Jones Act

Do we really need to "ship American"?

The Puerto Rico crisis revives the debate over the Jones Act—and a shipping policy as old as the U.S.

By Danny Vinik

As Puerto Rico’s debt crisis triggers congressional fights over issues like bankruptcy protection and a possible new federal oversight board for the island, it’s also reviving a controversial debate about an obscure shipping law whose origins date to the very first U.S. Congress: The Jones Act.

The law – whose current version was passed in 1920 – says that any goods shipped from one U.S. port to another must travel on a ship built in America, with an American crew, and owned by Americans. Originally intended to ensure sea-readiness in case of a war, it is now derided by its critics as an expensive, protective measure for maritime unions and shipbuilders. Supporters say the original rationale for the law is just as valid today as it was in the 18th century.

For Puerto Rico, opponents say the law drives up costs of everything from energy to consumer goods. The island lies nearly 1,000 miles from the U.S. mainland, and imports 80 percent of what it consumes. So as policymakers look for ways to ease the island’s financial burdens, the Jones Act has come under the microscope as an example of ways that domestic U.S. laws disproportionately drive up costs for a distant and cash-strapped territory. Though it’s not in the House draft of the Puerto Rico relief package, it has come up at congressional hearings, and an amendment exempting Puerto Rico will likely be offered when the bill hits the floor.

“[The merchant marine] are highway robbers,” said Salim Furth, a research fellow at the Heritage Foundation. “They basically said, ‘We got the government to say that we could extract rents from everyone who wants to use this route, and we have these 3.5 million people who are stuck on an island and we’re just going to take their money because we can.’”

But as the Puerto Rico fight develops, supporters of the law say the new push against the Jones Act has less to do with concern for the island than with a long-running war against the act waged by free-market think tanks and others who’ve been fighting it for years – a fight that resurfaces every few years in connection with issues such as oil exports and trade deals. Its opponents say the Jones Act has long outlived its purpose, and now only props up a domestic industry and drives up shipping costs.

At its heart, the Jones Act fight is a piece of a larger, long-term debate over what lengths the government should go to protect U.S. industries in the name of national security – even if it’s at an economic cost to the nation.

Further complicating the fight is another problem: Nobody actually knows whether the law drives up costs, or whether Puerto Rico would benefit from a repeal. As even the law’s opponents admit, almost no independent research exists on the costs and benefits of the Jones Act. It’s a real-life example of how hard it is to disentangle even very old laws from the interests that grow up around them over the years.

When the first U.S. Congress came into session in 1789, passing a so-called cabotage law to regulate the movement of goods between two U.S. ports made a lot of sense: the U.S.’s maritime strength was critical to its future as a nation, and a protectionist law made sure the young country had all the domestic capacity it needed.

Congress strengthened the law after the War of 1812; after World War I, it passed the Merchant Marine Act, which became known as the Jones Act for its sponsor, Sen. Wesley Jones. The law sets the rules for who can travel between U.S. ports, requiring all vessels to be U.S.-flagged, owned by Americans and operated by a crew of at least 75 percent U.S. citizens. The goal of the law was to preserve a strong merchant marine to help the military in times of war or national emergency and to help grow the country’s maritime commerce.

In a shipbuilding industry today that is very global, and driven mainly by foreign-flagged ships with crews mixed from all kinds of ports, it’s seen as an important protective fence around America’s own cargo shipping business. In times of emergency or war, those ships and seamen are often critical to transporting military cargo.

“It’s not just about the ships and the cargo,” said Paul Jaenichen, the administrator of the Department of Transportation’s Maritime Administration (MARAD), which deals with waterway transportation and supports the Jones Act. “It's about the mariners who sail on them and their level of qualifications. … Without those ships sailing, I don’t have the mariners. It becomes a national security issue.”

Critics and supporters both agree on one thing: Repealing the law will reduce jobs in the shipbuilding industry. The industry, according to MARAD, directly employs 110,000 people and is associated with 400,000 jobs in total – jobs that could be at risk if the Jones Act were repealed.

Removing that protection, critics say, would hurt U.S. shippers by forcing them to compete with foreign competition. To conservative think tanks like the Heritage Foundation, competition is exactly the idea: they see the law as a big form of interference with the free market, providing a monopoly to the domestic industry that can raise prices for goods shipped around the U.S.

"In terms of the sailors, there are not many Americans who want to spend six months to a year away from their families for the same wage that an Indonesian or Ghanaian will do it,” said Furth. “That’s free trade.”

The lower 48 states are less affected by the Jones Act because they can move goods by rail, pipeline or truck. But for noncontiguous American states and territories, like Puerto Rico, Hawaii and Alaska, it means almost all goods coming from the U.S. must travel on American ships.

“This has the singular distinction of being one of the oldest and most protective measures in the U.S. armory of protection,” said Gary Hufbauer, a former Treasury Department official and current senior fellow at the Peterson Institute of International Economics who opposes the act.

