Tag: Jones Act

It’s Time to Put the Jones Act Under the Microscope

On December 6th, 2018 the Herbert A. Stiefel Center for Trade Policy Studies will host a full-day conference entitled, “The Jones Act: Charting a New Course after a Century of Failure.” The purpose of this event is to shine an analytical spotlight on the Jones Act, a nearly 100-year-old law that restricts the transportation of cargo between two points in the United States to ships that are U.S.-built, crewed, owned, and flagged.

While supporters of the law claim the Jones Act is essential to ensuring a robust U.S. maritime industry capable of providing a ready supply of ships and qualified sailors in times of war and other national emergencies, both the number of ships built in the United States and U.S. sailors to crew them have been in a steady decline for decades. Not only has the Jones Act failed to deliver its promised benefits, it has also imposed a variety of different costs on the U.S. economy. This conference will examine these costs in greater detail, address the validity of the Jones Act’s national security argument, and evaluate options for reform.

As part of the conference, each of our participants will submit a short essay on a particular aspect of the Jones Act. These essays will be made available here as they are submitted by our speakers, and will be reproduced in expanded form after our conference. We encourage you to read, share, and provide feedback on these essays.

This event is part of our broader Project on Jones Act Reform, which seeks to raise awareness about the Jones Act and lay the groundwork for the repeal or reform of this outdated law. We hope you will visit our project page and join the discussion on Jones Act reform.

Reserve your spot to attend our event next month, read the conference essays, and be part of the conversation. We hope to see you there!

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The Jones Act Isn’t Working. Just Ask Its Supporters.

Although the Jones Act’s stated purpose is to ensure that the United States “shall have a merchant marine of the best equipped and most suitable types of vessels sufficient to carry the greater portion of its commerce and serve as a naval or military auxiliary in time of war or national emergency,” this plainly isn’t the case. But don’t take my word for it, just listen to ardent backers of the law such as Rep. John Garamendi (D-CA):

Our military relies on privately-owned sealift capacity and highly trained and credentialed merchant mariners to transport and sustain our armed forces when deployed overseas during times of conflict. But the number of ocean-going U.S.-flag vessels has dropped from 249 in the 1980s, to 106 in 2012, to at most 81 today.

The consequences of this steep decline are not just theoretical. Our military has had to turn to foreign-flagged vessels for sustainment in times of war, and experience shows that can have dangerous consequences. In the 1991 Gulf War, our armed forces relied on 192 foreign-flagged ships to carry cargo to the war zone. The foreign crews on thirteen vessels mutinied, forcing those ships to abandon their military mission. Would foreign flag carriers be any more reliable today, especially for a long-term deployment into active war zones?

But the number of ships is not the only issue: The U.S. Transportation Command and Federal Maritime Administration estimate that our country is now at least 1,800 mariners short of the minimum required for adequate military sealift, even with the Jones Act firmly in place. Without the Jones Act, our nation would be wholly unprepared to meet the labor demands of rapid, large-scale force projection for national security.

The House Coast Guard and Maritime Transportation Subcommittee’s ranking member is absolutely correct about the sad state of the U.S. merchant fleet. Some of his numbers, however, are off the mark. The drop in the number of ocean-going U.S.-flag vessels is even more dramatic than what he states, declining from 737 in 1985 to a current figure of 180. Regarding the 1991 Gulf War, meanwhile, the actual number of foreign-flagged ships used as part of the U.S. sealift was 177 rather than 192. It’s also inaccurate to say that thirteen vessels were forced to abandon their military mission, with eight of those vessels ultimately delivering their cargo after initial hesitations. 

Although an article of faith in pro-Jones Act circles, the congressman’s claim that the United States would be in even more dire straits absent the law is open to question. The Jones Act’s domestic build requirement, for example, forces U.S. carriers to purchase vessels at vastly inflated prices compared to foreign shipyards (4x is a figure used by many observers while a 2017 Congressional Research Service report placed the U.S. price at 6-8x higher). Using basic microeconomics we can intuit that higher prices mean fewer ships, and thus fewer mariners to crew them. 

