January 6, 2020 3:35PM

New Legislation Highlights Lack of Jones Act Competition

Just before Christmas, Rep. Ed Case (D‑HI), citing the Jones Act’s contributions to Hawaii’s high cost of living, introduced three bills taking aim at the protectionist law. The first such bill, the Noncontiguous Shipping Relief Act, would exempt all non‐​contiguous U.S. locations from the Jones Act — essentially Alaska, Guam, Hawaii, and Puerto Rico — while the second bill, the Noncontiguous Shipping Reasonable Rate Act, would limit shipping rates to the noncontiguous states and territories to no more than ten percent above international shipping rates for comparable routes.

Perhaps most interesting, however, is the third piece of legislation. Known as the Noncontiguous Shipping Competition Act, the bill would grant Jones Act exemptions to any state or territory not served by at least three Jones Act ocean carriers, each of which must have at least 20 percent of the market. The bill, in other words, would grant exemptions from the law to those states and territories that suffer from monopolies or duopolies in the Jones Act trades.

Which is to say, all of them.

Ocean transport between the U.S. mainland and noncontiguous states and territories offers very little to choose from. Only two carriers, Matson and TOTE Maritime, provide ship service to and from Alaska while the Hawaii trade is the province of Matson and Pasha Hawaii (Matson admits as much in its most recent annual report, noting that it only faces “one major U.S. flag Jones Act competitor” in both markets). In Puerto Rico, meanwhile, a 2018 report sponsored by the pro‐​Jones Act American Maritime Partnership showed that 85 percent of the container capacity in its Jones Act trade is controlled by just two carriers, TOTE Maritime and Crowley.

Duopoly after duopoly after duopoly.

Compounding matters is that, due to the Jones Act’s U.S.-build requirement, the few carriers serving these areas must pay incredible sums for the ships they use. Matson, for example, paid approximately $918 million for its four most recent vessel acquisitions, while two ships on order from Pasha are said to have a combined price tag of over $400 million. In a foreign shipyard, these vessels would likely cost anywhere from one‐​quarter to one‐​fifth as much. That’s hundreds of millions of dollars in extra costs to be borne by shippers, and ultimately consumers.

Stifled competition and increased ship costs inevitably mean higher prices for transporting cargo to and from the U.S. mainland. That’s no small matter for the noncontiguous states and territories that overwhelmingly rely on shipping to acquire needed goods. And it’s not just more expensive transport. In some cases, the Jones Act fleet’s limited capabilities make the purchase of goods from the mainland outright impossible.

At this time, Rep. Case’s effort to relieve Hawaii and other noncontiguous parts of the United States from the Jones Act’s burden faces the longest of odds. Indeed, when he introduced three Jones Act reform bills in 2003 during a previous stint in Congress they did not receive so much as a committee hearing. It’s not clear that the political ground has sufficiently shifted in the intervening years to make passage a realistic outcome.

But encouragement can still be found in Rep. Case’s willingness to speak out about the issue in what is typically a pro‐​Jones Act echo chamber. While reforms to the Jones Act may not be imminent, perhaps the new legislation can help spark an overdue conversation about the costs stemming from this failed relic

November 19, 2019 3:22PM

Needed: Straight Talk on the Jones Act and LNG

Last week Aaron Smith, president and CEO of the Offshore Marine Service Association, testified before the House Subcommittee on the Coast Guard and Maritime Transportation. As the head of a group which ardently backs the Jones Act it was no surprise that Smith used his opening statement to press for an even more restrictive interpretation of the law’s provisions. Shortly after that statement he then had this exchange with Rep. Bob Gibbs (R‑OH), the subcommittee’s Ranking Member:

Gibbs: “We’re exporting LNG now — largest producer in the world of natural gas and oil. And my understanding is…we pick up LNG shipments in the Gulf area and then they export to other countries but to get LNG in needed areas of the country, like in New England area for example, they have to get it from foreign. What can we do to adjust, fix it? How can we handle it so we can, Americans can burn LNG, natural gas, domestically‐​produced LNG and natural gas?”

