Shipping and International Trade in a Time of Disruption – Export Controls and Trade and Investment Sanctions

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At the start of 2020, the main challenge facing the shipping industry was the implementation of the IMO 2020 fuel standards requiring lower sulfur content in fuels. The massive global tragedy that was the COVID-19 pandemic, which has spared no nation, no industry, loomed on the horizon. The pandemic has ravaged lives, decimated businesses and forced us to rethink what we can prepare for. Navigation has been seriously affected in many ways.

We’re certainly in the middle of a perfect storm – we’re just coming out of the pandemic. China continues to close ports, grappling with rising oil prices, drastically rising shipping costs and adjusting to the effects of trade wars, and now the war in Ukraine.

covid

At the height of the pandemic in 2020, the plight of passengers and crew on board cruise ships and the cruise industry was brought into sharp focus. Cruise ships – with large numbers of passengers and crew and an emphasis on communal meals and group activities – have become incubators for the COVID-19 virus. Crews aboard merchant ships could not sign because the ports did not allow it. The closure of businesses and ports has also disrupted supply chains.

When ports close due to the pandemic or when the crew of ships are infected, it affects the contract of carriage. The effect depends on the terms of the Charter, whether the particular disruptive event is covered. A vessel with an infected crew will mean that the vessel will not be granted free practice or a certificate of good health by port authorities, which may prevent vessel readiness, owners time for loading or unloading, and the consequent effects of running the exposure time. and demurrage.

This disruption has caused a multiple increase in freight costs, a shortage of containers, congestion in ports. This, in turn, has led to shortages of key components in the supply chain, halting or delaying production of automobiles, smartphones. Even the ubiquitous McDonald’s has not been spared, with fries shortages. The multiplication of freight costs had led to considerable increases in the prices of all kinds of consumables. Now, the pandemic in the form of the Omicron variant is resurging again and has caused a massive and complete lockdown in Shanghai, more extensive than others in China.

Shanghai is a key trading and manufacturing base for global supply chains. The effects of this lockdown reverberate as globalization has interconnected major supply chains and what happens in key locations affects the entire chain.

Ever Given and the Suez Canal

The Mega Containership Ever Given ran aground while transiting the Suez Canal on March 23, 2021, lodged against both banks of the waterway. The blockage caused ships to retreat in the Mediterranean to the north and the Red Sea to the south. It is estimated that the costs to global trade were around $400 million per hour. The fragility of trade routes was revealed when the incident impacted the movement of cargo globally, as 12% of global trade is carried on ships using the canal.

For six days, the world watched as a multinational team of rescuers, tug operators and the Suez Canal Authority (SCA) coordinated a race against time to free the vessel and unclog the canal. A year later, Ever Given’s sister ship Ever Forward is as of April 2022 now stuck in the Chesapeake Bay near the port of Baltimore, USA. This incident exposes the navigational risks faced by large merchant vessels.

trade wars

President Donald Trump has launched a trade war with China, which has resulted in the imposition of tariffs on exports from each of the other countries. This has caused traders to find ways to overcome them by hiding the origin of the cargo. China and Australia have also cooled trade relations, after Australia pushed for an international investigation into the origin of the coronavirus without prior diplomatic consultations. China has targeted Australian barley, beef, wine, lobsters and coal over the past year after Canberra demanded an investigation into the origins of the coronavirus pandemic. The acts included China calling on Chinese parties not to import products from Australia and imposing high duties.

Ukraine

Putin’s invasion of Ukraine in March 2022 brings the world to the brink. The world was not prepared for this conflict. Countries responded by imposing trade sanctions, cutting Russia off from the international financial system and global trade. Russian ships and sanctions implemented by major trading nations and disruption of agricultural products. Ukraine is a key producer of wheat, barley, sunflower, corn and soybeans.

A force majeure clause generally exempts the parties from performing the contract following the occurrence of certain events. A company affected by the Russian sanctions must determine whether its contracts contain force majeure clauses and whether the Russian sanctions are an event that excuses full or delayed performance of the contract.

If the sanctions are not explicitly mentioned as force majeure, a broad definition of war, hostilities, conflicts or acts of government could cover the consequences of the sanctions. From historically low crude oil prices, the war in Ukraine drove oil prices to record highs.

Legal effects

Parties to shipping and related contracts, e.g. charter parties, FOB, CIF, bills of lading and charter contracts, set their agreed price, provide for price adjustment, force majeure and defenses in the event of specified events. The distribution of risks is essentially contractual. If the purchase or transaction has become more difficult or more expensive to complete, then one party will bear the increased costs of the transaction. Force majeure clauses or the common law principle of frustration will only apply if the transaction becomes impossible to complete, more difficult or more expensive.

If the parties rely on standard contracts, these contracts are most likely not to adequately provide for the shocks that hit shipping after 2020. Entering into contracts without adequately considering the terms of the contract at the light of known and potential risks would indeed be reckless. . Likewise, insurance can provide some protection. Parties should also seek advice from their insurance broker or intermediary as to whether existing coverage adequately covers their transactional risks in light of the current situation. For example, most forms of ocean freight insurance do not cover carrier delays or insolvency. The insurance coverage covers transit risks and not transactional failures or failures.

Originally published May 10, 2022

The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.

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