Linking to a Cato Institute analysis of the Jones Act, Garamendi then turns his attention to accusations that the law is an “outdated protectionist anachronism”:

Opponents of the Jones Act routinely claim that it is an outdated protectionist anachronism that does more harm than good, but nothing could be further from the truth. A comprehensive 2018 survey of seafaring and industrial nations around the world shows that cabotage laws such as the Jones Act, which provide for domestic preference for shipping policies, are the norm, not the exception. Ninety-one U.N. member states comprising 80 percent of the world’s coastlines have cabotage laws protecting domestic maritime trade. The conclusive fact from this survey is clear: seafaring nations understand the importance of their domestic maritime industries, and have laws on the books to safeguard them.

This misses the point. While cabotage laws are indeed common, the Jones Act’s stringent requirements—and in particular its mandate that ships must be built in the United States—place it well outside the mainstream. Indeed, the World Economic Forum calls the Jones Act the world’s “most restrictive example” of cabotage laws, noting that not even China has a domestic build requirement. 

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Another Jones Act Absurdity

Cape Ray

As North Carolina grapples with the aftermath of Hurricane Florence, transportation officials in the state are attempting to secure the use of a U.S. government-owned vessel, the Cape Ray, to transport supplies to the port of Wilmington. With the city temporarily transformed into an island by recent flooding, the roll-on, roll-off ship—or “ro-ro” in maritime parlance—will enable trucks filled with needed goods to drive aboard.

It’s a good thing the ship is government-owned—under private ownership the Cape Ray’s provision of relief supplies would be illegal. This absurd situation is due to a nearly 100-year-old law called the Jones Act. Passed in 1920, the law mandates that ships transporting goods between two points in the United States be U.S.-owned, crewed, flagged and built. The Cape Ray, however, was built in Japan.

Even if officials sought the private sector’s help and a Jones Act-compliant ro-ro ship to transport the trucks, none are available. According to data from the U.S. Maritime Administration (MARAD) there are only seven ro-ro ships in the entire Jones Act fleet. The closest one to North Carolina, the Delta Mariner, isn’t even an ocean-going vessel but rather operates on the Tennessee River. The other six vessels ply routes between the West Coast and Alaska or Hawaii.

The picture is little improved if Jones Act containerships and general cargo ships are also included, with a total of six such vessels currently on the East or Gulf Coasts (MARAD shows five but does not include the recently commissioned El Coquí). The closest one to the North Carolina flood victims is a 47-year-old general cargo ship, the Coastal Venture, which is currently moored near Charleston.

One reason behind the dearth of ships is the fact that U.S.-built vessels cost up to eight times as much as those built overseas. Such exorbitant prices mean that fewer are purchased, with fewer available for both general commerce and emergency situations. 

In contrast, there is little difficulty locating foreign-flagged ro-ro vessels in the mid-Atlantic region. The Marshall Islands-flagged Morning Pride, for example, is making its way up the East Coast toward Philadelphia, while the Norwegian-flagged Höegh Asia is bound for Baltimore. A combination cargo/ro-ro vessel, the Saudi-flagged Bahri Tabuk, is currently off the coast of North Carolina.

But because of the Jones Act, none of these ships are eligible to take on relief supplies at a U.S. port and speed them to Wilmington.

The Jones Act’s stated purpose is to ensure that the United States “shall have a merchant marine of the best equipped and most suitable types of vessels sufficient to carry the greater portion of its commerce and serve as a naval or military auxiliary in time of war or national emergency.” But when faced with a genuine emergency, such as Hurricane Maria in 2017 or Hurricane Florence today, the Jones Act fleet is often found wanting.

By its own terms, the law is a failure that actually impedes the realization of its goals. It’s time for the Jones Act to go. 

