July 17, 2015 12:53PM

The Jones Act Strikes Again

People who have heard of the Jones Act (Merchant Marine Act of 1920) generally are aware that its stated purpose is to maintain a strong U.S. merchant marine industry.  Drafters of the legislation hoped that the merchant fleet would remain healthy and robust if all shipments from one U.S. port to another were required to be carried on U.S.-built and U.S.-flagged vessels.  Unfortunately, things haven’t worked out very well. 

The protectionism of the Jones Act has given the United States the type of merchant marine that would be expected from a sector that has been cut off from market forces for close to a century.  Instead of being a global powerhouse, the U.S. merchant fleet has become a minor player.  In 1955 the 1,072 ships in the fleet accounted for 25 percent of global tonnage.  Today the 191 vessels account for 2 percent of the world total.  Those vessels primarily carry cargoes from one U.S. port to another, along with government-generated exports, such as military equipment and food aid. 

Not surprisingly, shipping goods on a U.S.-flagged vessel is a high-cost proposition, which explains why the U.S. fleet simply can’t compete in normal global commerce.  A 2011 study by the U.S. Maritime Administration (Marad) showed that the average daily operating costs for American vessels were roughly three times higher than comparable vessels registered in other countries.

Currently there are only three U.S.-flagged dry-bulk vessels of the type used to haul grains, fertilizers, and coal.  Lack of availability of U.S.-flagged vessels to ship grains between U.S. ports helps to explain a news item from last week:  50,000 metric tons of Brazilian corn have been contracted for shipment to Wilmington, NC. 

The decision to bring more grain into North Carolina isn’t hard to understand.  The state ranks second in production of pigs and turkeys, fourth in production of broiler chickens, and ninth in production of eggs.  The state’s livestock industry is large, so its animals require a lot of feed. North Carolina and surrounding southeastern states don’t raise enough corn and soybeans to meet local demand.  The United States as a whole produces plenty of livestock feedstuffs – particularly corn and soybeans – more than any other country.  From a North Carolina perspective, too much of those crops grow in the wrong place.  Des Moines, IA, for example, is in the heart of the Midwest.  It also is well over 1000 miles away from livestock producers in North Carolina. 

A substantial quantity of corn and soybeans (or soybean meal) moves by train from the Midwest to feed mills in the Southeast.  However, rail transport of bulk commodities not only is relatively costly, the timing of shipments also can be unpredictable.  Trains moving from the western Corn Belt need to go through Chicago, the busiest rail junction in the country.  Trains have been known to be delayed for days just trying to transit that city.  It’s not fun to be raising pigs or chickens when the feed you need to keep them from getting hungry is stuck on a train far away.

Several years ago a group of North Carolina livestock producers took steps to deal with the challenge of procuring a steady supply of competitively priced feedstuffs.  They banded together to build a facility for unloading cargoes of grains or soybean meal from ocean-going vessels at the port of Wilmington.  Wilmington Bulk LLC provides a cost-effective entry point for water-borne cargoes, which helps to assure abundant feed supplies for North Carolina farmers.  Instead of being limited to sourcing grains and soybean meal in the Southeast or Midwest of the United States, those products now can be procured from anywhere in the world.

But why not simply ship corn from the Midwest to Wilmington by water?  Waterborne transport of bulk commodities generally is less expensive than moving them via rail or truck.  The United States already has a highly sophisticated system for transporting agricultural commodities from the Midwest to the Gulf of Mexico that uses the Mississippi River and its tributaries.  This country long has been the world’s largest exporter of grains and soybeans.  The majority of those exports move down the river system before being loaded onto ocean vessels near New Orleans.  Why not just contract with an ocean-going dry-bulk vessel to make the relatively short trip (approx. 1600 miles) from Louisiana to North Carolina instead of the much longer trip (approx. 4500 miles) from the port of Santos in Brazil?

Yes, the Jones Act makes the perfectly rational plan of moving Midwestern grain by water to North Carolina economically infeasible.  Recall that there are only three dry-bulk vessels in the U.S.-flag fleet, and that the daily cost of chartering those vessels would be roughly three times higher than international rates.  Under those circumstances, it’s not hard to understand why the operators of Wilmington Bulk find it most cost-effective to obtain their supplies from overseas and have them shipped on foreign-flagged vessels.

The solution to this problem, of course, would be to allow foreign-flagged vessels to carry shipments from one U.S. port to another.  The best way to achieve this would be to repeal the Jones Act.  (Sen. John McCain (R-AZ) has drafted legislation to do so.)  If special maritime policies are needed to meet national security requirements, they should be targeted thoughtfully so that they don’t interfere with commercial shipping.  Until maritime statutes are reformed, though, it can be expected that North Carolina’s pigs and turkeys will continue to enjoy feedstuffs from around the world.

(For more detail on the Jones Act, see this recent article by my Cato colleague, Scott Lincicome.)