Tag: Jones Act

Navarro Misses the Boat on the Jones Act

In a recent Philadelphia Inquirer opinion piece White House economic advisor Peter Navarro hailed the christening of a new transport ship in the nearby Philly Shipyard as evidence of the “United States commercial shipbuilding industry’s rebirth.” As is typical of Navarro’s pronouncements, the reality is almost the exact opposite. In fact, a closer examination of the ship’s construction reveals it to be symptomatic not of a rebirth, but of the industry’s long downward slide.

Named after the late Senator Daniel K. Inouye of Hawaii, Navarro describes the 850-foot Aloha-class vessel as “massive” and notes that it is “the largest container ship ever built in the United States.” This, however, is somewhat akin to the tallest Liliputian. Although perhaps remarkble in a domestic context, by international standards the ship is a relative pipsqueak. Triple-E class ships produced by Daewoo Shipbuilding & Marine Engineering for Maersk Line, for example, are over 1,300 feet in length. While the Inouye’s cargo capacity is listed at 3,600 TEUs (twenty-foot equivalent units, roughly equivalent to a standardized shipping container), the Triple-E class can handle 18,000.

The only thing truly massive about the Inouye is its cost. The price tag for this vessel and another Aloha-class ship also under construction at the Philly Shipyard is $418 million, or $209 million each. The Triple-E vessels, purchased by Maersk Line, meanwhile, each cost $190 million. The South Korean-built ships, in other words, offer five times the cargo capacity for nearly $20 million dollars less.

But the story gets worse.

The Wall Street Journal reports that after the Philly Shipyard completes work on “two small ships”—a reference to the Inouye and its sister vessel—it has no more orders lined up. The shipyard is already laying off 20 percent of its workforce and the dearth of future work has prompted speculation of a possible shutdown. Sadly, the Philly Shipyard’s travails are hardly atypical of the U.S. shipbuilding industry, and even Navarro admits that the sector has seen its workforce decline from 180,000 in 1980 to 94,000 today.

And yet we are to believe that the Inouye’s construction heralds the pangs of an alleged rebirth? 

At least credit the White House advisor for assigning proper blame for this sad state of affairs (which he misguidedly presents as credit). The Inouye, Navarro says, is in large part the result of a protectionist law called the Jones Act. He’s not wrong. Formally known as the Merchant Marine Act of 1920, the law mandates that ships transporting merchandise between two domestic ports be U.S.-built, U.S.-owned, U.S.-flagged, and U.S.-crewed.

The result is that instead of purchasing cheaper foreign-built ships, Americans are faced with enormous prices for relatively small ships. The cost of transportation, in turn, is higher than what it would otherwise be while the number of Jones Act-compliant vessels has gone down, along with jobs for mariners and shipbuilders. Those ships that remain, meanwhile, are far older than the foreign counterparts—no surprise given the cost deterrent to buying new ships. While the Inouye is brand new, the average Jones Act containership is 20 years old. The international average is 11.5.

Consistent with other protectionist misadventures, the Jones Act’s list of victims includes those it was meant to help.

Rather than recommitting to the Jones Act and other failed forms of maritime protectionism as Navarro is so eager to do, the United States should instead be aggressively seeking this law’s repeal. An increasingly untenable status quo demands nothing less. Learn more about Cato’s Project on Jones Act Reform.

U.S. Maritime Sector Among the Jones Act’s Biggest Victims

Monday of this week marked the Day of the Seafarer, an occasion meant to recognize the critical role played by mariners in the global economy. American seafarers, however, increasingly find little to celebrate. A large source of their travails is the Jones Act. Signed into law 98 years ago this month, the law mandates that cargo transported between two domestic ports be carried on ships that are U.S.-built, U.S.-owned, U.S.-flagged, and U.S.-crewed.

The harm caused by this law is well documented. By reducing competition from foreign shipping options and mandating the use of domestically built ships that are vastly more expensive than those constructed elsewhere, the Jones Act has raised transportation costs and served as a de facto tax on the economy.

