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


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


To learn more please visit www​.cato​.org/​j​o​n​esact. 

The Trump administration seems to be looking for every possible excuse to raise tariffs. Early on it intensified the use of anti-dumping/countervailing duties and safeguard measures, which are the built-in protectionism that every administration uses. Then it dusted off some old statutes that had fallen into disuse: Section 232 (national security) to impose tariffs on steel and aluminum from around the world; and Section 301 (used to address unfair trade practices abroad) to impose tariffs on hundreds of billions of dollars of Chinese imports. And now it has a new idea for tariff increases: ending the duty-free access given to imports from some developing countries through the Generalized System of Preferences (GSP) program, and charging normal tariffs instead. Yesterday, the U.S. Trade Representative’s Office made the following announcement:

At the direction of President Donald J. Trump, U.S. Trade Representative Robert Lighthizer announced today that the United States intends to terminate India’s and Turkey’s designations as beneficiary developing countries under the Generalized System of Preferences (GSP) program because they no longer comply with the statutory eligibility criteria. 

India’s termination from GSP follows its failure to provide the United States with assurances that it will provide equitable and reasonable access to its markets in numerous sectors. Turkey’s termination from GSP follows a finding that it is sufficiently economically developed and should no longer benefit from preferential market access to the United States market.

By statute, these changes may not take effect until at least 60 days after the notifications to Congress and the governments of India and Turkey, and will be enacted by a Presidential Proclamation.

My old colleague Sallie James wrote about the GSP program many years ago. The program is definitely flawed, and she called for some sensible reforms. But rather than reforming the program, it seems like the Trump administration is simply looking for opportunities to raise tariffs.

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


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


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


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


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


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


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


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

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


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


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

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

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

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 (41 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 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.

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.

Congressman Sean Duffy has introduced a piece of legislation in the House entited “United States Reciprocal Trade Act.” Based on the title alone, you can guess that the legislation will not involve free trade, and there’s a lot to dislike about it. Dan Griswold of Mercatus has a good paper on the general topic of tariff reciprocity here; Clark Packard of the R Street Institute has a good op-ed on this particular legislation here; and Cato adjunct Scott Lincicome has a good twitter thread on the legislation here. I’m going to focus on an additional problem with the legislation: Because of its cherry-picking approach to tariffs, it will not even involve reciprocal trade. Rather, it looks like nothing more than an excuse to raise U.S. tariffs.

Last year, I blogged here about a comparison of tariff levels across countries, which makes clear that among wealthy countries, average tariff levels are roughly similar (with slight variations depending on how you do the measuring). Of course, within those average levels, the tariffs on particular goods vary a lot. For example, and somewhat famously in trade circles, U.S. car tariffs are 2.5% while U.S. truck tariffs are 25%, whereas in the EU car and truck tariffs are both 10%. Trump administration trade officials have focused on the tariff for cars, and said, in essence, “Hey, EU car tariffs are higher than ours and that’s not fair!” But when you look more broadly at tariffs on both cars and trucks, and realize that U.S. truck tariffs are much higher than EU truck tariffs, it is clear that U.S. and EU tariff levels are roughly equal as things stand now.

The “United States Reciprocal Trade Act” picks up on the Trump administration’s approach of using a skewed look at cherry-picked individual products, by focusing on duties and other trade barriers for “a particular good.” Here’s an excerpt:

SEC. 3. AUTHORITY TO TAKE CERTAIN ACTIONS RELATING TO RECIPROCAL TRADE.


IN GENERAL.—If the President determines that—


(1) the rate of duty imposed by a foreign country with respect to a particular good, when imported from the United States, is significantly higher than the rate of duty imposed by the United States on
that good, when imported from that country, or

(2) the nontariff barriers applied by a foreign country with respect to a particular good, when imported from the United States, impose significantly higher burdens, alone or in combination with any
tariffs imposed by that country on that good, than the burdens of the nontariff barriers applied by the United States with respect to that good, alone or in combination with any tariffs imposed by the United States on that good, when imported from that country, the President may take one or more of the actions authorized under subsection (b).

(b) ACTIONS AUTHORIZED.—The actions authorized under this subsection are the following:

(1) To negotiate and seek to enter into an agreement with the foreign country that commits the country to reduce the rate of duty or reduce or eliminate nontariff barriers on the good that is the subject of the determination under subsection (a).

(2) To impose a rate of duty on imports of the good that is equal to—

(A) the rate of duty imposed by the foreign country with respect to the good, in the case of a determination described in subsection (a)(1); or

(B) the effective rate of duty of the nontariff barriers applied by the foreign country with respect to the good, alone or in combination with any tariffs imposed by that country on that good, in the case of a determination described in subsection (a)(2).

In a nutshell, using the vehicle example, this legislation would let the administration address the higher EU car tariff by raising the U.S. car tariff, but would not do anything about the higher U.S. truck tariff. In theory, in reaction to a U.S. demand to renegotiate car tariffs, the EU could negotiate on just those tariffs, but realistically the EU is not going to negotiate about cars without also talking about trucks, so they are not going to lower their car tariff. Thus, the end result under this legislation will be that the U.S. car tariff goes up and all other tariffs stay the same.

Congressman Duffy has used this same example to defend the bill:

“… I’m going to drop a bill, the Reciprocal Trade Act, which is going to allow the president to say ‘OK you have a 10 percent tariff on our autos, and we only have a 2.5 percent tariff on your autos,’ [so] we’ll give the president the authority to raise our tariffs to 10 percent to match the European auto tariff, and once they reduce theirs the president can reduce those tariffs as well.”

As explained above, this focus on individual products gives a distorted view of what is going on with tariffs around the world.

To reiterate, this legislation is obviously not free trade in any sense of that term. But it is also not reciprocal trade. Rather, it is about trade that is unreciprocal in such a way as to allow the administration to raise U.S. tariffs on goods for which it would like to have higher tariffs.

Now, if the Trump administration really wanted to bring down EU tariffs, it could do so in the normal way, which is to sit down with the EU to negotiate lower tariffs on all products — cars, trucks, and everything else — traded between the U.S. and EU. That process is, in fact, slowly moving forward. This new legislation will only get in the way.

The Trump Administration’s trade warfare with China began in earnest last March 22^nd (following steel and aluminum tariffs that primarily hit other countries). U.S. and Chinese tariffs on each other’s goods then escalated repeatedly through September 18 with threats of much more the same by March 1 of this year.

The effect so far has been quite different from what President Trump first promised and still keeps pretending. In fact, U.S. goods exports to China (excluding services) fell by 26.3% from March through October, while U.S. imports from China rose by 36.5%.

U.S./China trade data were supposed to be updated for November on January 8, but that potential embarrassment was mercifully postponed by President Trump’s government shutdown. Yet Reuters, using Chinese data, estimates the U.S. trade deficit with China rose 17% last year. The table makes that estimate look low. 

Meanwhile, the Trump shutdown is rationalized by his fanciful untruths about people and drugs “flooding across the border” on foot between checkpoints, rather than in planes, trains, ships, trucks, and cars (not to mention overstaying visas). 

Oddly enough, Mr. Trump waited until after Republicans had lost the House to demand more billions for “The Wall” (as though the Executive Branch wrote the laws). 

If the end result of political feuding over a border wall turns out to be half as big a fiasco as President Trump’s trade war, how could he hope to run for reelection on the blatant failure of his two noisiest campaign issues? But it might not be too late for Trump to quietly discard his losing cards and pivot toward more promising games and issues.