What the Trump Administration Can Learn from the Jones Act

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The Trump administration has proposed several policies intended to boost the U.S. defense and industrial base, including Buy American directives and restrictions on imported steel and aluminum. The Jones Act—shorthand for the Merchant Marine Act of 1920—provides a lesson on how such economic controls can backfire.

The Jones Act is described by the U.S. Department of Homeland Security as a protectionist policy that is intended to protect and develop the American merchant marine and U.S. shipbuilding. Protectionist elements of the Jones Act include requirements that ships transporting goods within the United States must be U.S.-crewed, U.S.-owned, and U.S.-built. These provisions are unnecessary and counterproductive.

U.S. Crews

Jones Act defenders allege that requiring the use of U.S. crews for domestic waterborne shipping protects Americans against foreign terrorists and spies freely traversing the Mississippi River disguised as ship operators. This is largely a scare tactic. With or without the Jones Act, it is illegal for someone to work in the United States without a Permanent Resident Card, a work permit, or an employment-related visa. This is true whether they are transporting merchandise between U.S. ports or employed in any other job.

U.S. Ownership

The Jones Act’s requirement that ships transporting goods between domestic ports must be U.S.-owned deprives the industry of beneficial foreign investment. Areas of the economy that are open to foreign investment account for 7.1 million U.S. jobs. As other analysts have pointed out, removing ownership limits would provide more opportunities for Americans involved in domestic waterborne transportation to also benefit from job-creating foreign investment. As with foreign investment in other U.S. industries, ownership of vessels providing waterborne transportation would be screened by the Committee on Foreign Investment in the United States (CFIUS) to mitigate national security risks. Additionally, it has been argued that modern ownership arrangements render the Jones Act’s ownership requirement obsolete.

U.S. Construction

The most-criticized element of the Jones Act has been its ban on the use of foreign-built ships for domestic shipping. This is a unique regulatory barrier. No similar restrictions apply to the domestic transportation of merchandise by air, rail, or truck. As a result, Americans pay inflated prices for ships. According to a 2017 Congressional Research Service report, coastal-size containerships built in the United States cost six to eight times more than comparable foreign-built ships.

Does the Jones Act Promote Shipbuilding?

The argument made by proponents of the Jones Act is simple: The United States needs a strong shipbuilding industry, and the way to realize this goal is by freeing it of the obligation to compete with foreign shipbuilders.

But even if the first part of that statement is accurate, the second part is not. High tariffs don’t make industries stronger, and often actually make them weaker. As President Woodrow Wilson explained:

One of the counts of the indictment against the so-called ‘protective’ tariff is that it has robbed Americans of their independence, resourcefulness, and self-reliance. Our industry has grown invertebrate, cowardly, dependent on government aid. When I hear the argument of some of the biggest business men in this country, that if you took the ‘protection’ of the tariff off they would be overcome by the competition of the world, I ask where and when it happened that the boasted genius of America became afraid to go out into the open and compete with the world?

Economist Thomas Grennes noted in a research paper for the Mercatus Center that by reducing competition, the Jones Act reduces the incentive for U.S. shipbuilders to innovate. More generally, as comedian Adam Carolla observed: “American car companies have never been better, and don’t tell me you … wouldn’t be putting out Matadors and Gremlins 25 years later if it wasn’t for the Camry and the Sentra.”

Protectionist Tariffs Don’t Protect Jobs

There are plenty of examples demonstrating how protectionist policies such as the Jones Act fail to protect jobs. For example, the United States imposes very high taxes on imported clothing. As of 2017, the average U.S. tariff on clothing—technically, “articles of apparel and clothing accessories” —was 13.7 percent, while the U.S. tariff on other goods was less than 1 percent.

These high tariffs didn’t protect the labor-intensive jobs of clothing makers. Since 1990, U.S. employment in apparel manufacturing dropped by 88.2 percent.

Similarly, as National Taxpayers Union Foundation policy analyst Andrew Wilford has pointed out, the U.S. ban on the use of foreign-built vessels for domestic shipping hasn’t prevented a decline in non-military shipbuilding. According to the U.S. Maritime Administration, the United States non-defense oceangoing vessel fleet declined from 193 ships in 2000 to 96 as of October 2018.

