August 23, 2018 3:00PM

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.  

As for the fact that shipping rates are higher to the U.S. Virgin Islands than Puerto Rico, this is an apples to oranges comparison. The U.S. Virgin Islands have a population and economy roughly 30 times smaller than Puerto Rico. With its smaller size comes smaller trade flows, smaller economies of scale, and reduced efficiency in servicing this market that is reflected in higher transport costs.

Hunter then pivots from discounting the Jones Act’s economic cost to Puerto Rico to highlighting its alleged national security benefits:

In a time of war, without the Jones Act, quickly rebuilding our shipyard industrial base would be next to impossible and training the American merchant mariners to man ships would take precious time we will not have. Instead, we would have to rely on shipyards overseas to supply our ships and we would likely have to pay foreign mariners to operate those ships. Is this really a position in the best national security interest of our nation?

We can have the strongest military in the world, but without the ships and U.S. merchant mariners to bring supplies to service members overseas, our capabilities would be severely limited, a position acknowledged by Gen. Darren McDew, Commander of U.S. Transportation Command.

The reality is that the Jones Act has presided over the steady decline of the U.S. shipyard industrial base. Since the early 1980s the United States has lost more than 300 shipyards. It’s a statistic Hunter should be familiar with given that it was mentioned on several occasions during a 2013 congressional hearing that he chaired. Furthermore, claims that the United States would be forced to rely on foreign shipyards without the Jones Act overlooks the existing reliance on foreign components and know-how to produce the few and vastly overpriced commercial ships that emerge from American shipyards.

Dependence on foreigners to support the U.S. military, meanwhile, is a description of the status quo. When the United States found itself needing to quickly transport vast amounts of equipment and war matériel to Saudi Arabia following Iraq’s invasion of Kuwait, foreign-flagged and crewed ships played a key role. According to the U.S. Transportation Command’s official history of its role in that conflict, 26.6 percent of total unit cargo was carried by foreign-flagged vessels.

While Jones Act supporters claim that the law assures the United States of ready access to ships and merchant mariners in times of war, the Pentagon found its transport capabilities so strained during that conflict that it twice requested the use of a transport ship from the Soviet Union—and was rejected both times. On the mariner front, the United States was forced to press two octogenarians into service and one 92-year-old sailor. Turning to the present day, meanwhile, the U.S. Maritime Administration published a 2017 report which, in its own words, “documents a deficit of mariners with unlimited credentials to meet the national security and force projection needs.”

Hunter continues in a similar vein:

The Jones Act also improves our safety and security. Rather than having unvetted foreign workers sail ships on our inland waterways, the Jones Act mitigates safety risks by ensuring that vessels are operated by U.S. mariners only.

Pure demagoguery. Foreign mariners already operate in U.S. waters on a daily basis and present no established threat. As a 2011 GAO report noted, overwhelmingly foreign maritime crews already make millions of entries into U.S. ports each year and yet there has never been a reported terrorist attack involving one of these seafarers. What reason is there to think these same foreign mariners would suddenly become a menace if permitted to operate on inland waters?

Furthermore, Hunter is factually wrong. Foreign mariners are already allowed to work on Jones Act vessels, with the minimum number of American crew set at 75 percent, not 100. As for safety, let’s note that it was a Jones Act ship with an American captain, the Exxon Valdez, that is responsible for one of the worst environmental disasters in U.S. history.

Congressman Hunter concludes with some comments about the Jones Act’s economic impact:

The Jones Act also provides significant economic benefits, including here in Southern California. The thousands of Jones Act vessels support nearly 500,000 domestic jobs with nearly $100 billion in economic impact.

The fact is, there are cheaper places to build ships than the United States, and I am sure that there are plenty of Chinese shipyards with cheap Chinese steel eager to undercut ones here at home. I am also sure we could find cheaper foreign workers to operate the ships currently sailed by Americans.

If building the cheapest ship manned by the lowest paid workers is the end goal, then by all means, let’s get rid of the Jones Act. If you are like me, and you value good paying U.S. jobs in American Shipyards and the Americans who can man those ships in times of conflict, then the Jones Act is clearly worth protecting.

