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Colin Grabow on Current Trends in US Trade Policy and the Adverse Impact of the Jones Act
As shipping costs continue to rise and domestic infrastructure exhibits further wear and tear, the Jones Act has emerged as a major culprit.
Colin Grabow is a policy analyst at the Cato Institute’s Center for Trade Policy Studies, and he joins Macro Musings to talk about US trade policies, the Jones Act, and the consequences of this harmful maritime statute. Specifically, David and Colin also discuss the counterfactual world of TPP, the future of international trade, and how to fix the myriad of problems caused by the Jones Act.
Read the full episode transcript:
Note: While transcripts are lightly edited, they are not rigorously proofed for accuracy. If you notice an error, please reach out to [email protected]
David Beckworth: Colin, welcome to the show.
Colin Grabow: David, thanks for having me on.
Beckworth: Well, it's great to have you on, I've been following your work. I follow you closely on Twitter and you're very active on the Jones Act front, but also on trade policy and as I alluded to there the sugar industry. In general, I guess you're very active in the industrial policy space so you have a good command of that. But I'm curious, Colin, how did you get into this area? Why get into trade policy? Why pursue this objective?
Grabow: I've been interested in trade for a long time. I can remember the very first time I went to IKEA and walking around and looking at each product, I'd pick it up and look, and this would be from Bangladesh, the other thing would be from Mozambique or wherever, and all these products from all around the world brought to this one store, and I could shop at my convenience, and reasonably priced and I just thought this was amazing. So I had this long-standing interest in global integration and how it affects our lives. My master's degrees is international trade and investment policy. And I've considered myself a long time fan of free trade and then I had an opportunity to come work at the Cato Institute, to just be a professional advocate for free trade. Who could say no to that?
Beckworth: And I've had your colleague on, Scott Lincicome, so you have a number of great people there working on these issues. So it must be a fun environment to be in if you are passionate about these topics.
Beckworth: Yes. So I wanted to talk to you about trade policy, talk about what's going on in the Biden Administration, and then we want to narrow it down into the Jones Act, where you are the resident expert in DC. In fact, we were talking about this before the show, there aren't many people besides you who spend so much time thinking and writing about the Jones Act, is that fair?
Grabow: I think that's a fair characterization.
Beckworth: Okay. So folks, if you want to get a full treatment of the Jones Act, go look up his profile, his links, we'll provide some links in the show notes, and we'll allude to and mention some of his articles. But he is the Jones Act scholar here in the think tank world in DC, so look him up. But let's step back from Jones Act and think about US trade policy in general. And I'm going to cue this up Colin by reading some excerpts from an article from Anne Krueger, she used to be a chief economist at the World Bank and at the IMF. And this came out recently, earlier this year, but it's a great summary of what's happened to trade policy under Trump and it leads us right up to Biden, I'll let you run with this, tell us what's happening under Biden.
Beckworth: So just again, a quick excerpt from Anne Krueger's article, the title of the article is, *Biden's Frozen Trade Policy,* she begins by saying, "Global economic growth since World War II has been an unprecedented success. Compared to the first half of the 20th century, growth has been both more rapid and more widely shared around the world, leading to dramatic increases in life expectancy and health conditions in developing countries. Trade liberalization was an important factor in that progress. Among developing countries, those that opened their economies up to international trade experienced rapid growth. South Korea, Chile, China, and India in the 1990s are prominent examples of the successful trade liberalization, but there are many others. The US has led the postwar process of integration both by maintaining its own very open economy and by helping establish the World Trade Organization. Tragically, former US President Donald Trump has undermined this system."
Beckworth: She goes on to say, "His promise to make America great again was betrayed by his effort to use America's global leadership position to bully others on trade, which severely diminished the country's international standing. He weakened America's position in Asia by rejecting the Trans-Pacific Partnership. Trump also weakened North American Free Trade or NAFTA, imposed tariffs on imported steel, aluminum, washing machines, solar panels, other goods, all on dubious national security grounds. In doing so he flagrantly disregarded US treaty obligations under NAFTA and WTO. Moreover, the Trump Administration blocked appointments to WTO's appellate body, thereby paralyzing the dispute settlement mechanism." And she goes on to mention a few more things, the trade policy developments that happened under the Trump administration. So let's stop there and that's quite a mouthful, that's a lot going on under Trump administration. Where do we stand now? What has Biden done with trade policy? Has he changed course, because during the election he promised something a little bit different, but where do we stand with US trade policy?
The Current State of US Trade Policy
Grabow: Unfortunately, I think the US trade policy is frozen. We're hoping a lot of us that advocate for free trade, we're hoping for a course correction after the Trump years, and a return to what traditionally had been the US role of advocating for more open markets. This is long standing, go back to obviously the Reagan administration, they got the US involved in the Uruguay Round of free trade negotiations. This has culminated with the signing in 1994, the conclusion of the Uruguay Round and the advent of the WTO under Bill Clinton. Bill Clinton, he championed NAFTA, which was negotiated by his predecessor through Bush. Even under President Bush Jr., W. Bush, we saw an effort to try to further liberalize efforts. There was the ill-fated Doha Round under WTO.
Grabow: There were a number of bilateral deals negotiated, we saw a lot of those bilateral deals signed and became law under President Obama, President Obama championed the Trans-Pacific Partnership. And all of this came to a screeching halt under President Trump, who as you mentioned, literally one of his first acts in office was to pull out of the Trans-Pacific Partnership, the TPP. And what lot of us are hoping for is that some would say, "No, there's a lot of wisdom in globalization and in free trade." And you mentioned Anne Krueger's comments and she's noted all the good things that have correlated with increased globalization. I would argue not just correlated, but there's a causal relationship there as well. But unfortunately, for President Biden, I just don't think trade is a priority for him. And that's good to the extent that it was a priority for President Trump in all the wrong ways, first he talked about pulling out of NAFTA.
