The Jones Act: Economic Consequences

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Table of Contents

Introduction
Background
Consequences of the Jones Act
Supporters of the Jones Act
Conclusion
Works Cited

Introduction

Legislation not always keeps up with the times; sometimes, laws introduced decades ago may become outdated, but legislators are slow to update them. This is the case with the Merchant Marine Act, also known as the Jones Act. This law was intended to protect domestic trade, improve national security, and develop the maritime industry. However, being adopted in the previous century, it has exhausted its value for the country and currently brings more problems than benefits. This paper will analyze the Jones Act’s economic impact and assess its relevance in modern America. First, the background of the act will be provided to clarify its origins and goals. Second, the essay will explore the consequences of the law for the US maritime industry, economy, non-contiguous territories, and national security. Finally, the paper will review why the law is still supported by some people and why its stated benefits do not outweigh its drawbacks. Since the Jones Act caused the decline of the maritime industry, increased costs for the economy of the US and particularly non-contiguous territories, and failed to strengthen the US national security, it should be abolished.

Background

The Jones Act is a cabotage law passed in 1920 as a protectionist policy. Under this law, all goods transported between US locations should be carried by ships that are US-built, US-flagged, and US-owned, as well as crewed by Americans. Some of these requirements, namely those regarding the origin of crewmen and domestic build, make the Jones Act one of the most restrictive cabotage laws in the world (Pagel et al. 440). Because of this act, foreign vessels cannot engage in US domestic trade.

The Jones Act’s goal was to strengthen the US national security and foster the growth of the maritime industry. This law was enacted in response to World War I when the US needed to ensure it had a strong fleet capable of assisting in times of emergency or war (Olney 1). Hence, the national defense purpose was primary for legislators who developed the Merchant Marine Act. By withdrawing foreign vessels from the US territorial waters, the law was meant to strengthen national security and promote the building of domestic ships. The US-built ships were intended to be used in domestic commerce and be ready to assist in military or emergency operations should the need arise.

The Jones Act reflected two common trends of the twentieth century. The first trend is the extreme importance of water transportation in trade, and the second one is the practice of using private ships for military purposes (Grennes 4). Yet, in the modern world, trucks, railroads, airplanes, and pipelines have successfully replaced ships in transporting a wide range of products. Moreover, changes occurred in other areas, such as economics and warfare. The Jones Act was not adopted with regard to the current circumstances, and its consequences, described further, point to its irrelevance in the contemporary world.

Consequences of the Jones Act

The Merchant Marine Act has affected not only trade and national security but also the overall economy of the country. However, this impact was not as intended: the maritime industry was not strengthened, national security did not get the necessary naval assistance, and the country faced substantial economic losses. The sections below will provide a detailed explanation of how the Jones act affected the maritime industry, the economy of the country as a whole and non-contiguous territories in particular, and national security.

Impact on the Shipbuilding and Maritime Industries

Although the Jones Act was meant to contribute to the maritime industry’s growth, it yielded the opposite outcomes. First of all, it raised ship construction and operating costs. Increased costs were driven by profound changes in the global maritime industry after World War II, which shifted shipbuilding from developed to developing countries, especially Asian ones. By the end of the 20^th century, Japan, China, and South Korea dominated the shipbuilding market because of their high efficiency and standardization (Olney 4). Yet, as America was isolated from global competition by the Jones Act, it could not compete with Asian shipbuilders, leading to an increased difference in shipbuilding costs between American and Asian ships. Consequently, nowadays, building a tanker in the US costs four times more than building it abroad, and the cost of constructing a container ship in America is five times foreign costs (Olney 5). American ships have also become more expensive to operate: operating costs of the US vessels are more than twice as high per day as the costs of foreign vessels (Grennes 22). The Jones Act makes flying the US flag more expensive than flying foreign flags.

High costs of domestic ships led to a decrease in shipyards and the fleet. After World War II, the US had the largest shipbuilding industry, consisting of 8 naval shipyards and 64 private-sector shipyards, which could build large merchant ships (Olney 4). However, later, private shipyards reduced their production scales, shifted to ship repair, or closed. In 2011, there were only five public domestic shipyards, which dealt only with ship maintenance and decommissioning (Pagel et al. 443). As for private shipyards, their number was reduced to 20 (Pagel et al. 443). As the number of shipyards declined, so did the US fleet. Although the US feet consists of 40,000 vessels, 55% of them are barges operating on the Mississippi River (Grabow et al. 6). As for large merchant ships, their number was reduced from 2926 in 1960 to 169 in 2016, marking 94% decrease (Olney 5). This reduction in the fleet cannot be explained by the global decline in water transportation since the worldwide fleet experienced a 141% increase during the same period (Olney 5). Hence, the Jones Act shrank the US shipbuilding industry and fleet.

