Nov 28, 2018

A Jones Act Restriction with High Costs and No Benefits

Thomas Grennes Emeritus Professor of Economics, North Carolina State University

On January 28, 2018, a shipment of Russian Liquefied Natural Gas (LNG) was delivered to the Boston area port of Everett, Massachusetts. The delivery surprised some people because it originated from the Yamal Plant in Northwest Siberia. The plant was not only a long distance from the US, but it was also subject to sanctions by the US government against Russia. The surprise was compounded by the fact that the US has become one of the largest LNG exporters in the world, and the main export terminal in Sabine, Louisiana is much closer to New England than Siberia. Could this anomaly be the result of a bad trade deal that President Trump has recently criticized? No. Americans did this to themselves. The Jones Act of 1920, a costly barrier to US domestic trade, is the cause of New England’s reliance on Russian natural gas.

Physical characteristics of natural gas once limited transportation to pipelines. The result was separated national markets with surpluses in some countries, shortages in others, large price differences, and little international trade. Technological change allowed natural gas to be converted to a liquid, transported by special LNG tankers, and delivered to distant destinations where it would be converted back to a gas. International trade in LNG has expanded rapidly, an internationally integrated market has developed, and price differences have been reduced dramatically.

The Shale Revolution in the US brought about a large increase in production of natural gas and crude oil. The combination of increased natural gas production and LNG technology quickly transformed the US into one of the world’s leading LNG exporters, along with Australia, Qatar, and Malaysia. The first exports of LNG from the lower 48 states went from Cheniere’s Sabine, Louisiana export terminal to Brazil in February 2016. A new export terminal opened in 2018 at Coe Point, Maryland on the Chesapeake Bay. At the end of 2017, four other export terminals had been approved by the Department of Energy. US LNG exports quadrupled in 2017. Why not ship LNG from US ports to New England using LNG tankers rather than importing it from Siberia?

The Jones Act does not allow it. The Act requires all cargo transported from one US port to another to use a ship built, owned, manned, and flagged in America. US-built ships are more than four times as expensive as foreign-built ships and more expensive to operate. As a result, there are no Jones Act-compliant LNG tankers currently in operation. American LNG exports go all around the world, including to China and Poland, using foreign-flag tankers that are not allowed to operate in domestic trade.

Proponents of the Jones Act claim that there are national security benefits from training American workers to build and operate ships. However, for LNG the benefits from training American workers are currently zero. There are no American-built or operated LNG tankers in service, and none are under construction or ordered. The argument for applying the Jones Act to LNG is completely without merit.

Conversely, there is a strong case for permanently exempting LNG trade from the Jones Act. Natural gas could be supplied to New England from Sabine, Louisiana at lower cost by using foreign-built tankers. LNG could be sent from Louisiana to Puerto Rico rather than importing it from Trinidad. Using foreign-flag tankers on coastal routes could relieve congestion on pipelines that are operating at capacity or on routes where pipelines do not exist. Because of incomplete pipeline networks, there are still large regional price differences for natural gas within the US. In general, removing restrictions on foreign-built tankers would increase competition, which would allow shippers to negotiate better terms no matter what transportation mode they used.

The Jones Act is not the only barrier to expanding US production and exports of LNG. Domestic regulatory and licensing requirements are considerable, and tariffs against Chinese products by the Trump administration have resulted in threats of retaliatory tariffs by China against US LNG exports.

The greatest economic gain to the country would actually come from repealing the Jones Act entirely, but that would face strong opposition in the Congress. Until the political will to do so emerges, applying the Jones Act to domestic trade in LNG remains the worst kind of special interest policy. It imposes real economic costs on users without any corresponding benefits. There are no benefits to national security because no Americans are training to build LNG tankers or operate them.

Permanently exempting LNG trade would be a net benefit for the nation. A broader reform that would exempt all ocean-going ships trading with non-contiguous regions (primarily Hawaii, Alaska, and Puerto Rico) from the American-build requirement would be more beneficial. This is the Noncontiguous Trades Jones Act Reform​ (​​​​​​NTJAR) proposal put forth by the Hawaii Shippers’ Council. Either way, LNG trade remains a stark example of the economic harms imposed by the Jones Act and other barriers to trade.

Photo credit: Getty Images

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