Topic: Trade Policy

New Jones Act Ship No Cause for Celebration

Earlier this month a new Jones Act-eligible ship, Kaimana Hila, was officially christened when Rep. Tulsi Gabbard broke a ceremonial champagne bottle against the ship’s super-structure. On the surface, the new vessel is a triumph. At 850 feet in length and featuring a cargo capacity of 3,600 TEUs Kaimana Hila is—along with sister ship Daniel K. Inouye—the largest containership in the Jones Act fleet. But this is no shining example of U.S. seagoing prowess. In fact, the ship is in many ways symptomatic of the damage and dysfunction wrought by the Jones Act upon the U.S. maritime industry.

Such dysfunction begins with the vessel’s $209 million price tag (Kaimana Hila and Daniel K. Inouye were purchased for a combined price of $418 million). In comparison, one of the largest containerships in the world, OOCL Hong Kong, features a cargo capacity of 21,413 TEUs but a purchase price of just $158 million (six of these G-class ships were built by Samsung Heavy Industries for $950 million). That’s $51 million less for a ship capable of transporting six times more containers.

But the rot goes deeper. Despite charging such high prices for Kaimana Hila and Daniel K. Inouye, the company that built these ships has needed hundreds of millions of dollars in subsidies over the last 20 years to stay afloat. As detailed by the Philadephia Inquirer, over this time the Philly Shipyard has received government largesse ranging from tax deferrals to funding for employee training to a $438 million taxpayer-funded rebuilding of the shipyard in 1997 (nearly $700 million in 2019 dollars). The shipyard itself is leased from the city government for a mere $1 per year.

To these subsidies should be added the Jones Act’s domestic-build requirement, which forces Americans to purchase ships for domestic trade from the Philly Shipyard and its handful of U.S. competitors. Indeed, it might be the biggest subsidy of all.

Yet the Jones Act has proven to be something of a poisoned chalice for the Philly Shipyard. The high cost of U.S. shipbuilding has meant a diminished appetite for its commercial offerings, and the company’s outlook is increasingly bleak. So much so that the Philly Shipyard’s CEO has admitted that to assure its future the facility will need to rely upon government contracts for the majority of its business:

The shipyard has relied on the Jones Act, which requires that ships carrying goods between U.S. ports be made in the U.S., for orders, but there’s no longer enough of that business to go around. Over the next decade, [Philly Shipyard CEO Steinar] Nerbovik envisions that within a mix of government and commercial work, government contracts will predominate.

“We have too little work today,” Nerbovik acknowledged. The company had a $5.6 million loss in the first half of the year, and has reduced its workforce by 50 percent, from 1,200 people to 600. “We have said to some of our people, ‘I’m sorry, I have to lay you off for some months, but I hope to get you in again in a very short time.’”

In other words, rather than kickstarting a vibrant shipyard the combination of subsidies and Jones Act protectionism has only succeeded in fostering more government dependency.

The coda to this story is that Kaimana Hila will soon enter service transporting goods for Matson Inc. which, along with Pasha Hawaii, form a duopoly in transporting goods between the West Coast and Hawaii. Given such limited competition as well as the vastly inflated prices for the U.S.-built ships these carriers are required to use, the inevitable result is higher costs for Hawaii residents. Indeed, if this was not the case it would defy our most fundamental understanding of economics.

Kaimana Hila, then, is the story of a vastly overpriced ship built by a protected and subsidized shipyard facing an uncertain future which will now be used by a duopolist to gouge Hawaiian consumers. Only in Washington could this be considered a policy success that must be defended at all costs. 

Topics:

The Jones Act Fleet: High Costs and Limited Capabilities

Jones Act shipping is expensive. So much so that, as a new Cato Institute video points out, it actually competes with aircraft on the island of Hawaii for transporting cattle to the mainland. 

But the costly nature of Jones Act shipping is only one of the video’s key lessons. Another is the lack of appropriate ships to support such trade and the inefficiencies this creates. In a more economically rational world, Hawaiian cows would be sent to the West Coast aboard specially designed livestock carriers. 

But none exist in the Jones Act fleet, so ranchers in Hawaii make do with makeshift solutions such as using 747s or specialized containers placed aboard ships known as “cowtainers”—economic kludges not found anywhere else in the world. 

Topics:

Jones Act Repeal Bill Introduced

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/jonesact

Topics:

Any Excuse to Raise Tariffs

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.

Topics:

New Reports Detail the Jones Act’s Cost to Puerto Rico

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.

Topics:

Jones Act Lobby Hits the Panic Button

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 (44 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 as 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.

Puerto Rico, LNG, and the Jones Act

LNG ship

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.

Topics:

Pages