A century-old protectionist law that inflicts economic harm.
Monday, October 7, 2019 5 min read By:
Old Master== 
Why can’t you take a cruise on a major cruise line from New York to Miami or from San Francisco to Honolulu or even from Los Angeles to Seattle? What law contributes to the congestion that we see on major U.S. highways, especially on both coasts? What law not only raises the cost of shipping goods within the United States but also creates extra carbon dioxide?
The answer to the first question is the Passenger Vessel Services Act of 1886. It prohibits foreign ships from transporting passengers between two places in the United States. There is a stiff fine per passenger, currently $762, for every breach of this law. The answer to the second two questions is the Jones Act. The law, whose official title is the Merchant Marine Act of 1920, is named after Wesley Jones, the Republican Senator from Washington who introduced the law that year. It does for cargo what the Passenger Vessel Services Act does to passengers. Specifically, it imposes a four-part test for cargo to be shipped by water between two U.S. ports. The ships must be (1) U.S.-owned, (2) crewed by Americans, (3) registered in the United States, and (4) built in the United States.
We see similar restrictions in other parts of the transportation industry, such as airlines, but the laws for airlines aren’t as restrictive. A U.S. airline, for example, can legally buy an aircraft from a foreign producer such as Europe’s Airbus, Brazil’s Embraer, or Canada’s Bombardier. If an airline didn’t have this option, imagine the pricing power that Boeing would have over U.S. airlines, at least in the short run.
One might think that the Jones Act would be illegal under the anti-protectionist rules of the World Trade Organization. It’s not. As economist Thomas Grennes pointed out in a 2017 study for the Mercatus Center, the U.S. government “refused to discuss reform” of the Jones Act in the 1995 WTO negotiations on maritime services.
Why are the regulations on water transport so extreme? Consider Senator Jones’s rationale. He pointed to the fact that during World War I, the U.S. government needed to use some foreign-flagged ships to carry soldiers and war materiel to Europe. That, to Jones, was a problem. He stated:
Our shipping could be done more cheaply by others, and so we had none. When the war came this lack of shipping cost us hundreds of millions of dollars in higher freight rates or business losses and hundreds of millions of waste in the hasty building of ships to meet the emergency that threatened the overthrow of civilization, and today the papers are filled with stories of waste, corruption and inefficiency that was the inevitable result of the conditions and the situation that confronted us.
At first glance, Senator Jones might seem reasonable. But note three things. First, with his first sentence he admitted that using foreign ships caused the shipping to be done more cheaply. This means that banning competition from foreign ships from 1920 on would raise costs to U.S. shippers, which it has; more on that anon.
Second, Jones’s rationale was different from the usual national security rationale many proponents give for insisting on domestic provision. We often hear that we need domestic provision because without it there could be no provision. But Jones recognized—how could he not?—that the U.S. military was able to get its human and material cargo to Europe by using foreign ships. His issue was the short-run jacking up in price, not whether foreign vessels would be available.
That brings us to the third point. Jones’s rationale was that he wanted to avoid a spike in prices in wartime situations. But there’s a tough tradeoff. Whenever a government restricts competition, it causes prices to be higher than otherwise, and they’re higher as long as competition is restricted. This means that to avoid temporary and fairly infrequent spikes in prices, Jones pushed for a law that would make high prices permanent. That doesn’t seem like a good trade.
It’s not a good trade, because shipping prices are substantially higher due to the Jones Act. We can get a reasonable idea of how much higher by doing two comparisons. The first comparison is shipping costs between two U.S. ports that are subject to the Jones Act and those between two U.S. ports at least as far away when one of the ports is exempt from the Jones Act. In July 1999, the Government Accountability Office reported that the cost of shipping crude oil from Alaska’s North Slope to the U.S. Gulf Coast was $7.15 per barrel. But the U.S. Virgin Islands are exempt from Jones Act requirements. The cost of shipping crude oil from the North Slope to the U.S. Virgin Islands, which is much further away, was only $2.35 per barrel.
What makes that 67 percent lower cost even more striking is that the time taken to get the oil from the North Slope to the U.S. Virgin Islands was 84 days, which was more than double the 41 days taken to get oil from the North Slope to the Gulf Coast.
The other comparison we can do is of prices between two U.S. ports that are a given distance apart and between a U.S. port and a foreign port that are approximately the same distance apart. In 2014, John Frittelli of the Congressional Research Service found that shipping crude oil between the U.S. Gulf Coast and the Northeast cost about $5 to $6 per barrel while shipping it from the Gulf Coast to eastern Canada cost only $2. That’s a large premium to pay for U.S.-built and U.S.-manned ships.
We can indirectly see the absurdly high shipping costs induced by the Jones Act in other behaviors that someone unaware of the Jones Act would find simply bizarre. In their June 2018 study of the Jones Act, Cato Institute scholars Colin Grabow, Inu Manak, and Daniel Ikenson reported on some of the damaging effects on Hawaii. Hawaiians face much higher shipping costs to mainland United States because they are subject to the Jones Act. So what do Hawaii cattlemen do to get their cattle to the mainland? They transship their cattle through Canada and sometimes even ship their cattle by air.