The Jones Act restricts shipping by prohibiting non-qualifying vessels from transporting freight between the US ports. Although most governments use some types of cabotage laws to restrict the activity of foreign vessels in inland waterways, the World Economic Forum acknowledged the Jones Act as the most restrictive law in the world (Grabow et al. 4). Due to the Jones Act, the significance of water transportation in the US trade has been reduced considerably. One study analyzed the shipments by mode of transport in the US and found that domestic water shipments decreased by 44% from 1960 to 2014 (Olney 8). Currently, only 2% of American freight is carried by sea, in contrast to 40% in the European Union and 15% in Australia, where cabotage laws are less strict (Grabow et al. 5). Hence, the US domestic trade has become more reliant on land transportation over time.

A decrease in the use of water transportation cannot be attributed to its diminished importance because it is still used for exports to Canada and Mexico. In fact, the use of water transportation for exports in the US even increased by 300% from 1960 to 2014 (Olney 7). The difference between exports and domestic trade is that the former is not regulated by the Jones Act, while the latter is. Since the number of the Jones Act eligible ships decreased, so did the use of water transportation in domestic trade. Thus, although the Jones Act was expected to lead to the maritime industry growth, it actually caused its decline. The law excluded US ships from global competition, which prevented shipbuilders from building more cost-efficient vessels. As a result, the shipbuilding and operating costs increased, leading to a decreasing fleet and limited use of water transportation in domestic trade.

Influence on the US Economy

The Jones Act has led to a range of negative effects on the US economy. First of all, because of the adoption of this law, transportation costs have increased significantly. In 2010, the operating costs of US vessels engaged in foreign commerce were 2.7 times higher than the costs of foreign vessels (Grabow et al. 10). Operating costs include expenditures on tools, crew, repair and maintenance, supplies, insurance, and overhead. So, while foreign vessels spent $7,454 a day on these items, US-flagged ships spent $20,053 daily (Grabow et al. 10). As a result, shipping rates became high, which increased the demand for land transportation. The most important transportation mode in the US domestic trade is trucking, and the use of trucks, railroads, and pipelines for domestic shipments increased by 50-200% from 1960 to 2014 (Olney 8). Such a shift in the use of modes of transportation has negative economic and environmental implications. It leads to traffic congestion and encourages companies to choose more polluting means of transportation.

Higher ship production and operating costs lead to an increased burden on the US economy and customers. Different studies estimated the economic impact of the Jones Act and found that its net economic costs ranged from $1.1 billion to $1.3 billion (Grennes 23). It has also been estimated that the requirements of this law are equivalent to a 65% tariff on shipping services (Grennes 23). Furthermore, high water transportation costs distort domestic trade by making some states import goods from abroad instead of obtaining them from nearby US territories. For example, rock salt, which is used for treating icy roads in winter, is widely produced in the US. However, Virginia and Maryland import this product from Chile through the Panama Canal instead of the Port of South Louisiana (Grennes 25). Likewise, some states prefer to export their goods abroad rather than sell them to other US states. For instance, some crude oil is transported from the Texas Gulf Coast to Canada, ignoring northeastern US refineries (Grennes 25). Such distorted trade patterns are caused by the Jones Act, and they are harmful to the US economy.

Particular adverse consequences of the Jones Act can be noted in the US energy industry. According to Mason, the energy market is the second most considerably affected industry after maritime shipping, as it has been significantly complicated by the Jones Act (80). Traditionally, the transportation of natural resources heavily relied on the maritime industry. However, due to the Jones Act, water shipments became too expensive for the energy industry to use water transportation in domestic trade. For example, Mason notes that “shipping oil from Texas to New England costs about $6 per barrel, while shipping to Europe costs just $2 per barrel” (81). As a result, the petroleum industry incurs total costs of “more than $158 million every year” (Mason 81). Therefore, as alternative modes of transportation became available, energy producers shifted to them instead of continuing to use water transportation.

