Jones Act

New Study Sees Major Gains from Jones Act Reform

Last year, the Cato Institute released a policy analysis highlighting the often-overlooked costs of the Jones Act to the American economy. Far from just raising transportation costs, the policy analysis argued that there are a whole host of indirect costs that are ultimately born by U.S. consumers and businesses.  A new study from the Organization for Economic Cooperation and Development (OECD) provides further evidence for such claims. It estimates that repeal or even partial liberalization of the law could produce economic gains of up to $64 billion. As the report states:

The total U.S. economy may benefit from an increase in final demand in the range of USD 22 billion (scenario 1 [in which the Jones Act’s domestic build requirement is eliminated]) and USD 74 billion (scenario 2 [assuming full repeal]) which represent a rise between 0.12% and 0.39 percent in the long-term. U.S. total output is likely to increase between USD 40 billion (0.1%) and USD 135 billion (0.4%). In terms of domestic value added the results amount to around USD 19 billion and USD 64 billion, making up an increase of around 0.1% to 0.36% for the total U.S. economy.

These figures are significant. To place them in perspective, the U.S. International Trade Commission estimated the 15-year increase in U.S. GDP from joining the Trans-Pacific Partnership agreement to be $42.7 billion. In other words, simply by removing the Jones Act, the United States could realize potential gains in excess of ratifying a major trade deal with eleven other countries including the world’s third-largest economy. And it wouldn’t require negotiations with other countries to do so.

Furthermore, the economic benefits estimated by the OECD do not include secondary effects such as reduced highway congestion, less pollution, or the removal of an irritant from U.S. trade relations. The OECD’s numbers, in other words, are perhaps best viewed as a conservative estimate of the gains that could be unlocked by Jones Act reform.  

Rep. John Garamendi’s Questionable Defense of the Jones Act

To paraphrase Ronald Reagan, the problem with Rep. John Garamendi (D-CA) isn’t so much that he is uninformed, it’s just that he knows so many things that aren’t so. That, at least, is the impression one is left with after reading the California congressman’s latest op-ed in defense of the Jones Act which is replete with errors, half-truths, and contradictions. 

Disturbingly, the Chairman of the House Armed Services Committee’s Readiness Subcommittee fudges even basic facts. In the op-ed’s fourth paragraph, for example, Rep. Garamendi claims there are only 81 U.S.-flag oceangoing vessels. The latest data from the U.S. Maritime Administration, however, shows 180 such ships.

Rep. Garamendi later warns about the dangers of employing foreign-flag ships to transport supplies and equipment for the U.S. military, claiming that during the 1991 Gulf War “The foreign crews on thirteen vessels mutinied, forcing those ships to abandon their military mission.” But that’s not true. The United States Transportation Command’s official history of its performance in Operations Desert Shield and Desert Storm makes no mention of mutinies or mutineers and says that only two ships, the Trident Dusk and the Banglar Mamata, failed to deliver their cargo. Eleven other ships expressed some hesitation but did, in fact, fulfill their missions, and the Transportation Command says crews on foreign flag ships “on the whole proved dependable” and were “overall, reliable.”

Furthermore, Rep. Garamendi’s invocation of these foreign flag bulkers is curious, as the Jones Act is commonly presented as avoiding this very kind of foreign dependence. Plainly it is not accomplishing this goal. Indeed, another item mentioned by the Transportation Command’s report is that the United States was desperately short of ships that it twice asked the Soviet Union to borrow one of theirs.

The op-ed also suffers from other curious leaps of logic and seeming contradictions. 

Rep. Garamendi, for example, hits back at criticisms the Jones Act is outdated and harmful by noting that “Ninety-one U.N. member states comprising 80 percent of the world’s coastlines have cabotage laws protecting domestic maritime trade.” But this observation does nothing to refute the law’s critics or prove that the Jones Act is somehow useful. Notably, countries that have moved to loosen their cabotage laws such as the Philippines and New Zealand (see page 6) have experienced positive results. 

Doubling Down on Failed Maritime Protectionism

What to do when confronted with the failures of U.S. maritime protectionism? Call for more protectionism, of course. That, at least, is the apparent attitude of some members of Congress.

A notable aspect of the Jones Act debate is that the law’s supporters often admit, albeit tacitly, that it isn’t working very well. Rep. John Garamendi (D-CA) is a case in point. Participating in a recent panel discussion at the Brookings Institution, Rep. Garamendi readily conceded the enervated state of U.S. shipbuilding. “What remain of the American shipyards”—approximately 300 shipyards have closed since 1983—consist of “mostly small shipyards,” according to the California Congressman, as well as a few large ones which are “producing ships for the Jones Act but not for the international trade.”

Rep. Garamendi also freely acknowledged that, beyond the decline in shipyards, the United States also suffers from a lack of merchant mariners. Should the federal government call upon U.S. merchant mariners to crew the ships needed to deploy and sustain U.S. forces in time of war, Rep. Garamendi said that current projections show it falling 2,800 short (A 2017 government report found the deficit to be 1,839. This, however, was a best-case scenario assuming every mariner would be available and willing to sail).

This lack of mariners is no surprise given the steep decline in Jones Act-eligible ships, which have fallen from 326 in 1982 to just 99 today. In sum, fewer shipyards are building fewer ships which in turn employ fewer merchant mariners. Everything is trending in the wrong direction.

But if you were expecting Rep. Garamendi to reconsider his support for maritime protectionism in the wake of such failings, think again. Not only does he remain an ardent defender of the Jones Act, Rep. Garamendi believes that the maritime industry’s salvation is to be found in extending similar provisions to other areas of maritime commerce.

Citing the example of similar laws in Russia, India, and China—those noted paragons of wise economic policy—Rep. Garamendi used his Brookings appearance to highlight a bill called the Energizing American Shipbuilding Act. This legislation, which he vowed to re-introduce in a recent letter both he and Sen. Roger Wicker (R-MS) sent to senior Trump administration officials, would mandate that 15 percent of liquefied natural gas (LNG) exports and 10 percent of oil exports be carried aboard ships that are U.S.-flagged, U.S.-crewed, and U.S.-built.

This bill, if passed, would be a disaster.

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.

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. 

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.

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.

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