U.S. Trade Representative’s Office §301 Investigation if China Results in Rule Making With Million Dollar Penalties For Chinese Ships Landing in US Ports – Are You Ready For the Disruption?

China has demonstrated in the past its willingness to weaponize dependencies for purposes of economic coercion. China’s targeted dominance of the maritime, logistics, and shipbuilding sectors also serves a broader purpose to strengthen all of China’s instruments of national power through China’s Military-Civil Fusion (MCF) strategy. China has exercised influence on other nations’ policies in China’s favor and overtly punished other countries for policies that offend China.

The U.S. Trade Representative’s Office (USTR) has proposed charges of up to $1.5 million to Chinese ships docking in U.S. ports and $500,000 for ship operators with only one vessel in their fleet built in China or ordered from a Chinese shipyard. The January 16, 2025 report commissioned by the Biden Administration¹ “Section 301 Investigation of China’s Targeting of the Maritime, Logistics, and Shipbuilding Sectors for Dominance” included a recommended initiative which seeks to promote

U.S. shipping and penalize Chinese domination in global shipping. The Federal Register announced a public comment period by the USTR on these proposed fees and restrictions beginning on February 21, 2025.² A hearing³ is scheduled for March 24 with the comment period closing the same day.⁴

China’s targeting of these sectors for dominance has undercut competition and taken market share with dramatic effect: raising China’s shipbuilding market share from less than 5 percent of global tonnage in 1999, to over 50 percent in 2023; increasing China’s ownership of the commercial world fleet to over 19 percent as of January 2024; and controlling production of 95 percent of shipping containers and 86 percent of the world’s supply of intermodal chassis, among other

components and products. The USTR has indicated that in 1975, U.S. shipyards were building 70 ships, but just five annually today. In this Section 301 investigation, USTR found China’s acts, policies, and practices to be unreasonable and to burden or restrict US commerce. The proposed rule followed.

The bi-partisan US policy position is to prevent the entrenchment of China’s dominance in the international maritime trade logistics. Absent an aggressive policy to counter-act the offensive official Chinese national industrial policies there would be a future where US trade were “carried out on vessels made in China, financed by state- owned Chinese institutions, owned by Chinese shipping companies, and reliant on a global maritime and logistics infrastructure increasingly dominated by China” according to the USTR.

Disincentives & Dissuasion Techniques Proposed –

To obtain the elimination of China’s acts, policies, and practices, and in light of China’s market power over global supply, pricing, and access in the maritime, logistics, and shipbuilding sectors, USTR proposes to impose certain fees and restrictions on international maritime transport services related to Chinese ship operators and Chinese-built ships, as well as operators with pending orders for Chinese built ships.⁵

Disincentives are focused on Chinese maritime transport operators operating Chinese- built ships would pay up to $1.5 million per port entry. Those with a fleet greater than 50% Chinese-built would pay $1 million per vessel entry regardless of origin. The fee would fall to $750,000 if the Chinese fleet percentage was between 25% and 50% and

$500,000 if under 25%.⁶

Operators with Chinese made ships on order would also pay fees in similar amounts if the vessels are due to arrive from Chinese shipyards over the 24 months from the effective date of the proposed rule.

Operators are also saddled with a “quota” of annual exports which must be on US “flagged” vessels.⁷ The operators must increase the volume of US exports on US flagged vessels from one percent on year one to three percent in year two, to five percent in year three and 15 percent in year seven.

Incentives to promote the transport of U.S. goods on U.S. vessels are included in the proposed rule. According to the notice, the proposed rule would “remit” to the operator up to $1,000,000 per port entry for each US build vessel.

Findings of Anti-Competitive State Sponsored Private Enterprise Actions –

China’s objective is to ultimately displace foreign competitors throughout the maritime value chain in domestic and foreign markets, which increases the world’s dependence on its companies, products, services, and technology. The institutions that issue these plans provide insight into their respective importance. National economic and social development five-year plans are overseen by the CCP with the National Development and Reform Commission (NDRC)— China’s state planner and industrial policy regulator in charge of coordinating input and drafting.66 These plans are ratified by the National People’s Congress, China’s legislature.

