Time to Mobilize the Dispersed Costs of the Jones Act

November 21, 2018 • Cato Online Forum
By Nick Loris

A drink is not just a drink when it reflects the history and flavor of a place.

So goes the slogan for Bob Gunter’s Koloa Rum Company on the island of Kauai. Gunter takes pride in using local ingredients, and bottled his first batch of Hawaiian rum in 2009 to share those unique flavors, history, and sense of place with the rest of the world.

Koloa Rum uses Hawaiian cane sugar and mountain rainwater for its single batch rum. The company purchases guava, passionfruit, and papayas from local farmers to produce its flavored varieties. Gunter partners with Kauai Coffee Company on the island to make a specialty brew for their coffee flavored rum. They even buy boxes from local island manufacturers.

But buying local doesn’t always make financial sense for Gunter. And it isn’t always a choice. In fact, an antiquated, protectionist law forces Gunter to pay significantly more to use “local” shipping to send his rum to the mainland. Buying local means using American‐​built, owned, and operated ships to send cargo rather than cheaper, more efficient foreign‐​flagged carriers.

Section 27 of the Merchant Marine Act of 1920, colloquially known as the Jones Act, requires that shipments between two U.S. ports be on U.S.-built, U.S.-flagged, U.S.-crewed, and U.S.-owned vessels. Originally conceived to sustain the Merchant Marine fleet after the First World War, the special interests shielded by the law from foreign competition continue to argue its necessity on economic and national security grounds. Neither is remotely credible.

Advocates of the law maintain that the Jones Act is necessary to protect jobs and America’s shipbuilding base, but the economic costs of the law far outweigh the benefits to protected special interests. Jones Act vessels are more expensive to build and have dramatically higher operating costs than other options available to shippers. Jones Act vessels also have higher maintenance costs, and it is more costly to repair and maintain vessels in domestic shipyards compared to foreign ones. To deter the use of cheaper foreign shipyards, the federal government slaps a 50 percent tax on all repairs to U.S. flag vessels performed abroad. Repair and routine work on U.S. tankers costs almost 70 percent more than comparable work on foreign tankers.

Consequently, even though shipping cargo between U.S. ports is typically a much shorter distance than international voyages, it is also much more expensive.

For companies like Koloa Rum, the additional shipping costs are exorbitant. Gunter once shipped a container of rum to Sydney, Australia but the product had to go to California first. Often, there is no viable alternative to ship to‐​and‐​from Hawaii and foreign destinations without first transiting through a U.S. port. Using a Jones Act vessel from Hawaii to Los Angeles, California—a distance of 2,618 miles—cost Gunter $6,900. Using a foreign vessel from California to Sydney, a distance of approximately 7,500 miles, cost him $1,900. Every time Koloa Rum ships their product to the mainland or Alaska using mandatory Jones Act vessels, the company’s shipping cost more than triples. Hawaii is already an expensive place to operate a business, and the Jones Act unnecessarily drives operating costs even higher. Ironically, international competitors find it cheaper to export rum to the United States than Gunter finds it to sell his product within his own country’s borders.

For some businesses, the steep price of the Jones Act was too much to overcome. O’Keefe & Sons Bread Bakers on the Big Island closed in 2008 after thirteen years in operation. Small business owner Jim O’Keefe laid off 50 workers and cited the more than six figures he spent on protectionist shipping costs as a major reason why the business shuttered its doors. The French Gourmet, an artisan frozen pastry dough company, faced a similar death by Jones Act fate, going out of business in 2012 after nearly two decades of operation.

Cumulatively, the Jones Act prices American families and businesses pay conservatively reaches billions, if not tens of billions, of dollars every year. Some businesses absorb the costs, which means less investment for a new piece of equipment or less money to hire a new employee. Others pass the costs onto consumers, which suppresses demand and makes competing foreign products more attractive.

While America’s non‐​contiguous states and territories suffer disproportionately, every single business that ships a product between U.S. ports incurs higher transportation prices. For instance, transporting energy—whether it is crude oil, liquefied natural gas, or refined products—from the Gulf Coast to the northeast is more expensive. Shipping crude oil from the Gulf Coast to Canadian refineries costs $2 to $3 per barrel, but thanks to the Jones Act it costs between $5 and $6 to ship it to the U.S. east coast.

This not only adversely affects energy producers but also energy‐​consuming households and businesses. As the CEO of Gulf Oil pointed out in 2013: “If foreign owned and flag ships were able to carry gasoline in US waters, the price of gasoline in the North East and in Florida could be 20 to 30 cents lower.” Jones Act repeal would provide relief at the pump for drivers and also give U.S. businesses more of a competitive edge as their cost of business decreases with the decline in the price of gas.

Families in the Northeast, especially those dependent on home heating oil, would welcome more domestically produced crude and refined petroleum products transported by ship. This could be less expensive than imports or products transported by rail where sufficient pipeline capacity is not available.

