January 23, 2019

Repeal the Law That Is Sinking US Maritime Industry

Donald J. Boudreaux

Senior Fellow, F. A. Hayek Program for Advanced Study in Philosophy, Politics, and Economics

Alice Calder

Program Manager, Academic and Student Programs

For nearly 100 years the Jones Act has been restricting the U.S. shipping and fishing industry. It recently made news with the end of a long-fought battle to allow a brand-new fishing vessel, America's Finest, to be freed from its moors to work. The reason for its detainment? It was made of over 7 percent foreign steel (coming from the Netherlands), which exceeds the 1.5 percent limit stipulated by this restrictive and outdated law.

The Merchant Marine Act of 1920, commonly referred to as the Jones Act, is legislation that aims to promote and maintain the American merchant-marine fleet for commercial and defense purposes. It requires that all goods transported by water between U.S. ports must be carried by U.S. owned, crewed, and flagged ships (thus protecting them from foreign competition). Arguments in favor of the Jones Act center on national security, the need to be prepared for global conflict, and the need to respond to crises.

But time and time again, the effects of the Jones Act — just like other protectionist boondoggles — fail to satisfy the intended goals. This losing record is more than adequate to justify the act's repeal.

The domestic build and crew requirements of the Jones Act eliminate all foreign competition for U.S. coastal transport services. This stifled competition creates an artificial market for American-built cargo ships that cost as much as five times greater to build than similar ships built in China or Korea. Not surprisingly, the cost of operating an American flagged and crewed vessel is double that of foreign ones. Making matters even worse, this high cost and lack of competition means that the U.S. shipping industry has fallen behind in terms of innovation: Companies hang on to older, less efficient, and more dangerous ships rather than updating or retiring them.

One of the greatest costs of the Jones Act is the one it imposes on consumers. Emeritus professor of economics Thomas Grennes, who has written extensively on the Jones Act, found that for every $1 gained by U.S. sailors, ship builders, and carriers as a result of the Act, U.S. consumers lose more than $1, resulting in a net loss.

There have also been numerous studies of the potential benefits of repealing the act, showing there are huge gains to be made, particularly for those in non-contiguous states such as Hawaii. A 1999 report by the U.S. International Trade Commission finds that this welfare gain would be $1.32 billion, which is $2.0 billion in today's dollars.

The problem is that these costs are unseen because they're spread out among millions of consumers while the benefits, being concentrated in small pockets of industry, are more noticeable. And so those few who benefit have strong incentives to lobby to maintain their special privileges. Unfortunately, those who pay the costs have less of an incentive to lobby against these privileges.

The Jones Act is also responsible for far more obvious, sometimes lethal, costs. There is no more emblematic and utterly tragic case than the 2015 sinking of El Faro during Hurricane Joaquin, in which 33 lives were lost. This tragedy likely occurred because of the Jones Act. Having driven up the cost to shippers of using new ships, older vessels continue to be used despite being more dangerous to operate than newer ones. The average age of commercial ships worldwide is 11 years, but for the United States it’s an astounding 31! Built in 1975, El Faro was far beyond the average at which ships are retired. Lacking the structural integrity and safety features of newer vessels, it capsized in the hurricane, killing all on board.

In times of crisis like this, the Jones Act can also cripple the transport of essential resources and aid, a particular problem for non-contiguous regions like Hawaii, Alaska, and Puerto Rico. After Hurricane Irma struck Puerto Rico in 2017, President Trump waived the act for 10 days in order to resupply the island commonwealth. The need for a presidential exemption from Jones Act requirements begs the question as to why this act is still in effect at all, especially when the security and safety of citizens is a purported goal.

The prohibition on foreign competition by the Jones Act has not improved U.S. shipping — to the contrary, it fosters monopolistic complacency and stifles innovation. This monument to cronyism not only massively raises shipping costs, it fails even to achieve its goals of strengthening national security. An American merchant-marine fleet that is on average nearly 200 percent older than merchant ships worldwide would not be fit for conflict. The Jones Act must be repealed.