February 20, 2019 10:42AM

Jones Act Lobby Hits the Panic Button

Puerto Rico’s request for a limited Jones Act waiver to permit the importation of liquefied natural gas (LNG) from the U.S. mainland has touched off what can only be described as a near panic among the law’s supporters. Members of the House Transportation and Infrastructure Committee recently dashed off a letter to the administration expressing opposition to the move. The American Maritime Partnership and other pro-Jones Act special interests are currently urging supporters of the law to send “pre-formatted” emails to Congress. And this past weekend Matthew Paxton, the president of the Shipbuilders Council of America, published an op-ed blasting Puerto Rico’s waiver application.

Alarm bells are plainly ringing, and the Jones Act lobby is willing to do—and say—whatever it takes to prevail in this pivotal battle over the law’s future. That, at least, is the main takeaway from Paxton’s recent op-ed, which is a striking display of misdirection, half-truths, and overall paucity of argument.

Paxton begins the piece by invoking President Trump’s favored catchphrases of “America first” and “buy American and hire American.” Yet the entire point of Puerto Rico’s waiver request is that the Jones Act prevents the territory from buying American. Remember the issue here: Puerto Rico’s desire to purchase cheap natural gas from the U.S. mainland for electricity generation is frustrated by a lack of Jones Act eligible ships to transport it.

That the administration may grant a waiver to address this situation, Paxton continues, demonstrates that “special interests are prevailing over national interests, as deep-pocketed supporters in the oil and gas industry – those who epitomize the very ‘swamp’ that he vowed to drain – are swaying the debate.” Yes, you read that right—the Jones Act lobby is portraying itself as the victim here.

There’s a very simple test for assessing whether a group represents a swamp-dwelling special interest: are they trying to reach into your pockets? In this case, we have the Jones Act lobby which favors federal intervention to reduce competition and force Americans to pay inflated prices for transportation services. On the other side, meanwhile, are opponents of the law who do not ask for a single dollar from the federal government and, in the case of Puerto Rico, merely seek the opportunity to purchase a U.S.-made product. Readers can decide for themselves which is more at home in the D.C. muck.

Paxton then gets into the meat of his argument:

These special interests claim there are no ships in the world authorized to carry LNG from the U.S. to Puerto Rico.  This is patently wrong.  Legislation passed in 1996 allows for LNG carriers built anywhere before that year to transport American LNG to Puerto Rico by being brought under U.S. flag.  There are more than 50 of these ships in service throughout the world today, and a number of them are not on long-term contracts.  They are not serving in the Jones Act trade because there is not yet a firm market.

The loophole to which Paxton refers is far less noteworthy than what he lets on. While there is some number of LNG carriers in the world theoretically able to take advantage of this provision (44 according to the International Gas Union and 37 per the Government Accountability Office), the law still requires these vessels to be U.S.-registered and U.S.-crewed. This has not happened, is unlikely to ever happen, and thus U.S. LNG still effectively remains off limits for Puerto Rico. 

Paxton continues:

If the President goes through with waiving the Jones Act for 10 years for the purposes of transporting LNG along our nation’s coasts and to Puerto Rico, then his will be the administration that undermines this long-standing American law and does irreparable damage to the all-American industry it supports.

Waiving the Jones Act as planned will wipe out an emerging American LNG transportation market while signaling to all that the law will not be reliably enforced under this administration. This will have a devastating ripple effect that indubitably will serve to dry up U.S. investment in shipbuilding. Our situation will resemble that of Australia, Canada, and the United Kingdom – all struggling to revive their once-robust shipbuilding industries.

As a result, the U.S. will soon be forced to outsource shipbuilding to China and Korea. This will mean the shuttering of American shipyards and the elimination of hundreds of thousands of American jobs. It also will mean an end to our ability to respond with a domestic shipbuilding capacity in times of major war.

Let’s remember the facts of the case: the waiver request is for the ability to ship U.S. LNG to Puerto Rico alone and says nothing about “transporting LNG along our nation’s coast.” Should the Trump administration grant Puerto Rico’s waiver request not a single U.S. ship will be displaced, nor a single mariner lose their job. No shipyard will lose any business as there are currently no LNG carriers on order (and given the frightening cost of building such a carrier in a U.S. shipyard, none likely for the foreseeable future).