Grabow: He said it was one of the worst trade deals ever negotiated, ended up just renegotiating it, he pulled out of TPP, he kicked off the trade war with China. You mentioned some of the other measures… tariffs on steel and washing machines and so forth. So the good news is I don't think President Biden is going to kick off a new trade war, but there doesn't seem to be any interest in returning to the status quo ante on a lot of these things. With regard to the steel tariffs, he did sign some deals with I believe Japan and the European Union. But he didn't just simply remove them, basically moved to a new system with tariff rate quotas so it wasn't any great liberalization. But again, I don't see much further damage being inflicted, but I certainly see no appetite to try to undo a lot of the damage that was caused under his predecessor.
The good news is, I don't think President Biden is going to kick off a new trade war, but there doesn't seem to be any interest in returning to the status quo ante on a lot of these things.
Beckworth: So what do you think is driving this status quo preservation? So he's not really dialing back what Trump did, which is problematic for people who want to see more free trade and believe it has benefits to offer the world, what's driving it?
Grabow: I can think of a few explanations for this. One is that President Biden has this image, he has carefully cultivated this image of being very pro-union and taking his cues from unions, and unions traditionally are not friendly or favorably disposed towards freer trade, they see that as a threat to their jobs. And so I think President Biden is not going to cross the unions. I also think we're in a moment right now where a lot of Americans perceive the United States as being embroiled in a new cold war of sorts with China. I'm not sure exactly what the terminology is, but plainly there's some high tensions there. And so that means that there's a limited appetite towards reversing what Trump did, because any reversals of Trump's policy vis-a-vis China are perceived as giving into China. And paring back tariffs… that's perceived as China winning or giving into them. And we can't have that and that's not just Biden, that's not just Democrat, that's very bipartisan I think. So I think those are some of the animating features we've seen behind president Biden's attitude towards trade.
Beckworth: So today President Biden put a tweet out where he said, "From day one, very action I've taken to rebuild our economy has been guided by one principle, Made in America. It means using products, parts, and materials built right here in the United States, it means bringing manufacturing jobs back and building supply chains here at home." So what's wrong with that view of the world, that approach to trade policy?
The Problems with “Made in America” Rhetoric and the Rise of Tariff Inflation
Grabow: Right. So as you mentioned President Biden had his tweet praising basically the principle of making things in America. This could have been uttered very easily by president Trump, who's also a big fan of Made in America policies. And superficially who could be against such a thing, who's out there saying, "No, we shouldn't make things in America." I think this has a very obvious allure to a lot of people. But what we don't understand or what this argument fails to appreciate is the role of specialization and comparative advantage, and these terms that economists like to throw around, which means that we should specialize in the things that we're best at and leave these other things to other people to handle. For example, in the production of the iPhone, the iPhone of course is designed by Americans, but it has parts from all over the world and it is assembled in China.
I think this has a very obvious allure to a lot of people. But what we don't understand or what this argument fails to appreciate is the role of specialization and comparative advantage, and these terms that economists like to throw around, which means that we should specialize in the things that we're best at and leave these other things to other people to handle.
Grabow: Because China's probably the best place, the most efficient place to do that assembly. In California, and Americans are probably the best at designing, and other people that make the glass and some of the processors and the other… and the battery in other countries, they're probably the best at doing that. And if we did that all in the United States from the beginning to the end, designed, manufacture the components, assemble it all here in the United States, the cost would be enormous. It's amazing we can all have these super computers in our pockets because they're affordable, that would not be the case I suspect under the regime that President Biden envisions.
Grabow: So globalization is all about integration and letting people do the thing that they're best at. It's also about… what people don't appreciate is a lot of the trade we engage in is intermediate inputs. It's Americans taking foreign parts and using those to help build things. We talked earlier about the steel tariffs. Well, if you're making cars, for example, you want cheap steel, steel tariffs makes steel more expensive. It means your auto manufacturing business is less competitive, that's not good for American production, it's not good for jobs, so I think there are a lot of flaws in these kinds of arguments.
Beckworth: So you made the argument for specialization, for the power of markets to make things cheaper, more efficiently, more productively, you gave lots of examples, phones, cars. There's also another element to this and that is there's rent seeking. It's not just about making things more efficiently, cheaply, more productively, but it's avoiding all the rent seeking and by that we mean currying favors, making sure it's your firm that gets protected. And I have a quote here from an article that was in The Hill, it gave some examples of the cost we get from this protectionism. And they cite that, "The Trump tariffs on steel costs US consumers between the 900,000 and 1.2 million per steel job saved." So that's just one example where we're paying a higher price because the industry is fighting to protect its job. They have a reason to, it's a bigger gain for them, we see that cost diffuse spread out. And we'll get to this as we get into the Jones Act because I think it's a key part of the Jones Act story.
Beckworth: Also the current climate we're in is one of high inflation, that's one of the big issues that I deal with as a monetary economist. And at the end of the day that's ultimately driven by what the Fed's doing and fiscal policy and how much spending we have in this country. And so trend inflation, I think is a different discussion not related to trade, but trade could have an immediate impact on the inflation rate. And it's interesting that the Biden administration hasn't put its focus on inflation on maybe dropping some tariffs, making some things at least immediately cheaper. It's focused more on concerns about excess profits or market power, but could we make a difference, a meaningful difference in inflation if we reduced or dialed back some of President Trump's policies?
Grabow: Absolutely. Absolutely I do. American tariffs overall are pretty low, but you can find plenty of products where it's significant. If we want to make things cheaper for American consumers, a great way to do that is lower our barriers to foreign products, that's good for consumers, that's good for the economy. We discussed earlier the role of the inputs that help us produce things. When we trade with people it means more dollars in foreigners’ pockets that they can use to buy American products, that's what trade is all about, back and forth. Besides inflation let me also return to something you mentioned earlier about special interests, it's also curious because President Trump, one of his mantras was drain the swamp, get rid of these special interests. [If] you really want to do something about special interests, you want to make a lot of people on K Street unemployed, have free trade, because so much of trade policy is run by special interests trying to avoid foreign competition, trying to drive prices up on American consumers so they can collect those rents and I think that goes underappreciated.
