April 29, 2019 3:25PM

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 Garamendi, for example, hits back at criticisms the Jones Act is outdated and harmful by noting that "Ninety-one U.N. member states comprising 80 percent of the world’s coastlines have cabotage laws protecting domestic maritime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. 

In addition, Rep. Garamendi fails to mention that there is considerable variation in the severity of these cabotage laws. Only a handful of countries, for example, have Jones Act-style domestic-build requirements. Indeed, the Jones Act is such an extreme outlier that the World Economic Forum has deemed it the world's most restrictive example of a cabotage law. And if the commonplace nature of cabotage laws somehow validates the Jones Act, then by the same logic doesn't the unusual nature of its U.S.-build requirement suggest that this provision should be discarded?

Rep. Garamendi also claims that repealing the Jones Act would undermine U.S. economic development, but says that eliminating the law would lead to marine transportation along U.S. coastlines to be outsourced to "the cheapest foreign bidder." Well, which is it? Would the repeal of the Jones Act undermine growth or would it lead to foreign providers of shipping offering their services at cheap prices, thus saving Americans money? Unless Rep. Garamendi believes that economic prosperity is derived from higher costs and reduced purchasing power, these two statements are in direct conflict with each other. 

In his concluding paragraph, meanwhile, Rep. Garamendi calls for maintaining the Jones Act as necessary to preserve the United States' status as a "great maritime power," but this description seems in conflict with some of his other recent comments. Just last month he bemoaned the country's "dwindling merchant fleet" and in a recent letter to the Trump administration said the U.S.-flag international fleet was "in a state of precipitous decline." He has also admitted the sad state of U.S. commercial shipbuilding, stating at the Brookings Institution last month that it has been reduced to "mostly small shipyards" and a "few large ones." How do these statements comport with being a great maritime power? Or the Jones Act as a public policy success?

There is a final item that rankles. Rep. Garamendi declares the Jones Act to be the "lifeblood" of a U.S. maritime trade that "supports 650,000 jobs and almost $100 billion in annual economic impact." His figures are almost certainly based on a report from PricewaterhouseCoopers for the pro-Jones Act Transportation Institute. Notably, no copy of this report has ever been publicly released, making its findings impossible to verify or critique. That Jones Act supporters repeatedly cite a report and then refuse to release it for independent study should raise eyebrows.

The American people deserve an honest discussion about the Jones Act. Unfortunately, defenders of this law don't seem intent on giving them one.

April 24, 2019 11:45AM

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.

April 1, 2019 10:16AM

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.

Such requirements essentially amount to a giant tax upon U.S. energy exports that would make them less attractive to foreign buyers. But don’t take my word for it. According to a 2015 Government Accountability Office report on the subject, requiring U.S.-built-and-flagged carriers to transport U.S. LNG would “be associated with about 24-percent higher shipping rates if all of the additional cost were passed on to the buyer.”

That’s in large part due to the vastly higher cost associated with producing an LNG carrier in the United States compared to foreign shipyards. In fact, the GAO estimates that a U.S.-built carrier could cost up to $675 million (the precise cost is unknown as no such vessel has been built in the United States since 1980) while one can be built in South Korea for $175 million. Furthermore, even a U.S.-built LNG carrier may still need to rely extensively upon South Korean expertise. As the GAO pointed out in its analysis, one of the U.S. shipyards it spoke with admitted that building an LNG carrier might require hiring “250 to 300 skilled Korean workers for the duration of the build time to ensure the work is done correctly.”

David Ricardo is no doubt spinning in his grave.

But it gets worse. While Rep. Garamendi’s bill lacks the Jones Act’s U.S. ownership requirement, in one key way it is actually more draconian than the 1920 law. Under the Jones Act, the domestic-build requirement is considered to be satisfied if “major components of the hull and superstructure” are fabricated in the United States. The Energizing American Shipbuilding Act, however, extends this requirement to items such as engines and propellers that are almost invariably imported when constructing a Jones Act-eligible commercial ship.

