Via the Washington Examiner. For more about how the Jones Act has encouraged imports of Russian energy, please see this blog post or visit the Cato Institute’s Jones Act webpage. 

As outrage mounts over Russia’s invasion of Ukraine, Americans may be chagrined to learn that despite being the world’s largest oil producer and a net exporter of petroleum products, the United States turns to Russia to help meet its energy needs. Indeed, imports of Russian petroleum products have averaged over 370,000 barrels per day over the last decade, and in 2020 Russia was the third-largest source of U.S. petroleum imports. But why? While a number of factors explain this phenomenon, part of the answer lies in protectionist U.S. policy. More specifically, the Jones Act.

Passed in 1920, the Jones Act restricts the domestic waterborne transport of goods to vessels that are U.S.-flagged, U.S.-built and mostly U.S.-crewed and owned. But such vessels are several times more expensive to build and operate than foreign ships, resulting in very high shipping rates. So high, in fact, that after factoring in the cost of Jones Act shipping it can often make more sense to buy products from distant countries rather than other parts of the United States—including petroleum.

An explainer about the importation of Russian oil and petroleum released last week by the American Fuel & Petrochemical Manufacturers (AFPM), for example, strongly hints at the role of expensive domestic waterborne transport.

U.S. West Coast refineries rely on imports of light sweet crude oil from other countries, including Russia, because access to U.S. produced light sweet crude oil is challenged by geography, transportation and logistics [emphasis added],” AFPM states. The blunt the impact of U.S. reliance on Russian imports, the group adds that policymakers can “provide relief from…policies that make it uneconomic to transport crude oil and petroleum products domestically.

A December 2021 statement from AFPM was more explicit about the Jones Act’s impact on sourcing decisions. Noting that half of California’s crude oil needs are secured internationally, AFPM’s Chief Industry Analyst Susan Grissom blamed the state’s inability to secure domestic supplies on “a lack of pipeline and rail transportation options and cost-prohibitive Jones Act shipping requirements.”

Other sources also confirm the 1920 law’s distortionary role. A 2019 Reuters story, for example, highlighted a California refinery’s importation of crude oil from Nigeria instead of other parts of the United States at least partly due to the Jones Act while a 2017 report from the California Energy Commission noted that it cost 67 percent more to ship gasoline to California from the Gulf Coast than Singapore owing to the cost of Jones Act vessels and Panama Canal fees.

A 2017 Financial Times story, meanwhile, cited the Jones Act as a leading reason why East Coast refineries import foreign crude rather than turning to domestic suppliers.

When it’s cheaper for Americans to import oil and gasoline from abroad than other parts of the United States, no one should be surprised when that’s exactly what they do.

But sometimes the purchase of American energy isn’t just more expensive because of the Jones Act, but flat-out impossible. Despite a domestic abundance, liquefied natural gas (LNG) cannot be transported within the United States by water owing to a complete lack of LNG tankers compliant with the law (perhaps no surprise given that building such a vessel in the United States is estimated to cost over $500 million more than one constructed abroad). Instead, regions of the United States reliant on LNG tankers to meet their energy needs—New England and Puerto Rico—must source their natural gas from abroad. While such purchases are mostly from Trinidad and Tobago, recent years have seen cargoes that originated in Russia.

And so it is that a law justified on national security grounds encourages the purchase of foreign, including Russian, energy supplies over those produced within the United States.

In recent days there has been an understandable desire to punish Russia through sanctions. But changes to the Jones Act or even temporary waivers allowed for reasons of national defense should also be firmly on the table. Revisiting the law offers a unique two-fer that could both disincentivize the purchase of Russian energy products while offering a needed boost to the U.S. economy at a moment of increasing uncertainty.

The pandemic caused extreme economic disruptions and 2020 saw the biggest decline in world merchandise trade since 2009. Yet in 2021, merchandise trade bounced back increasing an estimated 22.4 percent compared to 2020. This remarkable recovery is a testament to the continued strength of the global economy, especially given continued COVID-19 concerns and myriad trade restrictions, particularly U.S. tariffs, that remain in place.

Reflecting on 2021, the Cato trade team looks back at the Biden administration’s trade policy accomplishments. Unfortunately, the administration made little progress—even worsening the situation in some cases—and is maintaining many of its predecessor’s policies. Thus, our 2022 wish list reiterates many of the wishes from last year’s list.

