Cato trade policy analyst Colin Grabow explains the sordid details in today's Wall Street Journal:
America’s Finest, a brand-new 264-foot fishing trawler, ought to be the pride of the fleet. As a newspaper in its birthplace of Anacortes, Wash., explained, the ship features an “on-board mechanized factory, fuel-efficient hull, and worker safety improvements”—priceless features for fishermen operating in the treacherous seas off Alaska. The ship is also said to have a smaller carbon footprint than any other fishing vessel in its region. According to Fishermen’s Finest, the company that ordered the ship, it would be the first new trawler purpose-built for the Pacific Northwest since 1989.
Sadly, it seems increasingly doubtful that the ship will ever ply its trade in U.S. waters. That’s because it contravenes the Jones Act, the 1920 law mandating, among other things, that ships carrying cargo between U.S. ports be domestically built
Ike Brannon's recent post on the Jones Act is excellent, and those who have not done so already should give it a read. He notes some of the many economic hardships imposed by the law, which are shielded from proper scrutiny because its large costs are spread across the population and benefits concentrated among a relatively limited number of entities such as shipbuilders.
Brannon's concluding sentences, however, may be too kind to the political process:
[P]laces like Puerto Rico, Hawaii and Alaska would benefit most of all [from getting rid of the Jones Act], since they are overly dependent upon shipping prices.
However, as those are only two low population states and a territory with no voting representation, their inconveniences won’t resonate much with Congress.
Such language implies that the elected representatives of Alaska and Hawaii are fully cognizant of the burdens imposed by the Jones Act, but are prevented from making headway toward its removal due to insufficient political sway. The truth is far worse. As I noted yesterday at USAToday.com, all four members of Hawaii's congressional delegation—Sen. Brian Schatz, Sen. Mazie Hirono, Rep. Colleen Hanabusa, and Rep. Tulsi Gabbard—stand foursquare in support of the law. Among the three members of Alaska's delegation, both Sen. Lisa Murkowski and Rep. Don Young have touted their backing of the Jones Act (I have been unable to determine the position of Sen. Dan Sullivan, who has only held his current position since 2015).
Why is this? While the definitive motivations of these politicians are known only to themselves, a reasonable guess can nonetheless be hazarded.
We can first dispense with partisan explanations, as Hawaii's congressional delegation is comprised entirely of Democrats while Murkowski and Young are both Republicans. More relevant is the fact that according to the American Maritime Partnership, Alaska is ranked #3 among the 50 states for maritime jobs per capita. Hawaii, being the lone U.S. state comprised of an island chain which imports as much as 90% of its food, presumably has a significant maritime sector as well. Those engaged in such employment, and who profit most from the Jones Act's concentrated benefits, are much more invested in its future than the consumers forced to bear its significant but relatively small individual costs. Commensurate pressures from constituents then win out over economic sense when politicians set their positions.
Further food for thought is to be found in the fact that the Senate's most committed Jones Act critic, Sen. John McCain, hails from the landlocked state of Arizona. McCain's legislation to grant Puerto Rico a permanent exemption from the Jones Act enjoys co-sponsorships from Sen. Mike Lee of Utah and Sen. James Lankford of Oklahoma, also of landlocked states. As a result, these Senators are more likely attuned to the Jones Act's net economic drag than benefits to maritime special interests. This may all be coincidence, but it fits perfectly with the public choice model of special interests.
When it comes to protectionist U.S. policy, bitter experience has shown that the truth is often worse than we think.
The Merchant Marine Act of 1920, commonly known as the Jones Act, is impossible to defend with a straight face. The Act requires that all people and goods travelling from one U.S. port to another be carried on U.S. owned, flagged and crewed ships. The rationale usually offered these days in support of the Act is that it protects American jobs, and that our military needs to have a fleet of ships it can borrow in case of some sort of emergency. Neither can be taken seriously.
For starters, the Jones Act probably costs us jobs. The high shipping costs engendered by the Jones Act encourage businesses to ship more things via rail or truck. Where that's not possible (as with Puerto Rico), it incentivizes businesses to import goods, rather than buy from a domestic customer and pay the prohibitively expensive toll the Jones Act imposes. In either case, fewer jobs result.