A list of the key machinery used in Daniel K. Inouye, a Jones Act containership launched last year, for example, reveals a huge reliance upon foreign components:

Machinery

Replace foreign components with domestic ones and the cost of building an LNG carrier will no doubt further balloon. Indeed, if such restrictions are imposed the GAO’s upper estimate of $675 million to build a U.S. LNG carrier may well prove overly optimistic.

The Jones Act is premised upon the unwritten bargain that in exchange for the costs of protectionism it will ensure a strong U.S. merchant marine. But while the law has produced very real costs, it has manifestly failed to generate its promised benefits, with the United States experiencing a long downward trend in shipyards, ships, and the mariners that crew them. Rather than admit to any shortcomings in current policy, however, Jones Act defenders seize upon these very failings to justify or even strengthen them. This is “heads I win, tails you lose” logic at its worst.

The U.S. maritime industry isn’t being protected, it’s being poisoned. It isn’t being spared from foreign competition but deprived of it. And the results are entirely predictable. Protectionism has been tried, and protectionism has failed. It’s time for a change in course.

March 18, 2019 10:49AM

New Jones Act Ship No Cause for Celebration

Earlier this month a new Jones Act-eligible ship, Kaimana Hila, was officially christened when Rep. Tulsi Gabbard broke a ceremonial champagne bottle against the ship’s super-structure. On the surface, the new vessel is a triumph. At 850 feet in length and featuring a cargo capacity of 3,600 TEUs Kaimana Hila is—along with sister ship Daniel K. Inouye—the largest containership in the Jones Act fleet. But this is no shining example of U.S. seagoing prowess. In fact, the ship is in many ways symptomatic of the damage and dysfunction wrought by the Jones Act upon the U.S. maritime industry.

Such dysfunction begins with the vessel’s $209 million price tag (Kaimana Hila and Daniel K. Inouye were purchased for a combined price of $418 million). In comparison, one of the largest containerships in the world, OOCL Hong Kong, features a cargo capacity of 21,413 TEUs but a purchase price of just $158 million (six of these G-class ships were built by Samsung Heavy Industries for $950 million). That’s $51 million less for a ship capable of transporting six times more containers.

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But the rot goes deeper. Despite charging such high prices for Kaimana Hila and Daniel K. Inouye, the company that built these ships has needed hundreds of millions of dollars in subsidies over the last 20 years to stay afloat. As detailed by the Philadephia Inquirer, over this time the Philly Shipyard has received government largesse ranging from tax deferrals to funding for employee training to a $438 million taxpayer-funded rebuilding of the shipyard in 1997 (nearly $700 million in 2019 dollars). The shipyard itself is leased from the city government for a mere $1 per year.

To these subsidies should be added the Jones Act’s domestic-build requirement, which forces Americans to purchase ships for domestic trade from the Philly Shipyard and its handful of U.S. competitors. Indeed, it might be the biggest subsidy of all.

Yet the Jones Act has proven to be something of a poisoned chalice for the Philly Shipyard. The high cost of U.S. shipbuilding has meant a diminished appetite for its commercial offerings, and the company's outlook is increasingly bleak. So much so that the Philly Shipyard’s CEO has admitted that to assure its future the facility will need to rely upon government contracts for the majority of its business:

The shipyard has relied on the Jones Act, which requires that ships carrying goods between U.S. ports be made in the U.S., for orders, but there's no longer enough of that business to go around. Over the next decade, [Philly Shipyard CEO Steinar] Nerbovik envisions that within a mix of government and commercial work, government contracts will predominate.

"We have too little work today," Nerbovik acknowledged. The company had a $5.6 million loss in the first half of the year, and has reduced its workforce by 50 percent, from 1,200 people to 600. "We have said to some of our people, 'I'm sorry, I have to lay you off for some months, but I hope to get you in again in a very short time.'"

In other words, rather than kickstarting a vibrant shipyard the combination of subsidies and Jones Act protectionism has only succeeded in fostering more government dependency.

The coda to this story is that Kaimana Hila will soon enter service transporting goods for Matson Inc. which, along with Pasha Hawaii, form a duopoly in transporting goods between the West Coast and Hawaii. Given such limited competition as well as the vastly inflated prices for the U.S.-built ships these carriers are required to use, the inevitable result is higher costs for Hawaii residents. Indeed, if this was not the case it would defy our most fundamental understanding of economics.