Limit Executive Branch Trade Powers

The U.S. Constitution gives Congress the power to regulate international commerce, including the imposition of tariffs and other taxes, but the legislative branch has delegated vast swaths of its trade-related powers to the president through several laws. Some of these statutes circumscribe the president’s authority, but the Trump years saw increasing recourse to vague Cold War-era statutes that gave the president significant discretion in taking trade actions without congressional oversight. And President Biden appears in no rush to change course.

As Cato’s Scott Lincicome and Inu Manak wrote last year, for example, Section 232 of the Trade Expansion Act of 1962 was used to impose “national security” tariffs on steel and aluminum (25% and 10%, respectively) imports with little economic or geopolitical justification. President Biden could have lifted these tariffs upon taking office but has not done so. Instead, he has negotiated a managed trade arrangement with the European Union to turn those tariffs into tariff-rate quotas that allow an historically low volume of metal to enter duty-free and remaining volumes to face tariffs. As Lincicome and Manak noted, this deal violates both domestic and international trade rules and, given its terms and complexity, may provide little relief for American manufacturers who rely on readily accessible, affordable metals.

The Biden administration has also continued the Trump administration’s policy under Section 301 of the Trade Act of 1974 to impose tariffs on hundreds of millions of dollars in Chinese imports—another clear abuse of the broad procedural and substantive discretion that Congress granted to the president under the law, as well as its textual ambiguity. As Lincicome showed last year, these measures have imposed significant economic costs while failing to achieve their geopolitical objectives.

Congress should take action to limit procedural loopholes in these laws and restore some balance between the executive and legislative branches on tariff and trade policy.

Return to Open Markets and Economic Confidence

While certainly no angel on trade, the United States did use to champion liberalization and lead multilateral and regional trade agreement negotiations. Today, however, U.S. policymakers are increasingly moving away from trade liberalization in support of industrial policy steeped in nostalgia and economic insecurity. The Sections 301 and 232 tariffs and current proposals in Congress to subsidize domestic production of semiconductors and other “critical technologies” are indicative of this move toward protectionism, as is the U.S. government’s expanded use of trade remedies (antidumping, countervailing duty, and safeguards) to restrict imports from certain countries. New provisions to these laws have, in fact, made it even easier for the Commerce Department to abuse its discretion and riddle American businesses and consumers with higher taxes—even for critical goods like construction materials (especially lumber) and intermodal chassis in a time of national emergency.

Meanwhile, a long list of tariff and non-tariff barriers on basic necessities—food, clothing, footwear, etc.—and industrial inputs pre-date the Trump administration and have avoided scrutiny for far too long. For example, marketing orders on produce distort prices and reduce the variety of fruits and vegetables. A wide range of other tariffs, such as 48 percent tariffs on shoes (including ones for children), also remain in effect, forcing American families to pay more for basic necessities such as food and clothing.

In permitting or even championing these measures, American policymakers ignore not only economic theory, high consumer and other costs, and numerous instances of U.S. industrial policy failure, but also the policies—rooted in openness, dynamism, and free markets—that made America great in the first place. Freer trade, in particular, has long bolstered the U.S. economy by providing lower prices, more variety, new opportunities for businesses and workers, increased dynamism and innovation, and national security through international cooperation. The United States should once again be a leader on trade and push other countries to embrace liberalization too. Doing that, however, will require policymakers to get our own “trade policy house” in order first. It’s long past time they started.

Pursue More Trade Agreements

The United States has trade agreements with 20 countries, each of which reduces tariffs and other trade barriers between participating nations. Not only has the United States been slow to sign new trade agreements, it has moved away from a free trade agreement template that liberalizes members’ economies and fosters cooperation towards a managed trade model that increases government regulation of commerce and fosters disputes.

Early on, the Biden administration made clear that it would prioritize “domestic investment” over negotiating trade deals. In July, the administration let Trade Promotion Authority lapse, scuttling prospects for any bilateral trade negotiations to make significant progress in the near future—even for the few talks that the trade-skeptical Trump administration had already initiated with Kenya, India, Brazil, and the United Kingdom. Biden’s steel deal with the EU, meanwhile, is anything but free trade, and the United States has refused to reengage in the Asia-Pacific through the already-completed Comprehensive and Progressive Trans-Pacific Partnership (CPTPP) that the Obama administration (and then VP Biden) had once championed. Meanwhile, China and several other AsiaPac countries have just implemented their own version of the CPTPP, the Regional Comprehensive Economic Partnership, further enhancing China’s economic and geopolitical gravity in the region at the United States’ expense.