In fact, if anything the waiver would likely bolster the U.S. maritime sector. Cheaper energy costs for Puerto Rico means more dollars in the pockets of its residents and more money to spend on imports from the U.S. mainland. Those imports, in turn, would be carried by U.S. ships crewed by U.S. mariners.

The reality is that U.S. shipbuilding has far more to fear from the status quo than any waiver that might be granted involving a type of ship which hasn’t been domestically made since 1980. Under the Jones Act’s watch the U.S. shipbuilding industry has seen approximately 300 shipyards close since 1983. In contrast, other forms of transportation not subject to Jones Act-style protectionism such as autos and airplanes see U.S. firms playing a leading role.

As for the outsourcing of U.S. shipbuilding, that ship in many ways has already sailed. The few large oceangoing ships built today typically use foreign designs and foreign components such as the engine. Even some of the shipyards themselves, such as VT Halter and the Philly Shipyard, are foreign-owned. The idea that the Jones Act is all that stands in the way of further shipyard closures, meanwhile, betrays a lack of confidence in the American worker and American ingenuity.

Regarding the wartime utility of American shipyards, there are only three major commercial shipyards in the United States (arguably four if Keppel AmFELS, currently said to be building a containership for Pasha Hawaii, is included). Of these shipyards, only one—General Dynamics NASSCO—also produces ships for the U.S. military. All of the remaining major shipyards in the United States exclusively produce naval vessels and do not compete in the Jones Act market.

Moving along:

China is already a world leader in global shipbuilding. The Chinese crave the opportunity to take over our small but vital commercial market, which they know will hasten the end of American shipbuilding. Then we will become dependent on ocean transportation from a nation the Pentagon recently labeled “certainly an adversary of the United States.”

In other words, after a century of the Jones Act making America strong, waiving it will make China even stronger while bolstering their ability to threaten our economic and national security.

This is a red herring. Puerto Rico’s application for a Jones Act waiver to import U.S. LNG has nothing to do with China, and Paxton’s invocation of the country is a naked attempt at distracting from the issue at hand. Regarding dependence on foreign countries for ocean transportation, this is nothing more than a description of the status quo with over 98 percent of U.S. foreign trade conducted using ships registered under foreign flags.

If a national security case can be made for preventing Americans from purchasing Chinese ships for use in domestic transport, then Paxton and others should do so. But the Jones Act is a blanket prohibition against the purchase of any foreign vessel used in domestic transport, including from treaty allies such as Japan, South Korea, and NATO members. Concerns about China are no reason to prevent the purchase of ships from other countries.

Because the Jones Act was instituted as a national security measure, any waiver requires a national defense emergency to be declared by the Department of Defense or the Department of Homeland Security. But no such thing is currently established in the administration’s justification. This would be a gross and blatant violation of the law.

Paxton references the “administration’s justification” but the Trump administration hasn’t justified anything yet, with no decision made on the matter. And absent such a justification with its attendant evidence and arguments he can’t possibly know whether such a waiver would violate the law.

Let’s be very clear about what is taking place. Paxton, along with the rest of the Jones Act lobby, is terrified of Puerto Rico’s application for a limited Jones Act waiver to import U.S. LNG. And they should be. For nearly 100 years Americans have operated under the Jones Act’s strictures, never knowing a world in which this law did not apply. But if this waiver is approved they could catch a tantalizing glimpse of cheap domestic ocean transport and the possibilities it could unlock. This, in turn, would likely raise questions about other aspects of the U.S. economy that are being shackled by the Jones Act and the wisdom of keeping the law in place.

Things are about to get interesting.

February 8, 2019 4:27PM

Puerto Rico, LNG, and the Jones Act

LNG ship

In 2017 the United States reached a milestone: for the first time since 1957 the country was a net exporter of natural gas. Today ships laden with U.S.-produced liquified natural gas (LNG) travel the globe delivering their cargo everywhere from Japan to Jordan and Spain to South Korea. One place U.S. LNG is not exported to, however, is Puerto Rico.

