October 25, 2023

Memo: Senate SHIP Act (S. 1829)

The Stop Harboring Iranian Petroleum Act of 2023 – the SHIP Act (S. 1829) –  introduced by Senator Marco Rubio (R-FL) – is a deeply reckless proposal that risks sabotaging the global economy in the name of combatting Iranian oil sales. 

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

  • Owns or operates a foreign port that, on or after the date of the enactment of this Act, permitted to dock at such foreign port a vessel–
    • That is included on the Treasury Department’s list of specially designated nationals and blocked persons for transporting Iranian crude oil; 
    • Of which the operator or owner of such vessel otherwise knowingly engages in a significant transaction to transport, offload, or deal in condensate, refined, or unrefined petroleum products, or other petrochemical products originating from the Islamic Republic of Iran;
  • Owns or operates a vessel that conducts sea-to-sea transfer involving a significant transaction of any petroleum product originating from the Islamic Republic of Iran;
  • Owns or operates a refinery that engages in a significant transaction to process, refine, or otherwise deal in any petroleum product originating from the Islamic Republic of 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. 

However, the bill even goes a step further, risking a radical expansion of sanctions with potentially dire circumstances, by also mandating sanctions on anyone who “engages in a significant transaction with, or provides material support to,” 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 that is at least two steps removed from Iran’s oil industry.

Playing this scenario out, 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. 

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 1) no longer engaged in the sanctionable activities; 2) “has taken and is continuing to take significant verifiable steps toward ceasing such activities” or 3) “the President has received reliable assurances from the government of the foreign country that such foreign person will not resume engaging in any” sanctionable activity. This is an extremely high bar that does not grant the President sufficient discretion on whether to impose designations.

On the House floor, the Republican lead Rep. Mike Lawler declared that this inflexible, almost unusable waiver was by design. He stated, “There are members of this body that are going to oppose this legislation because it is too strenuous, because it doesn’t give enough wiggle room to the administration. There’s a reason we are not giving wiggle room to the administration.”

For unclear reasons, the Senate version of the SHIP Act also includes a sunset for the waiver after five years, even though the broader sanctions mandated by the bill never sunset. This means that the highly-qualified waiver would disappear entirely five years after passage, which is extremely unusual for a sanctions bill.

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 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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