Regional trade agreements are a third-best form of trade liberalization, but they can be useful in surmounting domestic political obstacles to liberalize trade and achieving geopolitical objectives. In addition to prioritizing unilateral trade liberalization, the United States should move away from Trump-era managed trade deals and re-embrace real free trade agreements that, while imperfect, can eliminate government restrictions on cross-border commerce and enhance peace and security around the world.

Rethink “Buy America” and other U.S. Procurement Mandates

The Biden administration and many members of Congress have made improved infrastructure a top legislative priority, but this goal is undermined by a more hidden form of protectionism embraced by President Biden (like President Trump before him) and Congress: Buy America and other “local content” laws restricting federal purchases to goods produced in the United States. Indeed, such provisions were actually strengthened in the Infrastructure Investment and Jobs Act (IIJA) signed into law late last year.

While measures mandating the purchase of American products have a certain superficial appeal, they come with considerable, albeit less obvious downsides. Chief among these is raising the cost of goods purchased by the federal government and potentially decreasing quality. (After all, if the American-made goods at issue already offered the best value, such laws would be valuable only to the lawyers paid to navigate them.) Higher costs mean reduced purchases (e.g. fewer bridges repaired in an infrastructure context), more debt, higher taxes, or some combination thereof, and additional regulatory burdens mean slower projects. If the nation’s goal is improved infrastructure, why is the U.S. government making it more expensive and difficult to achieve?

Unfortunately, the problems don’t end there. To meet the Buy America standard in the IIJA, manufactured products must be domestically produced and ensure “the cost of the components of the manufactured product that are mined, produced, or manufactured in the United States is greater than 55 percent of the total cost of all components of the manufactured product.” Such criteria might please Congress but are sure to increase the law’s already high costs (in terms of both money and time): firms competing for government contracts must either manufacture their products in the less efficient manner desired by Washington—thereby placing them at a competitive disadvantage for non-government business—or adopt separate production processes for the commercial and government markets (with all of those extra costs). Either way, the result is reduced American competitiveness. Compounding matters, such restrictions invite retaliation by U.S. trading partners or their imposition of similar measures.

These laws might be politically popular, but they undermine the provision of public goods while roiling trade relations and damaging the economy. As such, they should be rethought if not outright repealed.

Discard Maritime Protectionism

Only days after taking office President Biden reaffirmed his support for the protectionist Jones Act, which like Buy America laws for federal procurement, applies to private coastwise shipping and undermines many of the administration’s priorities. On the infrastructure front, the law—along with the Foreign Dredge Act—contributes to the reduced efficiency of U.S. ports and waterways through higher dredging costs. With regard to climate change, meanwhile, the law also significantly increases the cost of domestic shipping—the most carbon-friendly means of transporting goods—thus disincentivizing its use. According to economist Tim Fitzgerald, reform or repeal of the Jones Act could produce environmental benefits alone of over $8 billion.

The administration has also set a goal of deploying 30 gigawatts of offshore wind energy by 2030, yet here too the Jones Act serves as an obstacle to its realization. And for an administration that prides itself on promoting U.S. goods via legislative mandate, the Jones Act discourages their domestic purchase by subjecting them to shipping costs that are typically far more expensive than those faced by imports.

If the administration is serious about realizing many of its stated goals, it should begin by identifying the Jones Act and other protectionist maritime laws as an impediment to their realization.

Revive Multilateralism

The World Trade Organization (WTO) has struggled for years but entered a constant state of crisis when the Trump administration started working to proactively undermine it. Tensions peaked in late 2019, when the United States blocked new appointments to the WTO Appellate Body, which hears dispute settlement appeals, and thus crippled what was inarguably the organization’s strongest and most effective instrument to maintain open and non-discriminatory trade among member nations. Although there may be legitimate concerns about WTO disputes and negotiations, the Trump administration did nothing to seek a solution to the impasse it created.

