photo: Alexandra Zakharova
American colonists resented the British Navigation Acts. Colonists smuggled, protested, and eventually revolted against the restrictions on trade. John Hancock, the most prominent signer of the Declaration of Independence, became one of the richest men in the Colonies by smuggling (John Hancock-Heritage). However, in 2017 in the independent United States of America, the Navigation Acts are not dead. They survive in the form of the Jones Act, which is approaching its 100th anniversary.
WHAT IS THE JONES ACT?
The Jones Act of 1920 denies Americans from having access to the best shipping services in the world. Specifically, merchandise shipped by water from one US port to another must use a ship that was built in America, owned by Americans, operated by Americans and flies the American flag. Ships that satisfy these Jones Act conditions are much more expensive than foreign-flag vessels, and the higher costs get shifted on to American consumers. The American-build requirement is particularly onerous, as many types of American ships cost five times as much as foreign ships. Consequently, American businesses that export or import goods choose to hire foreign-flag ships to carry more than 80% of their trade.
NET COST OF JONES ACT
Denying American businesses access to the least-cost transportation imposes a large cost on American consumers. A recent estimate of the consumer cost is $1.8 billion per year (Grennes 2017a). It is time for reform of the Jones Act. Relaxing restrictions on shipping would be equivalent to improving transportation infrastructure available to American businesses at no cost to the government’s budget. (Grennes 2017b)
Outlawing the use of foreign ships on domestic routes is equivalent to imposing a prohibitive tariff or an import quota of zero. It is well-known that tariffs impose a net loss on an economy as the losses to consumers exceed the gains to protected producers. Some defenders of the Jones Act acknowledge a cost to the economy, but they claim there is a larger gain to national security.
Ostensibly the Jones Act contributes to national security by aiding the foreign operations of the US military and by contributing to speedy and effective responses to domestic emergencies. Unfortunately, contributions of Jones Act ships to foreign military operations have been found to be negligible (Quartel). For domestic emergencies, the Jones Act has had a negative effect. By prohibiting foreign-flag ships from dealing with emergencies, the Jones Act has slowed the emergency response.
It is difficult to quantify contributions to national security, but they must be positively correlated with the number of workers trained to build and operate ships. By this measure, the Jones Act must be a failure. The number of ocean-going ships built in the US has dropped dramatically. Nine shipyards produce large ships, and only four of them produce merchant ships. With respect to operating ships, the size of the US-flag fleet has dropped from 16.9% of the world fleet in 1960 to 0.4% in 2016 (Grennes 2017a). The benefits to national security must be declining.
POLITICAL ECONOMY OF JONES ACT
If the Jones Act has net costs and provides negligible national security benefits, how can it survive for nearly a century? The answer is a common one in the economics of public choice. The benefits are concentrated but the costs are diffuse. The beneficiaries know who they are, how they gain, and they have mobilized a durable and effective coalition. Conversely, most of those who bear the cost are not aware of the act, and they have weak incentives to participate in a coalition.
RECENT ISSUES: ENERGY AND PUERTO RICO
The cost of the Jones Act increased with the shale revolution in America. With an increase in oil and gas production in new domestic locations, the demand for domestic transport has increased. However, the high cost of Jones Act ships has caused some oil to be transported with foreign flag ships from the Texas Gulf to the Atlantic Coast of Canada instead of to New England. There was also a recent skirmish over the use of foreign flag ships in the Gulf of Mexico. The Obama administration recommended disallowing the use of foreign ship for activities they had been doing for decades. A week ago, after strong lobbying by Jones Act supporters, the Coast Guard issued a ruling to deny the proposal and continue to allow the traditional practices of foreign ships.
The Jones Act is also being discussed in the context of the default on bonds by the government of Puerto Rico. The problems of Puerto Rico are much broader than shipping costs, but the Jones Act contributes to the island’s economic problems. All products imported from the mainland are more expensive(Milligan), and some operators of Jones Act ships have been convicted of monopoly practices.
LONG-RUN FORCES AFFECTING THE JONES ACT
The Jones Act protects shipbuilding and operating, but there are long term forces working against these activities. Autonomous ships are coming, and they will threaten the jobs of seafarers. Autonomous planes (drones) are already being used to service oil operations in the Gulf of Mexico (Wall Street Journal). Also the American shipyards are relying increasingly on offshore outsourcing to produce new ships and refit old ones. Increasingly the American shipyards are merely assembling ships from components made all over the world. The jobs they create are located increasingly in Asia and Europe, even if the authorities pretend that they are “made in America”.
The time has come for fundamental reform of the Jones Act. Complete repeal would generate the greatest gains to the US economy. However, congressional support for the Jones Act remains strong. More moderate reforms have considerable economic merit. Waiving the American-build requirement for ocean-going ships on trips to the non-contiguous regions of Hawaii, Alaska, and Puerto Rico would provide many of the gains that would result from complete repeal of the Act (Grennes 2017a). Reform of the Jones Act could simultaneously achieve (1) a reduction in excessive economic regulation, (2) provide access to better shipping infrastructure at lower cost for American businesses, and (3) reduce barriers to American energy production, without an additional cost to the Federal budget.
Grennes, Thomas. 2017a. “An Economic Analysis of the Jones Act”. Mercatus Research Paper. Link.
Grennes, Thomas. 2017b. “Put the Jones Act Out to Sea”. US News and World Report, May 15. Link.
Milligan, Joseph. 2017. “More Government Isn’t Puerto Rico’s Answer”. Wall Street Journal. May 15.
Quartel, Rob. 1991. “America’s Welfare Queen Fleet: The Need for Maritime Policy Reform”. Regulation (14): 58-67.
Wall Street Journal. 2016. “Ship Operators Explore Autonomous Sailing”, August 31.Link.