Why has it lasted so long in spite of the fact that most analytical studies indicate it is not beneficial for the nation as a whole?i Strong political support is a bit of a paradox because the U.S.-flag fleet and the American-shipbuilding industry have shrunk dramatically under the Jones Act’s watch. A simple explanation for the durability of the Act is that benefits are concentrated, but costs are widely diffused. The additional costs have made U.S.-flag ships uncompetitive relative to foreign flag ships on international routes and relative to other transportation modes on domestic routes. The decline on international routes is easy to document. American businesses that export and import have abandoned U.S.-flag ships almost completely. U.S.-flag ships recently carried less than 1 percent of exports and imports.
On domestic routes, where the Jones Act is applicable, the decline has been less obvious and less extreme, but the share of domestic trade using waterborne transport has declined for many decades relative to land-based transportation modes. Cargo that could be carried by U.S.-flag ships is instead being carried by trucks, railroads, pipelines, and airplanes. This paper will concentrate on the diversion of transportation from water to land.
Cabotage in other Countries and Transportation Modes
Do other countries have similar protectionist laws, and has there been a similar substitution of land for water transport abroad? Many countries have laws that protect domestic trade, but the U.S. law is one of the world’s most extreme.ii Most other countries do not require that ships be domestically built to engage in domestic trade.iii The decline in the relative importance of domestic waterborne trade has not occurred in most other countries.
In the United States, are the other transportation modes subject to the same kinds of rules as shipping? No, ships must be domestically-built, but trucks, planes, railroad equipment, and pipeline equipment can be imported. iv U.S. airlines can and do buy aircraft from Airbus of Europe, Embraer of Brazil, and Bombardier of Canada.v American trucking companies buy trucks from Sweden, Germany, Japan, etc.
Goals of the Jones Act
Has the Jones Act achieved its goals of strengthening U.S. shipbuilding and the merchant marine? Several pieces of evidence indicate no. Shipbuilding is shrinking and the U.S.-flag fleet is also shrinking. U.S.-flag ships carry less than 1 percent of U.S. exports and imports. Also, for domestic trade there has been a major substitution of land-based transportation for ships. Essentially, U.S.-flag ships operate only where they face no serious competition from foreign flag ships or other modes of domestic competition. Curiously, many supporters of the Jones Act acknowledge the decline of American shipbuilding and the American merchant marine while the Act has been in place, but they refuse to admit that it was a major cause of the contraction.vi When Senator Wesley Jones of Washington proposed the 1920 law that bears his name, he justified it in terms of national security, but he also had a narrower goal in mind. He wanted to protect the businesses of his Washington constituents from foreign competition. The narrow goal has been accomplished, but the country has suffered. For every dollar gained by protected businesses in Washington and other states, more than a dollar was lost by consumers and other businesses.
The American shipbuilding industry is small and getting smaller. Over 90 percent of commercial ships built in the world recently have been built in Japan, South Korea, or China. Hardly anyone buys American-built ships unless they are required to buy them. They cost much more than foreign-built ships and more than land-based transportation with the same capacity. Few American builders of ocean-going commercial ships remain. One of the three survivors, Philly Shipyard, had some orders cancelled in 2018. Workers have been laid off, and there is doubt as to whether the shipyard will survive. World shipyards are struggling to survive a surplus of ships. The major Asian shipbuilders produce a large volume of vessels that allow them to benefit from economies of scale. U.S. production is too small to benefit from economies of scale, and few American workers are trained to build ships.
The U.S. merchant marine has shrunk to the point where it is a tiny share of the world fleet. As Rear Admiral Mark H. Buzby, Administrator of the Maritime Administration (MARAD) stated, “It has been in steady decline since World War II as a result of decreasing demand and rising costs compared to international fleets.”vii The fleet is so small that in an emergency it is difficult to get access to a ship on short notice. The high cost of acquiring a new American-built ship results in the U.S. fleet being older and less safe than the foreign-flag fleet.viii Buzby warns about the shortage of trained American mariners, but the small and shrinking size of the fleet means that the shortage could get worse, unless more foreign mariners are employed. Current rules require that at least 75 percent of the mariners be Americans, but if that percentage could be lowered, there is a large supply of trained international seamen who could be hired. The potential labor supply includes all the mariners currently employed on foreign-flag ships carrying U.S. exports and imports.