The Act makes it cheaper for U.S. livestock farmers to buy grain from overseas than from American sources, and forces states such as Maryland and Virginia to import their road salt rather than buy it from Ohio. The East Coast of the U.S. cannot afford to get lumber from the Pacific Northwest. And shipping oil from Texas to New England costs about three times as much as shipping it to Europe.
The Jones Act survives because it's hard for people to see what it costs them. As long as constituents aren't complaining, politicians are happy with the status quo - especially since ship builders will write big checks to anyone willing to protect the Act.
The recent relaxation of the Jones Act for Puerto Rico has the potential (albeit slight) to change this calculus, but since it is scheduled to only last for ten days, the residents of this island won't see how much they could potentially save from not having this burden.
And those savings would be immense: In a study I recently did with Russ Kashian, we estimated that U.S. consumers would save billions of dollars if we got rid of the Jones Act. And places like Puerto Rico, Hawaii and Alaska would benefit most of all, since they are overly dependent upon shipping prices.
However, as those are only two low population states and a territory with no voting representation, their inconveniences won't resonate much with Congress.
George Will writes in his column today about the importance of the Port of Charleston – and by extension, trade – to the economy of South Carolina. Recent completion of the 10-year project to widen the Panama Canal to accommodate more traffic and passage of a new class of container ships with nearly triple the capacity of their immediate predecessors has exposed a logistics snafu that could cost South Carolina’s economy billions of dollars: Charleston Harbor is too shallow to accommodate these much larger, “Post-Panamax” ships efficiently (only limited sections of the harbor are deep enough and only during high tide).
According to the American Society of Civil Engineers, these vessels can lower shipping costs from 15-20 percent, but harbors need to be at least 47 feet deep to accommodate them. The U.S. Army Corps of Engineers reports that only seven of the 44 major U.S. Gulf Coast and Atlantic ports are “Post-Panamax ready.” American ports must be modernized if the United States is going to continue to succeed at attracting investment in manufacturing and if U.S. companies are going to compete successfully in the global economy.
As I wrote in the Wall Street Journal last year:
The absence of suitable harbors, especially in the fast-growing Southeast, means fewer infrastructure- and business-development projects to undergird regional growth. It also means that Post-Panamax ships will have to continue calling on West Coast ports, where their containers will be put on trucks and railcars to get products from Asia to the U.S. East and Midwest—a slower and more expensive process.
The problem can be traced to one major issue: funding. And that issue is made more complicated by another problem: protectionism. Most funding of infrastructure inevitably come from federal and state budgets – taxpayers, who should have a voice in the debate about whether these infrastructure projects constitute wise public investments. But a couple of long-standing, though obscure, protectionist laws have conspired to reduce capacity in dredging services, ensuring that projects take twice as long and cost twice as much as they should.
As I wrote in the WSJ:
This capacity shortage is the result of the Foreign Dredge Act of 1906 and the Merchant Marine Act of 1920 (aka the Jones Act). These laws prohibit foreign-built, -chartered, or -operated dredgers from competing in the U.S. The result is a domestic dredging industry that is immune to competition, has little incentive to invest in new equipment, and cannot meet the growing demand for dredging projects at U.S. ports.
For the next few years, federal, state and local government spending on dredging is expected to be about $2 billion annually. That spending will be supplemented by investments from U.S. ports and their private terminal partners to the tune of $9 billion a year to build and upgrade harbors, docks, terminals, connecting roads and rail, and storage facilities, as well as to purchase cranes and other equipment. There would be a lot more of these job-creating investments if European dredging companies were allowed to offer their services.
The Transatlantic trade talks offer a great opportunity to fix this problem. The best dredging companies in the world are European, mainly from the low-lying countries of Belgium and the Netherlands, where mastery of marine engineering projects has been developed over the centuries.