Getting the dispute settlement function back online is critical to reestablish more stability and predictability in the world trading system. Members have suggested numerous ways to resolve the deadlock, but the United States remains the only holdout and the Biden administration—much like its predecessor—seems uninterested in changing course. This position makes little substantive sense, given the administration’s goal of reining in China’s unfair trade practices and the WTO’s dispute settlement system’s relative efficacy in disciplining China’s behavior when Members bring cases and follow-through on compliance. Bringing more cases to the WTO could help bring longer-term changes to China’s economic model, as opposed to the failed approach of “Trumpian unilateralism,” which hasn’t altered China’s actions (not least because it lacks an enforcement mechanism) and may have even made things worse. Restoring the Appellate Body is easy (the U.S. merely needs to lift its hold on new appointments) and should be the administration’s top WTO priority in 2022.

The WTO’s negotiating arm also needs resuscitating, but the United States has stepped back from its traditional leadership role, which has been crucial to getting negotiations across the finish line. Members have recently agreed to cut red tape on domestic services regulations, made progress on tackling fisheries subsidies, and reengaged on an agenda for addressing issues on trade and environment. The negotiations on fisheries subsidies may be the most important because they involve all members and provide an opportunity to address China’s growing economic clout. On the other hand, pursuing “plurilateral” deals with willing nations could achieve important liberalization objectives, for example on environmental goods, by sidestepping the WTO’s traditional (and slow) “consensus” approach. Regardless, U.S. leadership is sorely lacking, and the Biden administration needs to reengage in these talks to ensure ambitious outcomes.

Finally, revitalizing multilateralism will also require a broader discussion of WTO reform, centered on negotiations, deliberation, and dispute settlement. For example, members need to improve special rules for large and rapidly growing economies, transparency for trade-distorting actions, dispute settlement procedures, and market access for services and digital trade. To do so, however, the United States must be willing to put its own sacred cows—agriculture subsidies and trade remedies, for example—on the altar. And the Biden administration must lay out its own vision for WTO reform—something it has so far refused to do—instead of just calling on others to “fight for the vision of the WTO that you want.” Articulating that vision will be key to moving these reform efforts forward.

New Year, New Opportunity

The new year lets us reflect on the past year’s missteps and chart a new and better course in the years ahead. Far from ushering in the end of globalization, the pandemic demonstrated its resilience and dynamism. Trade continued to satisfy American consumers’ and companies’ needs and desires, despite the many artificial barriers policymakers have thrown in our proverbial harbors. Congress and the administration disappointed in 2021, but 2022 is a fresh start. They should refocus the United States’ global position and recall the clear benefits of open trade and the many failures of American protectionism. Our wish list is obviously ambitious and we harbor no illusions that it will be fully achieved this year. But it can—at the very least—show readers and policymakers just how much there’s left to do restore American leadership on trade and in the process contribute to a more prosperous, stable, and peaceful society.

One unpleasant discovery for many Americans during 2021 has been the woeful state of the country’s ports, which have struggled to accommodate a deluge of demand for imported goods. To address these shortcomings, the Biden administration and much of Congress have—to the surprise of only the grossly naïve—largely centered their efforts around increased spending.

Included in the Infrastructure Investment and Jobs Act passed last month was $17.1 billion for ports, of which more than $11.5 billion will be focused on new construction. That money, one article says, “appears set to literally reshape ports in the years ahead with projects on the docket like dredging to allow bigger boats to enter or allow more boats to dock at once.”

Sen. Mike Lee (R‑Utah) has a better idea of how to help the country’s ports meet their dredging needs: remove outdated protectionism. Earlier this week Lee introduced four bills that would either reform or repeal the Foreign Dredge Act.

Passed in 1906, the Foreign Dredge Act restricts domestic dredging—the removal of sediment and debris from bodies of water (such as to deepen them to accommodate larger vessels)—to vessels that are U.S.-registered, U.S.-built and mostly U.S. owned and crewed. Shielding U.S. dredging firms from foreign competition means Americans must rely on a domestic fleet that is small, old, and expensive. The results range from costly coastal restoration projects to the less efficient operation of key ports and waterways.

Two bills proposed by Sen. Lee would address the Foreign Dredge Act in the most straightforward way: repealing it. The Port Modernization and Supply Chain Protection Act would repeal the law to permit foreign vessels to engage in domestic dredging while the Dredging to Ensure the Empowerment of Ports (DEEP) Act would combine repeal with a revamp of certain regulatory requirements under the Clean Water Act that are enforced by the U.S. Army Corps of Engineers.

