HIS Maritime & Trade
London, United Kingdom
21 October 2016
Challenges abound despite US easing of Cuba shipping rules
Greg Miller, Senior Editor
The Obama administration has just enacted historic changes to US rules governing shipping to Cuba, but risks and uncertainties may prevent vessel interests from taking advantage of the new opportunity.
Two shipping rule revisions were announced on 14 October: a major loosening of the ‘180-day rule’, which prevents a vessel without a licence from calling in the United States within six months of calling in Cuba; and a redefinition of Cuban transit cargo.
Vessels carrying export cargo to Cuba have been exempted from the 180-day rule if that cargo is not on the Commerce Control List (CCL), a list that designates goods that require US export licences. The vast majority of worldwide cargo shipped via containers is not on the CCL.
The definition of transit cargo – which is not prevented from entering the US under the trade embargo – has been changed from cargo that “does not enter the Cuban economy” to cargo that “is not removed from the vessel for use in Cuba and is not transferred to another vessel while in Cuba”.
These changes will not allow any additional US exports to Cuba beyond those already allowed under the embargo, but they will ease the way for non-US exports to Cuba. For the first time since the 180-day rule was enacted in 1992, a container ship carrying exports from Asia via the Panama Canal would be able to unload containers in Cuba – assuming that cargo is not on the CCL – then sail directly to a US port to unload additional containers on its front-haul leg. The addition of the Cuba call to the route should increase slot utilisation on vessels in that service.
The new rules will continue to stifle transhipment prospects for the PSA-operated terminal in Mariel. Because the redefinition of transit cargo excludes transfers between vessels, and because the 180-day rule change only applies to exports to Cuba, vessel interests face the same restrictions on Cuban transhipment as they did before, i.e. vessels carrying Cuban-transhipped cargoes will be barred from calling in America for six months.
Now that Cuban calls are allowed for vessels on the all-water Asia-to-US route, the question is: Will a shipping line actually do so? Numerous Caribbean maritime executives speaking to IHS Fairplay were highly sceptical, given the risks inherent in the non-CCL cargo requirement and the restrictions stemming from the US trade embargo.
According to one Caribbean port executive, “Once they do remove all the restrictions – including the embargo – it will be clear. But there’s still so much uncertainty, and if shipping lines find that the new rules are difficult to deal with, they won’t deal with them.” According to a Caribbean ship-operator executive, “If I have to go to my lawyer for advice in order to figure out whether I can do something, why bother when I can do something else? It’s not worth the risk.”
Under the new rules, a container ship that arrives at a US port after making its call in Cuba would have to prove to the US Coast Guard (USCG) inspector that it has not delivered any prohibited items to the island. The CCL includes thousands of highly specified cargo items. The vessel interest would have to ensure it did not inadvertently deliver a single item on the CCL to Cuba. If it did and the USCG determined that the vessel broke the rule, that vessel would be barred from US calls for six months, creating serious complications for the service.
“Although most goods are not on the list, the CCL is a very complicated set of regulations and shipping lines would have to be very careful about what cargo they are taking to Cuba. They would need to be sure that they know what they’re carrying,” said Reed Smith counsel Jane Freeberg Sarma.
Meanwhile, the US trade embargo would disallow a foreign operator from taking advantage of the rule change if its ship is owned or controlled by a person subject to US jurisdiction. Many major shipping lines operate vessels that are on long-term lease from US-listed shipowners. Vessels owned by such public entities would be prohibited from Cuban service if US shareholders had a majority stake, or if the majority of the board were Americans. Even if US shareholders held smaller stakes, it still raises concerns. “There is not really a ‘bright line’ rule [on public share ownership], so that is definitely something companies have to be cautious of,” Freeberg Sarma told IHS Fairplay.
Beyond the ownership issue, US insurers cannot cover foreign vessels serving Cuba and US financial institutions cannot provide debt financing for such vessels. According to Freeberg Sarma, all of these restrictions would likely be addressed in contracts. “Loans from US institutions would include requirements that a vessel not trade with sanctioned countries. There would also be an insurance clause [related to sanctioned countries] and a clause in the charter agreement,” she explained.
Even when restrictions are lifted – as is the case with the 180-day rule change – it can take time for contracts to be adjusted, if at all. “With the Iran sanctions, there were changes, but some insurers still didn’t offer coverage, even though it was permitted, and some did decide to provide coverage, but it took a while,” Freeberg Sarma noted.
The rise of container-shipping alliances poses yet another challenge. In an interview with IHS Fairplay in August, this issue was addressed by Charles Baker, the general director of the TC Mariel terminal in Cuba. “All of the different shipping lines in these alliances need to agree that they will include Mariel in their route and some of them have a greater degree of difficulty in making that decision. Some shipping lines have purposefully decided not to do business with Cuba so they don’t jeopardise their interests in the United States,” said Baker.
Another hurdle relates to ship size. Since the opening of the Panama Canal in June, Asia-to-US services transiting the waterway have upgraded vessel size from traditional 4,000–4,500 teu Panamaxes to 6,000–10,000 teu neo-Panamaxes. Today, Mariel’s port can only handle Panamaxes. The channel will not be dredged to handle neo-Panamaxes until next year.
A final barrier to new calls in Cuba involves US election timing. There are less than 90 days left before Barack Obama cedes the presidency to either Hillary Clinton or Donald Trump. Any shipping line considering Mariel calls under the new rule would have to wait until they are confident on how the next US president will handle regulations enacted by Obama.
According to John Kavulich, president of the US-Cuba Trade & Economic Council, “While President Obama is in office, they’re going to make this work as opposed to looking for ways to not make it work. But we have an election coming up and there will be someone else in the Oval Office soon.” Although Clinton’s views are generally in line with Obama’s, Trump “would like to see Cuba do more to get more”, Kavulich told IHS Fairplay.
“Sanctions are a political tool and as the person in office changes, the political agenda changes,” said Freeberg Sarma. “It’s hard to see what’s going to happen after the election, so it’s wise to be cautious.”
In fact, the reason there are so many practical hurdles to taking advantage of the new Cuban opportunity is that the rule change was driven by political operatives, not industry players. “The US government isn’t doing this for the sake of shipping. It’s doing this for the sake of normalising relations with Cuba,” said the Caribbean port executive.
According to Kavulich, “From the Obama administration’s perspective, this serves a political purpose. It means there is one less reason for the Cuban government to not re-engage with the US, because the Cubans are keenly aware that the Obama administration has choices it can make in terms of changing regulations and it has statutes it can do nothing about.”
THE COMMERCE CONTROL LIST
The Commerce Control List (CCL) is used to determine whether an export licence is required for a particular cargo to be shipped from the United States. In the case of the new Cuba shipping rule, the CCL is being used to determine whether an export cargo to Cuba from a non-US country, such as China, will be allowed for the purposes of obtaining a vessel exemption from the 180-day rule.
The 11 categories of items covered by the CCL are: nuclear and miscellaneous; materials, chemicals, micro-organisms, and toxins; materials processing; electronics; computers; telecommunications; information security; sensors and lasers; navigation and avionics; marine; and aerospace and propulsion. There are around 3,000 specific items within these categories (see list here).
To further complicate matters, certain items on the CCL – those classified as anti-terrorism items – may be shipped to Cuba under the Obama administration’s revised 180-day rule.