[If] you really want to do something about special interests, you want to make a lot of people on K Street unemployed, have free trade, because so much of trade policy is run by special interests trying to avoid foreign competition, trying to drive prices up on American consumers so they can collect those rents and I think that goes underappreciated.
Beckworth: Yeah. I came across a study by the Peterson Institute for International Economics, a recent one they did, and he argued a 2% reduction in tariffs would lead to a 1.3% reduction in the inflation rate, an immediate one time pop. And it was a study by Clyde Hufbauer, Megan Hogan, and Yilin Wang titled, *For Inflation Relief, the United States Should Look to Trade Liberalization.* So it was just an argument, they lay out examples of how this would work. So it would be nice to see the Biden Administration put some energy on that front, but let's step back, so we're talking about trade policy where it's been under Trump, where it's going under President Biden. And if we can step back even from that that big picture view to an even bigger picture view, and that is the history of trade policy in the US.
Beckworth: So I know you're a fan of Doug Irwin, I've had him on the podcast and he had a great book recently called *Clashing Over Commerce,* his magnum opus, a great big history of trade policy in the US. And he goes through these periods, he has three periods of trade policy. The first one's from 1763 to 1865 and he calls that the revenue period where trade policy was used to generate revenue… their taxes back then were tariffs, they didn't have income taxes and other things like we do today. The second period he called the restriction was from 1865 to 1932, that was driven by the Civil War and Republicans coming to power after that and were very much protectionist, infant industry arguments, protect the manufacturing base.
Beckworth: And then the third period, 1932 to the present, it's about free trade. And it's one where you reach agreements with other countries, multi-lateral arrangements. Those were the three periods and each of them were created by a shock, the Civil War or World War II. And so my question is, do you think we're at a turning point or is it time to start thinking about a fourth period in trade policy? When Trump's policies first came out I said, "Oh, he's just a bump in the road, it's a continuation." And you mentioned we still have relatively low tariff rates overall, but are we at an inflection point? Are we, do you think, turning directions permanently, or do you think things will swing back to where we were before President Trump was in office?
A New Era of Trade Policy?
Grabow: Well, like you, I certainly hope that president Trump was going to be a bump in the road and I've been concerned by the policies of the Biden Administration, the lack of enthusiasm for trying to pare back some of the protectionist measures that were enacted under President Trump, but it goes beyond Trump, right? If you look internationally, you can tell a story about a backlash against globalization, Brexit, even the pandemic and people saying, "Well, we can't depend on foreigners for our PPE." And war of course right now, last year the Ever Given ship stuck in the Suez Canal and people say, "Oh, this is another example when you're dependent on foreigners, you're beholden to forces like this." So you can definitely paint that picture, but I also think that there is a more optimistic picture out there.
Grabow: And that's if you take the long term view, there is this I think a long term trend towards globalization. Globalization has been going on forever almost, people have always tried to trade and not be constrained by borders. If you look at polling data, Americans tend to be pretty enthusiastic about trade. There's a real sharp divide between what Americans say they want or how they feel about free trade and the policies enacted by the people that represent them. I think this speaks a lot to the power of special interests. As you mentioned earlier, diffused costs and concentrated benefits, but I don't think it was a ground swell of support among Americans for protectionism. So I don't think the ground has shifted tremendously, but also if we look around the world, we see things like new free trade agreements being enacted.
Grabow: We pulled out of TPP, but guess what? Other countries all banded together and they renamed it the CPTPP, the Comprehensive and Progressive Trans-Pacific Partnership with Japan at the center and other countries, Africa has a pan-African free trade agreement. I think was it last year we saw the RCEP, the Regional Comprehensive Economic Partnership enacted with China that included China, which has a reputation of being on the more protectionist end of the scale. And also, it's interesting that at the same time we talk about slowing down globalization, perhaps a backlash of globalization or receding of globalization, we have this supply chain crisis where we have so many ships trying to get in and out of our ports, which reminds us, there is a considerable appetite among Americans for imports and also a desire to export as well, and to be able to get American products on those ships.
It's interesting that at the same time we talk about slowing down globalization, perhaps a backlash of globalization or receding of globalization, we have this supply chain crisis where we have so many ships trying to get in and out of our ports, which reminds us, there is a considerable appetite among Americans for imports and also a desire to export as well, and to be able to get American products on those ships.
Grabow: And I'll also point out that we also often think of trade and globalization in terms of stuff, things that get moved around, but also there's a digital element to this, that goes I think underappreciated. My wife and I as many couples do, as many people do, enjoy watching Netflix. My wife is Spanish. She's from Spain. One great thing about Netflix is it has a lot of programming that is not just Spanish language, but actually produced in Spain that we can watch together. And in fact, there was a show a few years ago we started watching called Casa de Papel, The House of Paper. And I thought, "Wow, this is a really good show. I would not normally have watched this." And it turns out that lots of other Americans felt the same way, it was released in Netflix in the United States with the name Money Heist, and it became this international phenomenon. So there's a cultural component here and a digital element that I think is part of the globalization story that I only see continuing.
Beckworth: Well, that's very encouraging and I wonder the discussion, a lot of discussion surrounding supply chains since the pandemic started, I wonder to what extent that's made Americans more aware of the importance of trade. They go to Lowe's, "Man, I can't get that saw, I can't get that mower because the ships are blocked at the port or China is shut down for the time being because of COVID." I wonder to what extent do you think that maybe they're more supportive of trade policy? You mentioned the polls, the numbers are good, do you think there's any interaction there that this pandemic has made us more aware and more favorable?
