Global tariffs – continuing uncertainty for marine insurers

Global trade policies have been at the top of government agendas recently. As trade relationships are reset, the marine industry has had to contend with fast moving developments, and plan for future impacts.

Tariffs as a negotiating tool

Tariffs policies are primarily used to regulate and control the flow of goods across borders, but their wider functionality extends to economic, political and strategic aims. Countries use tariffs to protect their domestic industries and workforces, generate government revenue and correct any perceived trade imbalances. The recent shifts in global tariff policies has brought these aims to the forefront of geopolitical relations.

Key dates

There have been many twists and turns in recent tariff announcements. Some of the key dates are below.

Impact on cargo volumes

The intended consequence behind the United States tariffs was to reduce reliance on imported goods.  Due to the uncertainties around what the tariffs might ultimately look like between different countries and across various sectors, it is possible that much less cargo will be moved to and from the United States. The impact of this would be a consequent downturn in demand for marine insurance and, ultimately, fewer claims.

As businesses look to diversify from their usual trade routes and trading partners, marine policy wordings need to be reviewed to ensure that those new routes and ports are covered under the policy.  It is not unusual to see certain jurisdictions excluded from cover and the insured should check such exclusions carefully.  The use of new ports and storage facilities will require due diligence around the provision of adequate security, storage and discharge facilities (with potential premium increases).

Stockpiling

While some shipments may be paused, some businesses may seek to stockpile goods before any future tariff increases come into effect. This will increase the volume and the overall value of goods held in warehouses.

As a consequence of this, the values declared under marine policies may be inaccurate and result in instances of underinsurance.

Some businesses may look to alternative ‘storage’ facilities, such as goods being stored in containers and, in some instances, in vehicles.  This will increase the likelihood of damage and theft and, therefore, claims.  

Delays

Due to uncertainties around shipments, there is an increased likelihood of delayed deliveries – and subsequent claims from a business’s customers.  It is likely that insured’s will look to insurers to cover those claims from – whether such claims are covered or not will depend upon the wording of the policy. 

Basis of valuation Clauses

Insurers will need to consider their basis of valuation clauses carefully.  Goods that are transported will likely have a substantially different value upon loading than when they get to their destination. Insurers need to consider whether their policies, in the event of a claim, will cover the increased value upon delivery which is generated by the imposition of such tariffs. 

If the policy covers market value of the goods, then the question is, what is ‘market value’ when the goods have not previously been sold in a market where significant tariffs have been imposed.

Abandonment

As the value of the goods may have increased from the point of collection to the point of delivery (where the tariffs will be imposed), there is a risk that goods will be abandoned once the goods reach the destination port.  This is particularly so where goods are being shipped on terms where payment of import duties is tied to delivery.  With significant tariffs being imposed, buyers may find themselves in a situation where the tariffs dwarf the potential sales price of the goods.  Buyers may then consider that it is more cost effective to simply fail to collect the goods (meaning there has been no delivery) and, effectively, abandon the goods at the port.  The goods will then be sat at the port with potential storge and demurrage charges incurring. 

Careful consideration needs to be given around who is liable for these charges, and for the additional tariff charges, including penalties for non-payment of such tariffs.  Does this fall on the insured or another party within the supply chain?  Are those charges and penalties covered under the policy?   

Tariff washing

Another issue which all parties to need to be aware of is the risk of ‘tariff-washing’. This is where exporters are selling their goods to neighbouring countries before onward sale to the United States in order to avoid tariffs. 

South Korea’s customs agency stated that in May alone it found USD 21 million worth of goods with falsified countries of origin (almost all destined for the US).

Comment

The result of the fast moving and dramatic rises in global tariffs means that global businesses are re-evaluating their supply chains, looking at alternative trading routes and new markets. Even with the rollback of some tariffs, companies and manufacturers are now wary of what may be next, fuelling further business uncertainty. 

For the marine insurance market, the disruption to supply chains could result in more claims, and rising claims inflation due to additional costs and risks incurred in moving goods across global markets.

Related article: US Tariffs: the regulatory landscape, impact on trade and strategic guidance for clients in the commercial, maritime and insurance sectors