Tag: Jones Act

New Report Exposes Jones Act’s Flaws

Evidence of the Jones Act’s failures continues to mount. Just weeks after the release of an OECD study predicting substantial gains from the law’s repeal, the Congressional Research Service (CRS) has a new report out which places the law’s shortcomings in sharp relief.

The report’s description of U.S. shipbuilding is particularly eyebrow-raising. Rather than bolstering this sector through the Jones Act’s domestic build mandate, the CRS notes the sector has experienced a steady deterioration in competitiveness since the law’s passage:

A 1922 government report on shipbuilding indicated that U.S.-built ships cost 20% more than those built in foreign yards. The cost differential increased to 50% in the 1930s. In the 1950s, U.S. shipyard prices were double those of foreign yards, and by the 1990s, they were three times the price of foreign yards. Today, the price of a U.S.-built tanker is estimated to be about four times the global price of a similar vessel, while a U.S.-built container ship may cost five times the global price, according to one maritime consulting firm.

Unsurprisingly, this loss of competitiveness has translated into commercial ship output that amounts to barely a rounding error in total global production:

The Merchant Marine Act of 1970 (P.L. 91-469) added as an additional objective of U.S. maritime policy to have a merchant marine “supplemented by efficient facilities for building and repairing vessels.” U.S. shipyards typically build only two or three oceangoing ships per year, and none for export, so they do not achieve economies of scale. There may be gaps of several years in between orders for container ships. In recent years, the demand has been sufficient to sustain one shipyard that builds only commercial ships. However, this yard stated that its employment had fallen below 100 people and that it had no vessels under construction or on order as of March 31, 2019.

The relationship between the Jones Act and the commercial shipbuilding sector’s travails is almost certainly causal. Drawn to a captive domestic market, U.S. shipyards have not sought to compete internationally and thus cannot achieve scale. This focus on the U.S. market means fewer opportunities for specialization and related productivity gains, while the lack of international competition reduces the need for improvement and innovation.

The result is spiraling costs and decreased demand for U.S.-built ships, leaving shipyards with less output to spread their fixed costs across. It’s a vicious cycle that shows no sign of ending. 

These spiraling shipbuilding costs aren’t just an economic problem. While the Jones Act is often justified on national security grounds, the high cost of domestic shipbuilding encouraged by this law has also impaired the military’s ability to source its sealift ships from U.S. shipyards: 

The cost differential is also an issue for Department of Defense officials in charge of military sealift ships. As discussed later in this report, the military has modified a plan to build sealift ships domestically, finding it unaffordable, and instead will buy more used foreign-built cargo ships. Since U.S. shipyards do not build vessels for export, they are not required to compete with foreign shipyards on price or vessel characteristics.

Indeed, just last week the Secretary of the Navy said that he “can’t really afford a lot of $400 million ships when I can go out and buy used [roll-on/roll-off ships] for $35 to $40 million.” And if high ship costs are a deterrent to notorious spendthrift Uncle Sam, the effect is surely no less pronounced within the broader maritime industry.

These high ship acquisition costs, as well as operating costs at least 2.7 times those of foreign-flagged vessels, help explain why demand for U.S. coastwise shipping has declined despite the many advantages of ocean transport:

While domestic ships are carrying fewer tons of freight today than they did in the 1950s, their most direct competitors, railroads and pipelines, are carrying more. Domestic ships have lost market share to land modes even though ships have economic advantages. Ocean carriers do not need to acquire and maintain rights-of-way like railroads and pipelines. They can move much more cargo per trip and per gallon of fuel than trucks and railroads. Although ships are slower than truck and rail modes, many shippers are willing to sacrifice transit time for substantially lower costs, as long as delivery schedules are reliable.

Also seemingly explained is the lack of coastal shipping to transport containers arriving aboard large cargo ships from abroad. Instead of being placed on smaller ships as part of a hub-and-spoke system, they are placed on rail and roads, with the latter leading to increased highway congestion:

Transshipment of international containerized cargo by feeder ships is prevalent abroad, but the practice does not exist in the United States. The Jones Act would require such ships be U.S.-built, -crewed, and -owned. Lack of transshipment services increases demand for rail and road connections to ports, as smaller feeder container ships do not play a role in distributing international containerized cargo among U.S. ports.