Grabow: I don't know, but what I would hope the lesson would be from this… there's one way you can examine this and think, "Well, I don't want to be beholden to foreigners for this thing, because then if the ship doesn't come in or they for whatever reason decide not to sell to us, then I'm in a bad spot." But I think we also need to remember that globalization means diversity of suppliers, it means redundancies in the system, it means not having all your eggs in one basket. Because yes, there could be some downsides with relying on certain foreign countries for certain products, but it's much preferable to the alternative. We look at countries that almost entirely strive to be self-reliant. We're talking about North Korea, we're talking about Cuba, that's the road we want to go down, that's not where we want to end up. Right now, for example, in the present day, war in Ukraine, Ukraine and Russia as well produce a lot of grain, a lot of wheat. Well, thankfully Canada also produces a lot of wheat. India apparently is having a record harvest of wheat. So there are alternatives that we can go to and that's possible because of this globalization and all the trade that we participate in.
Beckworth: So you think there'll be some push for diversification of supply chains because of the pandemic?
Grabow: I think there is, but there's also this talk of reshoring… Of, well, things are going so well in China, so we should move that production back to the United States and I think that's mostly over hyped. I think what we're more likely to see is, for example, a textile manufacturer, maybe they also set up shop in Vietnam or Thailand or something like that, other countries. So again, they don't have as many eggs in one basket. Doesn't mean it's all coming back here in the US, it just means there'll be maybe an even greater diversity of places that we source from.
I think we also need to remember that globalization means diversity of suppliers, it means redundancies in the system, it means not having all your eggs in one basket. Because yes, there could be some downsides with relying on certain foreign countries for certain products, but it's much preferable to the alternative.
Beckworth: One last question on this and then we'll move on to your wish list of reforms for trade policy, it will provide a nice segue into the Jones Act. But one thing that we've noticed is that Republicans, at least some Republicans have gone on board with this national conservatism, a very protectionist view, people that have surprised me. Senator Marco Rubio, for example, has become very much a fan of industrial policy. Of course, Senator Josh Hawley, he had an Op-Ed in New York Times… the title was *The Only Way to Solve Our Supply Chain Crisis Is to Rethink Trade.* And then you have former Republican pundits turn very inward, Oren Cass I'm thinking of in particular, the American Compass and others like him. There is some drift you see in the Republican Party, which typically was more free market. But I'm guessing you see this maybe just as part of some of this traction for looking inward, but at the end of the day it's going to be just a bump in the road.
Grabow: That's my hope. I'm not a political prognosticator, I don't know what's coming down. I've made a lot of bad bets lately, I didn't think that Trump would be as bad on trade as he was, I was hoping a lot of that would be rhetorical. And I was hoping, again, there'd be a course correction under the subsequent administration and that has yet to happen, so who knows what the future holds. But I think perhaps the optimistic take here is that a lot of these people changed course under President Trump, he was the central animating figure, leading figure in Republican circles and I'm hoping that Trump will fade into the background. I think a lot of this protectionist sentiment goes as Trumpism goes, to the extent that President Trump has a lot of currency then I think we'll continue to see this rhetoric.
Grabow: My hope is that Republicans will return to their senses and return to their roots, which are found more in pro market, pro free trade policies. And hopefully I hope if nothing else, having tried protectionism a bit, this trade war I think is very difficult to argue has produced any real value or benefits. I think the costs far outweigh any benefits that have been produced and people will draw appropriate lessons from that. So we put our hand on the stove and we discovered what that was like and now we'll try to get back towards what works, that's my hopeful assessment.
Beckworth: I want to draw upon what you said earlier and I think that's important here, and that is Trump may be a symptom of something bigger that's going on. You mentioned Brexit, the rise of populism around the world, really after the great financial crisis, after 2008, there's this surge that comes to a head in 2016. And I've had some previous guests on the show and they've said, "Look, some of this you can view as just a response to globalization pressures that have been there." And then the great financial crisis maybe brought it to a head and brought things to the surface and maybe we're riding this wave.
Beckworth: And again, it's come down because as you said there's a natural march towards globalization through the world. People naturally want to labor specialize, you don't have to tell people about markets, markets naturally emerge, there's a natural tendency to make oneself better. But again I wonder to what extent Trump, Brexit developments like that are just a part of a deeper angst that emerged out of the ashes of the great financial crisis and some of the concerns about globalization. And this is nothing new either, we've had these concerns before, I remember in the '90s there was massive protest against IMF, the World Bank. So maybe we're just on another wave we got to ride and we're close to the other side out of that wave, we're going to come down and full speed ahead into the march towards globalization.
My hope is that Republicans will return to their senses and return to their roots, which are found more in pro market, pro free trade policies...we put our hand on the stove and we discovered what that was like and now we'll try to get back towards what works, that's my hopeful assessment.
Grabow: That's my hope as well. And it's perhaps also worth pointing out that neither Brexit nor Trump's selection, did they win overwhelmingly, they were both very narrow. So I think it's difficult to make the case and this is reflected, again, in this groundswell of support for more protectionist policies. And of course, people who voted for Brexit had different motivations, I don't think you can lump all Brexit voters in with the notion that we say no to globalization. In fact, some of the leading voices of Brexit were those that said, "Well, the advantage to Brexit is we’ll be apart of the European Union, and we'll be in a much better position to negotiate free trade agreements on our own. We won't be held back by the more protectionist members of the EU." And of course there were different motivations for people who voted for Trump. And I would really be surprised if every Trump voter did so out of animus towards NAFTA or TPP.
Beckworth: Well, let's make this concrete. I want to draw upon an article of yours titled *Five Years Later the United States is Still Paying For Its TPP Blunder.* So Colin walk us through what would've happened or what would've been different if we had stayed with TPP, why care about trade policy like this? What would be the counterfactual world had we actually stuck with TPP?
The Counterfactual World of TPP
Grabow: So TPP, the Trans Pacific Partnership, it comprised of I believe I want to say 16 countries, something like that, the United States, some of the big ones, Canada, Mexico, Japan, Malaysia, Vietnam, Australia, this would've brought our economies closer together, removed trade barriers. What's the counterfactual here? How would the United States be different today? Well, we'd be richer, for starters, there were a couple different analyses done of the TPP and what its effects would be and they both projected gains. Now we can debate what the scale of those gains would be, I don't think it'd be life changing, but it would've been something, it would've been worthwhile. Also a lot of these countries we already had free trade agreements with, like Australia, for example, but it'd be nice to operate under one regime than having one trade agreement for this country, another trade agreement for that country, all with different provisions and rules and regulations and whatnot, so it would have made our trade with these countries coherent.