Smith: “Sure. Thank you for the question, Ranking Member Gibbs. The American maritime industry is willing to meet any challenge. And in fact, what we’re best at is overbuilding the market. If you give us the signals that a market will be protected, we’re probably going to build too many ships for it. And if you, with these signals now that LNG is going to be protected by this administration, what we’re seeing is even the European trade magazines are already saying that there’s going to be U.S. LNG capacity. One of my members just launched an ATB, an articulated tug and barge, to transport LNG. And I know that they can take that design, and are taking that design, to produce more of those so we can have that. It is my understanding, although this isn’t necessarily exactly what we do on a day‐​to‐​day basis, but it’s my understanding that we are right now basically at the export…there is no extra capacity in the export terminals. Once there is, we will have the vessels capable to carry that.”

Let’s review what happened here: Congressman Gibbs, perhaps mindful of New England’s need to import Russian liquefied natural gas (LNG) last year — and Puerto Rico’s complete dependence on foreign LNG — asked how U.S. LNG can be transported to these places. Smith responded with talk of excessive shipbuilding, LNG bunkering barges, and a lack of export capacity.

It was an astonishing display of misdirection.

Beyond the bizarre notion that market “protection” (i.e. reduced competition) leads to oversupply — surely news to economics professors everywhere — Smith’s citing of barges as evidence of the Jones Act fleet’s ability to transport LNG is preposterous. There are a total of two such Jones Act‐​compliant vessels, the Clean Jacksonville and the recently‐​launched Q‑LNG-4000. Both are primarily used for the refueling of other vessels.

What they are not used for, nor even capable of, is transporting bulk quantities of LNG for use in large‐​scale electricity generation. Neither vessel, in other words, will allow either New England or Puerto Rico to replace foreign imports with U.S. LNG.

The Clean Jacksonville, for example, has an LNG capacity of 2,200 m3 while the Q‑LNG-4000’s capacity is — as its name implies—4,000 m3. In comparison, the Gaselys, an LNG carrier that delivered Russian gas to New England in 2018, has a carrying capacity of 154,500m³.

LNG barges and LNG carriers both transport LNG in the same sense that bicycles and buses both transport people. But one is not a substitute for the other.

The claim, meanwhile, that there is a lack of LNG export capacity to meet domestic needs doesn’t pass the smell test. Consider the following:

  • The International Gas Union’s 2019 World LNG Report shows 29 of 37 LNG‐​importing countries meeting at least some of their needs with U.S. LNG (and one of the importers listed that didn’t purchase U.S. LNG, Puerto Rico, is subject to the Jones Act). The idea that the United States has sufficient LNG to export it all over the world, yet none available for domestic maritime transport, seems suspect.
  • An August 2018 McKinsey & Co. analysis noted that foreign LNG purchased to meet New England’s needs the previous winter was “$1.6/mmbtu above the cost of loaded spot LNG” at the LNG export facility at Sabine Pass, Louisiana. “The core restriction preventing traders from capitalizing on this arbitrage” according to McKinsey, was not a lack of export capacity, but rather the Jones Act.
  • A July 2019 Wall Street Journal article about the U.S. natural gas boom noted that “These days, it’s a hassle getting gas from drilling fields like the Marcellus and Utica shales in Appalachia, and the Permian Basin in West Texas, to customers in northern cities,” citing a lack of domestic LNG tankers and a “99‐​year‐​old law [that] prevents foreign tankers from shipping gas within the U.S.”
  • A July 2019 report from S&P Global Platts states that “Platts Analytics estimates that as much as 60%-80% of US LNG was either swapped or sold on spot/​short‐​term tender in 2018.” The existence of such a vibrant spot market speaks to the availability of U.S. LNG for those willing to meet the market price.

Smith’s unwillingness to paint an accurate picture of the situation is understandable. Admitting that the Jones Act and the vessels that serve under its restrictions are incapable of meeting the U.S. economy’s needs would be a bitter pill to swallow. Indeed, it would call the law’s entire logic into question.

So here’s the straight talk that Smith is unwilling to provide: the “fix” for allowing Americans to burn domestically‐​produced LNG is repeal or significant reform of the Jones Act.

As long as the Jones Act exists in its current form, the ships needed to transport U.S. LNG to domestic customers will not. The math simply doesn’t add up. No LNG carrier meeting the Jones Act’s restrictions, particularly its costly U.S.-build requirement, will be competitive in the international transport market. And with purely domestic business insufficient to keep such a ship employed on a full‐​time basis, there is no economic case for its construction.