Too often overlooked is that the Jones Act has also presided over the decimation of the U.S. maritime sector, the very industry whose fortunes it was meant to promote (an age-old story in the annals of protectionism). The numbers speak for themselves. Since 2000 the number of oceangoing vessels of at least 1,000 tons which meet the Jones Act’s requirements has shrunk from 193 to 99. A mere three U.S. shipyards are capable of producing oceangoing vessels for commercial shipping, and one of them, the Philly Shipyard, is facing a possible shutdown. Europe, in contrast, has roughly 60 major shipyards capable of building vessels of at least 150 meters in length, while the United States has a total of seven such shipyards when those producing military vessels are included.

Both the declining number of Jones Act ships and the struggles of the shipyards that build them are in large part explained by the vastly inflated cost of ships constructed in the United States. According to the Congressional Research Service, American-built coastal and feeder ships—the types of ships commonly used in domestic sea transport—cost between $190 and $250 million, whereas similar vessels constructed in a foreign shipyard cost about $30 million.

One unsurprising consequence of such stratospheric costs is a reluctance on the part of domestic shipping firms to invest in new ships, with U.S. seafarers forced to work aboard vessels that are significantly older than those found in other countries. Excluding tankers (these vessels were subject to a requirement in the wake of the Exxon Valdez oil spill that they be double-hulled by 2015, thus encouraging the purchase of new ships and decreasing their average age), the Jones Act fleet averages 30 years of age—fully 11 years older than the average age of a ship in the merchant fleet of other developed countries. For context, the maximum economic life of a ship in the world market is typically 20 years

International comparisons of specific ship types are even more eye-opening. Jones Act containerships, for example, average more than 30 years old. The international average is 11.5. The only two bulk ships in the Jones Act fleet average 38 years old, while the international average is 8.8. General cargo ships average 34 years of age compared to an international average of 25.2.

Struggling shipyards, a dwindling fleet of old ships, and fewer jobs are now the order of the day in the maritime sector. As Mark H. Buzby, head of the U.S. Maritime Administration, testified before Congress earlier this year, “over the last few decades, the U.S. maritime industry has suffered losses as companies, ships, and jobs moved overseas.” Also addressing members of Congress, one senior union official admitted that “the pool of licensed and unlicensed mariners has shrunk to a critical level.”

This is not a new story. During Operations Desert Shield and Desert Storm, the United States was so desperate for civilian mariners to crew transport vessels that it enlisted the services of two octogenarians and one 92-year-old. Its search for ships was equally frantic, resulting in two requests to borrow a ship from the Soviet Union—and two rejections. Notably, during this conflict a much larger share of U.S. military equipment and supplies was carried by foreign-flagged vessels (26.6 percent) than U.S.-flagged commercial vessels (12.7 percent).

Supporters of the Jones Act often claim the law is vital to assure a strong merchant marine capable of answering the country’s call in times of war or national emergency. Should the Jones Act be repealed, they warn that the maritime industry will enter a dangerous downward spiral. But the record clearly shows that their nightmare scenario, in fact, describes the status quo. It’s time for this law to go, or be significantly reformed.

Toward that end the Cato Institute has unveiled its Project on Jones Act Reform, which will feature a series of policy papers exposing the fallacies and realities of this archaic law. This first of these policy analyses, The Jones Act: A Burden America Can No Longer Bear, is now available and provides an overview of the law, its history, and myriad shortcomings. More such policy analyses will follow both this year and next, along with other commentary pieces about this failed law, so be sure to check back for the latest updates. 

For Lower Gas Prices, Scrap the Jones Act

Drawing attention to rising gas prices this week, Senate Minority Leader Charles Schumer (D-New York) called for President Trump to ease pain at the pump by leveraging his relationships with key OPEC leaders as well as the presidential bully pulpit to exert pressure on oil companies. “These higher oil prices are translating directly to soaring gas prices, something we know disproportionately hurts middle- and lower-income people,” the senator added.

While his apparent belief that gas prices are determined more by the whims of corporate leaders than market forces is severely misguided, Sen. Schumer’s stated concern for the welfare of American consumers is welcome. Rather than rely upon President Trump’s ability to cajole foreign and corporate leaders into lowering the cost of gas, however, Sen. Schumer should introduce legislation to repeal the Jones Act.