Grabow: As we already mentioned earlier, we are on this standoff with China, there are tensions with China right now. One big argument for the TPP is there was a geopolitical element to it that would've made these countries, the members orient themselves, tilt more in our direction you could say, that's important for say a country like Vietnam, that shares a border with China. And it'd be nice to have more trade between the United States and Vietnam. And they would be more maybe predisposed towards what Washington is seeking and they'd be more in our camp, we could say, same with maybe Malaysia and Japan is a long time ally. So there are geopolitical benefits there as well amidst tensions with China. So we'd be a richer country because that's what trade does, it makes people wealthy or more prosperous. We can debate the extent, but definitely just to some extent we would be better off economically. And again, just geopolitically, I think there were some real advantages to that agreement that unfortunately we’re missing out on.
Beckworth: Wasn't one of the geopolitical benefits that it would put pressure on China to behave. If everybody else was in this agreement and they're the odd one out, and they want to be a part of it, they would have an incentive to get their act together to behave. In other words it would've been a carrot approach versus what president Trump did was a stick approach, he said, "We're going to fight a trade war with you," as opposed to let's lead them to where they need to be.
Grabow: Exactly. That's a great point and in fact of China has indicated interest in joining the CPTPP, because they are very cognizant of the benefits to be had from being part of this club from being a member. And if they are to join, they will have to make some significant changes and some reforms in a pro market, pro-free trade direction, which would be great. I'm skeptical they'll actually do it, but if they step up to the plate that would be wonderful to incentivize them, it would be a real feather in the cap for CPTPP, if they're able to get China to move towards a more market friendly direction. And the irony of course will be if they do so the United States is still on the sideline, so this is an absolute failure on our part.
Beckworth: Okay. Let's move on to the *Cato Trade Team 2022 Policy Wish List,* there's an article, we’ll provided a link to that, and I'm going to fly through the wish list because I want to get to your part of it. So your colleagues among other things they want to have limited executive branch power and trade policy. So they, I guess, would seek to revise Section 232 and 301, so you couldn't invoke national security reasons as easily, they also push for more multilateral trade, rethink by America. And then finally this gets to your area, discard maritime protection, so this is where the Jones Act comes in. So let's segue into that, I think that's an important part of your work and something that we haven't really talked about on the show. So I want to spend the rest of the show talking about this and at the end we'll touch briefly on the sugar industry, but walk us through what is the Jones Act?
The Jones Act: Its Impact and Consequences
Grabow: The Jones Act is Section 27 of the Merchant Marine Act of 1920, which says that if you want to transport goods by water between two points in the United States, your vessel has to meet four conditions. That's that the vessel has to be US flag and registered, it has to be at least 75% US crewed, at least 75% US owned, and it has to be built in the United States, which is a very unusual requirement. We don't require that for any other form of transportation, but when it comes to things that float it has be made here in the US.
Beckworth: So who wants this, who's supporting it? Who are the advocates for the Jones Act?
Grabow: The Jones Act advocates are, well, unsurprisingly, the ship builders, the Shipbuilding Council of America, this a law that says you have to buy what they make, who wouldn't be for that? Also so it's the ship builders, it's the ship operators, so the carriers, the people that transport goods between the US mainland and Hawaii, for example, or Puerto Rico. It's the unions that crew these ships, the Marine Engineers Beneficial Association, the Seafarers International Union. So these three elements, they form the basis of support for the Jones Act.
Beckworth: And I should mention a number of articles you've written on the Jones Act, so there's a 2018 article of yours, a fairly long one titled, *The Jones Act: A Burden America Can No Longer Bear.* You have a 2019 piece, *Rust Buckets: How the Jones Act Undermines Shipbuilding and National Security,* and then we'll come to another article in a minute, *The Progressive Case for the Jones Act Reform.* But walk us through the consequences, what has happened because of the Jones Act, has it lived up to its billing for national security purposes to make us a better place, a stronger domestic shipping industry, is that the outcome we've received or do we have something else?
Grabow: Well, as we discussed earlier President Biden's tweet about how we should make everything in the United States and the Jones Act is the embodiment of this, right? It's American flagged, American crewed, American owned, American built ships, and who could be against such a thing? Well, the problem with this is that American ships are much more costly to operate than foreign ships. They're about three times more expensive than foreign ships due to a number of factors, not just US taxes and regulations, that's part of it, US crewing costs, Americans sailors get paid a lot more than their foreign counterparts. And also again, these ships have to be US built. Well, Americans are not very good at building ships. A US built ship typically costs anywhere from four to five times more than one built in another country. So a tanker ship, for example, a smaller one costs say 30 million, 35 million dollars overseas, that's a minimum of 150 million dollars here in the United States, a container ship that's 50 million dollars abroad is more like a 250 million dollar ship here.
Grabow: So if you have ships that are very expensive to crew and operate and very expensive to build, well, the unsurprising result is very expensive shipping, uncompetitive shipping. So much so that US ships are basically only used for one of two purposes, transporting goods to the non-contiguous parts of the United States, Alaska, Hawaii, Guam, Puerto Rico, where you have no other transport option, you can't put it on a truck, you can't put it on it on a rail. Or their tanker ships that transport oil and refined products to parts of the United States that either don't have pipelines or don't have enough pipelines. So for example, transporting gasoline from the Gulf Coast to Florida, Florida doesn't have pipelines. Or transporting crude oil from Alaska down to refineries on the West Coast, there is no pipeline there, those kinds of movements. When people have an alternative, they generally don't choose Jones Act ships, which is interesting because shipping in much of the world, we talk about globalization.