Industry-specific and overarching industrial plans may be drafted by a range of government and Party organizations. The highest-level industry-specific and overarching plans are issued jointly by the State Council—China’s executive branch—and the CCP Central Committee—the body of around 200 members that leads the Party and governs China.⁸

Diminished choice which creates dependencies is itself an unfair, anti-competitive outcome. China has demonstrated in the past its willingness to weaponize dependencies for purposes of economic coercion.

China exerts extraordinary control over the maritime, logistics, and shipbuilding sectors in order to achieve its targeted dominance of these sectors. Adherence to the objectives of China’s industrial plans is effectively mandatory. Both state actors and Chinese companies move toward the goals set by the central government and have little discretion to ignore China’s industrial targets. China’s targeted dominance of the maritime, logistics, and shipbuilding sectors also serves a broader purpose to strengthen all of China’s instruments of national power through China’s Military-Civil Fusion (MCF) strategy.

U.S. companies are severely constrained to compete for business in the global recapitalization of the commercial fleet. Low priced Chinese ships, which result from China’s targeted dominance, are among the constraints that U.S. companies face to compete for business. China’s state sponsored and -supported logistics services platform, LOGINK,⁹ continues to gain global dominance and impede the development of a fair and competitive market for such platforms, including at the expense of a now-defunct U.S. provider of similar services, due to China’s aggressive acquisition of management authority over ports in nations other than China.¹⁰ China controls 46 African ports among the many alleged to be under its indirect influence through companies structures.¹¹

China now owns 93 ports in 53 countries’ including Nigeria, Tanzania and Namibia, with China’s Ambassador to Namibia calling Walvis Bay port the ‘most brilliant pearl’ on Africa’s Atlantic coast. Of African Belt & Road Initiative (BRI) countries, 70% are located on the north, east, west or south coast with key investments made in ports near the Gulf of Aden and the Suez Canal, including Djibouti port, Port Sudan, Port Said–Port Tewfik, Ain Sokhna port, Zarzis port, El Hamdania port and the newly financed and commissioned Lekki deep seaport in Lagos, West Africa’s largest. The ports are specifically improved to accommodate Chinese military vessels

and infrastructure according to the reporting – a so called “dual-use model” – allows China to charge the host country to construct the facilities yet allows China to downplay the military significance of its port investments by quietly reducing the port fees disbursed to the host country as the debt is repaid.¹²

Ships and shipping are vital to U.S. economic security and the free flow of commerce. Globally, more than 80 percent of goods are transported by sea. In 2022, ships moved 44.6 percent of U.S. international goods trade by value ($2.3 trillion) and 78.6 percent of U.S. international goods trade by weight (1.6 billion tons). By value, ships move 61 percent of U.S. international goods trade with Asia and 45 percent of U.S. international goods trade with Europe. Today, China controls nearly a fifth of the world’s commercial shipping fleet. China can influence the pricing and availability of ships for international trade through its greater than 50 percent market share of production. It produces over 70 percent of ship-to-shore cranes, 86 percent of intermodal chassis, 95 percent of shipping containers, and increasing shares of other components and products.

USTR and Section 301 Are Powerful Tools In A Trade War –

The power delegated by Congress to the USTR must not be underestimated in the context of the evolving trade war. The Administration through mere “rule making” can significantly affect US industrial policy, employment, and the costs of consumer goods. The list of nations currently suffering Section 301 determinations is lengthy.¹³

Section 301 of the Trade Act of 1974, as amended (Trade Act), is designed to address unfair foreign practices affecting U.S. commerce. The Section 301 provisions of the Trade Act provide a domestic procedure through which interested persons may petition the U.S. Trade Representative to investigate a foreign government act, policy, or practice and take appropriate action. Section 301(b) may be used to respond to unreasonable or discriminatory foreign government acts, policies, and practices that burden or restrict U.S. commerce.