Passed in 1920, the Jones Act mandates that ships which transport goods between domestic ports be U.S.-built, U.S.-flagged, and at least 75 percent U.S.-owned and crewed. Such strictures, in turn, raise transportation prices by eliminating access to cheaper options which do not meet these requirements. This cost increase reverberates throughout the economy, with few parts harder hit than the energy sector. Although the total cost of the distortions imposed upon this key industry is unknown, anecdotal evidence suggests that it is significant. Consider:

  • A 2014 Congressional Research Service report found that the purchase price of U.S.-built tankers is “about four times the price of foreign-built tankers, and U.S. crewing costs are several times those of foreign-flag ships.” Given such a cost structure it’s no surprise the report also found that shipping crude oil from the Gulf Coast to the Northeast on Jones Act-compliant tankers costs roughly three times greater than shipping the oil a longer distance to Canada on foreign-flagged ships ($5 to $6 per barrel versus $2 per barrel). Professor James Coleman of Southern Methodist University, meanwhile, points out that refineries in this part of the country “pay more than three times as much to ship oil from Texas rather than from West Africa or Saudi Arabia.” 
  • 1999 Government Accountability Report (GAO) report stated that, incredibly, the cost to ship oil from Alaska’s North Slope aboard foreign-crewed and built ships to the U.S. Virgin Islands—which is exempt from the Jones Act—was approximately three times less than to the Gulf Coast on Jones Act vessels ($2.35 per barrel versus $7.15 per barrel).
  • A 2013 GAO report noted that “representatives of airlines purchasing jet fuel for use in Puerto Rico told us that they typically import fuel to the island from foreign countries, such as Venezuela, rather than from Gulf Coast refineries.” This occurs, the report added, “because of 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.”
  • According to the CEO of the Overseas Shipping Group, a provider of energy transportation services, the cost of hiring a Jones Act ship for crude service is about three to four times higher than using a foreign-flagged vessel. 

This is but a sample of the costs imposed by the Jones Act, which drives up the price of gas and all manner of goods purchased by Americans. If Sen. Schumer and his fellow Democrats are serious about their desire to ease the financial burden placed on Americans by the rising cost of oil, scrapping or deeply reforming this nearly 100-year-old law would be an excellent place to start.

America’s Finest: The Critics Respond

In a recent opinion piece for the Wall Street Journal I highlighted the plight of America’s Finest, a fishing vessel that, unless it is granted a waiver, will be prohibited from operating in U.S. waters due to its violation of the Jones Act. Although built in Washington state, the ship used steel, amounting to approximately 10 percent of the ship’s weight, that was cut and bent in the Netherlands. Coast Guard rules related to the Jones Act limit the amount of such foreign-modified steel to 1.5 percent (foreign-made raw steel, in contrast, can be used in unlimited amounts). 

Unsurprisingly the column has generated some notes of dissent, including a letter to the editor from Chris Philips, the managing editor of Fishermen’s News:

Regarding Colin Grabow’s “The Jones Act Drives America’s Finest Into Exile” (op-ed, April 30): The Jones Act is a cabotage rule similar to those enacted in most countries having a coastline, including Canada, Japan, South Korea, China, Germany and France. Mr. Grabow claims: “The shipyard says it simply wasn’t aware of the rule.”

The shipyard in question has been building Jones Act vessels for more than 40 years. No one at Dakota Creek Industries, from the security guard to the president, is unaware of the rule.

Mr. Philips is correct that the Jones Act is a cabotage rule. His contention that it is similar to those of most countries, and those he lists in particular, however, is incorrect. The World Economic Forum, for example, has described the Jones Act as the “most restrictive example” of such laws and none of the countries listed by Philips feature the Jones Act’s requirement that ships engaged in cabotage trade be domestically built. Furthermore, both Germany and France as members of the European Union allow ships from other EU members to engage in cabotage.