Although the Jones Act was intended to strengthen American shipbuilding and the American merchant marine, both have suffered major declines during the century the Act has been in effect. In addition, the inflated costs of building and operating American-flag ships have caused domestic trade to be redirected from the water to the land. This detour of trade has caused the United States to lose the advantages of water as a marine highway.
How Does the Jones Act Raise Costs?
Ships are much more expensive to build in America than in major Asian shipyards. U.S.-built ships recently cost six to eight times as much as foreign-built ships.ix As a result, owners replace them less frequently, the U.S.-flag fleet is older and less efficient, and the ships are less safe to operate.x American ships do use some foreign components, but MARAD requires that at least 50 percent of the tonnage of the components must be transported on more expensive U.S.-flagged ships,xi which erases some of the cost advantages of importing components.
U.S.-flag ships are required to have larger crews. Jones Act-compliant ships must use crew sizes higher than their foreign flag rivals, and this adds to labor costs. The crew size requirements are based on old technology. Automation reduces the necessary crew size. More automated processes could be carried out while some mariners remain on board, and completely autonomous ships would be the extreme case of zero crew on board.xii The Air Force is already using autonomous planes (e.g. drones), and naval officials are planning to use autonomous ships.xiii Crew sizes on foreign flag ships represent a kind of free market solution. Shippers choose ships and crews that deliver their cargo safely, on time, with minimum damage, at a competitive price. Crew sizes vary by country of registry, but the largest registries have safer records than the United States.xiv
However, carriers of certain products have found a way to circumvent certain rules that apply to ocean-going ships on some routes. They have switched to articulated barges that allow them to use crew sizes one-third the size of larger ships.xv Barges are used primarily to transport oil on coastal routes, without having to bear the higher costs of acquiring tankers and paying their larger crews. Given the Jones Act requirements, the barges provide some savings. However, they have disadvantages of having to stay near the coast, they cannot be used in bad weather, and they sacrifice economies of scale that tankers provide. The Jones Act has diverted some transportation from water to land, and from large ships to barges.
Requiring American crews raises costs, because wages of American mariners are higher. The wages of these mariners are inflated by the subsidies to cargo preference ships that Jones Act ships must compete with for crew members. Higher labor costs make U.S.-flag ships less competitive.
Jones Act supporters and American labor unions oppose using more foreign mariners, and they often mention potential security problems. This concern about citizenship appears to ignore the fact that American imports and exports are carried almost entirely by foreign-flag ships that are manned by foreign crews that have operated out of American ports for many years. If there is a shortage of Americans with the requisite skills, why not increase the allowable percentage of foreigners to 100 percent? The relevant foreign mariners would probably have the same skills and loyalty as the foreign mariners who serve on nearly all the ships that carry U.S. exports and imports every day. These mariners must have work visas, and they are vetted by the relevant U.S. security authorities.
Congestion on Land
The U.S. economy recovered from the Great Recession with an extraordinarily long expansion. As of October 2018, it has been a nine-year expansion, and the unemployment rate fell to 3.7 percent, the lowest rate in 50 years. Prolonged growth has put strains on all domestic transport modes. There have been widespread reports of shortages of trucks, truck drivers, railroad cars, and pipeline capacity. If pipelines do not exist in a region or are operating at capacity, they can become a barrier to trade that results in surpluses in some regions and shortages in others that result in large regional price differences. In August of this year, the absence of pipeline capacity resulted in a price discount of $23 per barrel in the Permian Basin of Texas relative to the price of crude in Houston.xvi Transportation congestion on land is a current problem, but the diversion of cargo from waterborne transportation to land transportation has been occurring for many decades, while the Jones Act has been in effect. Since 1960, the volume of waterborne transportation in the US has decreased by 50 percent, but the volume of rail transportation has increased by 50 percent, and the volume of cargo carried by trucks and other forms of land-based transportation has more than doubled.xvii Americans who regularly used the Panama Canal to transport goods between the West and East Coast in the past, rarely use the Canal for domestic transport anymore.xviii This substitution of transportation modes is not part of a broader pattern that affects other countries. Waterborne transportation between the United States and Canada and Mexico has not decreased. Trade with those neighbors is not covered by the Jones Act, and foreign-flag ships are used. Many of the land routes used by trucks, railroads, and pipelines run parallel to the alternative coastal water routes, but American businesses have systematically chosen to transport more of their cargo on land. Higher costs induced by the Jones Act are a major factor.