Not everyone, however, can take refuge from the Jones Act through the use of overland forms of transportation, and the CRS report notes that the Jones Act fleet tends to “operate in markets where shippers have little alternative.” This means the non-contiguous states and territories of Alaska, Hawaii, and Puerto Rico which have little choice but to suffer the law’s exorbitant costs. 

Meanwhile, high ship acquisition costs also undoubtedly play a role in the absence of entire ship types from the Jones Act fleet, and the advanced age and insufficient quantities of those that do exist:

Not all ship designs are represented in the Jones Act fleet. “Project cargo” or “heavy-lift” vessels are often used to carry oversized pieces of equipment such as smaller vessels, ship engines and modules, wind turbine parts, and power generation equipment. They would be useful for moving dredging fleets to project sites. There have not been any such vessels in the Jones Act fleet in recent decades. The Department of Defense has used “national defense” waivers of the Jones Act to move radar systems and newly built vessels on foreign-flag heavy-lift vessels. This type of cargo typically does not generate regular shipments in any one region; thus these ships would likely need to extend their market reach beyond the United States to include the international market. However, the higher cost structure of Jones Act operators is an obstacle to competing for international shipments.

Two dry bulk ships are in the oceangoing Jones Act fleet, and they appear to be mostly inactive, possibly because they are nearly 40 years old. This is twice the economic life of a ship in the global fleet (where ships are typically sent for scrapping between 15 and 20 years of age). The sole Jones Act-qualified chemical tanker was built in 1968. No LNG tankers are in the Jones Act fleet despite new domestic markets as a result of the shale gas boom. The lack of sufficient Jones Act-qualified tanker capacity to move booming shale oil production coastwise added to pressure for lifting the crude oil export ban in 2015.

One result is that despite the economy’s continued expansion, and thus increased transportation needs, the number of ships and amount of cargo they carry are in long-term decline:

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The report is rife with examples of the Jones Act’s inability to meet its stated aims. It points out, for example, that the law “has not succeeded in meeting the stated policy goal of sustaining a growing merchant marine that carries an increasing proportion of the nation’s commerce.” The objective of “providing shipping service on all routes essential for maintaining the flow [of commerce] at all times” and having the “safest” types of vessels are similarly unmet, with the CRS stating that “the Jones Act fleet does not appear to achieve either of these goals.” The report adds that “One can also question whether the policy objective of having ‘the best equipped and most suitable types of vessels’ has been achieved.”

The failure of protectionist policy is one of the world’s more predictable phenomena, and prior to its passage some appeared to foresee its problems and urge a different course. As the CRS report points out, the minority report to a 1919 House committee report to the bill that would become the Jones Act called for an approach based on competition and the removal of restrictions:

…in order to build up and sustain an American merchant marine it is absolutely necessary to remove every restriction against American merchants acquiring ships, whether built in the United States or out of the United States, at the lowest possible price, in order to enable them to compete with other nations in the transportation of the commerce of the world…Our American iron and steel manufacturers were unable to compete until they had to. When they had to they did compete successfully. Our shipbuilders can and will do likewise.

And more than 50 years ago the Lyndon B. Johnson administration accurately stated that protectionism and federal largesse would not reverse the U.S. merchant marine’s dwindling fortunes:

At a 1967 congressional hearing, Alan Boyd, Secretary of Transportation in the Lyndon B. Johnson Administration, testified that the U.S. merchant marine was “too small, too old, and too unproductive,” and stated, “you do not revitalize an industry by flooding it with Federal dollars and imprisoning it within a wall of protection.”

These voices, however, have been consistently ignored in favor of those advocating yet more protectionism and government intervention, the very policies that led to the U.S. maritime sector’s current predicament. But their record of failure has never been starker or more plain to see. It’s time for a new approach based on the principles of free markets, openness, and competition whose record of success is unsurpassed. It’s a plan just crazy enough to work.  

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Chinese Ships on the Mississippi River: Just Another Jones Act Tall Tale

Did you know that the Jones Act prevents Chinese ships from sailing on the Mississippi River? That, at least, is what Rep. Brian Babin (R-TX) claimed in a recent speech on the House floor. For dramatic effect the congressman used a picture of a ship flying an oversized Chinese flag with St. Louis’s Gateway Arch prominently displayed in the background:

Babin

“This is a hypothetical picture, thank goodness,” said the Texas congressman. “A Chinese-built vessel, subsidized by their communist regime, operated by the Chinese and delivering Chinese goods all in the very heartland of the United States of America. But this could easily become a reality if the Jones Act is waived.” 

