May 15, 2017

Put the Jones Act Out to Sea

Thomas Grennes

Emeritus Professor of Economics, North Carolina State University
Summary

The law failed to bolster American ship-building and instead stymied economic competitiveness.

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President Donald Trump has issued executive orders to reduce business regulation and to relax restrictions on domestic energy production. Along with many Democrats and Republicans, he supports improvements to our deteriorating national infrastructure. Is it possible to do all three, all without doing further harm to the federal budget?

Reforming or repealing the venerable Jones Act might just provide a good start. And with the Trump administration preparing to act on a proposal from the Obama administration that would make that law even more restrictive, timing is important.

The Merchant Marine Act of 1920, also known as the Jones Act, requires that any product shipped by water from one domestic port to another must use a ship built in America, owned by Americans, crewed by Americans and flying the American flag. Because it costs more to build and operate American ships, the act has imposed a significant shipping cost within the American economy for nearly a century.

The prohibition on the use of foreign ships is a form of protection, like a tariff or import quota. For each dollar transferred to builders and operators of ships, consumers and other end-users lose more than one dollar. It results in a net loss to the economy.

Defenders of the Jones Act claim that this criticism ignores its contribution to national security. Training more builders and operators of merchant ships, they say, complements the Navy's foreign military operations and improves the ability of the domestic fleet to respond to domestic disasters.

But if the Jones Act was designed to preserve a large ship-building industry and American-flag fleet, and thus bolster our national security, it has been a clear failure. There has been a large and continuous decline in American ship-building. Today there are only six domestic shipyards that produce ocean-going vessels, and only one of them produces both merchant and military ships. The American-flag fleet has shrunk from 16 percent of the world fleet in 1960 to less than one percent today. More than 95 percent of large merchant ships are now produced in South Korea, Japan and China. In 2000 there were 193 Jones Act-eligible ocean-going ships, but by 2014, only 90 remained. The remaining American builders engage in extensive foreign outsourcing for designs, engines, electronics or other essential components.

Former Maritime Commissioner Rob Quartel was especially critical of the contribution of Jones Act ships during the Gulf War, saying "The success of the Sealift – a brilliant feat of logistics – occurred in spite, (rather than because of) the Jones Act."

Prohibiting foreign flag vessels from participating in relief efforts has made the response to national disasters slower and less effective. Presidents have waived the act after hurricanes and oil spills, but only after a delay. After the BP oil spill of 2010, President Barack Obama rejected assistance offers from 13 foreign governments. Delays resulted in greater harm to the Gulf.

If the Jones Act is so costly to the nation, why has it lasted for nearly a century? The reason is simple, and all too common.

The act benefits a few well-organized interests, while the costs are spread across an entire country that barely knows it exists. In the regions where the costs are more visible, the losers have little political power. Among the largest losers are the states and territories that need the most goods shipped by sea: Hawaii and Alaska, with small populations and little political clout, and Puerto Rico, which lacks representation.

The costs of the Jones Act are growing as the United States has increased the production of oil whose transportation is subject to the act. More shipments from the Texas Gulf coast to Northeastern states would be beneficial, but currently crude oil must be carried on expensive Jones Act tankers. A proposal from the Obama administration submitted two days before he left office would make the Jones Act more, not less, restrictive toward oil production in the Gulf.

While a full repeal of the Jones Act would be the most effective way to rid ourselves of the economic anchor we're dragging, the act still has strong political support. One compromise could exempt Hawaii, Alaska and Puerto Rico from the American-built ship requirement. It could also include compensation for workers who lose their jobs following repeal, as was done for tobacco and peanut growers in the early 2000s when outdated support programs were repealed.

Reform of the Jones Act would contribute to less intrusive economic regulation and greater American energy production. It would also be a low-cost way to improve transportation infrastructure.