Industry analysts at Samuels International Associates estimate that European dredgers could save U.S. taxpayers $1 billion a year on current projects, and enable more projects to be completed more quickly. The European Dredging Association boasts that its member companies win 90% of the world’s projects that are open to foreign competition.
In a global economy where capital is mobile, workforce skills, the cost of regulation, taxes, energy costs, proximity to suppliers and customers and dozens of other criteria factor into where a company will invest. And for companies with transnational supply chains, transportation costs are crucial considerations.
Today the U.S. is falling behind…
Over at Café Hayek today, Don Boudreaux assesses Will’s piece and offers an excellent analogy between administrative protectionism (tariffs and the like) and physical protectionism (harbor disrepair), which reminded me of this masterful passage from Fredric Bastiat equating tariffs and physical impediments to trade with sweeping brilliance and simplicity:
Between Paris and Brussels obstacles of many kinds exist. First of all, there is distance, which entails loss of time, and we must either submit to this ourselves, or pay another to submit to it. Then come rivers, marshes, accidents, bad roads, which are so many difficulties to be surmounted. We succeed in building bridges, in forming roads, and making them smoother by pavements, iron rails, etc. But all this is costly, and the commodity must be made to bear the cost. Then there are robbers who infest the roads, and a body of police must be kept up, etc. Now, among these obstacles there is one which we have ourselves set up, and at no little cost, too, between Brussels and Paris. There are men who lie in ambuscade along the frontier, armed to the teeth, and whose business it is to throw difficulties in the way of transporting merchandise from the one country to the other. They are called Customhouse officers, and they act in precisely the same way as ruts and bad roads.
People who have heard of the Jones Act (Merchant Marine Act of 1920) generally are aware that its stated purpose is to maintain a strong U.S. merchant marine industry. Drafters of the legislation hoped that the merchant fleet would remain healthy and robust if all shipments from one U.S. port to another were required to be carried on U.S.-built and U.S.-flagged vessels. Unfortunately, things haven’t worked out very well.
The protectionism of the Jones Act has given the United States the type of merchant marine that would be expected from a sector that has been cut off from market forces for close to a century. Instead of being a global powerhouse, the U.S. merchant fleet has become a minor player. In 1955 the 1,072 ships in the fleet accounted for 25 percent of global tonnage. Today the 191 vessels account for 2 percent of the world total. Those vessels primarily carry cargoes from one U.S. port to another, along with government-generated exports, such as military equipment and food aid.
Not surprisingly, shipping goods on a U.S.-flagged vessel is a high-cost proposition, which explains why the U.S. fleet simply can’t compete in normal global commerce. A 2011 study by the U.S. Maritime Administration (Marad) showed that the average daily operating costs for American vessels were roughly three times higher than comparable vessels registered in other countries.
Currently there are only three U.S.-flagged dry-bulk vessels of the type used to haul grains, fertilizers, and coal. Lack of availability of U.S.-flagged vessels to ship grains between U.S. ports helps to explain a news item from last week: 50,000 metric tons of Brazilian corn have been contracted for shipment to Wilmington, NC.
The decision to bring more grain into North Carolina isn’t hard to understand. The state ranks second in production of pigs and turkeys, fourth in production of broiler chickens, and ninth in production of eggs. The state’s livestock industry is large, so its animals require a lot of feed. North Carolina and surrounding southeastern states don’t raise enough corn and soybeans to meet local demand. The United States as a whole produces plenty of livestock feedstuffs – particularly corn and soybeans – more than any other country. From a North Carolina perspective, too much of those crops grow in the wrong place. Des Moines, IA, for example, is in the heart of the Midwest. It also is well over 1000 miles away from livestock producers in North Carolina.
A substantial quantity of corn and soybeans (or soybean meal) moves by train from the Midwest to feed mills in the Southeast. However, rail transport of bulk commodities not only is relatively costly, the timing of shipments also can be unpredictable. Trains moving from the western Corn Belt need to go through Chicago, the busiest rail junction in the country. Trains have been known to be delayed for days just trying to transit that city. It’s not fun to be raising pigs or chickens when the feed you need to keep them from getting hungry is stuck on a train far away.