The Incentivizing the Expansion of U.S. Ports Act, meanwhile, would eliminate the Foreign Dredge Act’s onerous U.S.-built requirement. Allowing Americans access to foreign-built dredgers for domestic use would reduce the cost of acquiring such vessels, thus promoting the modernization and increased efficiency of the U.S. fleet. In truth, the few U.S. dredgers delivered by U.S. shipyards are in many ways already foreign-built.

A dredging vessel currently being assembled in Florida, for example, was designed by Dutch firm Royal IHC, which is also supplying much of the vessel’s equipment. As the company states:

[T]he R.B. WEEKS will be equipped with Royal IHC designed and built equipment, including the complete and highly efficient dredging installation, dredging automation and instrumentation, propulsion and main electrical system.

During the past year those key components have been manufactured, assembled and shop tested in workshops all over the world. Part of the equipment package (35 sea containers and the suction inlet section) have been sent in 6 separate shipments to the USA already.

As this example shows, notions that the U.S.-built requirement affords the United States a shipbuilding capability free of foreign reliance are entirely illusory. What the requirement does achieve, however, is vessels with higher price tags than those constructed in foreign shipyards.

Perhaps the most intriguing bill offered by Sen. Lee, however, is the Allied Partnership and Port Modernization Act. This piece of legislation would permit the operation of foreign dredgers in the United States provided they are registered in NATO member countries, owned and operated by entities incorporated in NATO countries, and built in a country that is a NATO or a major non-NATO ally (which includes leading shipbuilding countries Japan and South Korea).

By limiting dredging activities to such vessels, the bill would grant Americans access to some of the world’s largest and most efficient dredging firms based in Belgium and the Netherlands while seeking to allay national security concerns (assuming, of course, that concerns about foreign dredge operators operating in U.S. waters are genuine rather an excuse for competition avoidance).

As the United States begins the effort to improve its ports and waterways, the dispensing of taxpayer dollars should be accompanied—ideally, preceded—by policy optimization to ensure such expenditures achieve maximum bang for the buck. Sen. Lee’s bills provide an array of options in this regard to boost the efficiency of domestic dredging. The Utah senator’s proposed path, however, requires confronting the special interests that fight tooth and nail to preserve such protectionist measures.

Does Congress have the requisite fortitude for such a battle? History suggests not, but Sen. Lee should be applauded for putting these bills forward and setting the stage for a debate about the merits of this outdated protectionism. It is certainly one worth having.

As inflation worries mount, the Biden administration has found a new villain to blame for rising prices: international ocean shipping companies. Shipping congestion, the White House stated in a recent email to reporters, “has been a source of price-gouging by the ocean shipping cartel—price hikes that are part of the inflation.”

The remarks dovetail with a White House blog post last month:

Today a system of global alliances dominates global shipping where nine carriers that have been organized into three alliances control about 80 percent of the global shipping market and 95 percent on the critical East-West trade lanes. Alliances only controlled 29 percent of the market as recently as 2011. This lack of competition leaves American businesses at the mercy of just three alliances.

Such concerns raise a rather obvious question: why then does the Biden administration support the Jones Act, which squelches competition and drives up freight rates in domestic ocean shipping?

That the Jones Act produces costly shipping is not in dispute. With Jones Act-compliant ships three times more expensive to operate and four to five times more expensive to build than those in foreign fleets, high shipping costs are inevitable. A diverse set of government bodies including the Government Accountability Office, the U.S. Department of Agriculture, the U.S. International Trade Commission, and even the U.S. Navy have pointed out the expensive nature of such shipping.

As for evidence of limited competition, look no further than the U.S. maritime industry itself. A report commissioned by the American Maritime Partnership, a pro-Jones Act advocacy group, noted that just two Jones Act carriers, Crowley and TOTE Maritime, account for 85 percent of the container capacity in the Puerto Rico trade lane.

Another AMP report, meanwhile, shows that two Jones Act carriers, Matson and Pasha Hawaii, have over 96 percent of westbound container capacity from the U.S. mainland to Hawaii. The situation is little different in the Alaska market, where container ships operating between the Last Frontier and the U.S. mainland are limited to the duopoly of Matson and TOTE Maritime. Guam is also served by just two ocean carriers—Matson and APL—but Matson is trying to gain a monopoly position by ousting APL from the trade through legal action.