Incredibly, that’s not despite the fact that Puerto Rico is part of the United States, but because of it. As a U.S. territory, Puerto Rico is subject to the Jones Act, a 1920 law which restricts the transport of cargo between two points in the United States to vessels that are U.S.-built, U.S.-crewed, U.S.-owned, and U.S. flagged. Out of the world’s 478 ships dedicated to transporting LNG, however, none meet these requirements. In other words, exporting LNG from the U.S. mainland to Puerto Rico at any sort of scale is literally impossible. It can’t be done.

And this situation is unlikely to change anytime soon. As a 2015 GAO report points out, LNG carriers built in South Korea are likely 2-3 times cheaper than those constructed in the United States (this may actually understate matters as the GAO’s calculation assigns a cost of $200-225 million for a South Korean-built LNG carrier. A Wall Street Journal article this week, however, places that cost at $175 million). The word “likely” is deliberate—no one knows what the precise cost difference would be since an LNG carrier has not been built in the United States since 1980. And with decades having passed since one was last built a skills gap has emerged. As the GAO points out, to construct such a vessel American shipyards might need to bring over “skilled Korean workers for the duration of the build time to ensure the work is done correctly.”

Faced with the enormous costs and obstacles to building a Jones Act-compliant LNG carrier, it is no surprise that domestic LNG producers instead opt to use much cheaper foreign-built ships to export their natural gas internationally. With plenty of demand for their product abroad, their inability to send LNG to Puerto Rico is likely little more than an inconvenience. For Puerto Rico, however, this is a much bigger problem.

Already dependent on natural gas for approximately 34 percent of its electricity generation, Puerto Rico’s government would like to see that number increased. This is partly due to environmental concerns and a desire to displace some of the coal and petroleum that collectively account for 64 percent of the island's electricity. Another motivation is to realize the cost savings offered by relatively cheap LNG. But so long as the Jones Act remains in place Puerto Rico cannot take advantage of low LNG prices found on the U.S. mainland, and instead primarily meets its natural gas needs via more expensive imports from Trinidad and Tobago (as well as, according to Puerto Rico's Secretary of State Luis Rivera Marín, Russia).

With no Jones Act-compliant ships in existence to transport LNG from the U.S. mainland, and stuck paying higher prices for the product from foreign sources, the government of this cash-strapped territory understandably—and quite reasonably—applied in December for a limited waiver from the Jones Act to enable the importation of LNG from the United States aboard foreign-flagged vessels. To reiterate, such a measure would not displace a single U.S.-flagged ship as no U.S. vessel is capable of providing this service. Furthermore, the waiver application agrees to have the waiver suspended should a Jones Act-compliant LNG carrier come into existence.

But even the mere prospect of the slightest crack emerging in the Jones Act’s foundation is too much for supporters of this outdated law to stomach. This week both the Chairman and Ranking Member of the House Committee on Transportation and Infrastructure dispatched a letter to Secretary of Homeland Security Kirstjen Nielsen urging her to reject the waiver request.

In an era in which Democrats and Republicans struggle for the common ground necessary to keep the federal government open, it’s notable and depressing that rare bipartisanship is found in shared opposition to a measure which would provide the struggling people of Puerto Rico access to cheaper energy.

Given that no American ship would be displaced by this waiver, nor would a single mariner lose his job, one can’t help but wonder from where such opposition emanates. The cynic—typically proven correct in today’s Washington—would suspect it’s because such a waiver and the savings it generates would raise broader questions about the wisdom of keeping the Jones Act in place. Once exposed to even a taste of the non-Jones Act world, Americans would find it sufficiently potent to demand the law’s complete repeal. This, in turn, would be disastrous for the special interests that benefit from the higher costs the Jones Act produces.

This is the real dividing line in Washington, with consumers on one side and special interest swamp creatures on the other. Our federal representatives should pick their side accordingly.