The Cato report points to another bizarre consequence of the Jones Act: where Maryland and Virginia obtain the rock salt that they put on roads. Do they get it from the world’s largest producer of rock salt, namely, the United States. No! They buy it from—are you ready?—Chile!
A fundamental truth in economics is that when one good or service becomes more expensive, people look for cheaper substitutes. Shipments of cargo are not exempt from that truth.
Consider the 54 years between 1960 and 2014, when U.S. real GDP increased from $3.23 trillion to $17.14 trillion (all in 2012 dollars), an increase of 431 percent. One might expect a roughly similar increase in tonnage shipped by water. It didn’t happen. In 2017, the earlier-noted John Frittelli of the Congressional Research Service reported that between those two years, the amount of domestic contiguous coastal shipping, measured in tons, fell by 44 percent and domestic Great Lakes shipping fell by 43 percent. What happened? People substituted. Shipping by railroad, by oil pipelines, and by intercity trucks, all measured in tons, increased by 48 percent, 106 percent, and 217 percent respectively. It’s true that shipping on the Mississippi River System, which is also subject to the Jones Act, also increased, by a substantial 144 percent. That can be accounted for, notes Frittelli, by the fact that shipping on the Mississippi system is by barge. Frittelli does not give a comparison between the cost of constructing barges in the United States and the cost of constructing barges in other countries, but he does note that per unit of carrying capacity, their construction cost is about one sixth to one eighth the cost of the cost of constructing a ship in the United States.
Further evidence that this reflects the high and increasing cost of using U.S.-built and -manned ships is that the same Frittelli study found that waterborne shipping between the United States and Canada or Mexico, which, of course, was not subject to the Jones Act, rose by a hefty 304 percent over those 54 years.
Any totting up of the costs and benefits of the Jones Act should include two other costs and one benefit. The costs are the cost of congestion and the damage done, if any, by extra carbon dioxide, a greenhouse gas. The benefit is the gains to the U.S. workers who get to man the ships.
First, let’s consider the two added costs. A standard way to deliver goods by ship is to deliver to one port, do what’s called “breaking bulk,” which means off-loading the goods destined for that port or places nearby, and then move on to the next port where the ship drops off the cargo for that port and its environs, and so on. So, for example, a ship might off-load goods in Boston and then move on to Baltimore and off-load goods there. The problem is that the Jones Act prohibits foreign ships or ships staffed by foreigners from doing that because such a ship cannot legally go directly from one U.S. port to another. You might think that in order to do that, they would ship on U.S.-built and -crewed ships. But that’s too expensive. So, in the above example, the ship drops all its cargo in Boston and then the cargo destined for Baltimore and its environs is shipped by truck.
That shipping adds to congestion. In 2018 transportation consulting firm INRIX estimated that the cost of U.S. traffic congestion in 2017 was a whopping $305 billion. That cost is primarily in the form of lost time and secondarily in the form of extra fuel consumption. It’s possible that not much of this congestion is due to the lack of breaking bulk noted above. But consider the fact that there are about 3.5 million professional truck drivers in the United States and two million semis. These people aren’t just commuting. Truck drivers are expected to drive 125,000 miles a year. At a speed of 60 mph, which is almost certainly an underestimate, that amounts to 2,000 hours. So truckers spend at least 7 billion hours driving, which is 10 percent of the total hours that Americans spend. In the right places, that can mean a huge amount of traffic congestion. What we don’t know, of course, is how many of those hours were due to the Jones Act.
Whatever the number, we do know that shipping by truck creates more carbon dioxide than shipping by ship. Using ships produces 10 to 40 grams of CO2 per ton carried one kilometer and trucks produce a multiple, 60 to 150 grams for the same weight and distance.
One group that benefits is the few U.S. maritime workers who get to work. But the benefit should be calculated correctly. It is not the total pay to maritime workers: it is the pay over and above what they could get in their next highest-paying occupation. A simple finding in economics is that when foreign labor is much cheaper than U.S. labor—and in this case it is—the added pay to U.S. workers is well below the extra cost to shippers.
Notice what I didn’t count as a benefit: the reserve of ships that can be used in an emergency, which, after all, was stated by Senator Jones to be the raison d’etre of his 1919 law.
So why don’t I count it? Because the law hasn’t worked. Because ships produced in the United States cost a multiple of the cost of producing ships in foreign shipyards, few ships are produced here. Between 2014 and 2016, according to the above-mentioned Cato report, the total tonnage of ships produced in the United States was 910,000. That was a measly 1.3 percent of the total tonnage produced in South Korea, the leading ship-building country. Moreover, 65 percent of U.S. container ships are over 30 years old, which means they are less safe.
The Jones Act is even older and will turn 100 next year. Maybe we should deep six it. And how about repealing the even older Passenger Vessels Services Act while we’re at it.