By inflating the costs of using ships, the Jones Act sacrifices some inherent advantages of water transportation. Ships can carry more cargo per trip, they do not bear the costs of maintaining rights-of-way, and they have fewer limitations on the dimensions and weight of cargo.xix Revitalizing domestic shipping would substantially increase the capacity of the nation’s freight network. It would effectively increase the nation’s deteriorating infrastructure at a negligible cost.
The long-term trend toward moving cargo traffic from water to land has increased congestion on highways, railroads, pipelines and ports. One writer has accused the Jones Act of causing traffic jams on land.xx The problem of underutilizing water transport was recognized by the Congress as early as 2007 in the Marine Highway Initiative.xxi However, the high cost of loading and unloading cargoes at ports remains an obstacle to the goal of moving traffic from trucks to the water. Diverting cargo from water to land sacrifices some important advantages of water transport, such as economies of scale.
Port issues are not addressed directly by the Jones Act. However, the Foreign Dredge Act of 1906 is a similarly protectionist law that reinforces the Jones Act by influencing the choice between water and land transport.xxii Port inefficiencies or blockages make it more difficult and costly to connect water and land transportation. If there are port bottlenecks, shippers sending to domestic destinations will use land transport exclusively. U.S. ports are characterized by lower productivity relative to foreign ports.xxiii There has been resistance to automation in U.S. ports, and in some cases the hours per day when cargo can be transferred from ports to trucks is much less than in foreign ports. The cost of transferring cargo at ports between land and water is the largest component of using water transportation. Dredging ports is slower and more expensive in the United States, as a result of the Dredging Act, that prevents foreign dredging companies from performing services at U.S. ports. Unless port costs can be reduced, the goal of expanding the use of marine highways will be difficult to achieve.
Conclusion
An unintended consequence of U.S. marine policy has been to make U.S.-flag ships uncompetitive with foreign-flag ships in international transportation and uncompetitive with land-based transportation on domestic routes. This inward-looking maritime policy has been described as the “Abandoned Ocean.”xxiv American maritime policy has resisted automation in shipbuilding and in the operation of ships and ports. To become more competitive internationally, U.S.- flag ships would have to be allowed to follow the standards of foreign-flag ships. All four requirements (build, own, crew, flag) make U.S.-flag ships less competitive. In domestic trade, efficient regulation would apply the same standards across all transportation modes. Applying the U.S.-build requirement to ships, but not to other modes, is a serious penalty that reduces the share of shipping in the transportation mix. A moderate reform would relax the build-American requirement, at least for the non-contiguous regions of Hawaii, Alaska, and Puerto Rico. Ending all requirements of the Jones Act for ships on all routes would provide greater efficiency gains, but it would face powerful resistance. The greatest gains would come from relaxing restrictions on all transport modes and allowing free domestic and international trade in the services of ships, trucks, railroads, planes, pipelines, and dredging.