December 17, 2018 10:03AM

Another Failed Defense of the Jones Act

As the Cato Institute continues to press the case for Jones Act reform, defenders of this flawed and failed law have repeatedly made clear that they’ve taken notice. Fresh evidence of this was seen earlier this month with the publication of an op-ed on the leading maritime website gCaptain.com. Entitled “CATO’s Continued Attempt to Skin the Jones Act,” the piece was an obvious preemptive salvo launched a day prior to Cato’s recent conference on the law’s shortcomings. A close reading, however, reveals it to be another instance of Jones Act defenders missing the mark.

Examining the law’s history, author Sal Mercogliano—a professor at Campbell University—claims that prior to the outbreak of World War II that “the Jones Act, reinforced by the Merchant Marine Act of 1936 ensured that not only was there a domestic shipbuilding industry, but it could be ramped up to support the building of over 5,000 merchant ships…” This is, at best, incomplete. As the book Global Reach points out, during this time U.S. merchant shipbuilding was almost non-existent and the fleet itself in obvious decline:

By the mid-1930s American merchant shipbuilding had come to almost a complete halt. In the nearly twenty years following the end of World War I, America’s merchant fleet, including its cargo and passenger ships, was becoming obsolete and declining in numbers; nearly 90 percent of the merchant fleet was more than twenty years old, and few ships could do more than ten or eleven knots. Although the Maritime Commission established by the Merchant Marine Act of 1936 had planned to build 50 ships a year under its CDS provisions, by 1939 the United States had only about 1,340 cargo ships and tankers, fewer than the total built by U.S. shipyards in 1914-17, even accounting for wartime losses. In no respect was the U.S. commercial industry capable of meeting the demand for sealift posed by the looming conflicts in Europe and the Pacific.

It’s also worth pondering why, if the Jones Act should be regarded as a success, the Merchant Marine Act of 1936 was even needed.

Dr. Mercogliano’s explanation of stupefying U.S. shipbuilding costs—commonly estimated to be three to five times greater than those of Asian shipyards—similarly leaves much to be desired:

CATO contends that the Jones Act is a burden that American can no longer bear. Specifically, they cite the higher cost to build ships in America as opposed to overseas. The largest builders of commercial ships in the world today are the Republic of Korea, the People’s Republic of China, and Japan; nine out of every ten ships afloat are built in East Asia. The question that needs to be raised is why? It is the exact reason that the CATO Institute rails about with the United States – government subsidies. The South Korean government announced the injection of over $700 million dollars into Hyundai Merchant Marine to stabilize the largest Korean shipping line. It was announced that the South Korean government would be infusing over $1 trillion into shipbuilding, in violation of the World Trade Organization.

While it is true that Asian shipbuilders receive government largesse, both the amount and its alleged explanatory power are vastly overstated. The $1 trillion figure cited—a stunning two-thirds of South Korea’s GDP—has no basis in reality. In fact, a recent WTO case brought by Japan against South Korea over its shipbuilding subsidies uses the figure of $11 billion in financial assistance.

The main reason why U.S. shipyards are so wildly expensive is not subsidies but scale. Asian shipyards have it, while U.S. shipyards—where annual output of tankers and cargo ships is typically in the single digits—do not. As this 2015 National Defense University (NDU) report on the U.S. shipbuilding sector explains:

Many of the successful foreign shipbuilders enjoy significant economies of scale from commercial market share dominance. The Jones Act does not deliver the market share necessary for the United States to achieve competitive economies of scale and, therefore, the United States will likely never be competitive in the global commercial market.

A 2009 NDU report similarly held the Jones Act at least partly responsible for U.S. shipyards' lack of competitiveness:

Regarding the international market for commercial ships, U.S. shipbuilders face steep competition from shipbuilders in Asia who offer lower prices, are more efficient, and have higher industry best practice ratings. This is particularly true for the construction of vessels over 1,000 tons. This can be partially attributed to protectionist policies, such as the Jones Act, that have shielded domestic shipbuilders from the pressures of global competition. Thus while U.S. shipbuilders have remained competitive within the U.S. market, they were less so compared to foreign shipyards. None of the shipyards that the Industry Study Team visited expressed confidence that U.S. shipyards, as they are currently configured, could compete effectively in the global shipbuilding market.

