January 1, 2013
How the Jones Act Blocks Natural Disaster Relief
To get gasoline flowing in the New York area after Hurricane Sandy, President Barack Obama temporarily suspended the Jones Act, a statutory relic of the post-World War I era that bars foreign ships from carrying freight between U.S. ports. Within days of the president’s action, gasoline prices declined and filling-station lines, which had required police patrols to keep the peace, soon disappeared. That raises a question: Should the Jones Act still be on the books?
The answer is no.
Enacted in 1920, when memories of American ships being torpedoed off the East Coast were fresh, the Jones Act was designed to ensure that the U.S. had a fleet of loyal merchant ships in times of national emergency. The law, formally known as the Merchant Marine Act, required all vessels carrying goods between domestic ports to have been built in the U.S., as well as owned and crewed by Americans. Other provisions granted crew members the equivalent of health and disability protection.
By shutting out foreign competition, the law limits shipping capacity and inflates U.S. freight rates. Like most forms of protectionism, it benefits a few to the detriment of many. One analyst estimated that shipping oil from the Gulf Coast to the Northeast on foreign vessels would cost $1.20 a barrel versus $4 on U.S. ships. Although no one is quite sure of the overall economic burden imposed by the act, a 1999 study by the U.S. International Trade Commission found that ending it would save more than $1.3 billion a year.
U.S. islands such as Puerto Rico and Hawaii, along with the state of Alaska, feel the effects of the Jones Act more than most localities. Some of Hawaii’s political and business leaders have long complained that the restrictions mean all goods shipped from the U.S. mainland must go via the two carriers serving the state. By some estimates, this makes goods in Hawaii a third more expensive than they otherwise should be.
In November, a group of businesses in Hawaii sued to overturn the law. The higher freight costs paid by the state’s businesses, their suit says, are evidence of monopolistic pricing and in violation of the Constitution’s Commerce Clause.
The courts will decide the legal merits of the suit, but the economic case is clear: The Jones Act interferes with the normal functioning of the market. This is one reason the federal government keeps resorting to temporary waivers, such as the one signed by Obama. President George W. Bush, for example, suspended the law after Hurricane Katrina hit the Gulf Coast in 2005, letting foreign ships ferry fuel to the region.
The law has many supporters, mainly labor unions and inefficient U.S. shipbuilders, which by some accounts charge more than double the rates of overseas builders. Rail and trucking companies don’t mind the Jones Act because it tends to shift freight from transport on waterways to land.
Jones Act defenders also say the law is necessary for security reasons in our post-Sept. 11 world. Yet thousands of foreign ships engaged in international trade enter U.S. ports every year without incident, as Senator John McCain, a national-security hawk and long-time opponent of the Jones Act, has pointed out.
Two parts of the Jones Act should be dismantled.
First, the U.S. should abandon the requirement that ships used in domestic trade be built in the U.S. Because American shipyards have been shielded from international competition, they have failed to modernize and adopt the innovative production methods used overseas. The higher costs of building in the U.S. have deterred domestic cargo carriers from upgrading and their ships are less efficient and twice as old, on average, as international fleets.
Then, the U.S. needs to allow foreign shippers to compete in U.S. coastal waters.
To be sure, ending the Jones Act shouldn’t be a unilateral move. Dozens of other nations have similar protectionist laws, and the U.S. should only allow competition from ships that are registered to nations that agree to reciprocal rollbacks. Foreign freight carriers must be required to comply with U.S. labor and workplace protections. Furthermore, countries that offer unfair subsidies to builders should be barred from selling to U.S. shipping companies.
With those provisos, the Jones Act needs to go. It was designed to help the U.S. deal with national emergencies, yet presidents have had to suspend it in two major crises to accomplish just that. We aren’t likely to get better evidence that the law is outdated and counterproductive.