Kaimana Hila, then, is the story of a vastly overpriced ship built by a protected and subsidized shipyard facing an uncertain future which will now be used by a duopolist to gouge Hawaiian consumers. Only in Washington could this be considered a policy success that must be defended at all costs. 

March 11, 2019 9:19AM

The Jones Act Fleet: High Costs and Limited Capabilities

Jones Act shipping is expensive. So much so that, as a new Cato Institute video points out, it actually competes with aircraft on the island of Hawaii for transporting cattle to the mainland. 

But the costly nature of Jones Act shipping is only one of the video's key lessons. Another is the lack of appropriate ships to support such trade and the inefficiencies this creates. In a more economically rational world, Hawaiian cows would be sent to the West Coast aboard specially designed livestock carriers. 

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But none exist in the Jones Act fleet, so ranchers in Hawaii make do with makeshift solutions such as using 747s or specialized containers placed aboard ships known as "cowtainers"—economic kludges not found anywhere else in the world. 

As Sarah Moore of the Kealia Ranch points out, "The United States hasn't been able to maintain a fleet that we need to support the amount of trade that goes on, especially in the agricultural trade."

Beyond livestock carriers, other ship types are entirely absent from the Jones Act fleet as well. There are no bulk liquefied natural gas carriers, for example, nor liquefied propane gas carriers.  

And even when ships do exist, they may be old or few in number. Or both. The oceangoing Jones Act fleet has a grand total of two bulk carriers, one of which was built in 1980 and the other in 1981 (To place these build dates in context, Maritime Administrator Mark H. Buzby said in a congressional hearing last week that "it's rare in the commercial world to see a ship beyond about 15-20 years" of age).

The United States features a nearly $20 trillion economy with vast agricultural and energy sectors, thousands of miles of coastline, and several non-contiguous states and territories. Given such characteristics, it seems logical the country's waters would be teeming with coastwise trade conducted by ships of every specialized type imaginable. Instead, we have flying cows and cowtainers.

The current paradigm isn't working. At a minimum, major reforms are needed.

March 7, 2019 5:24PM

Jones Act Repeal Bill Introduced

Earlier today Senator Mike Lee introduced a bill to repeal the Jones Act. Such a move is long overdue. In place since 1920, the Jones Act mandates that goods transported by water between two points in the United States be done by vessels that are U.S.-flagged, U.S.-crewed, U.S.-owned, and U.S.-built. Ostensibly meant to bolster the U.S. maritime sector, the Jones Act has instead presided over its decline whether measured in the number of oceangoing ships, mariners to crew them, or shipyards to build them. 

While its benefits may be mythical, the law imposes very real burdens such as higher transportation costs, more highway congestion, more pollution, and even reduced access to U.S.-made products. In addition, the Jones Act's rejection of competition and consumer choice should be considered an affront to cherished American principles. It's time to rid ourselves of this antiquated law and chart a new course based on innovation and competition rather than discredited protectionism.

To learn more please visit www.cato.org/jonesact

February 25, 2019 9:31AM

New Reports Detail the Jones Act’s Cost to Puerto Rico

Last year the American Maritime Partnership released a report claiming that the Jones Act, a protectionist law which requires domestic water transport to be performed by vessels that are U.S.-made, crewed, owned, and flagged, imposes no cost on consumers in Puerto Rico. Riddled with apples-to-oranges comparisons and an opaque methodology—the no cost assertion was in large part based on a cost comparison of a mere 13 items sold by Walmart at its stores in Jacksonville, Florida and San Juan, Puerto Rico—the report was deeply flawed.

Just how flawed became more apparent last week when several Puerto Rico-based business groups released two analyses examining the Jones Act’s economic impact on the territory.

The first analysis, prepared by Puerto Rico-based Advantage Business Consulting, focused on the food and beverages sector where it found a Jones Act cost of $367 million. The methodology used is transparent. After surveying food industry companies in the territory about their transportation costs, the report’s authors found Jones Act vessels to have shipping prices 2.5 greater than non-Jones Act shipping from foreign ports ($3,027 versus $1,206) after adjusting for container size and distance. Total maritime transportation costs, meanwhile, were found to be 12 percent of the value of imports. By multiplying 60 percent (the percentage differential between $3,027 and $1,206) by the 12 percent figure, the report’s authors were able to derive a de facto Jones Act tax of 7.2 percent (.60 * .12).

