March 18, 2019 10:49AM

New Jones Act Ship No Cause for Celebration

Earlier this month a new Jones Act‐​eligible ship, Kaimana Hila, was officially christened when Rep. Tulsi Gabbard broke a ceremonial champagne bottle against the ship’s super‐​structure. On the surface, the new vessel is a triumph. At 850 feet in length and featuring a cargo capacity of 3,600 TEUs Kaimana Hila is—along with sister ship Daniel K. Inouye—the largest containership in the Jones Act fleet. But this is no shining example of U.S. seagoing prowess. In fact, the ship is in many ways symptomatic of the damage and dysfunction wrought by the Jones Act upon the U.S. maritime industry. Such dysfunction begins with the vessel’s $209 million price tag (Kaimana Hila and Daniel K. Inouye were purchased for a combined price of $418 million). In comparison, one of the largest containerships in the world, OOCL Hong Kong, features a cargo capacity of 21,413 TEUs but a purchase price of just $158 million (six of these G‐​class ships were built by Samsung Heavy Industries for $950 million). That’s $51 million less for a ship capable of transporting six times more containers.

But the rot goes deeper. Despite charging such high prices for Kaimana Hila and Daniel K. Inouye, the company that built these ships has needed hundreds of millions of dollars in subsidies over the last 20 years to stay afloat. As detailed by the Philadephia Inquirer, over this time the Philly Shipyard has received government largesse ranging from tax deferrals to funding for employee training to a $438 million taxpayer‐​funded rebuilding of the shipyard in 1997 (nearly $700 million in 2019 dollars). The shipyard itself is leased from the city government for a mere $1 per year. To these subsidies should be added the Jones Act’s domestic‐​build requirement, which forces Americans to purchase ships for domestic trade from the Philly Shipyard and its handful of U.S. competitors. Indeed, it might be the biggest subsidy of all. Yet the Jones Act has proven to be something of a poisoned chalice for the Philly Shipyard. The high cost of U.S. shipbuilding has meant a diminished appetite for its commercial offerings, and the company’s outlook is increasingly bleak. So much so that the Philly Shipyard’s CEO has admitted that to assure its future the facility will need to rely upon government contracts for the majority of its business:

The shipyard has relied on the Jones Act, which requires that ships carrying goods between U.S. ports be made in the U.S., for orders, but there’s no longer enough of that business to go around. Over the next decade, [Philly Shipyard CEO Steinar] Nerbovik envisions that within a mix of government and commercial work, government contracts will predominate. “We have too little work today,” Nerbovik acknowledged. The company had a $5.6 million loss in the first half of the year, and has reduced its workforce by 50 percent, from 1,200 people to 600. “We have said to some of our people, ‘I’m sorry, I have to lay you off for some months, but I hope to get you in again in a very short time.’ ”

In other words, rather than kickstarting a vibrant shipyard the combination of subsidies and Jones Act protectionism has only succeeded in fostering more government dependency. The coda to this story is that Kaimana Hila will soon enter service transporting goods for Matson Inc. which, along with Pasha Hawaii, form a duopoly in transporting goods between the West Coast and Hawaii. Given such limited competition as well as the vastly inflated prices for the U.S.-built ships these carriers are required to use, the inevitable result is higher costs for Hawaii residents. Indeed, if this was not the case it would defy our most fundamental understanding of economics. Kaimana Hila, then, is the story of a vastly overpriced ship built by a protected and subsidized shipyard facing an uncertain future which will now be used by a duopolist to gouge Hawaiian consumers. Only in Washington could this be considered a policy success that must be defended at all costs.