Other Jones Act supporters have made similar warnings. Clay Maitland, the chairman of the Merchant Marine Policy Coalition, stated last week that his support of the Jones Act was “all about preventing the Chinese government from getting control of our inland waterways,” while in 2017 the president and CEO of Jones Act carrier Tote Inc. said that the law’s repeal could result in North Korean barges and tugboats operating on the Mississippi River. And just last year the American Maritime Partnership, a Jones Act advocacy group, ran the following internet ad:

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Leaving aside the desirability of foreign ships operating on the Mississippi River, does the Jones Act actually prevent this from happening? Well, no. The Jones Act restricts the domestic waterborne transport of goods to vessels that are U.S.-flagged, U.S.-built and at least 75 percent U.S.-crewed and owned. It says absolutely nothing, however, about the ability of foreign ships to operate on inland waterways. 

In fact, there are foreign ships operating on U.S. inland waterways at this very moment. Indeed, a quick peek reveals numerous such vessels on the Mississippi River as far north as Baton Rouge and still more on the Delaware and Columbia Rivers headed to and from Philadelphia and Portland. 

That foreign ships are not more prevalent on inland waterways is a matter of simple physics: they’re too large. The ship used in Rep. Babin’s hypothetical picture, the CSCL Africa, has a draft of 11 meters (36 feet). The Mississippi River around St. Louis lacks the depth to support such a vessel. This helps explain why the U.S. Army Corps of Engineers only maintains a 9-foot shipping channel north of Baton Rouge but a 45-foot shipping channel south of it. 

But even the idea of smaller-sized foreign vessels on the country’s inland waterways is largely a figment of the Jones Act lobby’s imagination. A 1999 U.S. International Trade Commission report which examined the Jones Act’s economic impact said that it did not bother including inland waterways in its analysis because U.S. operators there “do not appear to be significantly vulnerable to foreign competition that may occur in the absence of Jones Act restrictions.”

This is in large part because foreign vessels would still have to comply with U.S. laws and regulations unrelated to the Jones Act. As Michael Hansen of the Hawaii Shippers Council points out:

…[T]he inland waterways barge industry is the least threatened by Jones Act reform or outright repeal. Even a full national repeal of maritime cabotage would be an insufficient condition for achieving continuous employment of foreign flag vessels operating in purely U.S. domestic trade. This is especially true for foreign shipping to displace purely domestic inland waterways traffic. This is primarily due to the extra-cabotage legal and regulatory web enveloping the inland waterways – from immigration, customs, taxation, business registration, labor, health and safety, to wage and hour – which would prevent a foreign flag vessel from being continuously employed in domestic service.

In addition, U.S. builders of smaller vessels such as barges are much more internationally competitive. This means that inland waterways operators are able to purchase vessels at prices similar to those found overseas, thus boosting their ability to compete. As the USITC states, “…operators in the inland trade acquire vessels from the internationally competitive U.S. barge and smaller shipbuilders and so have substantially more competitive capital costs.”

Jones Act or not, Chinese ships or North Korean barges cruising the American heartland’s innermost waterways isn’t going to happen. The American people deserve more facts and less scaremongering. 

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New Study Sees Major Gains from Jones Act Reform

Last year, the Cato Institute released a policy analysis highlighting the often-overlooked costs of the Jones Act to the American economy. Far from just raising transportation costs, the policy analysis argued that there are a whole host of indirect costs that are ultimately born by U.S. consumers and businesses.  A new study from the Organization for Economic Cooperation and Development (OECD) provides further evidence for such claims. It estimates that repeal or even partial liberalization of the law could produce economic gains of up to $64 billion. As the report states:

The total U.S. economy may benefit from an increase in final demand in the range of USD 22 billion (scenario 1 [in which the Jones Act’s domestic build requirement is eliminated]) and USD 74 billion (scenario 2 [assuming full repeal]) which represent a rise between 0.12% and 0.39 percent in the long-term. U.S. total output is likely to increase between USD 40 billion (0.1%) and USD 135 billion (0.4%). In terms of domestic value added the results amount to around USD 19 billion and USD 64 billion, making up an increase of around 0.1% to 0.36% for the total U.S. economy.