When this 7.2 percent tax was applied to the $4.154 billion estimated to be imported from the U.S. mainland in FY 2018 ($4.615 billion in food and beverages were imported while survey data indicates 90 percent of this originated from the U.S. mainland), the result was a cost of nearly $300 million. Again, this is just for food and beverages.  

The report points out, however, that other factors no doubt push this $300 million figure still higher.  One such factor is the need to first transport the goods to a port for shipment to Puerto Rico. While as recently as 1996 there were ten mainland ports from which goods could be transported to Puerto Rico, that number has since shrunk to a mere four. Furthermore, survey data indicates that just a single port—Jacksonville, Florida—accounts for 88 percent of containers sent to the territory.

In other words, to ship goods to Puerto Rico likely first means sending them to Jacksonville, which can mean significant added expense in a country as vast as the United States. The cost of transporting a 40-foot container from California to Jacksonville, the report noted, is $7,000.

Another factor cited is a “cascade effect” from markups in the distribution chain being higher than would otherwise be the case owing to the artificially high cost of transportation. In addition, the increased cost of inputs used by producers in Puerto Rico, such as farmers who must use fertilizers imported from the mainland, means a higher cost for final goods. According to Advantage Business Consulting the incorporation of these factors results in a total Jones Act cost to the food and beverage sector of $367 million.

The second analysis, meanwhile, took a more comprehensive look at the Jones Act’s impact on Puerto Rico. Produced by John Dunham and Associates, it used a model of international shipping costs for 260 different commodities and compared it against six different estimates of Jones Act shipping cost differentials. After controlling for distance and terminal handling charges the analysis estimated these differentials to range from 89 percent to roughly 30 percent.

Using the firm’s recommended model, the analysis finds the Jones Act raises the price of shipping cargo to Puerto Rico by $568.9 million and that prices are $1.1 billion higher than would be the case without the Jones Act. This, in turn, is estimated to mean 13,250 fewer jobs. Were they to exist, such jobs would mean $337.3 million more in wages and over $1.5 billion in increased economic activity. Tax revenue would be $106.4 million higher without the Jones Act.

Such costs are significant in almost any context. For a territory with a lower per capita GDP than every U.S. state, high unemployment, and still reeling from the impact of Hurricane Maria, they are even more so.

It should be stressed that these reports are but the latest evidence of the harm wrought by the Jones Act on Puerto Rico. Indeed, what was already known prior to their release constitutes quite an indictment. For example:

  • Earlier this decade three Jones Act carriers pled guilty to price collusion in the Puerto Rico trade, with $46.2 million in fines handed out and six executives sent to prison. Since this episode one of the guilty carriers announced its withdrawal from the market, further reducing competition. 
  • 2012 report issued by the Federal Reserve Bank of New York found that shipping a twenty-foot container of household and commercial goods from the East Coast to Puerto Rico—a Jones Act voyage—was estimated to cost $3,063 versus $1,504 to the nearby Dominican Republic and $1,687 to Jamaica.
  • 2013 GAO report pointed out that feed shipped to Puerto Rico from New Jersey by Jones Act carriers “costs more per ton than shipping from Saint John, Canada, by a foreign carrier—even though Saint John is 500 miles further away.” The same report also cited the example of jet fuel being imported from Venezuela rather than the Gulf Coast due to concerns about Jones Act vessel availability and costs.
  • Puerto Rico’s government has applied for a ten-year waiver from the Jones Act because the law prevents the U.S. territory from importing U.S. LNG due a lack of Jones Act eligible ships capable of transporting it. As a result, Puerto Rico largely meets its LNG needs via more expensive imports from Trinidad and Tobago.

That the Jones Act imposes costs on Puerto Rico is beyond dispute. Rather, the only real question is how much this cost is. Given these latest studies, it appears significant indeed. The time has come to scrap this law and spare Puerto Rico—along with the rest of the United States—from its continued ravages.