The Jones Act
The Jones Act requires all maritime trade between U.S. ports to be done by ships that are U.S.-flagged, U.S.-crewed, U.S.-owned and U.S.-built. Its initial objective was to guarantee the United States with a merchant marine in case of emergencies and war by limiting access of international competitors to the domestic water trade market. So, by definition it is a protectionist law. Furthermore, it has failed miserably in its objectives with the U.S. Merchant Marine seeing record low numbers after a century of the Jones Act and several other laws with similar purposes. Commercial shipbuilding and employment have decreased even while trade has increased exponentially.
The main reason for its failure is that higher operating and ship construction costs make U.S.-flagged Jones Act vessels less competitive than carriers using international flags.ii In fact, the U.S. carriers that forcefully defend this protectionist law founded most of the international ship registries such as those in Panama, Liberia, and the Marshall Islands, because they do not want to sail under the U.S. flag unless they have guaranteed cargo or a closed market as is the case of Puerto Rico, Alaska, and Hawaii.iii But for those jurisdictions, the clear lack of competitiveness of the Jones Act fleet directly translates into their own economies’ lack of competitiveness.
Consequence of Regulatory Changes: Unsupervised Market Concentration
In addition to higher operating and construction costs, the situation is worsened by extreme market concentration. Although the Jones Act has existed for almost 100 years, for most of those it was applied in tandem with transportation regulations that sought to prevent abuse, protecting shippers and consumers. The Interstate Commerce Commission (ICC) and the Federal Maritime Commission (FMC) had regulatory oversight over both domestic and international carriers. Tariffs had to be public and “reasonable,” assured by these agencies’ authority for passing judgment, including through public hearings where carriers had to open their books. The system was imperfect and claims of abuse by carriers were often filed with either agency.
But in 1995, a shift towards murkiness occurred. As part of the deregulation process of all transport in the United States that began in the 1980s, this oversight was eliminated with the Interstate Commerce Commission Termination Act of 1995 (ICCTA).iv The basic premise being that competition was a better regulator than the government. Unfortunately, the deregulation process was incomplete. It kept the Jones Act intact and instead of fostering competition and transparency, the changes created a scenario of mostly unsupervised oligopolies in the main three markets under the Jones Act.
Congress did create a new agency, the Surface Transportation Board (STB), to supplant the ICC. However, its main focus is railroad transportation and it has little authority over ocean transportation. Congress also maintained the FMC to oversee international ocean carriers, but for reasons unknown transferred its oversight over Domestic Offshore Carriers to the STB.
In terms of specific oversight, regulations under the FMC for international carriers are now very different than those under the STB for domestic carriers. Probably most important is that Jones Act carriers are not required to file any data on private service contracts, which in the Puerto Rico trade accounts for almost all movements. This means there are no reliable public statistics on the actual costs of transportation from the U.S. mainland to Puerto Rico. This information is paramount to an island that depends on this traffic, and its absence is actually used by the pro‐Jones Act sectors to make all sorts of farfetched allegations based on “confidential data” they alone have access to. In contrast, the FMC regulation that still applies to international carriers does require the filing of service contracts for oversight purposes.v There is no reasonable explanation for this difference considering that competition in the Jones Act trades has always been limited and thus more prone to abuse.
In any case, the conflicting policies and the potential for abuse were clear to Congress when they passed the ICCTA in 1995. In apparent premonition of the risks and contradictions of eliminating the federal supervision of such concentrated markets, Section 407 established that: