US New Tariff and What to Expect in Shipping Contracts
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On 2 April 2025, President Donald Trump of the United States (“US”) has imposed new tariff on almost every major trading partners. Characterized as “reciprocal” tariff ranging from 10% to 50%, Indonesia also did not escape from this imposition of tariff with a steep 32% on imports. This policy is expected to impact Indonesian-flagged vessels, particularly those involved in export activities and oceangoing voyages. In response, shipowners, operators, charterers, carriers, and other relevant stakeholders may need to explore risk mitigation strategies under this new trade regime.
In this ARMA Update, we will explore key considerations and potential adjustments to existing shipping contracts in light of the increased trade tariffs.
Understanding the US Reciprocal Tariff Policy
Before assessing contractual impacts, it is essential to understand the nature of the newly imposed tariffs. The US government introduced these reciprocal tariffs with the aim of reducing the trade deficit and safeguarding domestic industries. However, while intended to strengthen US trade, such measures may have significant adverse effects on the economies of affected countries, including Indonesia, by reducing their export competitiveness due to increased costs. The resulting decline in demand may lead to a long-term contraction in shipping volumes.
Implications of US Tariffs on Trade and Shipping
The imposition of these tariffs could result in the following key impacts on trade and shipping:
- Reduction in Trade Volumes Higher tariffs increase the cost of imported goods, potentially discouraging trade. This can lead to a significant reduction in cargo volumes, thereby decreasing demand for shipping services. In response, charterers may seek to exit existing charter party agreements in favour of more cost-effective options, while shipowners may be inclined to maintain these contracts to ensure stable vessel employment. Accordingly, it becomes crucial for both parties to carefully examine early termination, force majeure, and hardship clauses in their contracts. These provisions should clearly stipulate the consequences of trade disruptions and whether they justify renegotiation or termination, along with any associated penalties or liabilities.
- Shift in Trade Routes
The imposition of high tariffs may prompt shippers to seek alternative trade routes or engage with new trading partners to minimize cost exposure. This shift could result in significant changes in shipping patterns and affect demand in certain regions. Key considerations include:
- Deviation from Agreed Routes – Shippers and charterers may reroute cargo to avoid high-tariff destinations, necessitating a review of the deviation clauses within the charter party agreements to determine permissible route changes and associated liabilities.
- Amendment to Trading Terms – The alteration of routes or destinations may require contract amendments to reflect the updated trade lanes, including adjustments to freight rates, delivery timelines, and laytime provisions.
- Permitting Requirements for Oceangoing Voyages – Parties should assess whether new permits or authorizations are required for alternative international routes, especially for long-haul or cross-jurisdictional voyages.
- Compliance with Trade Sanctions – When selecting alternative trading partners or routes, it is essential to verify whether any trade sanctions or restrictions apply. Failure to comply could result in serious regulatory and legal consequences.
- Market Responses
In regard of the shifting trade dynamics caused by the US reciprocal tariffs, shipping companies and operators may be compelled to adopt various strategic responses to maintain competitiveness and operational sustainability. These responses may include the following:
- Cost Implications for Shipowner or Operators
- Termination or Renegotiation In a situation of declining cargo volumes, shipping companies face significant challenges in maintaining operational efficiency. When vessels no longer operate at optimal capacity and/or are not utilized for operational activities, the cost of shipment increases substantially. This increase in shipping costs is essentially a strategy to offset the operational expenses borne by the shipping company. However, such an adjustment cannot be implemented unilaterally, as charterers may argue that the increase in freight rates constitutes a form of hardship, which could ultimately serve as a basis for unilateral termination of the contract. Additionally, vessel insurance premiums may rise in response to increased geopolitical risks, trade route volatility, increase of piracy activities and higher cargo value exposure, further compounding the financial burden for shipowners and operators.
- Freight Rate Adjustments In response to the decline in cargo volumes or the increase in operational costs, shipping companies (owners, carriers or operator) will likely need to adjust their freight rates as a compensatory measure. In addition to ensuring the sustainability of their operations, such rate adjustments can also impact their competitive positioning in the market relative to their competitors. Furthermore, shipping companies should consider the provisions regarding the grace period in the charter agreement. This clause provides additional flexibility to the charterer in fulfilling their payment obligations, thus helping to prevent delays that may lead to potential disputes between the parties.
- Maintaining Operational Efficiency
- Crewing issue Prolonged downturns in shipping activity may prompt companies to make difficult decisions concerning crewing arrangements. To adjust to reduced demand and maintain financial sustainability, some operators might consider terminating manning agency contracts or implementing crew layoffs. While these measures could offer short-term relief, they must be carefully balanced against potential impacts on long-term operational readiness and compliance.
