October 16, 2023

Memo: The SHIP Act (H.R. 3774)

This memo was updated on October 25th, 2023, following the bill’s passage through the House Foreign Affairs Committee

H.R. 3774 – The SHIP Act, introduced by Rep. Lawler (R-NY), is a deeply reckless proposal that risks sabotaging the global economy in the name of combatting Iranian oil sales. It was advanced by the House Foreign Affairs Committee on October 19th despite strong objections from the Ranking Member, Gregory Meeks (D-NY), and other Democrats.

The bill mandates sanctions on key elements of the global energy and shipping industries, including anyone who: 

  • Owns or operates a foreign port and has knowingly facilitated or accommodated at least 1 designated vessel in landing at such port on or after the date of enactment of this Act for the purpose of transporting Iranian crude oil;
  • Knowingly transports, offloads, or otherwise engages in transactions involving petroleum or petroleum products, including petrochemicals, originating from Iran;
  • Knowingly owns or operates a vessel used to conduct ship-to-ship transfers of petroleum or petroleum products originating from Iran; and
  • Owns or operates a refinery that knowingly processes, refines, or otherwise engages in transactions involving petroleum or petroleum products originating from Iran. 

Such targeting alone would mandate new sanctions on an extensive part of the global oil industry, particularly in Asia – but also elsewhere around the globe, risking major disruptions to global energy supplies and the industries that rely on it. 

The Amendment in the Nature of a Substitute advanced by the House Foreign Affairs Committee did, thankfully, remove an extreme provision that would have gone beyond these dire effects. Originally, the bill called for sanctions on anyone who “knowingly engages in a significant transaction with, or provides material support to or for,” any entity designated under the above authorities. This goes beyond “primary” sanctions – aimed at blocking trade between the issuing country and the sanctioned country – or “secondary” sanctions – aimed at blocking trade between foreign nations and the sanctioned country. It would instead act like an unprecedented “tertiary” sanction to sever trade with any foreign entity two steps removed from Iran’s oil industry. However, this dangerous provision is still included in the Senate version of the bill (S. 1829), so it is not yet clear if it would be removed from any final version of the bill. 

Regardless, it is not an exaggeration to say that the bill risks triggering a global recession with profound harms to the U.S. economy if implemented to the hilt. After passage of the bill, any shipping company with ships passing through a port designated for servicing a lone Iranian tanker would be slated for designation under the bill. Or, any oil company that continues to utilize refineries that had processed Iranian petroleum products would need to be designated. Given the intertwined nature of both the global shipping and energy industries, this could be a truly massive expansion of existing sanctions. 

As Rep. Joaquin Castro (D-TX) stated in the mark-up on the bill:

If this bill were enacted, U.S. companies would be prohibited from doing any business, including transferring goods, at many of the world’s biggest ports, including in some of our largest allies and economic partners. This bill would disrupt global trade, supply chains, and damage our relations with important allies and partners. Not only would this bill cause a wholesale disruption of the global economy, but it would also raise gas prices and consumer prices here at home…If this broad, sweeping bill were enacted, Americans would feel the pain at the gas pump and the grocery store. This is irresponsible legislation.”

The bill’s implications for the Chinese tanker company COSCO Shipping Company, Ltd. – the largest shipping company in China – are illustrative of the stakes. COSCO was initially designated by the Trump administration for violating sanctions on Iranian oil, but that designation was subsequently reversed and pared down following blowback. Prior to the reversal, the initial designation “sent shock waves through shipping markets” as it initially would have “applied to the parent company’s fleet of more than 1,000 ships,” threatening the price of oil in particular. The Treasury Department subsequently pared it down.

As a result, a subsidiary of COSCO – COSCO Shipping Tanker (Dalian) Seaman & Ship Management Co – remains designated under Executive Order 13846. The passage of the SHIP Act would likely mandate the return of the designation on the parent company as a whole, which remains a major actor in international shipping. Critically, COSCO owns a minority stake in the Hamburg port – which is the largest port in Germany and the second largest port in Europe. Given the ties between COSCO and Hamburg, the SHIP Act would push the U.S. to designate this critical port – of a major treaty ally, no less, amid the conflict in Ukraine – with profound implications for trans-Atlantic security across the board.

Moreover, the waiver in the SHIP Act is highly qualified, meaning the administration would be severely restricted in its discretion of whether or not to implement sanctions with profound global ramifications. According to the “Special Rule,” the President would have to certify in writing that the entities in question are no longer engaged in the sanctionable activities or are taking “significant, verifiable steps toward permanently terminating such activities.” This is an extremely high bar that does not grant the President sufficient discretion on whether to impose designations.

As Ranking Member Meeks noted in the mark-up:

The Foreign Affairs Committee is the committee of diplomacy, and sanctions are one of the most important and impactful tools that we have in managing our relationships and security around the globe. Sanctions have to be limber. The executive branch that administers them needs to be able to adjust and scale them up and down as needed to make them successful. Unfortunately the waiver within this bill provides the executive with very limited flexibility. It is one of the strictest standards that can be found in law. In other words, the waiver provision is nearly unusable, and I think this standard must be adjusted to make this bill workable. 

If the bill passes, international companies would be faced with a choice that would not necessarily favor U.S. interests: adhere to increasingly unrealistic and costly unilateral sanctions on Iran that are not supported by the United Nations or international community writ large, or eschew the U.S. economy and continue to trade as usual. The disruption to the supply chain, and to the energy industry, could be massive – and China, by virtue of its important economy and relative neutrality on trade, could be in a better position to weather it.

Some of the measures in the bill do duplicate existing, extensive extraterritorial sanctions targeting Iran’s energy sector. The Biden administration continues to enforce those measures, even as Iran engages in new methods to smuggle its oil into markets around the globe. Sanctions are not leak proof, and given the unilateral nature of the sanctions that were reimposed on Iran under Trump it is not a surprise that Iranian oil sales first began to rebound under the Trump administration.

However, there is no ignoring the novel element to the SHIP Act that risks profound consequences for the global economy. By mandating sanctions on any foreign port where an Iranian oil tanker stops, as well as any refinery that processes Iranian oil, and then potentially any entity doing business with either, the bill risks sabotaging the economy as a whole to combat an issue with only marginal connection to U.S. interests on Iran. Congress should instead preserve necessary executive discretion for enforcing existing sanctions and abstain from passing a bill that would force the U.S. to take steps that risk dramatic blowback on the global economy. 

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