Advocates For Consumer Rights

What is “The Jones Act” and why should you care?



Jun 13, 2014

The Hawaii Shippers’ Council president is making progress in his quest for a Jones Act exemption
By Mark Coleman

Michael Hansen isn’t asking for much.

After all, as president of the Hawaii Shippers’ Council, it’s not like he’s seeking repeal of the entire federal Jones Act, also known as the Merchant Marine Act of 1920. He just wants a slim exemption from the federal maritime provision — specifically from Section 27 of the Act, which regulates “transportation of merchandise between points in United States in other than domestic built or rebuilt and documented vessels.”

Hansen believes that an exemption from that one provision of the Act would benefit Hawaii consumers significantly, by allowing the use of foreign-built vessels over a certain size to transport cargo on noncontiguous domestic routes, thereby lowering the cost of business here. His years-long effort to attain such an exemption has led to alliances with groups in Guam, Alaska and Puerto Rico, where progress toward the goal has been made with varying degrees of success.

The Hawaii Shippers’ Council, Hansen said, represents “basically cargo owners, people who are seeking to ship their merchandise in the domestic trade.” It has about two dozen members, he said, with “most of them being mainland-based, because they’re often the ones who, when they arrange to sell their goods in Hawaii, have to arrange for the freight.”

Hansen himself has been in the shipping business almost his entire career, since after graduating from Punahou School [Honolulu] 45 years ago, and attending Willamette University in Salem, Ore., for two years and then the University of Hawaii for about a year. His first job was with Hawaiian Tug & Barge, where he did barge repair, tug mechanical repair and supervised some cargo operations. He also owned a shipping agency, in conjunction with operating a cargo service between Hawaii, the Samoas, Tonga and the Cook Islands. Currently he is a shipping consultant and also does some ship broking. Hansen, 63, was born and raised in Hawaii and resides in Aina Haina.

Question: What is the Hawaii Shippers’ Council about, and what is its interest in the Jones Act?

Answer: The Hawaii Shippers’ Council was formed back in the 1990s, basically to support a Jones Act reform initiative led by Rob Quartel (a former U.S. Maritime Commissioner). His national organization was known as the Jones Act Reform Coalition. It was formed around 1995, and it went out of existence in 2001 or thereabouts, for lack of support. It was basically formed by agricultural interests, who wanted to use foreign-flag bulk carriers to move grain and other products around the country, because there are, in fact, no such kinds of ships in the Jones Act fleet. Quartel also had these other interests supporting him — for example, some of the people in the road salt business. That was in the news recently. The state of New Jersey ran out of salt and there was a big pile of salt up in Maine, I believe it was, and there was a foreign-flag ship sitting at the dock there that could have transported the cargo to New Jersey. But even though New Jersey applied for what’s known as a Jones Act waiver, it was denied and didn’t get the waiver.

Q: So when did the Hawaii Shippers’ Council pick up the issue again?

A: We re-activated in 2010.

Q: What was the reason for that?

A: Because the freight rates were becoming onerous, and there was a lack of vessel availability for special cargoes.

Q: Why seek just an exemption and not total repeal?

A: Well, there are a number of reasons. First of all, when you use the term “repeal,” that would really mean a nationwide repeal of the Jones Act, and that would be a very great undertaking. Even Rob Quartel and his Jones Act Reform Coalition did not attempt that. You’ve got enormous interests in the inland waterways, the rivers, where you’ve got the tugs and barges, and that is all Jones Act, and they don’t want to see any changes in the rules. And from our point of view, changing the rules for the inland waterways or the rivers wouldn’t make a difference for us anyway. So the next step down is a full exemption.

Q: Waivers have been granted before?

A: Right. But when we’re talking about waivers, you have to be a little careful because of the language. There’s established law that provides for the administration to grant waivers in times of national emergency. The ones that we’re most familiar with are the ones involving usually petroleum products, which was done during Hurricane Sandy and the Libyan war. … The Hurricane Sandy waiver was to allow foreign-flag tankers to carry refined petroleum products from the Gulf to the East Coast. The Libyan waiver was for foreign-flag crude tankers to take crude from the Strategic Petroleum Reserve to refineries. And President (George W.) Bush issued a waiver as well during the Hurricane Katrina time, for foreign-flag tankers to take oil from the Strategic Petroleum Reserve.

Q: So waivers are for national emergencies, but there’s never been a permanent exemption?

A: Oh, there have.

Q: What are those?

A: The U.S. Virgin Islands are exempt from maritime cabotage laws.

Q: What does that mean for them?

A: It means foreign-flag ships can trade freely between any U.S. port and the U.S. Virgin Islands. … That exemption was part of an agreement during World War I when the U.S. purchased the U.S. Virgin Islands from the Danish crown. Also, American Samoa is fully exempt from maritime cabotage; that was done as a result of the so-called Tripartite Convention (of 1899) between the United States, the U.K. and Germany. There’s a couple more: The Commonwealth of the Northern Mariana Islands is exempt from cabotage, and that is through the compact that provided for its annexation to the United States. And now Guam, Midway Island and Wake Island are exempt from the U.S.-build requirement of the Jones Act.

Q: What kind of an exemption are you seeking for Hawaii?