Planes, Trains, and Automobiles (and Trucks and Boats)

Some of the strongest transportation manufacturing industries in the United States operate in a low-tariff environment. As Table 1 shows, U.S. production of aircraft, railroad rolling stock, automobiles, and heavy duty trucks has been increasing, even though the government does not force Americans to use U.S.-built planes, trains, or automobiles when transporting cargo, as it does with ships.

Table 1: Low Tariffs Do Not Deter Manufacturing Growth

 

Effective Import Tariff

Rate (2017)

Change in Annual Production

(2000-2016)

Planes

0.0%

+109%

Trains

1.4%

+62%

Automobiles

1.3%

+44%

Trucks

0.3%

+36%

Source: Author’s calculation from U.S. International Trade Commission and Bureau of Labor Statistics data.

Moreover, the effective tariff rate for imported recreational boats is just 1 percent, but 95 percent of the recreational boats sold domestically are made in the USA. Clearly, American manufacturers don’t require high tariffs to be successful—in fact, their success may be contingent upon low barriers that encourage them to innovate and compete.

Shipbuilders Like Imports—Just Not for Their Customers

The Jones Act’s requirement that ships transporting cargo must be U.S.-built is somewhat misleading. In fact, as the Cato Institute’s Colin Grabow has pointed out, ships can be considered U.S.-made even though many of their components are imported.

This turns out to be a loophole big enough to steer a ship through. All the non-military oceangoing vessels assembled in the United States in recent years relied on imports, ranging from the engines to the very specifications on how to build a ship. Consider these examples of recent “U.S.-built” vessels:

  • San Diego’s National Steel and Shipbuilding (NASSCO) partners with Korea’s Daewoo Ship Engineering Company (DSEC) to design its commercial ships. In 2016, NASSCO received a $511 million order to build two new ships. Of this, $120 million reportedly went to DSEC to design the ships and provide supplies.
  • VT Halter Marine’s El Coqui containership was built with plans from European-based Wartsila Ship Design (WSD): Wartsila reported that “WSD has a very professional and dedicated team mainly located in Poland and Norway which is working very closely with VTHM (VT Halter) and CM (Crowley Maritime).” The El Coqui’s engines were also imported.
  • Norwegian-owned Philly Shipyard has produced several tankers based on a Korean Hyundai Mipo Dockyards (HMD) design. Four of the shipyard’s American Class tankers built in 2016 and 2017 rely on imported engines.

Two U.S. companies based in the state of Washington recently ran afoul of the Jones Act. The fishing company Fisherman’s Finest commissioned a new ship from Dakota Creek Industries. However, because 7 percent of the ship’s steel was from the Netherlands, the ship is not allowed to fish in U.S. coastal waters. A coalition of companies is seeking a Jones Act waiver to allow the ship to operate in the United States. A better approach would be to seek a blanket reform of the Jones Act’s protectionist Buy American requirements.

There is nothing wrong with shipbuilders using the highest quality inputs, regardless of where they are made. The problem is that the Jones Act deprives their customers of the same opportunity.

No Legitimate “National Security” Justification for the Jones Act

George Will inimitably wrote: “Fomenting spurious national-security anxieties is the first refuge of rent-seeking scoundrels who tart up protectionism as patriotism when they inveigle government into lining their pockets with their fellow citizens’ money.” A recent National Taxpayers Union Report, “Protectionism Will Not Improve National Security,” explains how protectionist policies like the Jones Act make America weaker. Trade barriers undermine U.S. security by weakening the economy and creating conflict with our allies. Earlier this year, more than 1,100 U.S. economists reiterated a call from economists in 1930 who wrote: “A tariff war does not furnish good soil for the growth of world peace.”

Instead of lobbying to maintain government protection from competition, shipbuilders and boat manufacturers should unite to oppose an increasingly costly and dangerous trade war that is driving up their cost of steel and aluminum, while simultaneously reducing the amount of cargo for them to transport. Headlines such as these are appearing with increasing frequency:

The Jones Act is nearing its 100th anniversary. Instead of receiving unending protection from international competition, shipbuilders should operate in the same low-tariff policy under which manufacturers of trucks, automobiles, aircraft, and other industries are thriving. The Jones Act should not be allowed to inflict another 100 years of damage on the U.S. economy.

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.

Bryan Riley