Is It Time to Repeal the Jones Act?

In the midst of the COVID-19 pandemic, repealing the Jones Act could save Puerto Rico tens of millions of dollars in its efforts to keep the island’s 3.2 million residents safe. The island’s legislature and the PROMESA fiscal control board recently agreed on a $787 million stimulus package using money from various Puerto Rican government emergency funds. This money, while useful in the short term, is not a long-term solution for dealing with natural disasters. Hurricanes, earthquakes, and pandemics have ravaged the island for too long for the rest of the United States to stand idly by and do nothing to support an American territory with an aging population and failing health care infrastructure.

The Jones Act at 100

The Merchant Marine Act of 1920 (the Jones Act) requires any ship carrying cargo or passengers between U.S. ports to be made in the United States with U.S. materials and staffed with American workers. These requirements disproportionately harm communities that lack other means of transport (roads) to transport basic goods that aren’t produced locally. They must either import goods on more expensive U.S. ships or import foreign goods. But there’s another perverse twist with foreign imports unique to Puerto Rico: Because of Puerto Rico’s proximity to the U.S. mainland, the Jones Act makes it more cost-effective for foreign companies to dock their ships in a mainland U.S. port and then transfer Puerto Rico–bound goods to a U.S. ship for transport to Puerto Rico. (This is because a foreign ship would violate the Jones Act if it stopped in San Juan on its way to another U.S. port.)

See the related CRC video:

A report commissioned by the Puerto Rico Chamber of Commerce found that Jones Act carriers (JACs) charged 151 percent more than the average shipping market. The report explains:

The Jones Act increases prices in Puerto Rico, contributes to a decline in competitiveness and promotes price fixing schemes. These higher prices increase the cost of living in Puerto Rico. In addition, by increasing the cost of doing business in the island, reduce employment.

The Jones Act has stifled economic growth in Puerto Rico for 100 years, and it’s hard to measure the ripple effects on consumers. What can be measured is the ability of Puerto Ricans to pay for goods and services: According to the U.S. Census Bureau, Puerto Ricans have a median annual income (in 2018 dollars) of $20,166 and a poverty rate of 43.1 percent, compared to the U.S. median annual income of $60,293 and poverty rate of 11.8 percent. The numbers reaffirm that the American citizens of Puerto Rico can ill afford any substantial economic disadvantage. The Jones Act unduly burdens poor consumers who have no voting representation in the Congress, which is perpetuating this protectionist policy.

The Claimed Benefits

In response to an amendment to repeal the Jones Act, Tom Allegretti, chairman of the American Maritime Partnership (AMP), argued that the “amendment would gut the nation’s shipbuilding capacity, outsource our U.S. Naval shipbuilding to foreign builders, and cost hundreds of thousands of family-wage jobs across this country.” However, none of his claims survive scrutiny.

The United States is not a major ship-building nation despite having some of the most extreme maritime cabotage laws in the world, the largest economy in the world, and the largest share of international trade. In fact, the American shipbuilding industry is dwindling if not already effectively dead. US ships built between 2014 and 2016 make up just over 1 percent of the gross tonnage built by South Korea or China during the same period.

Hamstrung by high costs and low rewards with no consumer base, domestic shipbuilders “protected” by the Jones Act are noncompetitive abroad. The world does not buy American-made ships built with American steel; there’s simply no reason to pay six to eight times more per ship just so that ship meets an arbitrary input goods requirement.

A Cato Institute report summarizes the Jones Act’s effects:

[O]ver the past three decades U.S. production of cargo and tanker vessels has typically been in the low single digits. The high cost of shipbuilding has contributed to an aging fleet, as there is less incentive to invest in newer ships. Typically, a ship has a total life expectancy of about 20 years, but—excluding tankers—the Jones Act fleet averages 30 years of age. Rather than ensure the existence of a strong domestic shipbuilding industry, the absence of competition has discouraged shipbuilders from innovating, keeping up with industry standards, or even building many new ships.

The Jones Act artificially inflates prices by increasing the cost of goods shipped between American ports. The international community can ship the same amount of goods at significantly lower costs, but the Jones Act protects domestic U.S. maritime shipping from international competition, shifting the higher costs onto merchants and consumers. Furthermore, despite nearly half of the U.S. population living on or near the coasts, just 2 percent of domestic freight is shipped by water. This contrasts with 40 percent in Europe.

Shipbuilding unions and crony-capitalist groups such as the AMP reap the benefits in this system, but everyone else, including the American consumer, loses.

The Players

Among the most important players is the AMP. Founded in 2014 as the successor to the Maritime Cabotage Task Force, this nonprofit corporation claims to be the voice of the maritime industry. Its website claims: “Today, AMP continues to be recognized as the ‘best organized and broadest coalition of interests in Washington’ for our work to educate policymakers and the public on the national and homeland security benefits of America’s domestic maritime industry.”

Digging deeper into AMP expenditures shows that AMP invests heavily in lobbyists to influence members of Congress and public relations firms trying to spin debunked nonsense as credible fact. In 2017 (the most recent tax returns publicly available), AMP paid $1.16 million to lobbyist group K & L Gates and another $500,000 to public relations firm Nahigian Strategies. That $1.56 million accounts for 88 percent of AMP’s overall expenditures. Both firms are massive powerbrokers in the DC political market, and the “work” they do for AMP is lobbying members of Congress to support the Jones Act and vote against most of their constituents’ interests. These “dark money” influencers contribute higher transportation costs, higher costs for goods such as food at the grocery store, and even more traffic—with residents of Alaska, Hawaii, Puerto Rico, and Guam bearing the brunt of the higher costs.

In 2018, Rep. John Garamendi (D-CA) and Rep. Peter DeFazio (D-OR) promoted an AMP study on the Jones Act of Puerto Rico. This study—stuffed with cherry-picked information included without context—has been on the topic. Interestingly, the Seafarer’s Union is Garamendi’s top campaign contributor by a significant margin. DeFazio received more money from transport unions than any other House candidate in the 2018 election. The Seafarers’ Union has backed the Jones Act publicly and has affiliate offices in San Francisco and San Juan, Puerto Rico. Garamendi supports extending Jones Act restrictions to oil and natural gas shipping in the United States, doubling down on disastrous policies that would likely raise energy prices for Americans.,

These two congressmen, in supporting the unions that have bankrolled their campaigns despite the economic harm to their constituents and the country, are posterchildren of how “dark money” influence warps American democratic government. Unions, trade associations, and politicians work hard to advance their narrow interests while the American people incur the costs.

Allowing non-American vessels operate in the American market would likely create jobs, not destroy them. For shipyard producers, competing in the international market to sell up-to-date, competitively priced ships could provide a valuable economic boost that would keep and create jobs in the United States. Ending the American steel requirements would lower input costs that could result in higher wages for shipyard employees as productivity improves or be realized in lower costs for coastline consumers. It would mean safe and reliable transport ships could be staffed by American workers, helping lower costs and keep Americans safe.

Counterarguments

Ground transportation provides a powerful counterargument to the Jones Act. No one has ever claimed truckers using foreign-made trucks are national security risk. Yet similar arguments are advanced to support Jones Act restrictions and bolstered by millions of dollars spent on lobbying and campaign contributions. Members of Congress should stop lining the pockets of crony-capitalists and repeal federal laws that protect domestic markets against free-market competition.

Alaska, Hawaii, Puerto Rico, and Guam in particular have suffered from the Jones Act for a century—that’s a century too long.