Furthermore, the United States is hardly innocent in this regard. As yet another NDU report points out, the Philly Shipyard alone has received “approximately $500 million in direct subsidies and leases its facility from the city for only $1 per year” while the Austal shipyard in Alabama and VT Halter shipyard in Mississippi have received millions more.

There’s also the small matter that the Jones Act itself, which mandates the purchase of U.S.-built ships, functions as a massive de facto subsidy scheme.

And for all of the finger pointing at foreign subsidies, it’s instructive that when the Clinton administration reached an international deal for an end to shipbuilding subsidies—one that included Japan and South Korea—U.S. shipbuilders performed an about face and turned it down. One would expect a rather different response if subsidies were indeed the decisive factor preventing these shipbuilders from competing with their foreign counterparts.

Mercogliano later goes on to discuss the Jones Act’s national security justification and the heavy U.S. reliance on foreign-flagged shipping during Operations Desert Shield and Desert Storm. While conceding that, despite having the Jones Act in place, the conflict “highlighted a shortfall in American sealift capacity,” Mercogliano seems to argue that this had largely been remedied by the time of the 2003 Iraq War with “all the cargo shipped to that conflict [going] on ships crewed by American merchant mariners.”

Other sources, however, paint a rather different picture. According to a 2009 Naval War College paper the shipping situation was in fact arguably even more dire than during Desert Shield/Storm:

With 77.6 percent of cargo being moved by United States government owned vessels, TRANSCOM still had to turn to the United States and foreign flagged merchant fleets during the deployment of OIF. In fact, since the United States flagged merchant fleet continued to decline between Desert Shield/Desert Storm and OIF, United States flagged merchant vessels delivered only 1.3 million square feet or a mere 6.3 percent of OIF deployment cargo. Therefore, even with TRANSCOM’s high priority of funding after Desert Shield/Desert Storm they were still required to use foreign flagged merchant vessels to move 3.3 million square feet or 16.0 percent of OIF deployment cargo.

While this looks like an 11 percent improvement from Desert Shield/Desert Storm, OIF required 12.1 million square feet less of cargo. Therefore, if the required cargo to be moved was equal to that of Desert Shield/Desert Storm then foreign flag vessels would certainly have been used to carry the majority of the additional cargo. In fact, using a conservative estimate of foreign flag vessels picking up 50 percent of the difference in cargo between the two conflicts would have brought the percentage of cargo carried by foreign flag vessels to 28.6 percent, one percent higher then (sic) during Desert Shield/Desert Storm.

Since this time the Jones Act fleet has only further deteriorated. When Operation Iraqi Freedom began in 2003 the number of Jones Act ships stood at 151. Today it is a mere 98.

None of this is to suggest that the piece is entirely devoid of useful facts or information. Mercogliano, for example, notes that the Jones Act’s namesake, Sen. Wesley Jones of Washington state, was “particularly interested in the cabotage provision between his home state and the Alaska territory.” This does not surprise, with the Jones Act resulting in two Canadian shipping companies that served Southeast Alaska driven from that market—a development that almost surely benefited competitors in Jones’s home state.

Refreshingly, Mercogliano also acknowledges that, should the Jones Act be repealed, “Americans could see a reduction in their freight rates and the opening of new water routes between American ports.”

Perhaps most importantly, while he uses his conclusion to oppose repeal of the Jones Act, Mercogliano concedes that reform is needed stating, “Does the Jones Act need reform? Yes, what 98-year-old law does not need updating.” We may differ on the exact reforms required, but acknowledging that not all is well with the Jones Act is an important first step. 

December 13, 2018 3:44PM

Jones Act Reform Gaining Momentum

Last week was a busy one for advocates of reforming the Jones Act. On Thursday the Cato Institute held a well-attended conference on the subject that featured a veritable Who’s Who of Jones Act experts and reform advocates. Video of the conference has now been posted, and those who were unable to participate or watch live should make sure to check out the many outstanding presentations that were made.

But ours was not the only gathering where the law was placed under scrutiny. Last week also saw a panel discussion held on the Jones Act as part of the National Hispanic Caucus of State Legislators’ (NHCSL) annual summit in San Diego. Unfortunately, the panel consisted only of myself and a moderator as invitations to groups supportive of the 1920 law apparently went unanswered. Nevertheless, the discussion was lively and opposition to the law in abundance.

