MOST of the shipping industry dodged a bullet when the US Trade Representative watered down port fees for Chinese ships this month. There was a palpable sense of relief.

Enter the SHIPS for America Act, which was reintroduced on Wednesday and includes new language on charging port fees to non-Chinese operators ordering at Chinese yards — a policy that was rejected in the final USTR decision.

The SHIPS Act was first introduced in the last Congress, in December. It has broad bipartisan support and is designed to revive US shipbuilding, an initiative backed by US president Donald Trump. It has a strong chance of becoming law in today’s political climate.

In addition to adding more port fees, the SHIPS Act would increase US cargo preference requirements well beyond USTR mandates. To revive shipbuilding, the thinking goes, US cargo shippers must be legally compelled to use high-cost, US-built vessels, artificially creating a market.

The USTR port fee plan originally proposed requiring a portion of all US exports be carried on US-built ships. The final version approved on April 17 only included export cargo preferences for liquified natural gas.

The SHIPS Act goes much further, roughly mirroring the USTR LNG shipping requirements, but also requiring that a portion of US crude exports are transported on US-built ships, as well as a portion of US imports from China, a policy that would heavily impact container shipping.

Bill targets Chinese shipbuilder CSSC

A key change in the new version of the SHIPS Act involves the funding of the Maritime Security Trust Fund. The change, if enacted, would increase US port fees beyond levels set by the USTR and ensnare more vessels.

The original version of the bill included changes in the way special tonnage taxes and lighthouse duties were levied, removing the ability to suspend them for vessels that are owned or operated by a “foreign entity of concern”, are registered in such a country, or have been registered there in the past three years. China is included in that definition.

That language implied an additional cost of $1 per net tonne for Chinese ships. The new version retains that language and goes much further.

It would provide revenue to the Maritime Security Trust Fund via the special tonnage taxes and lighthouse duties, as well as money from the USTR port fees. It would also obtain revenues from yet another tax on Chinese ships.

It defines a “foreign shipyard of concern” as any shipyard owned or controlled by a foreign country of concern. Senator Mark Kelly, a sponsor of the bill, said in a statement on Wednesday that this refers to yards owned by China State Shipbuilding Corporation.

However, the bill stipulates that starting in October 2027, other yards could be added to the list, raising the prospect that additional Chinese builders could be included in the definition.

The SHIPS Act would create a “penalty tax” for Chinese ships and operators, as well as non-Chinese operators that order at foreign shipyards of concern.

The penalty port tax would be $5 per tonne for ships owned or operated by a foreign country of concern (i.e., China), vessels registered there, or vessels registered there three years prior to “the date of the determination of the application”. (“Tonne” is not defined in the legislation but US tonnage taxes relate to net tonnes.)

The $5 per tonne penalty tax would also apply to ships of non-Chinese owners or operators if 50% or more of their vessels on order as of the application date were at a foreign shipyard of concern, or if 50% of the newbuild deliveries in the 24 months after the application date were from a designated yard. 

The penalty tax would be $3.50 per tonne for non-Chinese owners or operators with 25%-49% of ships on order at a foreign shipyard of concern, or delivered within 24 months of the application date.

There would also be a $1.25 per tonne penalty tax for ships of any owner or operator that had 50% or more of its ships constructed or undergoing repairs at a shipyard of concern “at any time” during the three years preceding the application date.

The SHIPS Act fees would not be cumulative; the highest category would apply. But these fees would be on top of the previously announced USTR port fees.

Cargoes would be forced onto US-built ships

The cargo preference requirements in the bill could have even more serious implications for shipping.

The language would require that an escalating percentage of US imports from China — which are mainly containerised goods — be carried on US-built ships.

The timeline is the same as in the original draft: 1% of goods from China measured by tonnage must be transported on US-built ships starting five years after the date of enactment, increasing 1% a year to 10% as of the fourteenth year.

Any shipper that fails to comply would be fined an amount that is greater than the difference of the cost of shipping on a US-built ship versus the cost of shipping on a flag-of-convenience ship.

Cargo preference requirements for US crude and LNG exports under the reintroduced SHIPS Act are also on the same schedule as in the December draft.