By acknowledging that Americans could buy ships at lower cost abroad—as much as eight times cheaper—Hunter essentially concedes that the law imposes a significant economic cost. Paying vastly more to obtain the same good is the path to impoverishment, not prosperity. The secret to economic growth and an improved standard of living lies in increased efficiency and doing more with less. By blocking Americans from lower-cost alternatives, the Jones Act does the opposite.

The national security advantages we allegedly receive in exchange for the Jones Act’s price tab, meanwhile, are a figment of the imagination. If anything, the law makes us less secure, not more.

The Jones Act isn’t working. Its promised benefits have failed to materialize while the law imposes significant burdens on the U.S. economy. The time for its repeal is long past due.

August 20, 2018 2:05PM

The Jones Act Makes Little Sense in a Globalized World

El Coquí

Late 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.

August 8, 2018 9:59AM

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.


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.

July 12, 2018 11:03AM

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.

June 28, 2018 11:45AM

U.S. Maritime Sector Among the Jones Act’s Biggest Victims

Monday of this week marked the Day of the Seafarer, an occasion meant to recognize the critical role played by mariners in the global economy. American seafarers, however, increasingly find little to celebrate. A large source of their travails is the Jones Act. Signed into law 98 years ago this month, the law mandates that cargo transported between two domestic ports be carried on ships that are U.S.-built, U.S.-owned, U.S.-flagged, and U.S.-crewed.

The harm caused by this law is well documented. By reducing competition from foreign shipping options and mandating the use of domestically built ships that are vastly more expensive than those constructed elsewhere, the Jones Act has raised transportation costs and served as a de facto tax on the economy.

Too often overlooked is that the Jones Act has also presided over the decimation of the U.S. maritime sector, the very industry whose fortunes it was meant to promote (an age-old story in the annals of protectionism). The numbers speak for themselves. Since 2000 the number of oceangoing vessels of at least 1,000 tons which meet the Jones Act’s requirements has shrunk from 193 to 99. A mere three U.S. shipyards are capable of producing oceangoing vessels for commercial shipping, and one of them, the Philly Shipyard, is facing a possible shutdown. Europe, in contrast, has roughly 60 major shipyards capable of building vessels of at least 150 meters in length, while the United States has a total of seven such shipyards when those producing military vessels are included.

Both the declining number of Jones Act ships and the struggles of the shipyards that build them are in large part explained by the vastly inflated cost of ships constructed in the United States. According to the Congressional Research Service, American-built coastal and feeder ships—the types of ships commonly used in domestic sea transport—cost between $190 and $250 million, whereas similar vessels constructed in a foreign shipyard cost about $30 million.

One unsurprising consequence of such stratospheric costs is a reluctance on the part of domestic shipping firms to invest in new ships, with U.S. seafarers forced to work aboard vessels that are significantly older than those found in other countries. Excluding tankers (these vessels were subject to a requirement in the wake of the Exxon Valdez oil spill that they be double-hulled by 2015, thus encouraging the purchase of new ships and decreasing their average age), the Jones Act fleet averages 30 years of age—fully 11 years older than the average age of a ship in the merchant fleet of other developed countries. For context, the maximum economic life of a ship in the world market is typically 20 years

International comparisons of specific ship types are even more eye-opening. Jones Act containerships, for example, average more than 30 years old. The international average is 11.5. The only two bulk ships in the Jones Act fleet average 38 years old, while the international average is 8.8. General cargo ships average 34 years of age compared to an international average of 25.2.

Struggling shipyards, a dwindling fleet of old ships, and fewer jobs are now the order of the day in the maritime sector. As Mark H. Buzby, head of the U.S. Maritime Administration, testified before Congress earlier this year, “over the last few decades, the U.S. maritime industry has suffered losses as companies, ships, and jobs moved overseas.” Also addressing members of Congress, one senior union official admitted that “the pool of licensed and unlicensed mariners has shrunk to a critical level.”

This is not a new story. During Operations Desert Shield and Desert Storm, the United States was so desperate for civilian mariners to crew transport vessels that it enlisted the services of two octogenarians and one 92-year-old. Its search for ships was equally frantic, resulting in two requests to borrow a ship from the Soviet Union—and two rejections. Notably, during this conflict a much larger share of U.S. military equipment and supplies was carried by foreign-flagged vessels (26.6 percent) than U.S.-flagged commercial vessels (12.7 percent).

