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The Jones Act and the Cost of Shipping Between U.S. Ports

By Dan Bergstresser and Marc Melitz·October 19
Brandeis University and Harvard University

The Issue:

The efforts to help Puerto Rico recover from Hurricane Maria, which made landfall on the island on September 20, 2017, have brought attention to a previously little-known piece of legislation, the Jones Act. This act prevents foreign-owned or operated vessels from shipping between ports in the United States, limiting competition in that type of transportation. The scarcity of Jones Act compliant vessels limits the movement of relief aid to that island from the United States mainland.  The Jones Act was temporarily suspended by President Trump on September 28 in an effort to support relief efforts in Puerto Rico. Similar suspensions of the Jones Act occurred in the wake of Hurricanes Harvey and Irma, as well as Sandy in 2012, and Hurricanes Katrina and Rita in 2005, to expedite the delivery of fuel. The effects of this Act at a time of acute crisis highlight a more general consequence of protectionist policies that endures over time; benefiting a small number of producers by raising costs and limiting choice for a vastly larger group of consumers. After the crisis subsides, these costs diffuse more broadly across all potential consumers of domestic shipping services.
Relief efforts in Puerto Rico after Hurricane Maria spotlighted a 1920s regulation that restricts shipping in the United States.

The Facts:

  • The Merchant Marine Act of 1920, often referred to as the Jones Act, requires shipping between U.S. ports to occur on ships that carry the U.S. flag, are built in the United States, and are owned by U.S. citizens. The act also requires crew on these ships to be comprised of at least 75 percent U.S. citizens or permanent residents. The original rationale for this act was to support the continuing viability of an American merchant marine fleet, an issue that was of concern after the significant losses to the U.S. Merchant Marine fleet in World War I. The Jones Act’s main purpose subsequently shifted towards supporting employment and work conditions for American shipbuilders and seamen. The U.S. is not unusual in restrictions on cabotage (the shipment of goods, person or mail between ports within the same country); most countries surveyed by the U.S. Department of Transportation restrict operation of international vessels between domestic ports to at least some degree. Since Puerto Rico is part of the United States, the Jones Act covers shipments to and from that island, just as it covers shipments to the 48 contiguous states, Alaska, Hawaii, and Guam.  The Jones Act does not cover some United States territories, such as the U.S. Virgin Islands.
  • The Jones Act raises the cost of transporting goods between American ports. For example, the cost of shipping crude oil from Texas to refineries in the East Coast is significantly more expensive per barrel than shipping crude to much more distant locations according to a 2014 study by the Congressional Research Service (see chart). Similarly, a 1988 study by the Government Accounting Office (GAO) on the effects of the Jones Act on Alaska, which depends much more on shipping than the contiguous 48 states, estimated extra shipping costs of $163 million per year for goods shipped between Alaska and the mainland United States. In 2012, the Federal Reserve Bank of New York found that shipping cost for a twenty-foot container from the mainland United States to Puerto Rico was $3,063, but only $1,503 for the same container from the mainland United States to the Dominican Republic. According to one estimate, the Jones Act raises the price of gasoline by as much as 15 cents per gallon because of the high costs of transporting fuel by U.S.-flagged ships relative to foreign-flagged ships. The ban on the transportation of liquefied natural gas by foreign-flagged ships raises the price paid by the Puerto Rico Electric Power Authority by as much as 30 percent. Overall, the World Economic Forum estimates that preventing foreign ships from transporting cargo between United States ports costs the United States economy $200 million per year in extra shipping costs.
  • The lessons from these statistics are reinforced by particular examples. In the severe winter of 2014, the New Jersey Department of Transportation ran short of road salt. A 40,000-ton pile of road salt was available 400 miles away, on the coast of Maine, near a vessel that could transport it. But this foreign vessel, which was not Jones Act-compliant, was banned from completing the delivery and ultimately the shipment was both delayed and more than double what it would have cost had the foreign-vessel been able to deliver it. Another example is that lumber products on the East Coast of the United States are purchased from Western Canada, rather than from Washington State or Oregon, because of the higher transportation costs due to the Jones Act.  Finally, a cattle rancher in Hawaii sends his cows to the mainland United States on airplanes, rather than ships, because of the sea transportation expenses associated with the Jones Act.
  • The provision of the Jones Act that requires ships to be built in the United States also raises costs. For example, the Congressional Research Service estimates that oil tankers built in the United States are about four times more expensive than those built abroad. An article by Brown Brothers Harriman reports that Matson Incorporated placed a $418 million order for two Jones Act ships, about five times what it would have cost to build the tankers in Asia and the contract price of $250 million for two vessels purchased by Philly Tankers AS was more than three times what comparable ships constructed in Vietnam would have cost.
  • The original motivation of the Jones Act was based on national security concerns, and these reasons continue to be advanced today. But cargo shipping by air is possible today, which was not the case in 1920. The United States Department of Defense frequently leases foreign vessels for missions that require sealift. Also, only one of the five shipyards that produce major vessels for the Navy and Coast Guard builds commercial vessels that are Jones Act compliant.

What this Means:

The Jones Act provides a particular example of how restrictions on trade benefit a very small group of producers at the expense of a vastly larger group of consumers. There is political support for these types of restrictions because the benefits are concentrated while the costs are much more diffuse; in this case, the beneficiaries are the owners and workers in the U.S. shipbuilding and industries while the costs are borne by consumers of shipping services, especially those in places like Alaska, Hawaii and Puerto Rico that disproportionately depend upon those services. Efforts to repeal the Jones Act, like those of Senator John McCain in January 2015, have failed due to the efforts of a coalition of the maritime industry, shipyards, unions and military officials. The costs of this act become particularly apparent at times of acute crisis, but its ongoing costs endure in more normal times and generate a structural impediment for places like Puerto Rico, as well as an overall burden on U.S. consumers.

Topics:

Deregulation / International Trade / Puerto Rico
Written by The EconoFact Network. To contact with any questions or comments, please email contact@econofact.org.

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