Introduction
During a time of declining bipartisanship in Washington, one law continues to enjoy the backing of members in both parties: The Merchant Marine Act of 1920, better known as the Jones Act. The law requires that shipping between U.S. ports is conducted by ships that are U.S.-built and at least 75 percent U.S.-owned. Proponents of the Jones Act base their support on two main planks: national security and job creation.
Supporters of the Jones Act argue that in times of war, the government needs a fleet of merchant mariners to support commerce as well as a naval reserve. Furthermore, the law creates a demand for Americans to build, repair, and serve as crew on domestic vessels. This demand, according to them, creates a vital source of job creation in the shipbuilding industry. While the Jones Act may have good policy intentions, the fact is that the Jones Act has done more harm than good. The Jones Act has harmed the economy by restricting shipping, contributed to higher prices and costs, and has done very little to actually achieve the objectives of its passage.
Restricting Shipping
The Jones Act restricts vessels that do not qualify under its provisions from “cabotage” – meaning such vessels are prevented from operating in inland waterways and transporting cargo between ports in the United States. According to the World Economic Forum, the Jones Act provides the world’s most restrictive example of global cabotage laws. This has a significant effect, with only an estimated 2 percent of American freight actually traveling by sea. Compare this with the European Union, where cabotage is allowed between member states, where 40 percent of EU freight is able to travel by sea.
The results of these shipping restrictions have had catastrophic effects, as seen in Puerto Rico this year in the aftermath of Hurricane Fiona. As a result of the Hurricane, thousands of Puerto Ricans were left without power for multiple weeks. At the same time, a ship from Texas carrying 300,000 barrels of diesel fuel needed to restore power was stuck off the coast for one reason – it was foreign-built and therefore did not meet the provisions under the Jones Act. While the Biden administration ultimately granted a Jones Act waiver to allow fuel to be transported to the island, this episode demonstrates the Act’s ill effects.
Higher Costs and Prices
The restrictions set forth by the Jones Act have also resulted in a cascade of higher costs and prices. The U.S. economy has faced inflated shipping costs, due to most cabotage being off-limits to foreign competition and domestic shipping firms being forced to pay vastly higher prices for their ships. These exorbitant shipping rates have adverse effects that can be felt throughout the economy as well. Artificially inflated shipping prices have increased demand for alternative forms of transportation such as rail and trucking. This increases the costs of these forms of transportation which, in turn, inflates business costs and rates. The broad increase in transportation costs ripples through supply chains of various industries; which has squeezed profits, curtailed business investment, and disadvantaged U.S. companies relative to their foreign competitors.
An industry that has been hard-hit by the Jones Act is the petroleum industry. Despite the fact that the U.S. is a global leader in oil and gas production, many Americans still have to depend on foreign energy because of the Jones Act’s constraints. For example, it is estimated that shipping oil from Texas refineries costs three times more than shipping oil from Canada. This shift in oil supply has significant implications for the industry, especially during a time of high gas and energy prices. Jones Act requirements are estimated to cost the petroleum industry about $298 million a year (in 2022 dollars adjusting for inflation).
Failed Objectives
In reality, the Jones Act has done very little to achieve its original objectives. As time has gone on, the Jones Act has become obsolete and out of sync with the demands of the modern military. In both the Gulf War of 1991 and the Iraq War of 2003, the U.S. military relied more on foreign-flagged vessels to transfer equipment and supplies than it did on domestic vessels. Furthermore, the Jones Act fleet has declined from 151 ships to 99 ships in the years since the Iraq War. Foreign-built ships also continue to prove essential to the military’s sealift capabilities. Of the 46 ships comprising the Maritime Administration’s Reserve Force — a fleet that helps transport combat equipment and supplies — 30 are foreign‐built. All these aspects only go to illustrate the divide between modern realities and the national security justification of the Jones Act. The job creation justification is also on weak footing when looking at the facts. Due to higher prices in waterborne transportation, demand for shipping services is driven down. This reduced demand for shipping services means that producers build fewer ships, decreasing employment opportunities in the industry for both ship construction and ship crew.
Moving Forward
In a year where supply chain issues are rampant and inflation continues to rise unbated, the Jones Act has only served to exacerbate these problems. For over 100 years, powerful special interests have prevented a serious look at the flaws of Jones Act in Congress. The time has come for Congress to turn a new leaf and repeal this harmful law.
References:
[1] https://www.cato.org/publications/policy-analysis/jones-act-burden-america-can-no-longer-bear
[2] https://www.cato.org/blog/lower-gas-prices-scrap-jones-act
[3] https://www.nationalreview.com/2022/10/its-time-to-repeal-the-jones-act/
Policy Interns 