It’s good to see members of Congress asking questions about the inability of Americans to consume U.S. LNG. But as long as the Jones Act lobby is tasked with responding, needed facts will remain elusive. 

November 12, 2019 12:07PM

Assessing the Jones Act’s National Security Rationale

The Jones Act has been a blight upon the United States for nearly 100 years. That the law survives despite its well‐​documented costs can in large part be ascribed to frequently made claims that it is vital to U.S. national security.

Such claims should be greeted with a skeptical eye.

As I explain in a new paper, decades of evidence suggest any contributions made by the law to national security are vastly overstated. In fact, there is considerable reason to think the Jones Act is a net national security liability.

The facts are these: under the Jones Act’s watch the U.S. maritime sector has suffered grievous setbacks. Numerous shipyards have closed, the domestic fleet’s numbers have dwindled, and the pool of mariners that the military draws upon to crew its sealift fleet has become perilously shallow. Rather than ensuring, as the law states in its purpose, a “merchant marine of the best equipped and most suitable types of vessels” capable of “serv[ing] as a naval or military auxiliary in time of war or national emergency” the Jones Act has produced a depleted, decrepit fleet of limited capabilities.

The Jones Act is complicit in this decline. The law, after all, is rooted in an absurd logic: that to promote both a strong U.S. shipbuilding sector and domestic fleet the latter must be compelled to purchase from the former. The result is the achievement of neither, which is the predictable outcome of linking two protected, uncompetitive sectors together.

U.S. commercial shipyards, oriented towards the captive Jones Act market, lack the scale and specialization that can only be achieved by building for the international shipbuilding market. As a result, the limited number of ships they produce are up to five times more expensive than those built abroad. It is a testament to their technological inferiority and lack of productivity — hallmarks of protected markets — that they do so while offering wages that are lower than those of most leading shipbuilding countries.

International Shipbuilding Labor Rates

Jones Act carriers that operate these wildly expensive ships, meanwhile, are forced to pass their acquisition costs along to consumers in the form of higher shipping rates. This, in turn, means less demand for their services, and thus fewer ships and mariners. Where consumers have a choice, they almost invariably opt for other forms of transportation such as trucks, railroads, and pipelines. Indeed, the 99 ship Jones Act fleet almost exclusively operates where there is low elasticity of demand and little competition, serving the shipping‐​dependent noncontiguous states and territories and the needs of the world’s largest oil‐​producing country (tanker ships account for 57 of the fleet’s 99 ships and roughly 80 percent of its deadweight tonnage).

Conceived in protectionist fallacies, the case for maintaining the 1920 Jones Act becomes ever more tortured given its increasingly glaring divorce from modern maritime realities. Among these:

  • The sharp rise in cost differences between U.S. and foreign‐​built ships. Shortly after the Jones Act was passed a U.S.-built ship was typically about 20 percent more expensive than one built abroad. That cost difference can now reach 400 percent.
  • The increased specialization of commercial ships. The military places a premium on flexible vessels that can operate in a variety of port environments and carry different types of cargo, while the commercial sector prizes ships geared towards specific tasks that disperse their cargo in modern ports. This makes the ships of the Jones Act fleet less valuable to the military.
  • The heavy reliance of U.S.-built Jones Act ships on foreign capital, components, and know‐​how. Jones Act ships almost invariably use foreign designs and are heavily dependent on foreign sources for critical components such as the engine and propeller. Furthermore, the shipyards themselves are often the subsidiaries of foreign parent corporations. Any notion that the high price of Jones Act ships has produced a U.S. shipbuilding capability free of foreign dependence is entirely illusory.

A new approach is needed.