Yet, there are some instances when maritime shipping is the only possible way to transport natural resources. This is the case for oil and gas production from shale. Since 1995, the US has experienced the “shale revolution” after its producers learned to obtain resources from shale (Mason 82). However, due to the Jones Act, the rich oil and gas reserves could not bring benefits to the domestic market. The reason for this is that oil producers chose to bypass the domestic market due to the high costs resulting from the Jones Act; instead, they exported their crude oil to foreign markets (Mason 82). US refineries, in their turn, could not benefit from domestic oil production and had to obtain resources from abroad. Hence, although the Jones Act was intended to protect and strengthen domestic commerce, it, in fact, harmed it, forcing US companies to trade with foreign businesses rather than domestic ones.

Effects on Non-Contiguous US Territories

The Jones Act has been harmful to the overall US economy, but its impact has been especially detrimental for people in the non-contiguous territories. The differences in the impact stem from the share of shipments transported via water. While contiguous US states can avoid using expensive maritime transportation, those US territories separated by the ocean cannot do so. Since the US government refused to amend or repeal the Jones Act for non-contiguous territories, they have been disproportionately affected by this law (Mason 81). These effects are especially evident in the energy market since such territories as Alaska, Puerto Rico, Hawaii, and Guam heavily rely on maritime transportation to import natural resources due to the lacking availability of trucks and pipelines. Due to the Jones Act, consumers in these regions bear a significant burden by paying higher prices (Pagel et al. 447). As a result, individuals’ living standards, as well as the overall economy of these areas, are worse than in states not affected by the cabotage law.

Alaska

Alaska is one of the US non-contiguous territories, the economy of which has been harmed by the Jones Act. Soon after the adoption of this law, the only two Canadian shipping companies serving Alaskan consumers were driven from this market. As a result, shipping firms from Seattle became monopolists in Alaska and began charging increased prices for the transportation of goods (Grabow et al. 4). Yet, this territory has no transportation alternatives and has to use expensive Jones Act ships. Alaska was the major producer of oil prior to the adoption of the Jones Act, but in the last decade, its crude oil production decreased by 46% (Morales 21). Currently, due to the cabotage law, this territory receives less for its oil, while Hawaiians and Californians, who are the main consumers of Alaskan oil, have to pay more for it (Grennes 28). Consequently, the economy of the region cannot grow as fast as it could if not restricted by the law.

Furthermore, the Jones Act may increase the added costs in the future with the opening of the Arctic northern route. This route will increase the demand for icebreakers, which the Coast Guard is unlikely to meet, but foreign icebreaker operators will not be available to the US due to the Jones Act (Grennes 29). Hence, unless this cabotage law is repealed, it will continue to induce losses to the Alaskan economy.

Puerto Rico

The Jones Act has made a significant contribution to the economic disaster in Puerto Rico. In 2010, it was calculated that this territory lost $537 million annually due to the cabotage law (Grennes 26). The economic development of Puerto Rico is hindered by the Jones Act. This region receives less for its exports and pays more for imports. For example, the cost of transporting a container from the US East Coast to Puerto Rico is $3,063, while shipping it to Kingston, Jamaica, costs only $1,607 (Grennes 26). Trade in the region has also been negatively affected because of the high costs of maritime transportation. From 2000 to 2010, the volume of 20-foot containers transported through Puerto Rico decreased by 20%, whereas it doubled in Jamaica, which was not restricted by the cabotage law (Morales 24). Hence, the Jones Act could have been one reason why Puerto Rico eventually defaulted on its debt.

Puerto Rican consumers pay higher prices for imported goods and electricity than people in other US territories. This happens because transportation companies pass their higher costs on to customers (Morales 24). For instance, due to the Jones Act, Puerto Ricans pay 15 cents more per gallon of gasoline and 30% more for liquefied natural gas (Mason 87). In September 2017, Puerto Rico was devastated by Hurricane Maria. In response to the disaster, Senator John McCain stated that it was “unacceptable to force the people of Puerto Rico to pay at least twice as much for food, clean drinking water, supplies and infrastructure due to Jones Act requirements” (Olney 4). As a result, the law was waived for ten days to allow foreign ships to deliver the much-needed aid for Puerto Rican recovery (Mason 66). The case of Hurricane Maria vividly illustrates the challenging circumstances faced by Puerto Ricans due to the Jones Act.