- Bunkering clause Parties to a shipping contract may also benefit from reassessing the terms of their bunkering clauses. From the perspective of the owner or the party responsible for bunker costs, it is crucial to provide clear instructions to the charterer or operator regarding prudent bunker usage during vessel operations. Conversely, the charterer or operator may seek opportunities to secure more competitive bunker pricing during procurement, balancing cost-efficiency with operational needs.
- Technological advancements In response to these challenges, shipping companies are likely to adopt structural improvements aimed at enhancing operational efficiency and reducing long-term costs. A key strategy involves the modernization of fleets and the optimization of shipping routes. By investing in newer, more fuel-efficient vessels and integrating advanced navigation and logistics technologies, operators can lower fuel consumption, shorten transit times, and increase overall route efficiency. These enhancements are essential for sustaining profitability amid rising operational costs and global trade uncertainties.
- Trade Sanctions Considerations A high frequency of tariff changes, as well as unpredictable adjustments, can create uncertainty for shipping companies and charterer party. This uncertainty, arising from increasingly dynamic tariff structures, may ultimately affect the ability of industry stakeholders to engage in long-term planning and to make strategic, sustainable investment decisions. Adding to this complexity is the heightened exposure to secondary sanctions and trade-related compliance risks, which involves the transport or purchase of Russian-origin oil. Given the geopolitical tensions and ongoing sanctions imposed by the United States and the European Union, companies that engage, either directly or indirectly, in transactions involving Russian crude or petroleum products may face potential consequences. These risks are particularly significant when dealing with jurisdictions, entities, or individuals listed by the US Office of Foreign Assets Control (OFAC), as violations may lead to severe penalties, including the freezing of assets, exclusion from US financial markets, or reputational damage.
- Cost Implications for Shipowner or Operators
- Hardship vs Force Majeure It is important for legal drafter to acknowledge and distinguish the difference between force majeure and hardships. Force majeure refers to an unforeseen event that occurs after the signing of the contract and is beyond the control of the parties involved, such as act of God. Force majeure renders one of the parties unable to perform its contractual obligations as stipulated in the agreement. In contrast, hardship also involves circumstances that are unforeseeable; however, they do not entirely prevent the performance of contractual obligations. Instead, hardship creates a significant difficulty for one of the parties in fulfilling its obligations, resulting in an imbalance in the contractual relationship. Hardship can cause an imbalance in the contract, where one party is faced with an undue burden in fulfilling its obligations, despite the fact that, technically, the performance of those obligations is still feasible. In this context, a significant increase in tariffs can be categorized as a hardship event. Moreover, a hardship event typically involves circumstances that are legal, technical, political, or financial in nature, occurring after the contract has been agreed upon (such as the increase in tariffs in this case). As such, hardship conditions necessitate the efforts to renegotiate the contract, and the hardship clause itself may require the parties to engage in alternative negotiations regarding the contract terms.
- Mitigating the Risk of Dispute
- Possibility of ship arrest As previously conveyed, a higher tariff may potentially result in implications such as early termination and claims of hardship (or even force majeure). Such circumstances may also give rise to claims for the fulfillment of obligations (Maritime Claims) by parties who have entered into a shipping contract. Under the 1999 International Convention on Arrest of Ships, one of the recognized Maritime Claims includes “any agreement relating to the carriage of goods or passengers on board the ship, whether contained in a charter party or otherwise”. In light of these circumstances, and in the absence of a practical mechanism to resolve disputes over the fulfilment of obligations under shipping contracts, it is likely that legal actions, including ship arrests, may increase. This is particularly relevant where a charterer fails to meet their obligations, due to factors such as a significant decline in cargo volumes or risks arising from the implementation of international trade sanctions.
- Constructing liquidated damages Also worth to consider, to reduce the risk of prolonged disputes in the future and to clarify the payment risk regarding compensation, the charter agreement may include provisions concerning liquidated damages. Liquidated damages represent a pre-agreed form of compensation, where the charterer is liable for a specified number of damages to be paid in the event of a breach of contract.
- Considering choice of forum of dispute Finally, parties to a shipping contract must carefully consider the choice of dispute resolution forum. In shipping practice, arbitration remains the preferred method for resolving disputes. While many countries have ratified the New York Convention and incorporated it into their domestic legal systems, parties should nonetheless evaluate the enforceability of arbitral awards in relevant jurisdictions, particularly where enforcement may be sought.
Disclaimer:
This client update is the property of ARMA Law and intended for providing general information and should not be treated as legal advice, nor shall it be relied upon by any party for any circumstance. ARMA Law has no intention to provide a specific legal advice with regard to this client update.
US New Tariff and What to Expect in Shipping Contracts
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