A Feeble Defense of the Jones Act

Rep. Duncan Hunter is not pleased with the Cato Institute’s efforts to repeal the Jones Act. Taking notice of a recent op-ed I penned criticizing the California congressman’s support of this costly law, Hunter took to the pages of the same newspaper last weekend to defend his stance. It’s worth reviewing the piece in full, as it recycles several arguments typically offered in support of the Jones Act—and exposes some glaring weaknesses.

Hunter begins his defense of the Jones Act by disputing accusations that the law negatively impacts Puerto Rico’s economy:

Like many opponents of the Jones Act, the CATO Institute attempts to conflate this 100-year old law with the struggles of Puerto Rico’s economy. They repeat the same tired argument that the Jones Act is responsible for high prices and economic instability, going so far as to make the ridiculous implication that the Jones Act adds $5 to the cost of a pint of ice cream.

A recent economic study disputed these price discrepancies but if concerns remain, it is important to recognize that Puerto Ricans have other options. Most of the ships that call on Puerto Rico are foreign flagged and current law allows them to deliver as many goods from foreign ports as Puerto Ricans can consume. A 2013 Government Accountability Office Study failed to conclude that removing the Jones Act would benefit Puerto Rico and, in fact, acknowledged that the regulation provides a number of advantages. Other studies have found that the Virgin Islands — approximately 100 miles from Puerto Rico — has no Jones Act requirement, but has higher shipping prices than Puerto Rico from the mainland.

There’s a lot to unpack here, but let’s begin by noting that the “recent economic study” Hunter refers to was funded by a pro-Jones Act special interest group with a questionable methodological approach. Pointing out that Puerto Ricans have options for obtaining needed goods that are not subject to the Jones Act, meanwhile, is essentially telling them to eat cake. The rest of the United States is, by far, Puerto Rico’s largest trading partner. Simply doing business with other countries instead of the world’s largest economy with which Puerto Rico shares deep political and cultural links is oftentimes not a feasible option.

But that doesn’t mean Puerto Ricans don’t try to hunt for cheaper alternatives. The 2013 GAO report cited by Hunter highlights numerous examples of this dynamic, including farmers who purchase feed from Canada instead of New Jersey due to lower shipping costs and the sourcing of jet fuel from Venezuela rather than domestically for the same reason.  

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The Jones Act Makes Little Sense in a Globalized World

El CoquíLate last month that rarest of commodities, a new U.S.-built commercial transport ship, completed its maiden voyage by entering the harbor of San Juan, Puerto Rico to deliver its cargo. Called El Coquí, the vessel is among the world’s first hybrid roll-on/roll-off container vessels—a “ConRo” in industry parlance—that is powered by liquefied natural gas. 

Supporters of the Jones Act, a protectionist law which mandates that ships transporting goods between U.S. ports be U.S.-owned, crewed, flagged, and built, have pointed to El Coquí as a symbol of the measure’s success. The President of the Shipbuilder’s Council of America cited “American skill and ingenuity, as well as critical laws like the Jones Act” in his remarks praising the new ship. A senior official with Crowley Maritime, which owns the ship, added that investments such as El Coquí “would not have been possible without the [Jones] Act.”

What El Coquí truly represents is the outdated thinking behind this law.

According to its supporters, the Jones Act helps ensure U.S. expertise in shipbuilding and a domestic capability that can be relied upon in times of war. But as El Coquí demonstrates, it’s unclear how much expertise the U.S. shipbuilding industry possesses or how purely American this capability really is. The vessel’s very DNA, for example, is more foreign than American, with design work largely performed by Finnish company Wärtsilä using a team mainly located in Poland and Norway. In addition, testing for a model of the ship took place at a facility in the Netherlands.

That’s not all. Its celebrated LNG propulsion system features engines from a German company, MAN Diesel & Turbo, that were produced in Japan. The actual LNG tanks were supplied by another German firm, TGE Marine Gas Engineering. No doubt a thorough inventory of the various components used to build the ship would reveal numerous other examples of sourcing from abroad.