Hawaii

Similar to Alaska and Puerto Rico, Hawaii experienced adverse effects of the Jones Act. As a non-contiguous territory, Hawaii cannot use alternative modes of transportation available on the mainland; therefore, this region cannot avoid increased costs. For example, transporting a 40-foot container from Los Angeles to the Hawaiian city of Honolulu with a Jones Act-eligible vessel costs $8,700 (Grennes 27). However, shipping the same container from the same location to Shanghai with a foreign-flagged ship costs $790 (Grennes 27). Due to such a substantial difference in costs, Hawaiians prefer to use foreign transportation options, which are farther away but much cheaper. For instance, Hawaiian cattlemen transship their cattle through Canada or transport cows by air (Grabow et al. 12). Additionally, Hawaiians pay much for oil because 75% of their electricity comes from petroleum, transported by Jones Act ships (Mason 87). They also pay higher prices for food, imported goods, and energy (Morales 23). Overall, the cost of living in this region is 12% higher than that in Connecticut, which is the next most expensive state (Pagel et al. 447). Thus, non-contiguous territories face many challenges because of the Jones Act.

Impact on National Security

Despite the Jones Act’s strong emphasis on strengthening US national security, its actual impact on this aspect can hardly be called positive. Even if the Jones Act fleet could have contributed to national security, its significance has decreased over time because the fleet has become smaller and older. For example, the number of large commercial ships diminished from 193 in 2000 to 90 in 2014 (Grennes 32). Moreover, although the developers of the Jones Act assumed that commercial ships would be able to support the US military in times of need, it turned out to be the wrong assumption. This is because the fleet consists mostly of tugboats and ferries and would contribute little to military actions (Grennes 32). According to the US Maritime Administration report, in 2016, the total fleet consisted of 171 ships (Pagel et al. 442). Of them, only 54% were Jones Act eligible, and even fewer — only 42.7% — were both Jones Act eligible and military useful (Pagel et al. 442). Hence, the composition of the Jones Act fleet does not make it strong support for US national security.

Even though the Jones Act fleet has some vessels that could be used in warfare, evidence shows that it actually does not contribute to military operations. For example, during the Gulf War, an armed campaign in the Middle East that occurred in 1990-1991, the US provided military aid to Kuwait. Of 460 vessels transporting military materials to Saudi ports, none were Jones Act ships (Grennes 32). Therefore, the US military logistics were successful despite the Jones Act rather than thanks to it. Furthermore, in military operations, speed is one of the key characteristics because supplies often need to be transported to distant parts of the world. However, Jones Act ships usually are not fast because private commercial ship owners are more interested in fuel-saving features instead of speed (Grennes 33). Their interests do not align with those of military leaders who are ready to sacrifice fuel economy for faster ships.

Furthermore, although the Jones Act was intended to ensure that US ships would be available to respond to domestic emergencies, it failed to do so. The case of Hurricane Maria described above supports this claim. When Puerto Rico was faced with a devastating natural disaster and needed outside help to facilitate its recovery, the Jones Act hindered the provision of this aid, which is why it was temporarily waived. This was not the only case when the Jones Act prevented the US from effectively responding to domestic emergencies. For example, during Hurricane Harvey in 2017, this law was also temporarily suspended to allow foreign ships to supply fuel for lifesaving efforts (Mason 66). Likewise, the Jones Act was waived in 2005 following Hurricanes Katrina and Rita and in 2012 after Hurricane Sandy (Grennes 35). These examples show that the Jones Act not just fails to provide the necessary assistance in emergencies but also hinders effective response activities.

Supporters of the Jones Act

Despite the Jones Act’s negative economic consequences and failure to accomplish its goals, it is still supported by some people. The reason behind this support is that proponents of the Jones Act usually benefit from this law. For example, labor unions advocate the Jones Act because, among the total costs of the Jones Act ships, 68% are crew costs; in contrast, in foreign ships, only 35% of total costs are crew costs (Grabow et al. 10). Hence, due to this law, American crew members in Jones Act eligible ships earn higher wages than their foreign counterparts. Shipbuilders and ship owners also support the law because it protects them from the competition. Among them, the prominent proponents are the US Navy League and the San Diego shipyard of NASSCO, which is the largest shipyard employer in the US (Grennes 37). The supporters’ logic follows the argument that the cabotage law is harmless since “it doesn’t cost the consumer a single penny” (Grennes 37). However, in fact, consumers bear the entire burden of the Jones Act because companies shift their costs to them.