Rather than maintain the Jones Act status quo with its opaque costs and inequitable burdens that are disproportionately placed upon Alaska, Hawaii, and Puerto Rico, the United States should consider some of the following measures to meet the U.S. military’s need for ships and mariners to transport supplies and equipment:

  • The establishment of a civilian Merchant Marine Reserve. The military currently lacks needed certainty around the availability of manpower to crew its sealift vessels in wartime. U.S. merchant mariners, meanwhile, are not provided with the training and benefits commensurate with their role in assuring U.S. national security. A civilian Merchant Marine Reserve could help address this.
  • Wage subsidies to the employers of U.S. mariners. To make the employment of U.S. mariners more attractive, the United States could offer wage subsidies to those who employ them in exchange for an agreement that they be released for wartime service with guaranteed employment upon their return.
  • Allowing the use of foreign mariners in some circumstances. To ease crew shortages the United States should consider the use of foreign mariners in some circumstances. To help mitigate possible risks measures such as background checks and eligibility restrictions to citizens of certain countries could be implemented.

To learn more please read the paper in its entirety here and visit Cato’s dedicated Jones Act webpage.

November 4, 2019 3:17PM

Want Americans to Buy U.S. Products? Dump the Jones Act.

Jones Act supporters often argue that the law, which mandates the use of U.S.-flagged, U.S.-built vessels that are at least 75 percent U.S. owned and crewed for purposes of domestic transport, epitomizes President Trump’s philosophy of “America First.” But as a new Wall Street Journal editorial points out, the truth is perhaps closer to the opposite:

[The Jones Act is] a particular problem for liquid natural gas, since there are zero LNG tankers that meet Jones Act rules. That means Puerto Rico effectively is barred from importing gas from LNG terminals in Georgia or Louisiana. As a result, it apparently turned to Siberia. The same happened two winters ago in New England, where gas is short due to a lack of pipeline capacity. A tanker of Russian gas was unloaded in Boston. How is this an “America First” policy?

The problem goes well beyond LNG. There are no Jones Act‐​compliant liquefied petroleum gas (LPG) carriers either, so Hawaii, New Hampshire, and Puerto Rico must meet their propane needs by importing it from as far away as West Africa. This is happening even though the United States is the world’s top LPG exporter. The United States is also one of the world’s leading exporters of asphalt, but the absence of Jones Act asphalt carriers means that Hawaii must import it from abroad.

Even when the appropriate Jones Act ships actually exist, they are typically much more expensive to use. Their high costs are such that California imports oil from Nigeria—going around the tip of South America — instead of the Gulf Coast. The journey may be far longer, but the cost of Jones Act shipping helps tip the math in favor of African oil.

That’s no surprise. A 1999 GAO report found that it was three times more expensive to send oil from Alaska to the Gulf Coast than to the Jones Act‐​exempt U.S. Virgin Islands. Amazingly, that’s despite the latter journey, via Cape Horn, taking twice as long (84 versus 41 days). A 2014 Congressional Research Service report found that shipping oil aboard Jones Act tankers from Texas to refineries in the Northeast was up to three times more expensive than shipping the oil to Canada.

A 2013 GAO report examining the Jones Act’s impact on Puerto Rico, meanwhile, described expensive Jones Act transport being a decisive factor in the decision to source products such as corn, potatoes, and fertilizer from abroad instead of domestically. The importation of jet fuel from Venezuela was also mentioned. This, according to the report, was due to the “difficulty in finding available Jones Act vessels to transport jet fuel and, when vessels are available, the high cost of such shipments compared to shipping the product from foreign countries.”

Let’s be clear: there is absolutely nothing wrong with Americans purchasing foreign products. Access to imports raises both productivity and consumer welfare. But just as the United States should not shun goods made abroad, neither should the U.S. government effectively place its thumb on the scale in favor of imports through misguided policies such as the Jones Act. At the very least, Americans should have the option of buying U.S. products, which is a current de facto impossibility for many given the Jones Act fleet’s decayed state.

Truly putting “America first” should mean substantial reform or repeal of the Jones Act.

October 23, 2019 11:00AM

Why Is an Energy Powerhouse Importing Russian LNG?

In the coming days a Spanish‐​flagged ship, the Catalunya Spirit, will deliver a shipment of Russia‐​originated liquefied natural gas (LNG) to Puerto Rico. Bizarrely, the United States — a leading exporter of LNG — is nonetheless importing it from a geopolitical rival. And this isn’t a first. Last year a supply of Russian LNG arrived in Boston amidst a spike in demand to fight off the winter cold.

So what gives?