These figures are significant. To place them in perspective, the U.S. International Trade Commission estimated the 15-year increase in U.S. GDP from joining the Trans-Pacific Partnership agreement to be $42.7 billion. In other words, simply by removing the Jones Act, the United States could realize potential gains in excess of ratifying a major trade deal with eleven other countries including the world’s third-largest economy. And it wouldn’t require negotiations with other countries to do so.

Furthermore, the economic benefits estimated by the OECD do not include secondary effects such as reduced highway congestion, less pollution, or the removal of an irritant from U.S. trade relations. The OECD’s numbers, in other words, are perhaps best viewed as a conservative estimate of the gains that could be unlocked by Jones Act reform.  

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Jones Act Waiver Gets Swamped

Well, no one said reforming the Jones Act was going to be easy. 

A week after reports emerged that President Trump was leaning toward granting a ten year Jones Act waiver for the transport of liquefied natural gas (LNG) by non-U.S.-flag ships, he seems to have reversed course following a meeting with congressional Jones Act advocates. The president apparently folded—bigly. The members of Congress who spoke with President Trump emerged from the White House projecting supreme confidence that a Jones Act waiver is now effectively off the table. 

While it is impossible to know what swayed President Trump, it beggars belief he was convinced by arguments made on economic grounds. Quite simply, there aren’t any.

If granted, the Jones Act waiver would have allowed Americans in New England and Puerto Rico to obtain bulk amounts of cheap LNG shipped in from other parts of the United States. Such a move would bolster the number of well-paid jobs in the energy sector as well as save Americans money. Furthermore, and perhaps most notably, the waiver would not have cost one single job in the U.S. maritime sector. No U.S.-flag LNG carriers would have been put out by the waiver as none exist, nor are any being built by the few remaining major U.S. shipyards. 

A press release from one of the meeting’s participants, meanwhile, offers a window into the tortured logic employed by Jones Act supporters. “We cannot let the United States become dependent on foreign countries to transport energy and critical products within the United States,” said Sen. Bill Cassidy. But under the Jones Act status quo the United States is dependent on both foreign energy—including from Russia—as well as the foreign-flag vessels that transport it. In the Louisiana senator’s muddled thinking it is apparently preferable to have those same ships transport LNG sourced from other countries rather than make a slight, temporary change to the Jones Act.

This is less a passioned defense than unthinking devotion to a powerful lobby. 

The power of the Jones Act lobby was also displayed by the attendance of Alaskan Senators Dan Sullivan and Lisa Murkowski at yesterday’s gathering. Their advocacy for the Jones Act is particularly galling given that their state is one of the law’s biggest victims. Highly dependent on maritime transport, Alaska bears a disproportionate burden of the Jones Act’s high costs. Indeed, the law is so detested in Alaska that it is written into state law—the result of a 1984 referendum—that the governor must lobby Congress for its repeal. But the interests of the state’s maritime unions and related interests apparently prevail of the popular will of the people. So it goes, both in Alaska and the country as a whole.

Fortunately, President Trump still has time to redeem himself, and there is perhaps solace to be found in the fact that he has demonstrated himself capable of unpredictable policy turns and zig-zags. That he has not yet publicly committed to leaving the Jones Act untouched offers at least a sliver of hope that sanity will prevail and a waiver eventually issued. Drain this swamp, Mr. President.

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Rep. John Garamendi’s Questionable Defense of the Jones Act

To paraphrase Ronald Reagan, the problem with Rep. John Garamendi (D-CA) isn’t so much that he is uninformed, it’s just that he knows so many things that aren’t so. That, at least, is the impression one is left with after reading the California congressman’s latest op-ed in defense of the Jones Act which is replete with errors, half-truths, and contradictions. 

Disturbingly, the Chairman of the House Armed Services Committee’s Readiness Subcommittee fudges even basic facts. In the op-ed’s fourth paragraph, for example, Rep. Garamendi claims there are only 81 U.S.-flag oceangoing vessels. The latest data from the U.S. Maritime Administration, however, shows 180 such ships.

Rep. Garamendi later warns about the dangers of employing foreign-flag ships to transport supplies and equipment for the U.S. military, claiming that during the 1991 Gulf War “The foreign crews on thirteen vessels mutinied, forcing those ships to abandon their military mission.” But that’s not true. The United States Transportation Command’s official history of its performance in Operations Desert Shield and Desert Storm makes no mention of mutinies or mutineers and says that only two ships, the Trident Dusk and the Banglar Mamata, failed to deliver their cargo. Eleven other ships expressed some hesitation but did, in fact, fulfill their missions, and the Transportation Command says crews on foreign flag ships “on the whole proved dependable” and were “overall, reliable.”

