The United States has imposed tariffs on a good number of nations to some degree. You can be confident that other nations will also impose retaliatory tariffs on U.S. exports. There will be widespread impacts in a few areas, but this writing only addresses your cargo and cargo insurance.
Tariffs and Your Cargo Insurance Rates
On the question of whether tariffs will impact your marine cargo insurance rates, the answer is likely no, not directly. Insurance products are not typically subject to tariffs. However, under certain circumstances, tariffs can increase the overall insured value of shipments, thereby raising premiums accordingly if included in the insured value. For yearly policyholders, the increase may be reflected at renewal time. For per-shipment insurance buyers, any value increase, if applicable, will be evident immediately, resulting in a corresponding rise in the cost to insure.
Since a tariff (tax) is an additional cost incurred when moving goods from one country to another, this cost can be factored into the value of the transaction, particularly in terms of cargo insurance. Since the importer pays the cost of the tariff, if the importer is the insured, they can add the cost to the insured value if they are the loss payee.
Incoterms and Tariffs
It is essential to consider both Incoterms and the transaction structure count. If the importer purchases the goods at the seller’s door EXW (Ex Works), the importer is responsible for all costs until delivery to their door, including inventory cost, transportation and handling, cargo insurance, and all applicable taxes, including tariffs. The importer is the party that purchases the cargo insurance and is the beneficiary of the policy, as they are at risk for the entire transit to their door. Conversely, if the transaction is Incoterm DDP (Delivered Duty Paid), where the seller (exporter) pays all until the named destination, the opposite of EXW takes place, with the seller paying all and would be the loss payee.
Incoterm CIF
Since the most used Incoterm is CIF (Cost, Insurance, and Freight) to the named port of destination, I will focus on the Incoterm CIF. With CIF, even though the risk transfers to the buyer at the exporter’s (seller’s) port of exit when the goods are loaded to the vessel, the seller is required to purchase the cargo insurance on the buyer’s behalf, but it is the buyer who is named the loss payee as they are at risk.
The seller’s obligation to the buyer is to deliver the goods, bearing all transport costs, to the buyer’s port of entry when the goods pass the ship’s rail upon unloading. That is where the seller’s obligation ends, and consequently, the cargo insurance typically also ends at the same time. This means that the cargo has not yet been officially imported into the buyer’s country, as the goods have not yet passed through Customs. This puts the burden of all costs and risks, including any tariffs, solely on the buyer after the goods have been unloaded from the vessel. Unless otherwise arranged, the buyer must arrange new cargo insurance to commence after the vessel’s unloading, covering many of the same risks as the seller was responsible for during ocean transport. Any tariffs that the buyer must pay must be factored into the insured value to be covered. The moral of the story is to confirm your Incoterms and understand how the deal structure impacts your cargo insurance.
Possible Shipment Abandonments
While tariffs may not directly cause cargo abandonments, they can be a significant indirect cause due to the unexpected financial strain they put on importers. I don’t expect established importers to abandon shipments at ports of entry worldwide. Still, it is quite possible that cash-strapped small-time operators working with thin margins could refuse to pay Customs fees and walk away from imports. This leaves your export at the port of entry of your buyer. If they have not paid you yet, this can be a problem.
Will traditional cargo insurance pay for abandoned cargo? The short answer is almost always no. Abandoned cargo is very much like ‘loss of market’ or your customer refusing to pay for the goods. The insurers focus more on the physical loss of the cargo, such as damage, theft, or loss. With abandonment, everyone knows where the cargo is, and it isn’t damaged.
Marine cargo insurers will not pay a claim for a deal between the seller and buyer that has gone bad. If you are the seller and insured, and it makes economic sense, depending on the circumstances, ask your insurer to extend the coverage to include the reverse logistics of having the container returned to you. Otherwise, the cargo will eventually end up in the hands, often through contract or auction, of a secondary market seller of discounted inventory, such as Jerome Haden from Haden Exports in New Orleans, who will sell it to buyers eager for a good deal.
In closing, with the additional costs added to imports via tariffs, make sure to ask your cargo insurance provider if the new tariffs affect your shipments. Be prepared to answer questions about the deal’s structure (Incoterms) so that they can effectively respond to you. If they won’t or can’t answer your questions, consider finding another cargo insurance provider, like me, who can and will.