Supporters of the Jones Act often claim the law is vital to assure a strong merchant marine capable of answering the country’s call in times of war or national emergency. Should the Jones Act be repealed, they warn that the maritime industry will enter a dangerous downward spiral. But the record clearly shows that their nightmare scenario, in fact, describes the status quo. It’s time for this law to go, or be significantly reformed.

Toward that end the Cato Institute has unveiled its Project on Jones Act Reform, which will feature a series of policy papers exposing the fallacies and realities of this archaic law. The first of these policy analyses, The Jones Act: A Burden America Can No Longer Bear, is now available and provides an overview of the law, its history, and myriad shortcomings. More such policy analyses will follow both this year and next, along with other commentary pieces about this failed law, so be sure to check back for the latest updates. 

May 24, 2018 4:22PM

For Lower Gas Prices, Scrap the Jones Act

Drawing attention to rising gas prices this week, Senate Minority Leader Charles Schumer (D-New York) called for President Trump to ease pain at the pump by leveraging his relationships with key OPEC leaders as well as the presidential bully pulpit to exert pressure on oil companies. “These higher oil prices are translating directly to soaring gas prices, something we know disproportionately hurts middle- and lower-income people,” the senator added.

While his apparent belief that gas prices are determined more by the whims of corporate leaders than market forces is severely misguided, Sen. Schumer's stated concern for the welfare of American consumers is welcome. Rather than rely upon President Trump's ability to cajole foreign and corporate leaders into lowering the cost of gas, however, Sen. Schumer should introduce legislation to repeal the Jones Act.

Passed in 1920, the Jones Act mandates that ships which transport goods between domestic ports be U.S.-built, U.S.-flagged, and at least 75 percent U.S.-owned and crewed. Such strictures, in turn, raise transportation prices by eliminating access to cheaper options which do not meet these requirements. This cost increase reverberates throughout the economy, with few parts harder hit than the energy sector. Although the total cost of the distortions imposed upon this key industry is unknown, anecdotal evidence suggests that it is significant. Consider:

  • A 2014 Congressional Research Service report found that the purchase price of U.S.-built tankers is "about four times the price of foreign-built tankers, and U.S. crewing costs are several times those of foreign-flag ships." Given such a cost structure it's no surprise the report also found that shipping crude oil from the Gulf Coast to the Northeast on Jones Act-compliant tankers costs roughly three times greater than shipping the oil a longer distance to Canada on foreign-flagged ships ($5 to $6 per barrel versus $2 per barrel). Professor James Coleman of Southern Methodist University, meanwhile, points out that refineries in this part of the country "pay more than three times as much to ship oil from Texas rather than from West Africa or Saudi Arabia." 
  • 1999 Government Accountability Report (GAO) report stated that, incredibly, the cost to ship oil from Alaska's North Slope aboard foreign-crewed and built ships to the U.S. Virgin Islands—which is exempt from the Jones Act—was approximately three times less than to the Gulf Coast on Jones Act vessels ($2.35 per barrel versus $7.15 per barrel).
  • A 2013 GAO report noted that "representatives of airlines purchasing jet fuel for use in Puerto Rico told us that they typically import fuel to the island from foreign countries, such as Venezuela, rather than from Gulf Coast refineries." This occurs, the report added, "because of difficulty in finding available Jones Act vessels to transport jet fuel and, when vessels are available, the high cost of such shipments compared to shipping the product from foreign countries."
  • According to the CEO of the Overseas Shipping Group, a provider of energy transportation services, the cost of hiring a Jones Act ship for crude service is about three to four times higher than using a foreign-flagged vessel. 

This is but a sample of the costs imposed by the Jones Act, which drives up the price of gas and all manner of goods purchased by Americans. If Sen. Schumer and his fellow Democrats are serious about their desire to ease the financial burden placed on Americans by the rising cost of oil, scrapping or deeply reforming this nearly 100-year-old law would be an excellent place to start.

May 10, 2018 3:51PM

America’s Finest: The Critics Respond

In a recent opinion piece for the Wall Street Journal I highlighted the plight of America's Finest, a fishing vessel that, unless it is granted a waiver, will be prohibited from operating in U.S. waters due to its violation of the Jones Act. Although built in Washington state, the ship used steel, amounting to approximately 10 percent of the ship's weight, that was cut and bent in the Netherlands. Coast Guard rules related to the Jones Act limit the amount of such foreign-modified steel to 1.5 percent (foreign-made raw steel, in contrast, can be used in unlimited amounts). 