As for the claim by the shipyard which built America’s Finest that it was “wasn’t aware of the rule,” a fair reading of my column makes plain that this was in reference not to the Jones Act, but rather its specific restriction that foreign-modified steel is limited to 1.5 percent of the ship’s weight. Indeed, I cited that 1.5 percent figure in the sentence preceding the claim about a lack of awareness. 

Philips then continues:

Mr. Grabow says the price of new vessels encourages the use of older ships. This is a no-brainer and a non sequitur. The same market forces apply to any depreciable asset world-wide. He also makes the oft-repeated claim that the Jones Act “made it difficult to ship emergency aid to Puerto Rico.” This is simply false.

Such comments reflect a failure to engage with the substance of what I wrote. By prohibiting access to foreign-built ships—or in this case, domestically-built ships which use too much foreign-worked steel—the Jones Act artificially drives up the cost of newer vessels. This, in turn, forces mariners to work on ships that are less safe and efficient than newer vessels. Indeed, the company which ordered America’s Finest was motivated in part by a desire for greater efficiency and to provide its employees with safety improvements. This is by no means a non sequitur, and gets to the core of the burden imposed by the Jones Act.

Regarding aid to Puerto Rico, meanwhile, I stand by my words. Greenpeace, for example, says that it would have been easily able to transport donated supplies on a foreign-registered vessel to Puerto Rico absent the Jones Act, but instead the matter was “quite complicated.” Economist Thomas Grennes further notes that a “Norwegian-flag ship that was docked in New Orleans offered to take supplies to Puerto Rico, but the waiver expired before it could complete its voyage.” 

Philips concludes:

The Jones Act exists to protect our nation’s shipbuilding industry, which is critical to the security of this country. Those of us in the maritime and military fields understand this very well.

If this is so then the Jones Act, as typical of protectionist schemes, is a failure. In 2015 the U.S. Maritime Administration (MARAD) listed the number of active shipyards in the United States at 124 of which only 22 are “mid-sized to large shipyards capable of building naval ships and submarines, oceangoing cargo ships, drilling rigs and high-value, high-complexity mid-sized vessels.” In comparison, Japan currently has over 1,000 shipyards and it is estimated that China has over 2,000. Europe has roughly 60 shipyards capable of producing ships at least 150 meters in length. 

Measured in terms of output the picture is equally dismal, with the shipbuilding sector hugely dependent on government contracts. As MARAD itself notes, 10 out of 12 large deep-draft vessels delivered in 2014 were to U.S. government agencies and “98 out of the 150 new vessels ordered from U.S. private shipbuilders [that year] were for the U.S. military.” This lack of competitiveness and dependence on government is also evidenced by the fact that from 2006-2016 U.S. shipyards produced an average of merely 4.1 tankers and cargo ships per year. This is the opposite of a thriving sector. 

Such statistics are the tip of the iceberg in documenting the Jones Act’s myriad shortcomings, both in terms of ensuring a healthy shipbuilding sector and bolstering the country’s national security. 

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“America’s Finest” Is Another Casualty of the Jones Act

Cato trade policy analyst Colin Grabow explains the sordid details in today’s Wall Street Journal:

America’s Finest, a brand-new 264-foot fishing trawler, ought to be the pride of the fleet. As a newspaper in its birthplace of Anacortes, Wash., explained, the ship features an “on-board mechanized factory, fuel-efficient hull, and worker safety improvements”—priceless features for fishermen operating in the treacherous seas off Alaska. The ship is also said to have a smaller carbon footprint than any other fishing vessel in its region. According to Fishermen’s Finest, the company that ordered the ship, it would be the first new trawler purpose-built for the Pacific Northwest since 1989.

Sadly, it seems increasingly doubtful that the ship will ever ply its trade in U.S. waters. That’s because it contravenes the Jones Act, the 1920 law mandating, among other things, that ships carrying cargo between U.S. ports be domestically built

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The Jones Act: It’s Worse than You Think

Ike Brannon’s recent post on the Jones Act is excellent, and those who have not done so already should give it a read. He notes some of the many economic hardships imposed by the law, which are shielded from proper scrutiny because its large costs are spread across the population and benefits concentrated among a relatively limited number of entities such as shipbuilders. 

