End protectionism in the shipping industry
In the annals of economic protectionism, few laws surpass the Merchant Marine Act of 1920, also known as the Jones Act. For almost 100 years, the act has created monopolies for domestic shipping interests, undermined the U.S. shipping industry, and done long-term damage to local economies in Hawaii, Alaska and Puerto Rico. Like nearly all protectionist efforts, the law has, over time, undermined the very thing it was designed to support: national security during times of war through an unparalleled shipbuilding industry and U.S. Merchant Marine.
Under terms of the law, sea trade between any U.S. ports is required to be carried on U.S.-built ships that are also U.S.-owned and flagged and populated by crew composed of at least 75 percent U.S. citizens. These manufacturing and labor restrictions took effect when the German U-boat submarine — not offshoring — was the biggest risk to U.S. commerce. But research by the George Mason University’s Mercatus Center shows the law has contributed to making the U.S. shipbuilding industry completely uncompetitive over the past 60 years.
As the Mercatus study notes, there were 2,926 large ships in the U.S. commercial fleet in 1960, making up 16.9 percent of the world fleet. By 2016, that number had fallen to 169 ships, only 0.4 percent of the world fleet. U.S.-flagged ships carried 25 percent of U.S. international trade in 1955; by 2015, the share had dropped to 1 percent of total exports.
In any other industry, this sort of economic decline would have set off klaxons and drawn a major political response. In a 1999 study, the U.S. International Trade Commission estimated the Jones Act cost U.S. consumers $1.32 billion annually, its requirements being the equivalent of a 65 percent tariff on shipping services.
So where’s the outrage? Both the Interstate Highway System and cheaper aviation have made massive inroads into interstate commerce over the past century. Meanwhile, U.S. export and import businesses simply use cheaper foreign-flagged vessels. It also helps that U.S. airlines aren’t prevented from purchasing aircraft from Europe, Canada, or Brazil nor U.S. truckers from buying German or Japanese-made big rigs. While no one would propose banning airlines or truckers from relying on these foreign industries, this is precisely what the Jones Act does for the U.S. shipping industry.
Given that intermodal transportation options have exploded through the contiguous United States, the seafaring industry’s decline has largely been hidden from view, except for the noncontiguous states of Hawaii and Alaska and insular territories like Puerto Rico. In Puerto Rico’s case, the Jones Act is the structural foundation behind much of its current economic woes. It’s estimated that the cost of all non-U.S. goods imported into the commonwealth are 15 to 20 percent higher than on the mainland, with three or four Jacksonville-based shipping companies handling all Jones Act-related transport to Puerto Rico. Thanks to these shipping costs, cars cost roughly $6,000 more in Puerto Rico than on the mainland, and food is roughly twice as expensive as in Florida.
It’s easy to find similar examples of major trade distortions between West Coast ports and Alaska and Hawaii. Cattle ranchers from the Big Island have to charter a weekly 747 cargo jet to get their cattle to the mainland because it’s cheaper than Jones Act shipping. In the 1970s, it was cheaper for a Japanese-owned pulp mill in Southeast Alaska to send its products to Japan and then back to Seattle — 8,000 miles roundtrip — than to ship the 700 miles directly to Seattle. Needless to say, there is no wood pulp industry left in Alaska today. In the 21st century, such irrational shipping decisions would be accompanied by the additional worries about the excess carbon emissions they produce.
Coincidentally, it is the shale oil and gas revolution that is bringing attention to the Jones Act in parts of the country with more political clout. The December 2015 lifting of the 40-year ban on crude-oil exports has boosted oil exports to more than 500,000 barrels a day out of Texas and Louisiana ports. Yet according to the Congressional Research Service, refineries along the U.S. East Coast on average import more than 500,000 barrels of crude a day from Nigeria, Angola, and Iraq, rather than from the U.S. Gulf Coast — thanks, once again, to costs imposed by the Jones Act. Shipping from Texas to Northeast refineries costs roughly $5–6 per barrel using domestic shipping, while shipping even further up the Eastern Seaboard to refineries in eastern Canada (using international tankers and crews) costs just $2 a barrel. For a standard tanker carrying 300,000 tons deadweight, this amounts to cost savings of about $1 million per shipment.
Labor costs are the most significant difference. A unionized U.S. sailor is 5.5 times more expensive than one on a foreign-flag vessel, and such vessels are usually populated with sailors from many nations, especially the Philippines and China. A separate 1915 U.S. statute, written when ships were run by steam boilers, adds to the cost by mandating larger crews to keep watch over the boilers 24 hours a day. The statute is still in effect, even though U.S. ships are now powered by much safer diesel motors or, increasingly, by natural gas turbines.
Jones Act defenders go to great lengths to argue it must be preserved because “national security” is at stake. But few commercial ships are useable by a 21st century Navy. Additionally, if threats of terrorism emanating from foreign commercial shipping are so severe, why have there been thousands of foreign ships per year docked in U.S. ports since 2001 without a single terrorist incident tied to them? How would traffic between U.S. ports by these ships somehow increase such a threat?
The 97-year-old law is many decades past due for serious amendment and perhaps even complete repeal. The upcoming centennial, in 2020, presents an ideal opportunity to highlight the Jones Act’s mercantilist history — and to bid it a final farewell.
