements to ship on U.S.-built and U.S. flagged vessels will be impossible, and imposing these requirements will damage the economy,” the World Shipping Council says.
The percentage of U.S. flagged vessels to carry U.S. cargo varies in the proposal from 5 percent to 15 percent; another part of the proposal foresees U.S. built shipping carrying up to 20 per cent of U.S. exports.
“These proposals would be impossible to comply with because they do not reflect the realities of the U.S.-flag and U.S.-built fleets and of existing U.S. shipyard capacity,” the WSC says, adding that the current U.S. built containership fleet is small, aging, and lacks spare vessels that could be used for international routes.
“The U.S.-built TEU volume necessary to export three percent of current U.S. exports would be nearly the amount of the entire fleet of U.S.-built containerships currently operating on either domestic or international routes – and that is based on the aggressive assumptions that U.S.-built containerships in international commerce would make six round trips per year and would always leave the United States full,” the WSC says, adding that “the proposed requirements for use of U.S.-built vessels are simply not realistic”.
Building up the U.S. shipyard capacity isn’t realistic either, the WSC explains. It notes that many existing U.S. shipyards face physical constraints and are in any case optimised to build U.S. naval vessels. Even if the nation were to massively invest to meet the USTR’s proposals, it would “likely take many years” to achieve the necessary shipyard expansion “let alone … produce the number of vessels required”.
And the workforce just isn’t there.
The WSC notes that U.S. shipyards face a significant shortfall of workers and many shipyards are attempting to recruit and retain thousands of skilled laborers just to meet current requirements. The U.S. Government has identified a need for 174,000 new skilled laborers just to meet U.S. naval shipbuilding demand.
“While various entities at the federal, state, and local levels have undertaken efforts to increase the number of skilled workers available for U.S. shipbuilding, those efforts will likely take years, if not longer, to come to fruition – far longer than would be necessary to produce enough vessels to satisfy the rapid-onset requirements for exportation on U.S.-built vessels proposed by USTR.”, the WSC notes.