Unsurprisingly the column has generated some notes of dissent, including a letter to the editor from Chris Philips, the managing editor of Fishermen’s News:

Regarding Colin Grabow’s “The Jones Act Drives America’s Finest Into Exile” (op-ed, April 30): The Jones Act is a cabotage rule similar to those enacted in most countries having a coastline, including Canada, Japan, South Korea, China, Germany and France. Mr. Grabow claims: “The shipyard says it simply wasn’t aware of the rule.”

The shipyard in question has been building Jones Act vessels for more than 40 years. No one at Dakota Creek Industries, from the security guard to the president, is unaware of the rule.

Mr. Philips is correct that the Jones Act is a cabotage rule. His contention that it is similar to those of most countries, and those he lists in particular, however, is incorrect. The World Economic Forum, for example, has described the Jones Act as the "most restrictive example" of such laws and none of the countries listed by Philips feature the Jones Act's requirement that ships engaged in cabotage trade be domestically built. Furthermore, both Germany and France as members of the European Union allow ships from other EU members to engage in cabotage.

As for the claim by the shipyard which built America's Finest that it was "wasn't aware of the rule," a fair reading of my column makes plain that this was in reference not to the Jones Act, but rather its specific restriction that foreign-modified steel is limited to 1.5 percent of the ship's weight. Indeed, I cited that 1.5 percent figure in the sentence preceding the claim about a lack of awareness. 

Philips then continues:

Mr. Grabow says the price of new vessels encourages the use of older ships. This is a no-brainer and a non sequitur. The same market forces apply to any depreciable asset world-wide. He also makes the oft-repeated claim that the Jones Act “made it difficult to ship emergency aid to Puerto Rico.” This is simply false.

Such comments reflect a failure to engage with the substance of what I wrote. By prohibiting access to foreign-built ships—or in this case, domestically-built ships which use too much foreign-worked steel—the Jones Act artificially drives up the cost of newer vessels. This, in turn, forces mariners to work on ships that are less safe and efficient than newer vessels. Indeed, the company which ordered America's Finest was motivated in part by a desire for greater efficiency and to provide its employees with safety improvements. This is by no means a non sequitur, and gets to the core of the burden imposed by the Jones Act.

Regarding aid to Puerto Rico, meanwhile, I stand by my words. Greenpeace, for example, says that it would have been easily able to transport donated supplies on a foreign-registered vessel to Puerto Rico absent the Jones Act, but instead the matter was "quite complicated." Economist Thomas Grennes further notes that a "Norwegian-flag ship that was docked in New Orleans offered to take supplies to Puerto Rico, but the waiver expired before it could complete its voyage." 

Philips concludes:

The Jones Act exists to protect our nation’s shipbuilding industry, which is critical to the security of this country. Those of us in the maritime and military fields understand this very well.

If this is so then the Jones Act, as typical of protectionist schemes, is a failure. In 2015 the U.S. Maritime Administration (MARAD) listed the number of active shipyards in the United States at 124 of which only 22 are “mid-sized to large shipyards capable of building naval ships and submarines, oceangoing cargo ships, drilling rigs and high-value, high-complexity mid-sized vessels.” In comparison, Japan currently has over 1,000 shipyards and it is estimated that China has over 2,000. Europe has roughly 60 shipyards capable of producing ships at least 150 meters in length. 

Measured in terms of output the picture is equally dismal, with the shipbuilding sector hugely dependent on government contracts. As MARAD itself notes, 10 out of 12 large deep-draft vessels delivered in 2014 were to U.S. government agencies and "98 out of the 150 new vessels ordered from U.S. private shipbuilders [that year] were for the U.S. military." This lack of competitiveness and dependence on government is also evidenced by the fact that from 2006-2016 U.S. shipyards produced an average of merely 4.1 tankers and cargo ships per year. This is the opposite of a thriving sector. 

Such statistics are the tip of the iceberg in documenting the Jones Act's myriad shortcomings, both in terms of ensuring a healthy shipbuilding sector and bolstering the country's national security.