The only parts of El Coquí guaranteed to be truly U.S.-built are the hull and superstructure, which is how compliance with the Jones Act’s domestic build requirement is assessed. This demand, however, brings with it a fearsome price tag. To take delivery of El Coquí as well as a sister ship, Crowley Maritime is estimated to have paid $350 million, or $175 million per vessel. For perspective, the largest containership in the world, the G-Class, features a price tag of $950 million for six ships, or $158 million per vessel.

That’s a $17 million discount for a ship with a vastly larger cargo capacity. And despite its bigger size, the first G-Class ship was delivered in a mere 18 months. El Coquí required 45 months. That’s about as much time as it took the United States to secure victory in World War II.

The key difference between El Coquí and the G-Class is that the latter is built by Samsung Heavy Industries in South Korea. While the number of large oceangoing commercial vessels built in the United States per year typically numbers in the single digits, Samsung says that its Geoje shipyard alone churns out 30 ships. With vastly greater numbers of ships under construction the South Korea shipyard is able to realize larger economies of scale than its U.S. counterparts, producing at significantly lower cost and in less time.

Because of the Jones Act these cheaper ships are effectively forbidden fruit. Instead, carriers engaged in domestic transport must purchase their vessels from U.S. shipyards at vastly higher prices. These high prices, in turn, deter competition and raise costs to consumers.

The law’s alleged national security upside, meanwhile, rings hollow given the industry’s deep international exposure and reliance on foreign know-how. Jones Act-compliant ships may be officially labeled as U.S.-built, but—as is the case with all manner of manufactured products—the production process spans the globe. 

The Jones Act brings with it considerable disadvantages in exchange for benefits that, upon closer examination, are almost entirely mythical. It’s time to rid ourselves of this nonsensical and counterproductive law.

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No Jones Act Cost to Puerto Rico? I Have My Doubts

In a new op-ed I take issue Rep. Duncan Hunter (R-CA) for his unstinting support of maritime special interests and the Jones Act at the expense of average Americans. Particularly egregious is Hunter’s promotion of a recent report funded by a special interest group, the American Maritime Partnership, which makes the incredible claim that the Jones Act imposes no cost to consumers in Puerto Rico. Indeed, Hunter actually presided over a gathering of the House Subcommittee on Maritime Transportation meant to highlight its dubious findings.

While Hunter’s support for the AMP and the unseemly nexus between legislators and maritime special interests is the op-ed’s focus, the shortcomings of the AMP-funded report are worth exploring in greater detail.

From simply a theoretical perspective, the notion that the Jones Act would leave consumers in Puerto Rico unscathed is highly implausible. The Jones Act, which among other provisions prohibits foreign-flagged ships from transporting cargo between domestic ports and Puerto Rico, is a protectionist law. Keeping out competition is the entire point. It violates our understanding of economics to believe this is consequence-free for either costs or prices. Further note that competition among Jones Act carriers that provide service to Puerto Rico is sufficiently restrained that several of them were found guilty of price fixing.

Even if we were to believe that a perfectly competitive market exists in Puerto Rico despite the Jones Act’s restrictions, let us also remember that the law raises costs to those providing cargo transport by mandating the use of ships built in the United States. These ships are wildly more expensive than those constructed overseas, with a purchase price up to eight times higher. If consumers aren’t feeling the impact of these higher costs, then who is? Are we to believe that profit-maximizing companies that transport the cargo or the retailers who sell the goods in Puerto Rico happily absorb the costs of these expensive vessels?

If the theoretical underpinnings of the AMP’s claim are questionable, the methodology used to support it is doubly so. The finding that the Jones Act has no impact on consumers in Puerto Rico is in large part based on a price comparison, conducted via Walmart’s website, for 10 grocery items and three durable goods at the retailer’s locations in Jacksonville, Florida and San Juan, Puerto Rico. For these 13 items the price of each was found to be either the same or less in San Juan.