Grabow: Globalization has been enabled by cheap efficient shipping and has brought all kinds of interesting supply chains together. It's an efficient way of moving goods, generally speaking. But here in the United States we've made it so absurdly expensive that it doesn't take place. This has all kinds of distortions in our trade patterns. There's been a lot talk lately, of course, about Russia and Ukraine, a lot of people have woken up to the fact the United States imports non-trivial amounts of Russian crude oil. One reason for that, not the only reason, but one reason for that is you have refineries on the East and West Coast, for example, that they've found it's just cheaper to import all the way from Russia than from Texas. Because once you factor the cost of shipping it doesn't make sense to buy American. Puerto Rico, same thing, buy their gas from as far away as the Baltic countries or Togo, places like this instead of the Gulf Coast, which is much closer in large part because of the Jones Act.
Globalization has been enabled by cheap efficient shipping and has brought all kinds of interesting supply chains together. It's an efficient way of moving goods, generally speaking. But here in the United States we've made it so absurdly expensive that it doesn't take place. This has all kinds of distortions in our trade patterns.
Grabow: And then we have these bizarre situations where it's actually not just more expensive to buy American products, but it's actually impossible. Puerto Rico uses natural gas for something like one third of its power generation and it all comes from abroad. Why? Well, the United States, we're the world's leading producer of natural gas. I believe that we're the world's third largest exporter of it and they can't buy it because there are no ships to transport it. There are zero ships compliant with the Jones Act capable of transporting natural gas, so they have to buy it from foreign countries, so all kinds of absurd outcomes because of this law.
Beckworth: That's amazing. Our own country, a part of it cannot get a big source of its energy because of the Jones Act. So stepping back, the big point is this law hasn't lived up to its billing. The billing is it would provide more ships, more sailors, more potential vessels that could be turned into something military in case of a war, that hasn't happened, we've actually seen a decrease in those numbers is that right?
Grabow: That's absolutely right. So the logic of the Jones Act is that by restricting it to US flag vessels, that means we have lots of ships and by restricting it to American crew members, well, it means you have Americans cruise ships in time of a war. And by requiring that these ships are US built, it means that we have a vibrant domestic shipbuilding capability in times of war that can build and repair new ships, that's the theory. Well, the reality is that none of that has really come to pass. The Jones Act fleet over time has gotten smaller and smaller. It turns out that forcing people to pay five times more the global price for a ship is not a great way of encouraging people to use ships, it's not great for promoting your domestic fleet.
Grabow: So there's not a lot of demand for shipping, that means a lot of ships don't get built. Since year 2000 based on my calculations, I think we've had an average about three ships built per year, commercial ocean going ships. To put that in context, a single ship yard in South Korea can build 60 ships in a year, whereas all US shipyards combined, we're talking about… actually last year, there were zero ships built. And the ironic thing here perhaps is that the few ships that are built are highly dependent on foreigners. So now the logic of the Jones Act is, "Well, if a war comes around at least we're not dependent on foreigners." Oh yes, we are. These ships are designed by foreigners, they use foreign components like the engine, the propeller are very key elements of it.
Grabow: Because to be considered US built, it just means that the water type envelope of the ship, basically the hull and the super structure have to be American made and assembled. But all the components that go into that ship, that actually make it work, they're often brought in here from South Korea, even China and elsewhere, so it's not accomplished anything. We have a small fleet. The number of Jones Act ships is 94 right now, to put that in context there's something… there are around 50,000 ships in the world, there are just 94 that comply with the Jones Act, we don't build very many. The ones that we do build are highly dependent on foreigners and to the extent we have ship building in this country, it's overwhelmingly driven by the military. Ships built and repaired for the US government, for the Navy, for the Coast Guard, for the NOAA, these account for something like 80% of industry revenue is from government contracts, this not the commercial sector driving those.
The Jones Act fleet over time has gotten smaller and smaller. It turns out that forcing people to pay five times more the global price for a ship is not a great way of encouraging people to use ships, it's not great for promoting your domestic fleet.
Beckworth: You have some nice time series charts in your papers, that show this downward March in the number of ships that are around because of the Jones Act. And that number you gave earlier, three produced on average in the US versus 60 out of say, South Korea, smaller country-
Grabow: For just a single yard in South Korea's that's not even all of the South Korean yards, that’s just for just a single ship yard.
Beckworth: So the counterpoint would be, "Well, Collin needs to do the counterfactual, what if we didn't have the Jones Act maybe we would have even fewer ships." But that's hard to beat… three, it seems like we're pretty low already and it seems to me the only direction to go would be up, not fewer ships being made.
Grabow: Yeah. So the question is what would US look like without the Jones Act? And if you listen to Jones advocates they say, "Well, US shipbuilding goes to zero. We build nothing." My response to that is a couple points. Number one, as I mentioned earlier, 80% of US shipbuilding is driven by government contracts, they're not subject to the Jones Act, it has nothing to do with the Jones Act. Number two, as you mentioned, it's hard to do much worse. And then also I just think Americans with these policies… “Made in America,” you have to buy the American product… implicit in those policies is the idea that Americans absent those policies can't compete. Americans aren't good enough, Americans can't do it, they need to be coddled, they need a helping hand.
Grabow: I reject that, I think that Americans are incredibly innovative hardworking people. And I think that when forced to compete Americans will rise to the occasion. Now I do think that US shipbuilding, maybe it'll look different than it does today, I don't think that we'll build large ocean going ships. But if you look over to Europe, for example, what they do is these are not low wage countries. These are in many ways analogous to our own country and our economy, they find niches within the shipbuilding market, they specialize in certain areas. Something like 90% percent or 95% of all cruise ships are built in Europe. Icebreakers, I think something like 70% of them are built in Finland, you find dredging vessels, highly specialized, high value add ships are built there… also, they do a lot of outsourcing.
Grabow: For example, in Norway, what they will do is they will have the hulls of the ship built in a cheaper yard say in Croatia or Poland or even Vietnam, and they'll be brought up to Norway and Norway, the Norwegians will do what's called outfitting. They'll put all the components in it and a lot of the high value add work, and that's how they stay competitive in the ship building game. If you tried that in the United States and have the hull built in Mexico and then transport it up to the Gulf Coast to do the outfitting… You wouldn't be able to use that ship in domestic trade, it would be illegal to use that ship to transport goods between the US ports because of the Jones Act, so it's a real disincentive to those sorts of models. And the last thing I'll just say here is the Jones Act means you don't have to compete internationally. And I just think that fundamentally, industries that don't have to compete won't be competitive. It's pretty much baked in the cake, Americans will not be competitive so long as they don't have to compete.