The opportunity costs are significant as well. Iowa and Ohio soybean growers miss out on opportunities to sell their product to North Carolinian hog farmers who choose to buy cheaper soybean meal from Brazil. According to representatives of the Puerto Rican Farm Bureau, “[S]hipping feed 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.” Other Puerto Rican food importers purchase corn and potatoes from foreign countries rather than U.S. farmers.

The rock salt market is yet another market where the Jones Act disrupts open competition. Used to salt roads during snow and ice storms, the United States is the second largest producer of rock salt in the world. 95 percent of the rock salt comes from seven states: Kansas, Louisiana, Michigan, New York, Ohio, Texas, and Utah. These states and domestic rock salt producers lose when places such as Maryland and Virginia import their rock salt from Chile through the Panama Canal rather than from the Port of South Louisiana.

The opportunity costs also extend beyond lost sales for American businesses. A few years ago, the Jones Act prevented New Jersey officials from using a foreign ship to transport salt from Maine in time to respond to a winter storm. James Simpson, the state’s Department of Transportation Commissioner stated, “I’ve got a shipload of salt, 400 miles from here. The only thing that we’ve been able to define as an American flag vessel would take us a month to get the salt here when I can have the salt here in a day and a half.”

New Jersey was forced to spend an additional $700,000 using a Jones Act vessel to ship rock salt from Searsport, Maine to Port Newark. The state government could have spent that $700,000 elsewhere to the benefit of its citizens (or better yet, taxed them less!). Jones Act proponents called the New Jersey debacle a result of bad planning, but the real culprit is bad policy.

The national security benefits the Jones Act purportedly brings are similarly nonexistent. Supporters of the protectionist law argue that such benefits include a merchant fleet that can be used in times of crisis and sustaining the industrial base for U.S. shipbuilding.

Neither argument has been borne out by actual experience. The domestic fleet of ships has atrophied significantly. In 1955, there were 1,072 U.S.-built commercial ships. By 2000, the Jones Acteligible fleet consisted of just 193 ships and that number has now shrunk to 96, with 77 qualifying as military useful.

Furthermore, the Department of Defense (DoD) has frequently leased foreign vessels to execute missions that require additional sealift capacity. The Maritime Administration’s Ready Reserve Fleet (RRF) also proves that maritime security does not rely on the Jones Act. This fleet, created for “transport of Army and Marine Corps unit equipment, combat support equipment, and initial resupply during the critical surge period before commercial ships can be marshaled,” has supplied the military at the outset of both the Iraq and Afghanistan wars as well as in past conflicts. Currently, 30 of the 46 RRF ships are foreign‐​built. If the U.S. military is comfortable with using foreign vessels during wartime, the argument that they are less safe in commercial use makes little sense.

Even if there were a demonstrable national security benefit, the Jones Act is an incredibly inefficient way to maintain naval capabilities. Subjecting the entire U.S. economy and specific industries to the inefficiencies of a massive protectionist regime for the claimed security benefits is absurd, and it also has numerous distortionary impacts. If the U.S. military is not comfortable using foreign vessels, then it should simply purchase the ships it needs as part of the defense program and spread the costs to all American taxpayers as a public good.

The difficulty in eliminating crony, preferential policies like the Jones Act is the public choice problem of concentrated benefits and dispersed costs. Entrenched interests have a stronger incentive to maintain the status quo, which keeps them from having to compete for American customers and their lobbying efforts reflect that. On the other hand, there is less appetite to bang on a Congressman’s door when the costs of the Jones Act are thinly spread across all consumers.

However, the costs are more substantial than simply tallying the aggregate cost to consumers. Small business bankruptcies because of the Jones Act, for example, are heartbreaking, and they tell a compelling personal story of the real costs of cronyism. In turn, they are a powerful weapon that can mobilize business communities, small and large, harmed by the Jones Act.

Strange bedfellows turn heads in Washington, and the case for Jones Act repeal should be one such instance. For instance, when a conservative and liberal think tank team up on an issue or Big Oil and Big Green form an influential alliance, people pay attention.

The states and territories of Hawaii, Alaska, Puerto Rico, and Guam have been carrying the mantle for Jones Act reform for decades because they incur the highest proportion of its costs. However, the preferential treatment for a select few also harms an eclectic mix of businesses on America’s mainland. Small businesses, farmers, energy companies and rock salt producers are just a handful of the industries negatively affected. There are many more businesses and communities out there. The revival of a repeal coalition could galvanize these businesses to unite against the common enemy that exists in the Jones Act.

The late Senator John McCain (R-AZ) was a unique champion for Jones Act repeal because he saw the policy for the protectionist nonsense that it is. His concern for U.S. national security was also beyond question. Sadly, however, few Members of Congress have followed in his footsteps. If these industries band together and collectively knock on doors, more Members in Iowa, North Carolina, New Jersey, and others will start to pay attention.

Many good economists have challenged the economic rationale for the Jones Act, and many national security experts have pointed out the fallacies of the defense rationale. The best shot at true reform will come from unified, repetitive outcry from the “dispersed costs” coalition.

The opinions expressed here are solely those of the author and do not necessarily reflect the views of the Cato Institute. This essay was prepared as part of a special Cato online forum on The Jones Act: Charting a New Course after a Century of Failure.