The Jones Act Doesn't Make Sense, It Takes Cents

by Antonio Flores about a year ago in trade

How an Ancient Shipping Law Makes You Pay More

The Jones Act Doesn't Make Sense, It Takes Cents

It was George W. Bush who once said, "Free market capitalism is far more than economic theory. It is the engine of social mobility, the highway to the American Dream."

Our nation was built on these principles and we've seen great success by allowing the free market to take its course. Nevertheless, there is a sector within the American market that has not seen the kind of competition that many other sectors have and thus is not thriving—a detriment to the American consumer. I'm referring to the US domestic shipbuilding industry. See, unlike the US automotive sector, which actively competes with other foreign sellers (Namely Honda, Hyundai, BMW), the US shipbuilding industry is "protected" from this type of competition by a Law known commonly as the Jones Act.

The Jones Act (enacted as part of the Merchant Marine Act of 1920) is a piece of federal legislation which imposes four primary requirements on vessels carrying goods between United States ports:

  1. Owned by U.S. (companies/citizens)
  2. Crewed by U.S. (citizens).
  3. Registered in the U.S.
  4. Built (or rebuilt) in the United States

(This clause is referred to as the “US Domestic Build Requirement.”)

Something to keep in mind, is that the Jones Act requirements only apply to domestic, or coastal shipping (Starting at a US port and ending at a US port), which doesn't include shipping from an American port to a foreign port.

The first three requirements make some practical sense: mandating US sailors on shipping vessels, instead of being able to buy cheap and often exploited foreign labor; mandated US registration, meaning that those companies were subject to US law instead of often lax foreign regulations, etc.

However, the domestic build requirement stands out as different altogether, because it prohibits the usage of a certain type of vehicle. Naturally this does benefit the maritime industry in a way, because it limits the ship buyer's choice to either American-made or nothing, if he wants to ship goods domestically. And while on first glance this doesn't seem harmful in the slightest, we must remember what happens whenever competition is decreased. Imagine if the NBA split off into two groups: the top 29 teams and the lowest 3 teams, who just competed against themselves. They wouldn't have to put in half as much effort than if they competed against the best in the game. Unfortunately, this scenario isn't too far off from what we see in today's shipbuilding industry.

The simple idea of limiting a ship buyer's options results in two major issues.

The first problem that arises is simply that ship buyer's are forced to buy poor quality. US shipping companies are limited to buying poor quality vessels because of the US build requirement--this is apparent when the evidence is assessed.

Thomas Grennes, a professor of economics emeritus at North Carolina State University, observed the following. "Signee nations of the Paris Memorandum of Understanding on Port State Control, an international agreement on ship inspections, collect data on inspections of ships in ports and frequency of detentions of unsafe ships. Their latest data for July 2017 indicate that U.S. ships ranked 36th out of 42 relatively safe countries. In safety, they ranked below all the Western European countries and Japan and China."

There's one thing in being second place or third place, but ranked 36th out of 42 in safety?!? That's outrageous, especially considering that we rank below both Japan and China. Unfortunately the bad news doesn't end there. On top of being poorer quality, US ships are also old.

World Maritime News reported on March 22, 2016: "The US-built fleet is considerably older than the global, non-US built fleet... The current US-built fleet has an average age of 33-years-old versus 13-years-old for the global fleet."

On average, our ships are 20 years older than comparable foreign ships. But are older ships really that big of a deal? Once again Thomas Greenes offers an answer:

"A recent study by a group at Southampton University analyzed shipping data for the last 15 years. It concluded that older ships were associated with more frequent accidents."

To sum, US ships aren't as safe as foreign vessels, they're older and thus more likely to crash, and thanks to the Build Requirement, companies that want to ship their goods domestically must use one of these ships.

As insane as this might sound, there's another large issue caused by the Build Requirement, one that hits much closer to home. This issue deals with the high cost of these unsatisfactory vessels. US Companies are forced to pay more for domestic shipping because of the build requirement as explained by the executive editor of Bloomberg.

"The U.S. shipbuilding industry has lost its competitive edge... A coastal container ship can cost six to eight times more to build in the U.S. than in a foreign shipyard."

Clearly US ships aren't on the cheaper end of the spectrum, but the high costs of these is accentuated when we take into the older age of these ships. Just like an aging car, the older Jones Act Ships get, the more their maintenance costs; just another detriment to US shipping companies. The Government Accountability Office explains:

"Fuel is one of the largest vessel operating cost for the Jones Act carriers... and fuel costs have increased substantially over the last ten years... older vessels burn fuel faster and less efficiently compared to newer vessels, and the age of some of the Jones Act carriers’ vessels has contributed to increasing fuel costs. Furthermore, older vessels require more maintenance and repair expenses than newer vessels. As mentioned, on average, foreign-flag vessels are newer, and as such will generally benefit from lower overall fuel and ongoing maintenance costs."

Put simply, US ships are the worst trade deal maybe ever signed anywhere. Okay maybe not the worst, but probably pretty close. This situation wouldn't be so detrimental, if not for the US Build Requirement. This ancient shipping regulation burdens US companies by robbing them of the freedom to choose ships that are better built to ship their goods domestically, which equates to higher costs for poor quality—the definition of ineffective economics.

The obvious question now seems to be, why was this bill enacted? Why is it still around? Well, the answer has to do with national security.

