Three Easy Ways to Improve Competition in Transportation Policy
Introduction
The free market economy of the United States brings substantial benefit to consumers through competition. Because consumers have their own capital and are free to choose how to spend it, producers must compete with one another to capture market share and are incentivized to improve their productivity. This productivity improvement, in turn, grows the overall economy and improves quality of life.
But for reasons of public health, safety or national security, government regulation is often adopted to constrain the market to achieve a public policy goal. Sometimes such regulations succeed; other times they remain in place simply because they are insufficiently challenged. In cases of natural monopolies, a distinct role for regulation is to facilitate competition—and in the transportation industry, such regulation is often poorly conceived.
As the cost of truck and rail freight hauling remains substantially above pre-pandemic levels, there are three simple policy solutions that would increase competition in transportation services and reduce costs to Americans.
Repeal the Jones Act
The Jones Act is a 1920 law designed to protect the U.S. shipbuilding industry. Under the law, any transport of goods between two U.S. ports must be done by a U.S.-built, crewed, owned and flagged vessel. The problem is that restricting carriers between two U.S. ports drives up the costs of goods—causing Americans to rely on more trucking even when maritime transport makes sense.
The thinking behind the Jones Act was that it would support a domestic shipbuilding industry. But the intranational maritime shipping industry is not large enough to justify building ships expressly for such a purpose. The law utterly fails in its protectionist effort. One study found that, since 2000, Jones Act vessels have accounted for less than 5 percent of orders for shipbuilders that produce both military and Jones Act vessels. General Dynamics, one of the nation’s largest shipbuilders, earned $8.6 billion in revenue from marine systems in 2018—less than 3 percent of which was for Jones Act vessels. Simply put, if the Jones Act is meant to support a domestic shipbuilding industry for national security purposes, then military procurements are far more important. But its continued implementation creates all sorts of problems for shipping.
The Jones Act drives up the costs of products that cannot be transported via optimal means. In the island territory of Puerto Rico, the law is estimated to cost residents more than $300 million annually because they are only allowed to import goods from the mainland through Jones Act vessels. It also raises the cost of transporting goods for residents of the contiguous United States by preventing Americans from utilizing foreign vessels that are already transiting between U.S. ports from carrying domestic cargo. Other freight transport must then be paid to move goods up and down the coast.
Additionally, in an interesting quirk of energy policy, the Jones Act prevents Americans from buying domestically produced natural gas. The northeastern United States has insufficient pipeline infrastructure to transport natural gas from the rest of the country; therefore, it must import liquefied natural gas (LNG) to coastal ports where less pipeline infrastructure is needed. But because the United States doesn’t produce any LNG tankers, it’s not possible for U.S. natural gas to be shipped as LNG. Because the Jones Act prevents such trade between two U.S. ports, Americans are forced to buy foreign natural gas even though plenty is produced domestically and would cost less.
And while the president could waive Jones Act requirements, such waivers are rare. Even after Hurricane Maria wiped out power to Puerto Rico, former President Donald Trump refused to allow a waiver that would have allowed Puerto Rico to buy U.S. natural gas to restore power. The Jones Act is a classic example of bad economic policy with dispersed costs and concentrated benefits, where an entrenched political interest lobbies to maintain protection despite increased costs to Americans.
Expand Reciprocal Switching for Freight Rail
The U.S. rail industry is a successful, competitive market, thanks largely to deregulation in the 1980s. Competition among carriers lowered costs, rationalized capacity and stimulated productivity. However, there are two points on a rail journey that are not typically subject to competition: the beginning and the end. Usually, the final segment of track to and from a customer are owned by one carrier—and that carrier can exclude access to competitors.
As a result, some aspects of the rail industry are akin to other “natural monopolies” like electric transmission and natural gas infrastructure. Customers end up captive to one supplier, who uses their market power to charge rates higher than a competitive market would. Monopoly power leaves two regulatory options to achieve competitive rates: substitute or facilitate competition.
Part of the regulatory role of the Surface Transportation Board (STB) is to substitute for competition where monopolies exist. For comparison, the Federal Energy Regulatory Commission switched to facilitating competition by requiring electric transmission and natural gas pipeline owners to provide nondiscriminatory access to all users—resulting in billions in annual cost savings. This enables fully competitive industry segments, such as electric power generation and retail, to transact over monopoly network infrastructure and offers a corollary for how regulators can stimulate competition where it does not yet exist.