Notes:
i Thomas Grennes, “An Economic Analysis of the Jones Act,” Mercatus Center Research Paper, March 17, 2017.
ii Colin Grabow, Inu Manak, and Daniel Ikenson, “The Jones Act: A Burden America Can No Longer Bear,” Cato Institute Policy Analysis no. 845, June 28, 2018; Colin Grabow, “Another Jones Act Absurdity,” Cato at Liberty, September 21, 2018, https://www.cato.org/blog/another-jones-act-absurdity; Mike Schuler, “New Report Details Cabotage Laws from Around the World,” gCaptain, September 25, 2018, https://gcaptain.com/new-report-details-cabotage-laws-from-around-the-world/.
iii John Frittelli, “Revitalizing Coastal Shipping for Domestic Commerce,” Congressional Research Service, May 2, 2017, https://fas.org/sgp/crs/misc/R44831.pdf.
iv John Frittelli, “Revitalizing Coastal Shipping for Domestic Commerce.”
v Andrew Tangel and Doug Cameron, “Boeing Boosts Its Financial Outlook,” Wall Street Journal, October 24, 2018, https://www.wsj.com/articles/boeing-climbs-on-jet-demand-1540384084.
vi Mark H. Buzby, “Remarks to Northern Virginia Council of the Navy League,” New York Harbor School Founders luncheon, The lighthouse at Chelsea Piers, October 11, 2018, http://www.marad.dot.gov/search/history+of+the+jones+act/.
vii Ibid.
viii Thomas Grennes, “Does the Jones Act Endanger American Seamen?” Regulation, Fall 2017, p. 2.
ix John Frittelli, “Revitalizing Coastal Shipping for Domestic Commerce.”
x Thomas Grennes, “Does the Jones Act Endanger American Seamen?”
xi John Frittelli, “Revitalizing Coastal Shipping for Domestic Commerce.”
xii Maximo Meija, “Developing a Regulatory Framework for Autonomous Shipping,” Baltic Rim Economies, Issue 3, October 31, 2018.
xiii Mark H. Buzby “Remarks to Northern Virginia Council of the Navy League.”
xiv Thomas Grennes, “Does the Jones Act Endanger American Seamen?”
xv John Frittelli, “Revitalizing Coastal Shipping for Domestic Commerce.”
xvi Tortoise, “Who Wins as Oil Price Differentials Widen in the Permian Basin?,” Yahoo! Finance, June 18, 2018, https://finance.yahoo.com/news/wins-oil-price-differentials-widen-204854624.html.
xvii John Frittelli, “Revitalizing Coastal Shipping for Domestic Commerce.”
xviii Ibid.
xix Ibid.
xx Erik Olsen, “An Arcane American Law Protected by Powerful Interests Is Causing Insane Traffic Jams,” Quartz, August 7, 2017, https://qz.com/1032288/how-a-100-year-old-american-law-helps-make-your-commute-miserable/.
xxi John Frittelli, “Revitalizing Coastal Shipping for Domestic Commerce.”; Scott G. Borgerson and Rockford Weitz, “America’s Deep Blue Highway: How Coastal Shipping Could Reduce Traffic Congestion, Lower Pollution, and Bolster National Security,” Institute for Global Maritime Studies, 2008; John Curtis Perry, Scott Borgerson and Rockford Weitz, “The Deep Blue Highway,” New York Times, January 2, 2007, https://www.nytimes.com/2007/01/02/opinion/02perry.html?mtrref=undefine….
xxii Nancy McLernon, “Protecting U.S. Dredgers Kills Jobs,” Wall Street Journal, April 16, 2018, https://www.wsj.com/articles/protecting-u-s-dredgers-kills-jobs-1523915….
xxiii Thomas Grennes, “Does the Jones Act Endanger American Seamen?”
xxiv Andrew Gibson and Arthur Donovan, The Abandoned Ocean: A History of US Maritime Policy (Columbia, SC: University of South Carolina Press, 2001).
Jeremy Dwyer-Lindgren, “Airbus Says North American Airlines Now Flying 1500 of its Jets,” USA Today, September 22, 2017, https://www.usatoday.com/story/travel/flights/todayinthesky/2017/09/22/airbus-says-north-american-airlines-now-flying‑1–500-its-jets/692453001/.
Bryan, Riley, “Are Jones Act Ships Really Made in the USA? Well Sort of,” The Hill, June 6, 2017.
The opinions expressed here are solely those of the author and do not necessarily reflect the views of the Cato Institute. This essay was prepared as part of a special Cato online forum on The Jones Act: Charting a New Course after a Century of Failure.