The reason we enacted the US domestic build requirement after WWI was to protect US shipbuilders from foreign competition. Lawmakers hoped that this would preserve a strong fleet of commercial ships that could be used by the Navy in times of war. Obviously, this clause hasn’t supported US shipbuilders like it was supposed to. This becomes clear when we take a look at the stats. Again from David Shipley at Bloomberg:

"In 1960, there were nearly 3,000 U.S.-flag oceangoing vessels... By 2016, there were 169 such ships—less than one percent of the global total."

Because of the build requirement, US shipbuilders haven’t had to compete against foreign companies. Since our ships aren’t competitive with foreign ships, naturally, we lose business, thus failing to expand like the rest of the world has. Which means, in reality, the Jones act has damaged US shipbuilders more than it has helped them. The few ships that remain in our fleet are older and more costly—not the high quality vessels our navy would want to call upon in times of emergency. Unfortunately, the goal of the build requirement has failed.

After looking at economic scenarios like these, our minds often race to one main question: How am I affected? How do I fit into this story? If this describes you right now, fear not, for both you and I play a part in this story. We are the consumer.

There are actually two ways that the everyday consumer is affected by this troublesome law.

The first is through higher fuel prices. The Hawaii Free Press noted that, "Most of the motor and heating fuel used on our coasts is carried at some stage to refineries and/or distribution points by ships built in the United States, as required by the Jones Act." Considering that US ships are more costly than foreign, there is an obvious higher cost for transporting anything, in this case oil. But just how much is this cost?

The Hawaii Free Press continues:

"The capital cost of U.S. built tankers... moving crude oil or refined fuel along our coasts is between four and five times higher than that of similar vessels built almost anywhere else. The difference in the building costs represents about 3.5-4 U.S. cents... per gallon of fuel transported. Using 2009 Census data,... there are 133 million motor vehicles registered on the two coasts.... If each vehicle travels 12,000 miles per year and averages one gallon for every 15 miles traveled it consumes 800 gallons per year making the total for the 133 million vehicles 106.3 Billion gallons/year. At four cents per gallon that comes to about $4.25 billion/year."

You read that right. Using more expensive ships to transport oil raising the cost of gasoline at the pump. While it may seem like just a few cents, taken as a whole this is a huge cost. And this number (4.25 billion), is a clear underestimation of the economic burden of this requirement. This calculation only includes the east coast and west coast (excluding the many island territories and the inland rivers and lakes), it uses data stating that US ships are 4-5 times more expensive (the most recent data says that number is closer to 6-8 times more expensive), and most importantly, this equation only mentions oil! Think about all the other products we transport! You'd be correct in thinking that the cost of these items would also be raised if transported by US ships domestically. A seemingly distant maritime issue has found its way into our everyday lives.

As aggravating as this is, there's another way this law negatively affects the average joe: Increased traffic.

Keeping in mind that the US build requirement inevitably increases the cost of shipping cargo, it should be no surprise that the companies that can, will often try to avoid this situation by shifting their goods onto trucks. While this does bring the cost of products down, it also creates problem for the rest of the driving public.

Erik Olsen, West Coast Video Correspondent for Quartz Media, explains:

"But the Jones Act has had an impact... Those high costs not only make the goods Americans buy more expensive, they’ve pushed ever more freight onto trucks, significantly increasing highways congestion, intensifying air pollution and further degrading the country’s infrastructure... Trucks account for just 10 percent of vehicle miles traveled on US highways, but they cause over 75 percent of the total maintenance costs, according to the Federal Highway Administration."

Just in case you haven't heard, US roads and highways are in a terrible state already. By disincentivizing shipping, we aren't doing ourselves any favors.

Olsen elaborates:

"American commuters spend an extra 6.9 billion hours and purchase an extra 3.1 billion gallons of fuel every year because of traffic congestion. Along the country’s coastal highways like the I-95, I-5, and I-10, the average commuter spends more than 50 hours a year in traffic."

There are few things as frustrating as being stuck for hours in traffic, but what makes this even more frustrating is that there are ways to decrease this!

"According to the Tufts study, many of the coastal routes hit hardest by traffic congestion could be circumvented by ships. Shipping is vastly more efficient, safer and less polluting than transport by trucks." (Olsen)

Once again a seemingly simple issue is discouraged by none other than the US build requirement which detracts companies from using ships, and punishes the companies that do choose that route. This is the lose-lose situation that we find ourselves in today.

The most surprising fact about this irritating dilemma, is that this law has been in place for just about 100 years. How could something so obviously harmful still be in existence for that long, you ask? One simple answer: Dedicated Lobbyists.

In the first ten months of 2017 alone, "47 different groups have lobbied Congress on the Jones Act... according to Senate lobbying records." (Miami Herald) These activists rally hard against anyone who casts doubt on the Jones Act, filling the pockets of congressmen who voice their jargon. The size and tenacity of these groups led Senator John McCain (a strong opponent of the Jones Act) to state, "I have to tell you... the power of this maritime lobby is as powerful as anybody or any organization I have run up against in my political career." What makes supporters of this act so successful is due to the fact that the "benefits" of this requirement directed to one group, the large ship builders, while the costs are widespread across America. Thus, it is far easier to organize voices in favor of the Jones Act than against it.

That doesn't mean the situation is hopeless. I'm convinced that the more people understand and familiarize themselves with the factors in this situation, the easier it will be to organize a voice against such frustrations. Until that time, however, the free market will continue to be stifled, the high cost of products will continue to rise, and US infrastructure will continue to disappoint. Let's hope that in the next 100 years, our lawmakers will put aside the lobbyists demands and provide the market with the freedom it needs.

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Antonio Flores

Politics and research are two of my many interests, and I look forward to learning more about how our world runs. 

See all posts by Antonio Flores