Basically, the Jones Act. This 1920 law mandates that vessels transporting cargo within the United States must be U.S.-registered, at least 75 percent U.S.-owned, at least 75 percent U.S.-crewed, and U.S.-built. But no ships capable of transporting LNG in bulk quantities that meet these requirements exist. Of the world’s more than 525 LNG carriers, not a single one is Jones Act‐​compliant. And so even as ships laden with U.S. LNG voyage to countries as distant as India and Japan, it cannot be sent by water to other parts of the United States.

This is almost certain to remain the case so long as no changes are made to the Jones Act. The law’s strictures virtually guarantee that transporting U.S. LNG to Puerto Rico, or via ship to any other part of the United States, will never make economic sense.

The cost of ship construction alone is prohibitive. According to the Wall Street Journal, a U.S.-built LNG carrier would cost over half a billion dollars more than one purchased from a South Korean shipyard ($700 million versus $180 million). Beyond the general inefficiency of U.S. commercial shipyards, this differential is explained by a lack of expertise — U.S. shipyards have not built an LNG carrier since 1980. In a 2015 GAO report one U.S. shipyard admitted that to build such a ship it would have to “hire an additional 250 to 300 skilled Korean workers for the duration of the build time to ensure the work is done correctly.”

Crewing the ship with Americans still further diminishes the attractiveness of a Jones Act‐​compliant LNG carrier. U.S.-flagged ships are estimated to have operating costs in excess of $6 million per year compared to ships operating under foreign flags, with U.S. crews the primary cost driver.

To make the math pencil out, a Jones Act‐​compliant LNG carrier would have to charge rates well above those of foreign‐​flagged carriers. This would cut into the savings of using cheap U.S. LNG in the first place, if not erase it entirely. And when such a ship was not delivering LNG to Puerto Rico, how would it earn its keep? For deliveries to international destinations the ship would have to compete against foreign‐​flag vessels with far lower costs. Any U.S.-built and U.S.-crewed LNG carrier would almost certainly be unemployable and unviable on a long‐​term basis.

Flying cows and the importation of Russian gas — the gross inefficiencies wrought by the Jones Act would be laughable were they not so serious.

October 1, 2019 3:04PM

Old Ships Still Abundant in the Jones Act Fleet

Four years ago today the United States suffered a horrible maritime tragedy with the sinking of the Jones Act‐​qualified containership El Faro. Caught in the midst of Hurricane Joaquin during its voyage from Jacksonville, Florida to San Juan, Puerto Rico, the ship was lost with all hands. Although investigations performed by the Coast Guard and National Transportation Safety Board largely assigned blame for the disaster to the ship’s captain for his failure to divert away from the storm, the El Faro’s advanced age also garnered considerable attention. Built in 1975, the ship was 40 years old when it slipped beneath the heaving waves.

For an oceangoing ship that is ancient. A ship’s useful life is commonly estimated to be anywhere from 20 to 30 years, and some observers place that figure even lower. U.S. Maritime Administrator Mark H. Buzby has testified before Congress that “in the commercial world it’s rare to see a ship beyond about 15 or 20 years.”

But ships long past their normal useful lifespan remain abundant within the Jones Act fleet. Just last week the Lihue, the world’s second‐​oldest containership at 48 years of age, was placed back in service by carrier Matson after being laid up for 11 months. And that’s not even the oldest Jones Act ship. The Chemical Pioneer, a vessel partially made from the charred hulk of a wrecked containership, was built in 1968. A general cargo ship, the Coastal Trader, was built in 1963.

The evidence goes beyond anecdotes. According to the Maritime Administration’s latest statistics, 30 of the 99 Jones Act ships in existence were built in 1994 or earlier. The Jones Act fleet’s nine general cargo ships average 35 years of age while its two dry bulk ships average 38. Jones Act containerships may seem like spring chickens at 24 years of age, but their youth is very much a Jones Act‐​specific context; their international counterparts average a mere 12.

Fortunately, a handful of new ships are on the way. Matson’s ships Lihue and the 1973‐​built Matsonia are set to be replaced by the Lurline, slated for delivery later this month, and another ship also named the Matsonia next year. Carrier Pasha Hawaii, meanwhile, will take delivery of two containerships next year. Even after removal of these elderly ships and the addition of new ones the Jones Act fleet’s containerships will still average at least 20 years of age.