The problem is nobody knows how much the Jones Act really costs the country, or how much Puerto Rico would benefit from an exemption. Little independent scholarship has tested these claims, as Furth admits. In 2012, the New York Federal Reserve produced a report on Puerto Rico, in which it found that “available data show that shipping is more costly to Puerto Rico than to regional peers” but the bank also lamented the lack of substantive research on the issue. The Government Accountability Office looked into the issue in 2013 but was unable to determine a cost of the law, saying the effects were “highly uncertain.” An older study, from the International Trade Commission, estimated that repealing the law would reduce shipping costs by about 20 percent but it is more than a decade out of date.

How much would an exemption benefit Puerto Rico? That’s not clear either. “We had trouble finding out much about the Jones Act,” said Anne Krueger, a former top official at the International Monetary Fund who produced a report for the Puerto Rico government in which it recommended exempting the island from the Jones Act.

Miguel Soto-Class, president of the San Juan-based Center for a New Economy, believes it would help reduce the cost of goods, particularly energy. “But if I have to choose a top three [policy wishes],” he added, “I don’t know if the Jones Act would make it.”

The fight over the Jones Act echoes last year’s battle over the Export-Import Bank, which provides loan guarantees to help overseas customers buy goods made by U.S. companies. Opponents of Ex-Im argue that the bank is a form of protectionism that subsidizes a few lucky U.S. companies while damaging the U.S. economy overall; supporters of Ex-Im see it as an important backstop on an unfair playing field, in which foreign governments generously subsidize their own industries as they try to compete against the U.S.

“If you waive the Jones Act, you don't have our companies competing against foreign companies,” said Matthew Paxton, president of the Shipbuilders Council. “You have our companies competing against foreign governments – foreign governments that have said they are going to manipulate this market.”

The Shipbuilders Council has been die-hard supporters of the act. Asked if he would support an exemption just for Puerto Rico, Paxton says it would actually hurt the island, not help it, by jeopardizing reliable cargo service and costing jobs. But, he added, the consequences of an exemption would be far broader than Puerto Rico: It would put the entire shipbuilding industry at risk.

“You keep having these kind of dumb conversations that aren’t fact-based and you’re going to see finance markets start to really constrict,” he said. “Just saying this applies to Puerto Rico is absolute falsehood. It applies everywhere.”

Beneath the whole Jones Act argument lies the question of national security: in the modern era, are “cabotage” laws like the Jones Act necessary to keep America safe?

In the 18th and early 19th century, such laws were critical to ensuring the U.S. had the capacity to build ships for its Navy and had seamen to navigate them. If foreign competition caused much of the domestic shipping industry to migrate overseas, the U.S.’s naval superiority could be at risk.

The American Maritime Partnership provided a list of past quotes from military leaders supporting the Jones Act, including from the former commander of U.S. Transportation Command who is now the vice chairman of the Joint Chiefs of Staff and the current commander of U.S. Transportation Command. Jaenichen, the administrator of MARAD, has also been a vocal proponent of the law.

“We've never had a U.S. citizen mariner on a U.S. flagged ships say no to carrying our forces into harm’s way or providing the equipment that they need to be able to fight the fight,” he said. “That is not true for a foreign flagged ship.”

Opponents of the law say that instead of ensuring the U.S. has the premier shipbuilding capabilities, it has caused the industry to underinvest, without having to face foreign competition. “It's basically smothered [the shipping industry] with protection so right now it could not compete in an open market,” said Furth.

In fact, the act’s greatest opponent in Congress has been one of the chief advocates of a strong military: Sen. John McCain (R-Ariz.), who has introduced a bill to repeal the law. Asked at a Heritage event on the Jones Act in 2014 about the need for a strong merchant marine, McCain recommended repealing the law and then requiring vessels traveling in American waters to have certain qualifications of their crew.

Asked about McCain’s proposal, Jaenichen responded, “Can you do it? Absolutely. But somebody is going to have to pay for it, and guess who that somebody is?”

The argument that U.S. transportation industries need protective laws for the sake of national security is not limited to the Jones Act. A similar debate exists in the airline, trucking and railway industries. For instance, foreign airlines can fly into U.S. airports, but can’t fly passengers on U.S. domestic routes.

These airline cabotage rules, Hufbauer said, limit competition and keep prices high while also upsetting our trade partners who want access to the U.S market. In turn, he added, they limit the ability of U.S. trade officials to request concessions on other issues.

The Jones Act fight has simmered behind the scenes for years but as Congress has focused on Puerto Rico, the two sides have each undertaken an intense lobbying campaign on Capitol Hill. So far, the Jones Act appears safe. The House Natural Resource Committee’s first draft of legislation to help Puerto Rico contained no changes to the law. And while an amendment will likely be offered to exempt Puerto Rico from the Jones Act, it is not expected to pass – something that has not dismayed the law’s opponents.

“We just want to move the conversation,” said Furth.

Critics chalk up the opposition to the lobbying power behind it. McCain once called the American Maritime Partnership "as powerful as anybody or any organization I have run up against in my political career.” Furth says he’s heard from lawmakers and staff who would like to support the repeal of the Jones Act but can’t do it for political reasons. “That’s a story we hear again and again,” he said.

The result: The Jones Act is unlikely to go away anytime soon.

”I expect the protection will continue for years to come,” said Hufbauer. “Sad for Puerto Rico – happy for the merchant marine!”