The Jones Act hinders fair competition in the shipbuilding and maritime industry, which is beneficial for proponents of this law. Although Jones Act carriers have to pay high prices for their vessels, they do not oppose the law because, in the absence of foreign rivals, they can charge significantly higher freight rates (Grennes 38). Meanwhile, a lack of competition is detrimental to the US maritime industry because it prevents its development and growth. For example, in Europe, where cabotage laws are less strict, rivalry forced shipyards to find unique areas in which they could specialize, which was necessary for them to remain competitive (Grabow et al. 8). As a result, European companies currently dominate several specialized market segments, such as cruise vessels, luxury yachts, and offshore vessels (Grabow et al. 8). The US could also achieve similar success, but, as long as the Jones Act remains in force, shipbuilders and carriers will not be motivated to search for ways to improve their performance and competitiveness.

Proponents of the Jones Act often defend this law by stating that it creates a large number of jobs. Indeed, the law creates many jobs at each stage of the shipping process: from shipbuilding to ship operation. This is because the Jones Act requires ships to be built in the US and operated by an American crew. Overall, about 500,000 workers are employed in the US shipping industry directly or indirectly (Grennes 38). However, when one evaluates the costs of this job creation, it becomes evident that it does not bring many benefits to the US economy. While the industry employs thousands of workers, it produces small outputs, and the costs of production are high, which implies low productivity per worker and high labor costs (Grennes 39). Moreover, the vessels produced by US shipyards are used for very narrow purposes, namely, for transporting goods between US ports (Mason 77). Thus, the Jones Act leads to the industry’s inefficiency, which puts into question its economic viability.

Overall, the Jones Act brings benefits to a small group of industry operators but imposes increased costs on a much larger group of consumers. Therefore, the US economy, especially the economy of non-contiguous territories and other coastal states, will benefit from the abolishment of the Jones Act. The repeal of the Jones Act does not mean that the US should waive cabotage laws completely. The country will still need laws to protect US shipping, but in a way that will not harm the maritime industry and economy like the Jones Act did (Mason 89). One essential way to do so is to allow non-contiguous territories to employ foreign vessels to save costs (Mason 89). This condition is important for facilitating the economic recovery of these regions as they have been bearing the largest portion of the burden imposed by the Jones Act. If no measures are taken, consumers in Puerto Rico, Alaska, Hawaii, and other coastal states will continue to be disproportionately affected by this cabotage law, and their economic development will remain threatened.

Conclusion

To sum up, the Jones Act should be repealed because it did not accomplish its primary aims and instead led to adverse economic consequences. Although the law was aimed to strengthen the US maritime industry, it actually decreased the fleet and restricted shipping by increasing shipbuilding and operating costs. Furthermore, it imposed additional costs on the US economy, especially in non-contiguous territories. Consumers in Alaska, Puerto Rico, and Hawaii have to pay higher prices for many essential goods, including food and energy, because of the Jones Act. Moreover, the law failed to improve national security because the US fleet has become smaller and older, and its ships are mostly slow commercial vessels that cannot effectively support military operations or emergency response efforts. Nevertheless, the Jones Act is still supported by small but powerful groups who gain benefits from increased costs and a lack of competition. Given the Jones Act’s consequences, legislators should consider the interests of the larger population that bears the burden of this law. By repealing the law, the US may reduce shipping costs, thus boosting the growth of the economy and the maritime industry.

Works Cited

Grabow, Colin, et al. “The Jones Act: A Burden America Can No Longer Bear.” Cato Institute Policy Analysis, no. 845, 2018, pp. 1-24.

Grennes, Thomas. An Economic Analysis of the Jones Act. Mercatus Center at George Mason University, 2017. SSRN, Web.

Mason, Kyle. “Sabotage by Cabotage: The Jones Act’s Attack on U.S. Energy.” The Journal of Business, Entrepreneurship & the Law, vol. 12, no. 1, 2019, pp. 64-92.

Morales, Joseph. The Jones Act – The Real Natural Disaster: An Analysis of the Merchant Marine Act of 1920. 2018. California State U, Master’s thesis.

Olney, William W. “Cabotage Sabotage? The Curious Case of the Jones Act.” Journal of International Economics, vol. 127, 2020, pp. 1-13.

Pagel, Jeffrey, et al. “Jones Act: Protectionist Policy in the Twenty-First Century.” Maritime Economics & Logistics, vol. 21, no. 4, 2019, pp. 439-463.

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