Beckworth: Your article that's titled, *Rust Buckets: How the Jones Act Undermines US Shipbuilding and National Security* was a great read because you actually walked through several examples. You walked through the Vietnam War, the Iraqi War in 1990 and put the Jones Act to the test. Did the Jones Act deliver? Let's start with 1990, the Iraq War, walk us through that case study.
The Jones Act means you don't have to compete internationally. And I just think that fundamentally, industries that don't have to compete won't be competitive. It's pretty much baked in the cake, Americans will not be competitive so long as they don't have to compete.
The Iraq War Case Study
Grabow: So 1990, Iraq invades Kuwait, and there are concerns among Americans that that Saddam Hussein is going to continue on and invade the oil fields of Saudi Arabia, that's not something we want to have happen. So there's a rush to get as many troops and equipment and supplies to Saudi Arabia as quickly as possible to prevent that possibility of Iraqi invasion. Well, thank goodness we have the Jones Act, plenty of ships to rely upon, plenty of Mariners. No we didn't. The reality is that 25% of the shipping used to transport supplies and equipment from the United States to Saudi Arabia was foreign flagged commercial ships. Among the American ships a lot of these were what they call grey hulled government owned ships, these were not commercial ships. From the Jones Act fleet there was only one ship that was actually used to transport anything from the US to Saudi Arabia.
Grabow: And if we stop and think about there's a good reason for that, because if you pull a ship out of the United States, who's going to take stuff to Puerto Rico, who's going to take stuff to Hawaii, those ships are needed here, they're not easily available. The US was so desperate for shipping that we twice went to the Soviets and asked them to borrow one of their ships to transport our military equipment to Saudi Arabia. We were so desperate for mariners, we had to use a lot of retirees. There were guys who were veterans of the Vietnam War, the Korean War, World War II, at least two of these sailors used to crew US ships for the [inaudible] were in their 80s.
Grabow: The oldest was 92 years old.
Grabow: That's how desperate they were. In fact, there almost weren't enough mariners. And then the Great Lakes froze over in January of 1991, and they were able to use some of those sailors to help crew our ships. And remember this is 30 years ago, since then the US fleet has only gotten smaller, the number of Mariners has only further declined, this isn't working.
Beckworth: You mentioned in that report that the Vietnam war was similar. And you also mentioned there's been a number of reports, a 2017 MARAD report that warned, "In a wartime scenario the US would be at least 1,839 mariners short of the 13,607 needed to perform sustained sea lift operations and crew to the US commercial fleet," and a number of other reports. So basically it has not lived up to its billing as being a provider of national security. And that's pretty shocking that only one ship in 1990 could attribute to the US commercial fleet, the Jones Act.
Beckworth: Colin you also go to another area where the Jones Act has had a perverse outcome and that's mentioned in your article, *The Progressive Case for the Jones Act Reform.* So in that article you mentioned Puerto Rico, now you already mentioned Puerto Rico already, but they're highly dependent upon these us ships to get a large part of their energy there, it means they have a lower standard of living. In fact, it is such a challenge that Representative Alexandria Ocasio-Cortez was championing the ending of the Jones Act, which is pretty surprising since it puts you and her on the same page. But also you speak to climate change and the effect that the Jones Act has on our infrastructure, wear and tear. I got the impression reading this that one reason I see so many semi-trucks on the interstate is because in part the Jones Act, so maybe walk us through that interesting story about infrastructure and the Jones Act.
Infrastructure and the Jones Act
Grabow: That's right. So the Jones Act is obviously… it's a law that has to do with transportation and we've made it very unaffordable or unattractive to send goods along our coasts by water, so people seek alternative forms of transportation, that means if they can't use a ship, they're going to use a truck, they're going to use rail. If they use a truck that means more wear and tear on our highways. A heavy truck puts a lore more wear and tear on our highways than a car, it means more congestion, it means more cars idling, which means more pollution. Also just from a carbon perspective, if you want to move something point A to point B, you can't do much better, I don't think any better, than a ship. Waterborne transport is a very efficient means of moving goods from a CO2 perspective.
Grabow: Trucks put out a lot more carbon, rail puts out somewhat more carbon, it's higher not dramatically higher, but it is higher. So if you want to cut carbon emissions, we should try to be moving more goods by water in this country. And if you just look at US geography, you'd think we'd be able to do that. So many of our major cities are right on our coast Boston, New York, Philadelphia, Miami, Houston, Los Angeles, San Francisco, Seattle, on and on, you'd think there's a lot of potential for this. But ships account for just 2% of freight moved as measured by ton miles, one ton moved one mile.
Grabow: 2%, then add barges and you’re at 6%. And again, if you just look at US geography, we should be predisposed to using a lot of waterborne transport. But we've, again, just made it so unattractive and so expensive that we use these other forms of transportation with consequences for the environment and with consequences for your commute. I'm not going to pretend that if we got rid of the Jones Act, that I95 would suddenly empty out and be smooth sailing, but I have to think there would be fewer trucks. We can have a debate over how many fewer, but I do think it would be a definite improvement.
A heavy truck puts a lore more wear and tear on our highways than a car, it means more congestion, it means more cars idling, which means more pollution. Also just from a carbon perspective, if you want to move something point A to point B, you can't do much better, I don't think any better, than a ship...So if you want to cut carbon emissions, we should try to be moving more goods by water in this country.
Beckworth: That 2% is a pretty shocking number. 2% of the freight is with ships, so compare that to other countries, I'm assuming they do quite a bit more with shipping than we do.