It’s not just the small number of carriers that is a problem, but also the high barriers to market entry. Challenging incumbent operators requires acquiring U.S.-built ships, which are both expensive and take years to construct. Two ships ordered by Pasha Hawaii in September 2017, for example, feature a combined price tag of over $400 million and still haven’t been delivered. Such difficulty in obtaining ships is no small obstacle to challenging the shipping status quo.

Those with lingering doubts about the limited nature of Jones Act shipping competition should consider that in 2008 five shipping officials active in the Puerto Rico trade pled guilty for their roles in what the Department of Justice called “one of the largest domestic price-fixing conspiracies ever investigated by the United States.” The ability of these shipping companies to engage in such price-fixing, which lasted for years, was plainly aided by the restrictive nature of Jones Act shipping.

If the Biden administration wants to get serious about promoting ocean shipping competition and driving down freight rates it should first look to get its domestic house in order. And a logical starting point would be revisiting the costly burden that is the Jones Act.

It’s a sad day when the United States suffers from more restrictive policy than China, yet here we are. Last week Beijing announced that it will allow foreign ships to do something that would be illegal in this country: transport goods between domestic ports.

Although details remain scant, it appears that China will permit foreign vessels to engage in cargo relay by which cargo is transported by a company between two ports within a country and then transferred to another vessel owned by the same company for shipment abroad (or the reverse). To be conducted on a trial basis through the end of 2024, the liberalized rules will apply to the transportation of containers from the ports of Dalian, Tianjin, and Qingdao to Shanghai’s Yangshan port (the world’s busiest).

The international reaction has been very positive, with some observers noting the move’s potential to help address supply chain woes.

The president of the European Chamber of Commerce in China, for example, called the easing of shipping restrictions “a very welcome step which may ease some of the bottlenecks exporters are experiencing” while shipping giant Maersk’s Asia Pacific head of operations said it “may also address some of the factors behind the bottlenecks in supply chains as it could potentially shorten transit times and free up additional capacity for our customers.”

Beijing’s announcement isn’t entirely surprising, with the liberalization of international trade cargo under consideration since at least 2019. The logic of less restrictive cabotage laws is apparently sufficiently compelling that even China, hardly an economic freedom exemplar, sees its virtues.

Not so the United States, which is subject to the onerous Jones Act. Deemed the world’s most restrictive cabotage law by the World Economic Forum, the Jones Act limits domestic waterborne cargo transport to vessels that are U.S.-flagged, U.S.-built, and mostly U.S.-crewed and owned. Such vessels are significantly more expensive to build and operate than internationally-flagged ships, which no doubt helps explain the lack of cargo relay and transshipment in the United States. As the Congressional Research Service points out:

Once loaded, containers of imports are discharged from a ship in a U.S. port, Jones Act-compliant vessels must be used if they are transshipped by water to other U.S. ports…Transshipment of international containerized cargo by feeder ships is prevalent abroad, but the practice does not exist in the United States. Instead, essentially all movement of containers between ports in the contiguous United States, including import and export containers, occurs by truck or train.

Lacking the hub and spoke model of smaller vessels (“feeder ships”) transporting containers to ports for eventual placement on larger ships, containerships instead stop at a few U.S. ports to pick up and drop off goods for import and export before sailing to a foreign destination. That the United States is an outlier in its lack of feeder shipping suggests the current approach is suboptimal, producing inefficiencies that are particularly ill-advised at a time of pronounced supply chain strains.

Reform should be a pressing agenda item. Fortunately, a new bill introduced earlier this month by Sen. Mike Lee and Rep. Michelle Fischbach offers a step in this direction by, among other actions, providing temporary waivers of the Jones Act for vessels transporting cargo from one U.S. port to another in order to relieve congestion, backlogs, or delays at a port. Unfortunately, even such modest reform is unlikely to be passed by a Congress and White House that are in thrall to pro-Jones Act special interests.

So long as this is the case the United States will remain stuck in the maritime past, clinging to outdated protectionism while even the likes of China pursue liberalization. What a pity.

Last week a U.S. shipyard on the Great Lakes did something sadly unusual: it launched a new commercial ship. Called the Mark W. Barker, the self-unloading freighter—which still requires a bit more work—is slated for delivery next spring. When that happens, it will be the first new ship added to the U.S.-flagged Great Lakes fleet since 1983.