A: We are seeking reform for what we’re calling our noncontiguous trades, and that would basically cover Alaska, Guam, Hawaii and Puerto Rico. What we’re looking for is an exemption from the build requirement. Our proposed exemption would apply only to ships over a thousand gross tons. The reason for this is that the cost of building what are known as major ships in the United States is now very well documented to be five times what it is in South Korea or Japan. An exemption would allow foreign-built vessels that have been registered in United States and are now flying a U.S. flag and have U.S. owners and have U.S. crew aboard to carry cargo between the contiguous United States and the noncontiguous jurisdictions.

Q: That’s it? I mean, that seems kind of mellow.

A: Exactly. And especially when you take into consideration what U.S. aviation cabotage has as part of its rules, that you can use a foreign-manufactured aircraft in any domestic trade in the United States, for example, Airbus …

Q: To what extent would that help Hawaii?

A: A great deal, because right now the cost of building a major ship in the United States is so high that we have an artificial shortage of vessels. For example, we have 90 ships over a thousand gross tons in the Jones Act fleet, about half of which are employed in noncontiguous trades. So we — the noncontiguans — are disproportionately paying for the cost of the U.S.-build provision of the Jones Act. This is direct cross subsidy to the inefficient major ship builders located on the U.S. mainland. … Now, many people find it counterintuitive that (U.S.) shipping companies support the U.S.-build requirement, in that it increases the cost of the ships they have to buy. They think, “Well, why wouldn’t they support your reform proposal, and take the cheaper ships?” Well, the thing is, the build requirement is, in fact, part of the protections that they enjoy. Because the price is so high, there’s really nobody else in the world who wants in on the trade. It inflates their position and it makes the trades virtually incontestable.

Q: But how would this help Hawaii specifically, for consumers, let’s say?

A: Well, the price data shows the cost of living in Hawaii is about 17 percent higher than U.S. norm. We might be able to take one or two points off of that.

Q: What interests here are helping you?

A: … The Hawaii Cattlemen’s Association has been a great supporter of ours.

Q: How would that help them?

A: Well, … the problem they face is they have to bring in feed from the (mainland), but with no bulk carriers, there’s no feed or very expensive feed, if you bring it by container. The other option is to ship their young animals to the (mainland) market, and to do that … they’re shipping their young animals in containers that have been modified to accept the live animals, called “cowtainers” — and they have to send a guy on the ship to be the stock tender. The way everybody else in the world ships animals like that … is in livestock carriers, but there are no livestock carriers in the U.S. fleet.

Q: What are some recent developments in this effort that have been raising your profile, that perhaps could be called victories, even?

A: Well, the legislature of Guam in April of this year adopted a resolution overwhelmingly … that basically called on their delegate to Congress, Madeleine Bordallo, to introduce legislation to bring this exemption we’re talking about into federal law. And we had introduced in the Hawaii Legislature resolutions in both House and Senate side. The Senate wasn’t so strong. But the House side, there were seven representatives who sponsored the resolution, including the Speaker, so we feel that we’re making some progress there.

Q: What did that resolution call for?

A: Basically it calls on our delegation in Congress to work with their counterparts in the other noncontiguous congressional delegations toward introducing federal legislation to grant this proposed exemptions to the noncontiguous jurisdictions. Also, it looks like we’ll have a resolution in the Alaska state senate next year, and we’re waiting now on the Puerto Rican senate to issue a report on the hearings that they held in January and February of this year on the Jones Act. They held very extensive hearings; almost three weeks. And I had an opportunity to testify, by Skype. Basically, they’re trying to figure out what position that they’re going to stake out on the Jones Act. The people in Puerto Rico would like to have a full exemption, along the same lines of the U.S. Virgin Islands, but that’s not going to be in the cards. … Also, if we’re ever going to change our energy mix, we’re going to need some exemptions from the build requirement, in respect to liquified natural gas, most probably. The governor’s recent Hawaii Refinery Task Force report made a statement that Hawaii will need an exemption from the Jones Act, if they wish to hold down energy prices going into the future.

Q: Who are the major opponents of even this limited goal that you have? A: Well, of course, the Jones Act industry as a whole is opposed to it. There’s an alliance between the ship builders, ship owners and maritime unions, and they collectively defend each other. And, like I said, the build requirement insulates them further from competition — as if flag cabotage didn’t do enough of that. Probably the strongest argument they have is the so-called national defense argument. But when you look at that, it’s a fairly weak argument. There’s three legs to the defense argument. The first is what’s known as sea lift. That’s the capacity of the ships you have that can carry cargo to an overseas contingency. But very few Jones Act ships are used for sea lift. We have a fleet in the United States known as U.S.-flagged international trade fleet — the primary group of ships that provide U.S.-flag sea lift — and those are all foreign-built … and about half are foreign owned. The second leg … is that you want to maintain your shipbuilding industrial base. The problem with that is we build so few large commercial ships every year that it really doesn’t do very much in terms of maintaining that base. In fact, there’s a couple of military college reports that suggest that the U.S. Department of Defense might be better off not defending the U.S.-build requirement for commercial ships and have the shipyards concentrate on government ships.

Q: And the third leg?

A: The third leg is we need to maintain the fleet to have trained crew in time of national emergency. And the U.S.-build exemption would not harm that at all. In fact, we’re likely to see an increase of ships in the noncontiguous trades, and that would mean more U.S. seamen.

Q: Do you think this proposal of yours will fly ultimately?

A: We certainly hope it will. I mean, the logic, we think, is quite good. And as the cost of building in the U.S. continues to escalate, it becomes much more difficult for the carriers to defend it.