On March 12, 2024, five national labor unions filed a petition requesting an investigation into the acts, policies, and practices of China targeting the maritime, logistics, and shipbuilding sectors for dominance. The U.S. Trade Representative found that China’s targeting for dominance is unreasonable and burdens or restricts U.S. commerce. The rule making ensued.

The Law Of Bad Timing – Costly Port Calls & Major Alliance Over Capacity On The Seas

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The law of bad timing resulting in unintended consequences applies to all things including maritime trade and the ships on which it sails. The proposed levy on Chinese ships calling at US ports could trigger moves to switch out Chinese built ships from US trades that would cause widespread disruptions over the coming months. Chinese carriers would be most affected by the levies and their potential exodus would create a void in the market as they account for 17% of US container imports from the Far East.

These uncertainties add to the current challenges that carriers are facing, with freight rates continuing to slide and carriers unable to maintain capacity discipline. The restructuring of carrier alliances is causing a short-term capacity shift in the trans-Pacific, giving cargo owners about 20% more functional capacity this month compared with a year ago but still 8% less than in January 2025.¹⁴ Forward schedules show capacity increases across the board in March and unless carriers reverse course soon, freight rate hikes will continue to prove elusive.¹⁵ EC freight futures fell sharply on early week trading due to carriers’ aggressive price cuts and the SCFIS’ 11.2% drop published after market close will fuel further price weakness in the coming week.

Capacity cuts in early February has translated to a sharp drop in the number of ships departing the Strait of Singapore last week to just 97,950 teu, against the 13-week average of 286,000 teu but will rebound over the coming weeks with March capacity at 288,000 teu. EC prices declined by

3-9%.¹⁶ MSC will have better market coverage and a larger market share compared to the Gemini Cooperation despite operating as the sole independent carrier on the East-West trades following the alliance reshuffle in February 2025.¹⁷ MSC will be able to offer the same or a larger number of weekly sailings on all of the 4 main routes than Maersk and Hapag-Lloyd, using its self- operated services as well as selective partnerships with Premier Alliance on the North Europe and Med routes and with Zim on the US. The Premier Alliance of ONE,¹⁸ Yang Ming and HMM is the newly named version of the former THE Alliance, which Hapag-Lloyd departed to partner with Maersk. The Federal Maritime Commission approved the Premier Alliance to take effect Feb. 9, 2025.

The only grouping remaining intact come February 1, the Ocean Alliance, made up of COSCO, OOCL, CMA CGM and Evergreen, will also be the one with the largest market share and widest market coverage this year.¹⁹ The Gemini, ONE and Premier alliances control 80% of worldwide container capacity.²⁰

Consequences –

Whether any of them comment on the proposed rule will illuminate the likelihood of litigation postponing the effective date of the proposed rule. Lower rates, increased surplus capacity, and stress of armed conflict on the preferred shipping lanes²¹ all add up to a decreased capacity to absorb the USTR proposed penalties for using Chinese made cargo vessels. The American consumer is going to feel an immense price impact when the number of vessels landing at US ports decreases dramatically or the cost of goods landed increases dramatically as a result of this proposed rule.

References

¹ https://ustr.gov/issue-areas/enforcement/section-301-investigations/section-301-china- targeting-maritime-logistics-and-shipbuilding-sectors-dominance

² https://ustr.gov/about-us/policy-offices/press-office/press-releases/2025/february/ustr-seeks- public-comment-proposed-actions-section-301-investigation-chinas-targeting-maritime

³ Those wishing to testify at the hearing must submit a written request to the USTR on or before March 10, 2025.