Grabow: So if you look over Europe, last I checked you see different figures out there, but I saw that coastal shipping is something that was like 35% somewhere, roughly a third, something like that, there's different ways of measuring these things. Of course, geography figures into this as well, Europe is very well disposed towards maritime transport. So I'm not sure if in the United States, we would go from 2% to 30 something percent, maybe not even 20%, but I do think it'd be more than 2%.
Beckworth: Right. Right. But it's great to look overseas at least to give you an idea that the number probably is larger. Again, thinking through counterfactuals, well, let's look around the rest of the world and see what they're doing, and at least it seems to suggest we would do more shipping if the Jones Act was removed. So we've discussed the Jones Act, we see it's problematic, how would you change the Jones Act? What's your ideal solution? And then what would be a compromise solution?
Possible Solutions to the Jones Act Problem
Grabow: So in Libertopia, people from Cato Institute run everything, I would abolish the Jones Act, I would just scrap it, but there are legitimate national security needs. The military does need to be able to transport goods around the world to where it's needed. And to the extent that we need more ships, I would do a direct subsidy program and say, okay, go to the military, go to the Pentagon and say, "How many ships do you need? 'We need 50 ships.' Okay. Subsidize those ships to make sure that they're there. Pay them a stipend on an annual basis in exchange for their availability in time of war." This is not high in the sky stuff, in fact, we already do this. There's something called the Maritime Security Program that gives 60 ships $5.2 million per year.
Grabow: These ships are all foreign built ships that engage in international trade because although they’re American flagged and American crewed, they were built in the wrong country, so it'd be illegal for these American ships to transport goods within the United States, but expand that program to however many we need and if you add more ships that means more mariners too. On the ship building front, again, we're building three ships per year, they're all highly dependent on foreigners. The idea that the Jones Act is what maintains our shipbuilding capability is something I really struggle with. In fact, if we got rid of Jones Act, I think there would be more ships in our waters, that means more opportunities to repair ships, that means more business for shipyards. But short of that, I don't see that happening anytime soon, but I do think there are some compromises that can be made.
Grabow: One starting point would be, say, instituting a waiver system, where if someone wants to ship something from point A to point B and there's no American ship, you can use a foreign ship. We discussed LNG earlier, so institute a waiver system that would say, "Hey, I'm willing to use an American ship, but none exist or none are available," then you can use a foreign ship. Right now the only waivers we have are for reasons of national security, national defense. There are none given for purely commercial considerations, it's very difficult to get one right now. I think eliminating the US built requirement and just bringing our shipping laws in line with our transportation laws more broadly, apply to shipping the same laws that we have for airplanes. You can use an Airbus airplane and I think that our domestic airline industry is much better for that.
I would abolish the Jones Act, I would just scrap it, but there are legitimate national security needs. The military does need to be able to transport goods around the world to where it's needed. And to the extent that we need more ships, I would do a direct subsidy program...The idea that the Jones Act is what maintains our shipbuilding capability is something I really struggle with. In fact, if we got rid of Jones Act, I think there would be more ships in our waters, that means more opportunities to repair ships, that means more business for shipyards.
Grabow: Imagine if they all had to pay four or five times the world price for their airplanes, what that would do to our tourism industry in this country, so many consequences of that. I think that's a very common sense way, or even just do it for large ships and you can leave it in place for tugboats and smaller stuff, but we're obviously not very good at building ships in this country, so that's another starting point. I also think an exemption say for Puerto Rico or the other non-contiguous parts of the country that have no choice but to use ships would be in order. Puerto Rico particularly so because A it's a territory that does not have a vote in Congress, but is nonetheless subjected to the Jones Act. And B this is a territory, a commonwealth with 43% poverty rate and we force them to use the world's most expensive shipping, that's not right, that's not fair. Even if you buy into this argument that Jones Act is critical for national security… Well, we shouldn't take the national security bill and stick Puerto Rico with it, it should be shared by all Americans, much more equitably, that's just not fair. So these are some reforms I would hope that there could be some agreement on.
Beckworth: Are there any developments or progress on these reforms or do you see any coming in the future?
Grabow: So the encouraging news is that there have been a number of people that have stepped up in Congress and have introduced bills to pare back the Jones Act, reform it in various ways. Senator Mike Lee has introduced bill to just flat out repeal it, he has a co-sponsor in the house, a house version was introduced by Representative Tom McClintock. Representative Ed Case of Hawaii, has introduced a bill that would exempt Hawaii from the Jones Act. Now Hawaii is a very interesting example because I think a lot of people when they hear about the Jones Act, they suspect that there's widespread opposition in Hawaii and Alaska. And basically what happens is that members of Congress from these parts of the country, from these states, express their opposition to the Jones Act and the other representatives of the other 48 states say, "We don't care, that's your problem."
Grabow: In fact, you find some of the strongest support… Representative Ed Case is an outlier and why is this, it's because some of the places that disproportionately bear the Jones Act costs, are also disproportionately home to maritime interest groups that profit from the law and donate accordingly and make sure… are very much invested in it remaining in place. Anyway, Representative Case has introduced that bill. Representative Scott Perry of Pennsylvania, just a couple weeks ago introduced a bill that would exempt all energy shipments from the Jones Act. He was viewing this issue through the prism of US energy imports from Russia and asked, "So why are we using Russian energy when we have plenty of our own." And as I mentioned earlier, part of that is because we make it so expensive to buy it because of the Jones Act. So there's definitely… there are people that appreciate the role and have stepped up, the discouraging part is that there haven't been much in the way of co-sponsors and getting traction for these bills. So there are voices, there are people that are waking up, but the folks that support it, they're up on the hill every day, they are making the case for these laws, and unfortunately they seem to have the ear of most members of Congress.
Beckworth: Well, Collin this has been a fascinating conversation on the Jones Act, and we'll provide links to all these articles we've been talking about, so listeners check them out. We did not have time to get into your sugar industry work, but we will post your article titled *Candy-Coated Cartel: Time to Kill the US Sugar Program,* another fascinating read. But Colin, thank you so much for coming on the show today.
Grabow: David, thank you so much, it's been an absolute pleasure.
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