Several years ago a group of North Carolina livestock producers took steps to deal with the challenge of procuring a steady supply of competitively priced feedstuffs. They banded together to build a facility for unloading cargoes of grains or soybean meal from ocean-going vessels at the port of Wilmington. Wilmington Bulk LLC provides a cost-effective entry point for water-borne cargoes, which helps to assure abundant feed supplies for North Carolina farmers. Instead of being limited to sourcing grains and soybean meal in the Southeast or Midwest of the United States, those products now can be procured from anywhere in the world.
But why not simply ship corn from the Midwest to Wilmington by water? Waterborne transport of bulk commodities generally is less expensive than moving them via rail or truck. The United States already has a highly sophisticated system for transporting agricultural commodities from the Midwest to the Gulf of Mexico that uses the Mississippi River and its tributaries. This country long has been the world’s largest exporter of grains and soybeans. The majority of those exports move down the river system before being loaded onto ocean vessels near New Orleans. Why not just contract with an ocean-going dry-bulk vessel to make the relatively short trip (approx. 1600 miles) from Louisiana to North Carolina instead of the much longer trip (approx. 4500 miles) from the port of Santos in Brazil?
Yes, the Jones Act makes the perfectly rational plan of moving Midwestern grain by water to North Carolina economically infeasible. Recall that there are only three dry-bulk vessels in the U.S.-flag fleet, and that the daily cost of chartering those vessels would be roughly three times higher than international rates. Under those circumstances, it’s not hard to understand why the operators of Wilmington Bulk find it most cost-effective to obtain their supplies from overseas and have them shipped on foreign-flagged vessels.
The solution to this problem, of course, would be to allow foreign-flagged vessels to carry shipments from one U.S. port to another. The best way to achieve this would be to repeal the Jones Act. (Sen. John McCain (R-AZ) has drafted legislation to do so.) If special maritime policies are needed to meet national security requirements, they should be targeted thoughtfully so that they don’t interfere with commercial shipping. Until maritime statutes are reformed, though, it can be expected that North Carolina’s pigs and turkeys will continue to enjoy feedstuffs from around the world.
(For more detail on the Jones Act, see this recent article by my Cato colleague, Scott Lincicome.)
To the extent that trade agreements result in Americans being "freer" to transact how and with whom they please, I support them. But one of my biggest misgivings about these agreements, and the negotiations that precede them, is that they reinforce the fallacy that trade is an "Us-versus-Them" contest where the objective is to secure market openings abroad, while preventing such liberalization at home. Liberalization at home -- opening the domestic market to competition -- is what free trade is about. Thus, the objective of free trade negotiations is not free trade. Follow?
In response to a question from House Ways and Means Trade Subcommittee Chairman Devin Nunes about what was being done to ensure that liberalization of trade in film and television services isn't excluded from the TTIP negotiations, U.S. Trade Representative Michael Froman assured: "The United States has made clear to the EU that we strongly support a comprehensive agreement without exclusions (my emphasis)."
Then there was this question from Rep. Charles Boustany (R-LA): "Can you assure me that the Jones Act will not be diluted in any trade agreements that are negotiated during your tenure?"
Among other favors it bestows upon domestic shipbuilders, the Jones Act forbids foreign-flagged vessels from operating between U.S. ports, ensuring that U.S. maritime shipping (as crucial as it is to U.S. supply chains and U.S. production costs) is an industry that operates without any foreign competition. None.
How much more economically self-destructive can policy be than a federal law that consigns U.S. businesses to inefficient production and transportation options, deters investment in U.S. manufacturing and distribution operations, and gives carte blanche to shipbuilders to be as unresponsive to customer needs as they and their unions desire?
Ambassador Froman's answer:
We recognize the importance that the Jones Act has for the state of Louisiana. This Administratrion has continuously ensured that the application of the Jones Act is permitted under each of our trade agreements. As we continue to participate in discussions where this issue may arise, including trade agreement negotiations, we will continue to take this position.
About being clear to the EU that we strongly support a comprehensive agreement without exclusions...not so much.