Instituted upon electric and natural gas industry deregulation, vertical unbundling made it easier to avoid discriminatory, monopolistic practices in specific industry segments. Rail deregulation, however, retained vertically integrated companies. An option to facilitate competition within railroads’ monopoly segment is called reciprocal switching, which is when a carrier that owns rail allows competing carriers to use their infrastructure and switching stations. Customers can then choose between at least two carriers that compete on price. In addition to providing pricing discipline, competition improves service quality (which monopolists tend to neglect). To mitigate these effects, the STB recently proposed a requirement for reciprocal switching in cases of inadequate service quality.
Arguments against reciprocal switching hinge largely upon the idea that mandates to expand it would require government intervention at an expense that would outweigh the benefit—but many of these concerns are easy to address through clauses in policy. As an example, some argue that forcing reciprocal switching will require carriers to accommodate requests that create an unreasonable increase in operational complexity; however, it is easy to waive a reciprocal switching requirement if the number of switching stations required is impractical. Others argue that forcing carriers to allow competitors to use their infrastructure reduces the incentive to invest in new infrastructure. But it is important to keep in mind that infrastructure investment still occurs for comparable economic scenarios in other industries because a profit motive to service customers still exists.
Another argument against reciprocal switching points out that regulation already restricts anticompetitive practices. They would argue that because this existing requirement is rarely used, carriers are not acting as a monopoly that would warrant regulation. Yet proponents argue that the existing bar to incur reciprocal switching requirements is too high, leaving monopolies unchallenged and service quality poor. But it is important to understand that if carriers are, in fact, offering competitive rates, then expanded reciprocal switching would have little impact, as customers would continue to choose the competitive carrier. In fact, proposed requirements to expand reciprocal switching would only apply in cases where local service is inadequate.
Overall, it is important to understand that an infrastructure system that is competitive except at end points will not yield the full economic benefit competition would deliver because incentives for productivity improvement, service quality and cost reduction are blunted. This is why reciprocal switching, or some other means of enabling broader competition at end points for freight rail customers, is key.
Consider Allowing Bigger, Heavier Trucks on Roads
About 65 percent of all freight weight in the United States is transported by heavy trucks. Semi-trucks are large vehicles, and the federal government allows them to carry up to 80,000 pounds without a special permit. But if they were larger, and could carry even more, it would help lower transportation costs across the country.
Weight limits on heavy trucks are implemented because the heavier a truck is, the less maneuverable it is—and the more likely it is to be a hazard on the road. However, Europe allows bigger trucks that can carry more weight. The lowest limit in the European Union (EU) is 88,184 pounds (40 metric tons), and the limit in the Netherlands 110,231 pounds (50 metric tons). The EU is considering allowing even larger trucks on the road, which could carry up to 132,277 pounds (60 metric tons).
Even with bigger, heavier trucks, the EU has, on average, much safer roads. There are many factors that affect road safety, and there is currently no universally accepted reason for why the United States is so far behind the EU on road safety. But given the EU’s adoption of heavier trucks, it is certainly possible that the United States could also benefit from larger trucks without compromising road safety.
The current U.S. regulatory cap of 80,000 pounds artificially constrains the market and reduces the carriage capacity of trucks. Without this requirement, carriers could utilize bigger trucks to transport more volume with fewer vehicles and in less time—thereby improving transport access and availability as well as lower costs. A theoretical road safety argument in favor of heavier trucks posits that greater truck capacity and fewer required trips would reduce the number of opportunities for accidents, as well. Though the justification for this regulation is safety, the limit may not be set appropriately.
One proposed legislation seeks to begin a pilot program that allows for larger, heavier trucks in the United States. Given that these vehicles already operate elsewhere in the world without any exceptional safety concerns, it makes sense that the United States should catch up to its European counterparts by experimenting with the viability of larger trucks.
Conclusion
When policy constrains competition, consumers pay the price. In the examples outlined above, it is apparent how simplistic, sometimes well-intentioned policies shield carriers from the very competition needed to discipline costs and stimulate innovation. Thankfully, the policy answer is often simple: Embrace competition.
Corrected: The post has been corrected to note that the Jones Act does not prevent foreign vessels from transporting foreign goods up and down the coast.