Brannon’s concluding sentences, however, may be too kind to the political process:

[P]laces like Puerto Rico, Hawaii and Alaska would benefit most of all [from getting rid of the Jones Act], since they are overly dependent upon shipping prices.

However, as those are only two low population states and a territory with no voting representation, their inconveniences won’t resonate much with Congress.

Such language implies that the elected representatives of Alaska and Hawaii are fully cognizant of the burdens imposed by the Jones Act, but are prevented from making headway toward its removal due to insufficient political sway. The truth is far worse. As I noted yesterday at USAToday.com, all four members of Hawaii’s congressional delegation—Sen. Brian Schatz, Sen. Mazie Hirono, Rep. Colleen Hanabusa, and Rep. Tulsi Gabbard—stand foursquare in support of the law. Among the three members of Alaska’s delegation, both Sen. Lisa Murkowski and Rep. Don Young have touted their backing of the Jones Act (I have been unable to determine the position of Sen. Dan Sullivan, who has only held his current position since 2015). 

Why is this? While the definitive motivations of these politicians are known only to themselves, a reasonable guess can nonetheless be hazarded.

We can first dispense with partisan explanations, as Hawaii’s congressional delegation is comprised entirely of Democrats while Murkowski and Young are both Republicans. More relevant is the fact that according to the American Maritime Partnership, Alaska is ranked #3 among the 50 states for maritime jobs per capita. Hawaii, being the lone U.S. state comprised of an island chain which imports as much as 90% of its food, presumably has a significant maritime sector as well. Those engaged in such employment, and who profit most from the Jones Act’s concentrated benefits, are much more invested in its future than the consumers forced to bear its significant but relatively small individual costs. Commensurate pressures from constituents then win out over economic sense when politicians set their positions.

Further food for thought is to be found in the fact that the Senate’s most committed Jones Act critic, Sen. John McCain, hails from the landlocked state of Arizona. McCain’s legislation to grant Puerto Rico a permanent exemption from the Jones Act enjoys co-sponsorships from Sen. Mike Lee of Utah and Sen. James Lankford of Oklahoma, also of landlocked states. As a result, these Senators are more likely attuned to the Jones Act’s net economic drag than benefits to maritime special interests. This may all be coincidence, but it fits perfectly with the public choice model of special interests

When it comes to protectionist U.S. policy, bitter experience has shown that the truth is often worse than we think. 

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Protectionism Is Crippling Atlantic and Gulf Coast Ports

George Will writes in his column today about the importance of the Port of Charleston – and by extension, trade – to the economy of South Carolina. Recent completion of the 10-year project to widen the Panama Canal to accommodate more traffic and passage of a new class of container ships with nearly triple the capacity of their immediate predecessors has exposed a logistics snafu that could cost South Carolina’s economy billions of dollars: Charleston Harbor is too shallow to accommodate these much larger, “Post-Panamax” ships efficiently (only limited sections of the harbor are deep enough and only during high tide).

According to the American Society of Civil Engineers, these vessels can lower shipping costs from 15-20 percent, but harbors need to be at least 47 feet deep to accommodate them. The U.S. Army Corps of Engineers reports that only seven of the 44 major U.S. Gulf Coast and Atlantic ports are “Post-Panamax ready.” American ports must be modernized if the United States is going to continue to succeed at attracting investment in manufacturing and if U.S. companies are going to compete successfully in the global economy.

As I wrote in the Wall Street Journal last year:

The absence of suitable harbors, especially in the fast-growing Southeast, means fewer infrastructure- and business-development projects to undergird regional growth. It also means that Post-Panamax ships will have to continue calling on West Coast ports, where their containers will be put on trucks and railcars to get products from Asia to the U.S. East and Midwest—a slower and more expensive process.

The problem can be traced to one major issue: funding.  And that issue is made more complicated by another problem: protectionism.  Most funding of infrastructure inevitably come from federal and state budgets – taxpayers, who should have a voice in the debate about whether these infrastructure projects constitute wise public investments.  But a couple of long-standing, though obscure, protectionist laws have conspired to reduce capacity in dredging services, ensuring that projects take twice as long and cost twice as much as they should.

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