⁴ https://www.federalregister.gov/documents/2025/02/27/2025-03134/proposed-action-in- section-301-investigation-of-chinas-targeting-of-the-maritime-logistics-and

⁵   90 Fed.Reg.38.pp10845 (Feb 27, 2025) *** Service Fee on Maritime Transport Operators with Prospective Orders for Chinese Vessels: An additional fee based on the percentage of vessels ordered from Chinese shipyards: (a) for operators with 50 percent or greater of their vessel orders in Chinese shipyards or vessels expected to be delivered by Chinese shipyards over the next 24 months, the operator will be charged up to $1,000,000 per vessel entrance to a

U.S. port; for operators with greater than 25 percent and less than 50 percent of their vessel orders in Chinese shipyards or expected to be delivered by Chinese shipyards over the next 24 months, the operator will be charged up to $750,000 per vessel entrance to a U.S. port; for operators with greater than 0 percent and less than 25 percent of their vessel orders in Chinese shipyards or expected to be delivered by Chinese shipyards over the next 24 months, the operator will be charged up to $500,000 per vessel entrance to a U.S. port; or (b) a fee of up to

$1,000,000 per vessel entrance to a U.S. port will be charged to a vessel operator if 25 percent or more of the total number of vessels ordered by that operator, or expected to be delivered to that operator, are ordered or expected to be delivered by Chinese shipyards over the next 24 months.***

⁶ 90 Fed.Reg.38.pp10844-45 (Feb 27, 2025) ***Service Fee on Chinese Maritime Transport Operators: A vessel operator of China to be charged a fee on the international maritime transport being provided (a) at a rate of up to $1,000,000 per entrance of any vessel of that operator to a U.S. port; or (b) per entrance of any vessel of that operator to a U.S. port, at a rate of up to $1,000 per net ton of the vessel’s capacity. *** Upon the entrance of a Chinese- built vessel to a U.S. port, a fee to be charged to that vessel’s operator on the international maritime transport provided via that vessel (a) at a rate of up to $1,500,000; (b) based on the percentage of Chinese-built vessels in that operator’s fleet: for operators with 50 percent or greater of their fleet comprised of Chinese-built vessels, the operator will be charged up to $1,000,000 per vessel entrance to a U.S. port; for operators with greater than 25 percent and less than 50 percent of their fleet comprised of Chinese-built vessels, the operator will be charged a fee up to $750,000 per vessel entrance to a U.S. port; for operators with greater than 0 percent and less than 25 percent of their fleet comprised of Chinese-built vessels, the operator will be charged a fee up to $500,000 per vessel entrance to a U.S. port; or (c) based on the percentage of Chinese-built vessels in an operator’s fleet: an additional fee of up to $1,000,000 will be charged to a vessel operator per vessel entrance to a U.S. port if the number of Chinese-built vessels in the operator’s fleet.***

⁷ 90 Fed.Reg.38.pp10845 (Feb 27, 2025) The terms “flagged” and “built” are not synonymous so it is presumed the distinction is intentional. ***”U.S. goods are to be exported on U.S.- flagged, U.S.-built vessels, but may be approved for export on a non-U.S.- built vessel provided the operator providing international maritime transport services demonstrates that at least 20 percent of U.S. products, per calendar year, that the operator will transport by vessel, will be transported on U.S.-flagged, U.S.-built ships.”***

⁸ In March 2015, China released Made in China 2025’s (“MIC2025”) foundational document, the State Council’s Made in China 2025 Notice. MIC2025 implements the first 10 years (2015-2025) of China’s Strong Manufacturing Nation Strategy, a 30-year plan divided into 10- year segments to make China the world’s preeminent advanced manufacturing power before the 100th anniversary of China in 2049. An official interpretation of Made in China 2025 [hereinafter “MIC2025”] describes maritime engineering equipment as, “a general term for all kinds of equipment used to develop, utilize, and protect the ocean.” See Interpretation of Made in China 2025: Promoting the Development of Maritime Engineering and High-Technology Ships, Ministry of Industry and Information Technology [hereinafter “MIIT”] (May 12, 2016), https://www.gov.cn/zhuanti/2016-05/12/content_5072766.htm.