For US crude exports, 3% of volumes would have to be exported on US-flagged tankers in each of the first four years after the law’s implementation, 3% would have to be carried on US-built tankers in the years five to seven, 6% on US-built ships in years eight to 10, 8% in years 11-13, and 10% starting in the fourteenth year.

For LNG exports, 2% of volumes would have to be exported on US-flagged LNG carriers in the first to fifth year after implementation; 2% would have to be carried on US-built LNG carriers in years six to seven, 3% in years eight to nine, 4% in years 10-11, 6% in years 12-13, 7% in years 14-15, 9% in years 16-17, 11% in years 18-19, 13% in years 20-21 and 15% in year 22 and thereafter.

Adding to the confusion for LNG shippers, this is a different schedule than the cargo preference rule agreed to by the USTR, although it gets to the same percentage — 15% — at around the same time.

The USTR policy mandates that 1% of US LNG exports be on US-flagged ships starting in April 2028, then 1% on US-built ships a year later, increasing 1% a year to 13% in 2046, then rising to 15% in 2047.

Criticisms of cargo preferences, given US shipbuilding limitations

Gordon Sheerer, a senior advisor at Poten & Partners, spoke about cargo-preference rules and US shipbuilding limitations during an online presentation on Wednesday morning, prior to the announcement that the SHIPS Act had been reintroduced.

Sheerer was speaking about cargo-preference requirements of the USTR rule specifically relating to LNG shipping, but the broader issues he brought up apply to the crude tanker and container shipping requirements in the SHIPS Act.

The USTR requirements on US-built LNG vessels “are to put it mildly, challenging, and to put it more bluntly, impossible to achieve”, Sheerer said.

“It’s not clear to me how you would ever build an LNG carrier in the United States, and you would certainly not have one on the water and ready to load cargo by 2029. LNG ships are some of the most complex ships you can construct anywhere under any circumstances. The challenges around that are going to be phenomenal.

“The other thing, just as a practical matter, is: Who’s supposed to make sure the 1% [or future higher percentages] gets exported [on a US ship]? The language of the rule is very, very unclear. In some places, it reads like the exporter, i.e., the operator of the liquefaction plant, but often they don’t hold the export license. In some cases, it says it’s the vessel operator. I don’t know how a vessel operator determines how it meets the threshold.

“And when you think about it, we will have 10 US LNG export terminals by 2028-2029. Do each of them have to meet the 1%? Or can they do it collectively? If somebody met the entire 1% and nobody else did, would all the others lose their export licenses? The permutations and questions this raises are endless.”

“Then there’s the larger question of cost,” said Poten & Partners global head of business intelligence Jason Freer. “We’ve done a back-of-the envelope look at this. A US-built LNG carrier, if you could do it at all, would be two to four times as expensive as one built in a Korean yard — and those are $260m a pop. So, the economics look quite unfavourable, and that’s an understatement.”

Sheerer said, “We’re talking about a commodity that’s globally traded. So effectively, the consequences of an extreme increase in export costs [to cover the higher cost of the ship] will be a much lower price received in the US. That brings into question the economic viability of some of those US LNG exports. I’m at a complete loss to understand the policy rationale behind this and the way it’s going to practically work.”

The US has not built an LNG carrier since the 1970s, but it has built crude tankers and containerships — at prices that are multiples of those in Asia.

Sheerer’s argument on high US newbuilding pricing affecting the export freight costs of a global commodity would apply to the crude trade as well.

The freight cost for mandated imports from China on US-built containerships would also be higher. Indeed, the bill language confirms this with its penalty policy for shippers that don’t use US-built ships.

Sheerer’s point on whether the percentage requirements are industry-wide or per-shipper also apply to the crude trade.

As for containerised imports from China, the bill language is clear that every shipper must meet the percentage threshold, which implies that everyone from Walmart to a small business transporting a few boxes per year would have to put 1% of volumes on a US-built ship. Given how many container importers there are in the US, that suggests an enormous administrative burden for whoever oversees the policy, should the SHIPS Act pass into law.

“The worst part of all of this is just the degree of uncertainty,” said Sheerer, commenting on the situation in general for LNG shipping.

“Every day you wake up and there’s some new rule or regulation that impacts you in some inadvertently strange way. You just don’t know what’s going to happen. It’s literally the rule of the day and every day the rule changes. And in that environment, nobody is going to make new long-term commitments, and that’s the biggest threat we face.”