And then the fleet will once again start to advance in age. No additional orders for new ships are on the books and, as maritime publication Marine Log reported in June, “nobody is seeing much of a market developing for further replacement oceangoing Jones Act containerships or tankers.” In other words, after 2020 it will likely be years until the next new Jones Act ship arrives. 

This reluctance to purchase new ships despite the fleet’s relative decrepitude is easily explained by the Jones Act’s prohibition on the use of dramatically cheaper foreign‐​built ships. Matson’s latest two ships have a reported price tag of $511 million for the pair. The construction of similar vessels abroad likely would have cost one‐​fifth as much. These high prices serve as a barrier to market entry, raise the cost of transportation, and result in U.S. mariners plying their trade aboard ships that should have been retired long ago.

Reform, if not outright repeal, is urgently needed.

August 26, 2019 3:27PM

An Opportunity for Trump to Lead on Jones Act Reform

President Donald Trump and U.K. Prime Minister Boris Johnson met on the sidelines of the G7 summit this weekend, and among the issues discussed was a possible U.S.-U.K. free trade agreement. In public remarks Johnson made clear his desire that such a deal include cabotage privileges for U.K.-flagged ships:

PRESIDENT TRUMP: We’re having very good trade talks between the UK and ourselves. We’re going to do a very big trade deal — bigger than we’ve ever had with the UK.

And now, they won’t have it. At some point, they won’t have the obstacle of — they won’t have the anchor around their ankle, because that’s what they had. So, we’re going to have some very good trade talks and big numbers.

PRIME MINISTER JOHNSON: Talking of the anchor — talking of the anchor, Donald, what we want is for our ships to be able to take freight, say, from New York to Boston, which at the moment they can’t do. So, we want cabotage. How about that?

PRESIDENT TRUMP: Many things — many things we’re talking about.

PRIME MINISTER JOHNSON: That would be a good thing.

Preventing British ships from transporting goods between two U.S. ports is the Jones Act. Passed in 1920, the law restricts domestic waterborne transport to vessels meeting four conditions: they must be U.S.-built, U.S.-flagged, at least 75 percent U.S.-owned, and at least 75 percent U.S.-crewed.

Given Johnson’s comments, it seems likely that British trade negotiators will seek an exemption from this law for U.K.-flagged ships. If granted, their U.S. counterparts will surely demand the removal of various trade barriers to the $2.6 trillion U.K. economy. For Americans this would be an economic twofer, providing them access to a wider range of transport options as well as expanded export opportunities.

Unfortunately, history does not augur in favor of such an outcome. When presented with demands for Jones Act relief U.S. trade negotiators have invariably refused to cede even an inch of ground — an intransigence which reflects the power of the lobbyists who back the law. Indeed, during bilateral trade negotiations with Canada in the 1980s the Jones Act lobby was able to persuade more than half the members of the Senate and House to sign resolutions declaring the Jones Act off the table.

But there was a price to be paid. Not only were Americans denied the ability to use Canadian vessels for domestic transport but — as a former Canadian diplomat points out—the Jones Act was used as a means to deflect from areas where Canadians were loath to part with their own protectionist policies:

Mackay

Americans are still paying the price for Jones Act protectionism. Continued U.S. obstinacy over the law in trade negotiations is undoubtedly met with corresponding moves from its negotiating partners. That’s how the game is played.

During talks that eventually resulted in the U.S.-South Korea free trade agreement, for example, South Korea — home to one of the world’s largest shipbuilding industries — no doubt raised the issue of the Jones Act’s U.S.-build requirement. U.S. negotiators did not accommodate them, and it’s a safe assumption that barriers to the South Korean economy which otherwise could have been removed were left in place (rice, which was specifically excluded from the deal by South Korea, seems one strong possibility). 

This is just another one of the myriad ways in which the Jones Act harms the United States. These harms include: higher transportation costsincreased congestion and highway maintenance costs; more pollution; the inability of Americans to buy U.S. products; and increased barriers to U.S. exports from our trading partners. The tally from these various costs is surely dizzying.

Boris Johnson has done President Trump a favor. With the Jones Act now on the negotiating table, an opportunity has been presented to expand economic freedom at home and increase export opportunities for U.S. businesses abroad. It’s one that Trump should seize.