Just how abundant became clear the next day, when the NHCSL voted on a resolution calling for the law’s repeal. Co-sponsored by New Jersey State Senator Nellie Pou and Pennsylvania State Representative Ángel Cruz, it passed by an overwhelming 56-10 margin.

The resolution, whose provisions include a call for NHCSL members to put forward similar measures in their respective legislatures calling for the Jones Act’s repeal, already appears to be bearing fruit. Puerto Rico Rep. José Aponte has announced his intention to introduce such a resolution. Others are sure to follow.

These are only the latest signs of support, particularly at the grassroots level, for reform of this failed law. Earlier this year, for example, the New York City Bar Association endorsed a permanent Jones Act exemption for Puerto Rico.

Unfortunately, too many in Washington still don’t grasp the necessity of revisiting the Jones Act. But even here in D.C. there is good news to be found, with reform advocates set to be bolstered by the arrival of newly elected Rep. Ed Case of Hawaii. A longtime opponent of the law, Case was victorious in his race against another Jones Act critic, Cam Cavasso. Congressional races where the nominees from both major political parties compete to burnish their anti-Jones Act credentials is certainly a refreshing change and would seem to speak to mounting opposition to the law.

The Jones Act has existed for over 98 years, and the edifice’s immediate collapse is unlikely. But cracks in the foundation are beginning to appear. 

November 16, 2018 12:14PM

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!

October 23, 2018 12:27PM

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. 

Finally, he addresses the Jones Act's economic impact on Puerto Rico:

Just as important, a recent nonpartisan economic study found that the Jones Act does not impact consumer prices in Puerto Rico. Rather, the Jones Act has a net positive economic impact, because the certainty of the regularly scheduled coastwise trade allows shippers to invest in state of the art maritime technologies and local port investments. In fact, consumer price comparisons of common household commodities between Puerto Rico and other Caribbean islands found that consumer prices on Puerto Rico are commonly lower.

The referenced study may have been "nonpartisan" but it was hardly the product of disinterested observers, having been funded by the pro-Jones Act American Maritime Partnership. As discussed in a previous blog post the study's methodology is dubious and its claims should be treated with a great deal of skepticism.

In addition, the logic behind the claim that the Jones Act has a net positive economic impact on Puerto Rico is unclear. State of the art maritime technologies and local port investments are certainly good for the carriers, but it is unclear how this benefits the average Puerto Rican. If the argument is that these confer efficiencies that allow Jones Act carriers to lower transport costs, then they should have little to fear from competing against foreign-flag ships. The fact that they steadily refrain from doing so and instead cling to the Jones Act's protections, however, is telling. 

It's also worth noting that regularly scheduled trade with Puerto Rico happens outside of the Jones Act, with Tropical Shipping (whose owner, Saltchuk, also owns Jones Act carrier TOTE Maritime), for example, offering regular service from Halifax, Canada. 

Although the Jones Act's alleged economic benefits to Puerto Rico are fictional its costs are very real and well documented. A 2012 report from the Federal Reserve Bank of New York, for example, stated that shipping a twenty-foot container of household and commercial goods from the East Coast to Puerto Rico costs roughly twice that of shipping the same goods to nearby Jamaica or the Dominican Republic.

In addition, a 2013 GAO report points out that the high cost of shipping resulting from the Jones Act results in Puerto Rican farmers purchasing grain from Canada instead of New Jersey and jet fuel from countries such as Venezuela rather than the Gulf Coast. The report also highlighted price fixing in the Jones Act trade servicing Puerto Rico, with a federal investigation resulting in three of four Jones Act carriers pleading guilty and fined about $46 million. Six executives were sentenced to a total of more than 11 years in prison.  

All of these points and much more will be discussed during the Cato Institute's upcoming conference on the Jones Act in December, the culmination of which will be a debate between those who favor and oppose the law.

We invite Rep. Garamendi to participate in this debate and defend the Jones Act in this public setting. 

September 21, 2018 5:50PM

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.