Put another way, the last time the Great Lakes fleet saw a new ship was the same year Michael Jackson unveiled the moonwalk and the first cell phone was released for commercial use.

In sharp contrast, Canada’s own Great Lakes fleet has been adding new ships at an impressive pace. Canada Steamship Lines (CSL), for example, has taken delivery of six new freighters in the last 10 years while Algoma Central Corporation has added eleven. And more ships are on the way.

Algoma Central says that it expects the new ships to be 45 percent more energy efficient than the vessels they are replacing, owing to a combination of new engines, increased cargo capacity, and an advanced hull form. CSL similarly predicts various efficiency gains from its new vessels.

So why aren’t American shipping companies following suit? The answer in large part lies in differing policies towards imported ships. Ships engaged in domestic trade in the United States must comply with the Jones Act, which among other restrictions forbids the use of ships built abroad. Canada, meanwhile, allows foreign-built ships to be purchased duty-free for domestic use following its repeal of a 25 percent tariff in 2010.

As a result, the U.S. Maritime Administration admitted in a 2013 report that Canadians can now buy their ships at prices “substantially below what they would cost to build in North American shipyards.” One Great Lakes shipping expert points out that Canadians can buy three foreign-built ships for the same price it would take to construct one at home.

The tariff’s repeal appears to have played a decisive role in Canada’s fleet modernization. “The bottom line was the import duty was lifted,” said an official with the Canadian Shipowners Association in 2015. “That generated considerable investment by our membership.”

If a 25 percent tariff is a deterrent to new ships, imagine the impact of the Jones Act’s U.S.-built requirement which essentially has the same effect as a tariff of several hundred percent.

Unfortunately, little imagination is required. While the Canadian Great Lakes fleet becomes increasingly modernized the U.S. fleet—chained to a vastly uncompetitive domestic shipbuilding industry—features ships that were mostly built in the 1970s and decades prior. Incredibly, one vessel in the Great Lakes fleet, the St. Mary’s Challenger, was built in 1906 as a freighter and still served that purpose all the way until 2013 when it was converted to use as an unpowered barge.

This reliance on ancient vessels is only feasible is due to the freshwater environment of the Great Lakes which, unlike saltwater, doesn’t quickly corrode steel. It does, however, become thinner over time necessitating replacement. Engines and other parts also must be replaced, both due to wear and tear and a desire to take advantage of superior technologies. As the example of Canada’s fleet shows, at some point it just makes financial sense to buy a new ship.

But American ship operators are highly reluctant to do so given the high capital costs involved, and instead make do with measures such as “repowering” the old ships with new engines. But that’s still far from cheap, with engine upgrades pegged in 2009 at $22 million. In comparison, Canadian firm Algoma Central has purchased entirely new ships for $50 million.

It’s difficult to figure out what national interest current U.S. policy is supposed to be serving. It plainly isn’t promoting a more efficient water transportation network on the Great Lakes, with harmful consequences for the industries—including regional steel producers—that rely upon these laker ships as part of their supply chain. It also isn’t promoting the domestic shipping industry, with the U.S.-built requirement vastly inflating the price of new vessels (although vessel operators no doubt appreciate that such high prices protect their position by deterring new competitors from entering the market).

It’s not even clear it is serving the interests of U.S. shipbuilders in the region. As one study points out, U.S. government policy “…has not resulted in a healthy merchant shipbuilding base especially in the [Great Lakes Marine Transportation System].” Indeed, many of the ships found in the U.S. Great Lakes fleet were constructed in shipyards that no longer exist. The shipyard currently building the Mark W. Barker, Fincantieri Bay Shipbuilding, is a modest operation with a typical output of 2–3 tugboats and barges per year.

There’s just not that large of a market for ships and other vessels that cost significantly more than those constructed overseas.

What we are witnessing on the Great Lakes is a fascinating natural experiment in protectionism versus free trade. Canada’s embrace of the latter has led to new investment and modernized vessels while the United States finds itself with an ancient fleet and little commercial shipbuilding. The superior choice is clear. Washington should follow Ottawa’s lead and allow free trade in ships by eliminating the Jones Act’s U.S.-built requirement. Or better yet, repeal the law entirely. 

Special thanks to Avie Vaidya for his help with this blog post.