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.Read the rest of this post »
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.Read the rest of this post »
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.
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!
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.Read the rest of this post »
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.
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.Read the rest of this post »