Walmart goods

The defects of this approach are numerous. For starters, no explanation is provided for how the basket of goods was selected. Walmart sells thousands of items—why were these chosen? This is significant as it isn’t difficult to find items for sale at both locations that tell a rather different story. A 48 oz container of Breyers ice cream, for example, is priced at $2.98 in Jacksonville but $8.12 in San Juan. Numerous other price discrepancies indicating a premium paid by consumers in San Juan are easily found.

Jacksonville

San Juan

Beyond questions over how the limited basket of goods was selected, one must also wonder why Walmart should be considered representative of Puerto Rico’s retail sector and the impact that the Jones Act has on the territory’s consumers. Walmart is an extraordinarily efficient firm famous for its ability to squeeze margins from suppliers, likely including those it depends on for transportation. Do other retailers in Puerto Rico enjoy Walmart’s cost structure, or share in any discounts on ocean transport it is able to negotiate? 

Furthermore, why should retail prices be regarded as a proxy for transportation costs or evidence of their burden? As Crowley Maritime, a member of AMP and the largest carrier that provides service to Puerto Rico states, “There are many factors affecting prices on the island – energy, taxes, trucking, warehousing, rent, market size and more.” Indeed. Unless all other costs are controlled for, the impact of transportation alone is unknowable.

One retailer. Thirteen items. No explanation for how the goods are selected. No controls to isolate the cost of transportation. And yet on this basis we are offered a rather sweeping conclusion.

A conclusion, it should be added, that is at odds with respected resources on cost of living differences in the United States. According to the Instituto de Estadísticas de Puerto Rico, grocery items in the territory are the 13th most expensive out of 297 locations in the United States. The group also shows food items, contra the AMP report, as 18.4 percent higher in Puerto Rico than in Jacksonville.

Other aspects of the report’s approach are similarly questionable. To bolster its case that the Jones Act does not impose higher costs on Puerto Rico the report offers up a chart (based, it appears, on confidential data from the carriers that is unverifiable) which shows revenue per container for ships traveling between the continental United States and other ports in the northern Caribbean:

Revenue per container

At first glance this appears to show that Puerto Ricans are getting a relative deal compared to a number of neighboring islands, but are they really? St. Croix, for example, has a smaller container port than San Juan, and likely operates with less efficiency due to its reduced scale. The fact that Puerto Rico has vastly greater trade volumes with the rest of the United States—nearly four times that of other Caribbean countries combined per a 2002 report—also likely unlocks efficiencies unavailable to other Caribbean ports.

To the extent higher revenue per container reflects the higher prices necessary to cover the higher costs of providing service on less efficient routes, this tells us nothing about the Jones Act’s impact or what freight rates between Puerto Rico and the continental United States might look like in a post-Jones Act environment. In short, it is not apparent that this is an apples-to-apples comparison or that such figures provide much in the way of relevant information.

The remainder of the report in large part consists of claims about the high level of service provided by Jones Act carriers to Puerto Rico. It cites, for example, that the use of “vessels and intermodal equipment that are uniquely designed to closely integrate the commonwealth with the advanced logistics systems of the mainland provides cargo owners with major economic and service advantages.”

But the alleged advantages and cost-effectiveness of the Jones Act carriers raises the question of why the law is then needed. If the Jones Act carriers already provide a high-quality service at a competitive price, then why should they fear a change to the status quo? If they are as competitive as they claim to be, why not open the market for sea transport with other parts of the United States to foreign competition?

The evident fear of such competition and employment of dubious analytical methods are instructive. Equally so is that pro-Jones Act politicians such as Duncan Hunter eagerly seize on this special interest-funded report despite its obvious flaws. It’s time to give the residents of Puerto Rico, and the rest of the United States, a break from this costly and outdated law.

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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.