Furthermore, Rep. Garamendi’s invocation of these foreign flag bulkers is curious, as the Jones Act is commonly presented as avoiding this very kind of foreign dependence. Plainly it is not accomplishing this goal. Indeed, another item mentioned by the Transportation Command’s report is that the United States was desperately short of ships that it twice asked the Soviet Union to borrow one of theirs.

The op-ed also suffers from other curious leaps of logic and seeming contradictions. 

Rep. Garamendi, for example, hits back at criticisms the Jones Act is outdated and harmful by noting that “Ninety-one U.N. member states comprising 80 percent of the world’s coastlines have cabotage laws protecting domestic maritime trade.” But this observation does nothing to refute the law’s critics or prove that the Jones Act is somehow useful. Notably, countries that have moved to loosen their cabotage laws such as the Philippines and New Zealand (see page 6) have experienced positive results. 

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President Trump Considering a Jones Act Waiver

New reports suggest that President Trump is considering granting a Jones Act waiver to allow non-U.S.-flagged ships to transport natural gas from energy-rich parts of the United States to the Northeast and Puerto Rico. He should do so without delay. Granting this waiver would mark not just a triumph of common sense, but also help fulfill President Trump's campaign promise to take on the Washington special interests who profit from laws such as the Jones Act at the expense of American consumers and businesses.

To learn more about this issue both the public and media alike are invited to attend an April 30 event at the Cato Institute that will examine the Jones Act’s impact on Puerto Rico. Featuring Puerto Rico's Secretary of State, the president of the Puerto Rico Economic Development Bank, and other experts, the event will include a discussion of the island's attempt to obtain a Jones Act waiver for the purpose of transporting U.S. natural gas. For further information about both the Jones Act and the Cato Institute’s effort to raise awareness about this burdensome and outdated law please visit cato.org/jonesact.

Doubling Down on Failed Maritime Protectionism

What to do when confronted with the failures of U.S. maritime protectionism? Call for more protectionism, of course. That, at least, is the apparent attitude of some members of Congress.

A notable aspect of the Jones Act debate is that the law’s supporters often admit, albeit tacitly, that it isn’t working very well. Rep. John Garamendi (D-CA) is a case in point. Participating in a recent panel discussion at the Brookings Institution, Rep. Garamendi readily conceded the enervated state of U.S. shipbuilding. “What remain of the American shipyards”—approximately 300 shipyards have closed since 1983—consist of “mostly small shipyards,” according to the California Congressman, as well as a few large ones which are “producing ships for the Jones Act but not for the international trade.”

Rep. Garamendi also freely acknowledged that, beyond the decline in shipyards, the United States also suffers from a lack of merchant mariners. Should the federal government call upon U.S. merchant mariners to crew the ships needed to deploy and sustain U.S. forces in time of war, Rep. Garamendi said that current projections show it falling 2,800 short (A 2017 government report found the deficit to be 1,839. This, however, was a best-case scenario assuming every mariner would be available and willing to sail).

This lack of mariners is no surprise given the steep decline in Jones Act-eligible ships, which have fallen from 326 in 1982 to just 99 today. In sum, fewer shipyards are building fewer ships which in turn employ fewer merchant mariners. Everything is trending in the wrong direction.

But if you were expecting Rep. Garamendi to reconsider his support for maritime protectionism in the wake of such failings, think again. Not only does he remain an ardent defender of the Jones Act, Rep. Garamendi believes that the maritime industry’s salvation is to be found in extending similar provisions to other areas of maritime commerce.

Citing the example of similar laws in Russia, India, and China—those noted paragons of wise economic policy—Rep. Garamendi used his Brookings appearance to highlight a bill called the Energizing American Shipbuilding Act. This legislation, which he vowed to re-introduce in a recent letter both he and Sen. Roger Wicker (R-MS) sent to senior Trump administration officials, would mandate that 15 percent of liquefied natural gas (LNG) exports and 10 percent of oil exports be carried aboard ships that are U.S.-flagged, U.S.-crewed, and U.S.-built.

This bill, if passed, would be a disaster.

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