Making Vanuatu Great Again

Trump Tariffs Are a Boon to the Foreign-Flagging Business

YouTubers Gone With the Winns pose for a shot advertising a video that explains why their hailing port is Bikini in the Marshall Islands.

As I was tapping away at the keyboard, something registered out of the corner of my eye. I glanced out the hatch. There they flew—just a few more points from the Dow plummeting to oblivion like flaming bits from a SpaceX rocket.

Yes, everyone’s talking tariffs like they just might be a bad thing.

Well, not everyone…

There is one cadre—one small group of maybe a dozen American lawyers—who see the Trump Administration’s tariff initiative as a terrific opportunity. These are the lawyers who specialize in foreign flagging yachts for American owners.

Tariffs, you will be happy to know, are going to make Vanuatu great again.

The South Pacific island nation is on the list of otherwise insignificant places on Earth whose shipping registry lets foreigners register their yachts to escape regulations, avoid taxes and, now, tariffs.

Some of those so-called flag states are derived from the old British Empire, including the Cayman Islands, British Virgin Islands and Jamaica, which allow an American owner to fly the “Red Ensign”with a British “Union Jack” on the upper inside corner.

The ensign of a Cayman Islands registered yacht, similar to that of other former British possessions that offer “flags of convenience” for yachts. Vessels flying ensigns are said to be “red flagged.”

To achieve this “James Bond” look for your yacht, all you need to do is have your American lawyer hire an island lawyer to set up a corporation at their street address in the island’s capital and make that business the yacht’s legal owner.

Attorney Todd Lochner of Annapolis is one of those lawyers. There’s another firm that specializes in offshore flagging from its New England office and a smattering of them on the West Coast. The biggest concentration, of course, is in South Florida—maybe a half dozen.

Lochner said he has all three of his associate attorneys rehearsing the paperwork in anticipation of a surge in offshore flagging. He said he believes higher tariffs will radically change the cost-benefit equation for registering a vessel elsewhere.

Used to be, the cost of a new boat had to be about $300,000 to benefit.

Funny story: 20 years ago foreign flags were particularly popular in Florida, which has a 6 percent excise tax on new yachts. The purchaser of a new boat costing $300,000 paid $18,000 to the state of Florida, while the buyer of a $3 million boat would pay $180,000. Sounds fair, right?

In 2010, Florida legislators decided to go full-on regressive by enacting an $18,000 cap for taxes on new yacht purchases. Whether you bought your boat for $300,000, $3 million or $30 million, the tax was $18,000.

How did lawmakers arrive at $18,000? Legend has it that they looked up how much a South Florida lawyer was charging for a Cayman Islands flagging and made that the number.

The Stars & Stripes had a comeback on the water because of state caps like Florida’s combined with a couple built-in disincentives to foreign flags.

Owners first have to obtain a cruising permit to keep their foreign-flagged boats in the U.S. At the end of that permit’s one-year duration, those vessels must leave the country and be cleared through Customs somewhere else before owners could bring them back and apply for a new permit.

Plus, the offshore flag itself costs about $1,500 a year to maintain with the country of registration.

Before Trump the First, the cost to import a foreign-built yacht into the U.S. was 1.5 percent, and, as noted above, the decision of whether to foreign-flag or not was based mostly on homeport state taxes.

Nordhavn is always a good example because, except for a few years in the beginning, this California company has had its boats built in Taiwan, China or Turkey—all of the above nowadays.

The first Trump administration imposed a 25 percent China tariff that included yachts. It stood to reason, according to Jim Leishman of Nordhavn, that buyers of multi-million-dollar Nordhavns from China would thereafter be foreign-flagged.

But, earlier this month, when Trump the Second raised the tariff on Turkish builds to 10 percent and on Taiwan builds to 34 percent, the people at Nordhavn were taken aback.

Long term, Nordhavn’s answer will not be a U.S. factory—the Trump administration’s stated goal. “You could build them in the U.S., but they are so labor-intensive, and they would cost so much that nobody would buy them,” Leishman said.

So, for Nordhavn’s U.S. customers—about half its buyers are American—the short-term and long-term answer is foreign flagging, even for its line of 41-footers built in Turkey, the smallest boat in the Nordhavn fleet, prices starting at $750,000.

As Lochner now says, even the old $300,000 tipping point no longer applies:

Before these tariffs vessel excise tax was five or six percent of the fair market value of the vessel capped at either $15,000 or $18,000 or New York, somewhere around $21,000. Five percent of $300,000 is $15,000. A vessel with a foreign flag gets a U.S. cruising permit and does not have to pay any excise tax to any individual state. The cost of importing the vessel used to be 1.5 percent, which which was also saved.

Now, if you get lucky, you’re going to owe $30,000 as the import duty on a $300,000 vessel then you’ll get the privilege of paying an extra $15,000 to the lowest possible cap states so now you’re $45,000-ish, and you have not used the boat yet. Your $300,000 vessel has cost you approximately $345,000. It’s $45,000 of extra taxes and import duty/tariff or $12,000 to your friendly local neighborhood maritime attorney. You can run the math at lower and lower values to see how much is the floor in terms of value of the vessel. And that’s before the 30 percent in addition for any Europen-built.

One of the jurisdictions that will benefit from a surge in foreign-flagging is the Marshall Islands, a sovereign nation in “free association with the United States.” This sprawling Pacific island nation of 60,000 people happens to have one of the three biggest ship registries in the world in terms of tonnage. Yachts are included in the mix.

The flag of the Marshall Islands.

Bikini is the name of an atoll in the Marshall Islands, known as the site of 28 nuclear tests conducted between the end of World War II and 1958, Today it is one of the Marshall’s hailing ports and, for sure, the sexiest.

Flagging authorities can be tight-lipped but International Registries, which provides administrative and technical support to the Marshall Islands, was willing to share a few basic stats. There are more than 5,700 vessels registered in the Marshall Islands with 1,068 being yachts, 621 of which are under 24 meters and 447 over 24 meters.

Ionna Hernandez, senior client manager at International Registries, says yacht specialists at the company’s offices in Ft. Lauderdale, Geneva, Istanbul, London, New York and Roosendaal are ready to handle any surge in applications. “Once all requisite documentation has been received, a yacht registration may be conducted in as little as 24 hours,” Hernandez said.

Mathew Miller is a maritime attorney in Florida and another specialist in foreign flagging. He and Leishman at Nordhavn share a concern that the administration might come to view flags of convenience as a loophole that needs to be closed, despite a couple centuries of precedents under maritime law.

“The big fear is that they’re going to come up with an order around tariffs and throw up a roadblock,” Leishman said. He said there are vessels being built right now, whose budgets cannot cover an extra high six-figure or a seven-figure tariff payment.

Despite worries, Miller predicted an increase in his own business as long as the economy manages to chug along amidst current uncertainty and confusion. But, he asked, what if the economy tumbles and people stop ordering new boats?

The flag of Vanuatu.