China’s Ministry of Transport has now issued the Implementation Measures for the Special Port Fees on US-linked vessels. The new measures mark Beijing’s formal response to the US Trade Representative’s Section 301 measures against Chinese vessels.
With effect from October 14, (subject to the relevant exemptions) vessels owned, operated, or even 25% controlled by US entities must pay special port fees when calling at Chinese ports. The fee starts at RMB 400 per net ton and will climb to RMB 1,120 per ton by 2028, capped at five voyages per year.
Both the US and Chinese regimes share one striking feature: they look past the flag and go straight to ownership and control and operation. The Chinese measure, in particular, applies to any vessel where US entities hold 25% or more of equity, voting rights, or board seats — a definition broad enough to capture many offshore special purpose vehicles commonly used in sale and leaseback deals.
This raises a practical and legal question that will now occupy chartering desks and lawyers alike: who pays?
Contract questions
Every bareboat charter or finance lease is drafted differently, but most — including the BIMCO BARECON 2017 standard — allocate “all costs, expenses and charges arising out of the operation of the vessel” to the charterer, with no distinction as to whether a cost stems from the owner’s nationality or corporate structure. On a literal reading, that would make the tariff the charterer’s problem.
From an operational perspective, there is logic to that approach: the charterer controls the trading pattern and decides whether to call at Chinese ports, knowing that the tariff applies. Yet the counterargument is equally persuasive. The fee arises solely because of the lessor’s ownership structure — it is not a charge on the voyage or the service, but on the ownership.
In commercial terms, that makes it more analogous to a tax on capital than a port due. Passing it through to the charterer could unfairly burden the charterer for circumstances beyond its control, while absorbing such an exceptional item would erode lessor margins and make US or Chinese leasing houses less competitive. Neither side will be comfortable for long, and future contracts may see bespoke clauses emerge to deal specifically with the allocation of these “nationality-based” fees.
In recent years, lenders and borrowers have seen an increase in the burden of reporting and monitoring — either driven by sanctions, war zones or similar geographical risk situations — and the challenge of having to deal with uncertain and fast changing circumstances raises the question of what might come next. This is another compliance issue requiring attention, also at a commercial risk level — including due consideration of the level of fee that may require to be paid and who bears the cost.
The Implementation Measures require pre-arrival declaration and payment of the fee before entry into Chinese waters, with non-payment leading to denial of port clearance. That creates a more acute risk profile than typical port dues collected after arrival.
The Measures appear to apply even where a vessel diverts to a Chinese port for emergency reasons.
If a US-linked ship suffers mechanical failure or seeks refuge from heavy weather, it may technically be obliged to pay the full tariff before entering port — potentially delaying entry and endangering safety.
For financiers, this is not just a theoretical concern.
A ship mortgage or lessor interest is only as secure as the vessel’s ability to operate safely and freely. A rule that conditions port entry on advance tariff payment introduces a new operational risk — one that could potentially have some weight in credit assessments and insurance coverage.
Cash flows and covenants
Vessels trading regularly with China and owned or financed by US interests (and vice versa) will face higher operating costs and possibly reduced charter demand. Over time, one may expect that this could affect vessel valuations, with knock-on effects for loan-to-value (LTV) ratios under ship mortgage facilities.
Whether this qualifies as a material adverse change (MAC) will depend entirely on the drafting. A broad MAC clause tied to “material deterioration in the value of the security” could, in theory, be triggered if the tariffs materially weaken income streams or residual value assumptions. More broadly drafted clauses referring to “changes in political or regulatory environment materially affecting operations” might also come into play.
Furthermore, operators planning to operate their vessels in China trades may find it more challenging to maintain liquidity covenants as there may be pressure on voyage earnings as a result of these fees.
In practice, lenders are likely to treat this as a factor for re-assessment rather than immediate enforcement — but it reinforces the point that geopolitics is becoming, amongst many other issues, a financial covenant issue.
Opportunities for new capital providers
The mirror-image tariffs in Washington and Beijing have done something remarkable: they have introduced a cost to the nationality of the capital to finance a vessel. A US leasing house’s involvement now carries a price tag in China; similarly, financing a vessel through a Chinese leasing house may face a very similar issue when calling in the US.
Under the Implementation Measures, vessels built in China are exempt even if US-owned or operated, and ballast vessels entering Chinese shipyards for repairs are also excluded. Whilst these exceptions, at the moment, may limit the vessels affected from the Chinese tariffs, being a capital provider unrelated to China and the US could fast become a competitive advantage. We may soon see leasing companies restructure their ownership chains, introduce new investors, or relocate SPVs to third ‘neutral’ jurisdictions to ensure their customers do not inherit politically driven costs. More importantly, this battle of tariffs between the U.S. and China could soon open new opportunities for leasing companies based in Japan, Singapore, UK, the EU and many other jurisdictions.
The Special Port Service Fees may look like a narrow retaliatory measure. However, its imposition challenges long-settled assumptions in the ship finance industry about cost allocation, operational safety, and asset valuation.
For now, shipowners, charterers, lenders and lessors should review their exposure: not only trade routes, but the ownership structures embedded in their financing structures. In an age where a port authority can deny entry until a tariff is paid, risk management begins long before the vessel reaches port.
Philip Rymer is a partner at Reed Smith, a member of the firm’s Transportation Industry Group, and is a lawyer in its ship finance team. Robbie Peroni is a senior associate in Reed Smith’s Transportation Industry Group, with a focus on maritime law.
Source: Baltic Exchange