⁹ 90 Fed.Reg.38.pp10845 (Feb 27, 2025) ***Actions to reduce exposure to and risks from China’s promotion of the National Transportation and Logistics Public Information Platform (LOGINK) or other similar platforms, such as recommending that relevant U.S. agencies investigate alleged anticompetitive practices from Chinese shipping companies, restricting LOGINK access to U.S. shipping data, or banning or continuing to ban terminals at U.S. ports and U.S. ports from using LOGINK software.***

¹⁰ Several international ports around the world are controlled by Chinese companies, including the Port of Piraeus in Greece, the Port of Valencia in Spain, the Port of Hamburg in Germany, the Port of Kingston in Jamaica, and various ports in Africa, with companies like China Harbour Engineering Company and China Merchant Port Holdings being key players in these investments; this is largely driven by China’s Belt and Road Initiative, which aims to expand its global infrastructure influence.

¹¹ 2024 – Mar-12.Hamlyn.B. RUSI.China in Sub-Saharan Africa_ Sanction-Proof Supply Lines and Dual Use Ports; https://www.rusi.org/explore-our- research/publications/commentary/china-sub-saharan-africa-sanction-proof-supply-lines-and- dual-use- ports#:~:text=China%20now%20owns%2093%20ports,pearl’%20on%20Africa’s%20Atlantic

%20coast.

¹² 2024 – Mar-12.Hamlyn.B. RUSI.China in Sub-Saharan Africa_ Sanction-Proof Supply Lines and Dual Use Ports¹³https://ustr.gov/issue-areas/enforcement/section-301-investigations

¹⁴ https://www.universalcargo.com/trans-pacific-capacity-dips-with-alliance-reshuffling-so- freight- rates/#:~:text=The%20restructuring%20of%20carrier%20alliances,by%20maritime%20intellig ence%20firm%20eeSea.

¹⁵  https://www.linerlytica.com/post/market-pulse-2025-week-08/

¹⁶ https://www.linerlytica.com/post/25-week-08-freight-futures-watch/

¹⁷ As the only carrier opting to go-it-alone with no alliance in 2025, MSC unsurprisingly showed the strongest growth, in terms of teu slots in 2024. https://theloadstar.com/alliance- reshuffle-will-increase-box-ship-shortage-as-carriers-hunt-buffers/

¹⁸ ONE (Ocean Network Express) was formed in 2016 as the integrated container businesses of Japan-based trio Kawasaki Kisen Kaisha (K-Line), Mitsui O.S.K. Lines (MOL) and Nippon Yusen Kaisha (NYK). Headquartered in Singapore, ONE focuses on key east-west routes and collectively operates more than 240 vessels with capacity of 1.9 million twenty-foot equivalent units, on 165 services to 120 countries. The new Gemini Cooperation joins the Hapag-Lloyd and Denmark’s Maersk, which left the pioneering 2M 10-year vessel-sharing agreement (VSA) formed in 2015 with Mediterranean Shipping Co. (MSC). The Gemini partners have been public about their goal of providing 90% schedule reliability in an industry that has struggled to make good on half its promised arrivals amid disruptions stretching back to the start of the pandemic. The simplified, hub-and-spoke network similar to those pioneered by airlines features mostly single operator loops and fewer port calls per service, calling high-efficiency terminals with 29 mainliner services and interregional shuttle services, and covers the full scope of U.S. trades including Asia to the West and East coasts, and trans-Atlantic.

¹⁹  https://splash247.com/global-liner-alliances-retrench/

²⁰ https://www.freightwaves.com/news/what-shippers-should-know-about-ocean-carrier- alliance-changes-in-2025

²¹ https://www2.deloitte.com/us/en/insights/economy/spotlight/conflict-climate-among- current-issues-in-maritime-industry.html