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Jones Act Lawsuit Will Test Control of Hawaii’s Shipping Monopoly

By Malia Zimmerman, 10/20/2009 5:52:42 AM

Big Island small business owner Jim O’Keefe operated the O’Keefe & Sons Bread Bakers in Hilo, Hawaii for 13 years before shutting down his extensive operation in 2008. His popular bakery closure left 50 people out of work, retail customers searching for other restaurants to buy deli and baked goods from, and several area businesses, grocery stores and resorts scrambling for other local places to buy wholesale baked foods.

The cost of doing business in Hawaii was just too high for O’Keefe to continue operating. Through his own research, he discovered that a large part of his expenses were for shipping flour and other food ingredients to the island of Hawaii.

“I would buy a 50 pound bag of flour for $6 or $7 in the mainland, and by the time it landed in Hilo, it cost me $12.50 a bag,” O’Keefe says.

O’Keefe, like virtually every other business person in Hawaii, sees the cost of goods skyrocket by the time they reach Hawaiian shores because of the Jones Act, a federal law that says all products shipped between American ports must be shipped in American made vessels by a crew that is 75 percent American. That law limits competition from world shippers, and raises the cost of doing business here, in O’Keefe’s case, by six figures over the life of his business.

“I checked into shipping rates in Hong Kong for an equivalent shipping distance and it was a third of the price of what we are paying here in Hawaii,” O’Keefe says. “The six figures I spent on paying Matson, labor unions and shipping owners could have been spent on local salaries, growth for my business, and during the economic downturn, could have meant the survival of my business.”

O’Keefe’s experience led him to agree to be a plaintiff in a lawsuit filed by local attorneys John Carroll and Christopher Dias, which is seeking injunctive relief for several local small business owners and ranchers whose business was hurt economically by the Jones Act.

Carroll, a former state senator who is also running for governor in 2010 as a Republican, says the lawsuit is “precedent setting.”

Hawaii’s Chief U.S. District Judge David Ezra is overseeing the case, and has set a hearing on the motion for a preliminary injunction on December 7, 2009, based on the plaintiffs’ claim that the restrictions are “excessively expensive for Hawaii’s people and are in violation of the Fifth and Fourteenth Amendments as well as the Commerce Clause of the U.S. Constitution.”

One of the purposes of enacting the Jones Act, Carroll says, was to ensure the United States of America would be well equipped with a maritime fleet that could compete in a worldwide economy, but it has had the opposite effect: “Unfortunately, it created unconstitutional restrictions on commerce between the state of Hawaii and worldwide shippers as well as on interstate commerce.”

Because Hawaii is separated from the continental United States by 2,300 miles of ocean, he estimates “Hawaii is dependent on ocean shipping for at least 90 percent of every commodity used and consumed in the state.” That had a compound effect on agriculture and the ranching industry. “The expense of agricultural production became prohibitive, not only because of the inbound shipping cost of fertilizers, herbicides, and farm implements, but also due to the outbound shipping costs for our locally grown fruits, livestock and ornamental plants. Hawaii cattle ranchers are faced with an intolerable situation. They often have to transport their cattle, from Kawaihae to Vancouver B.C. on a Canadian owned Corral Lines to remain profitable. The cattle must then be trucked (often for 500 miles) into the U.S. to be fattened and sold. To go direct, some are flown on Boeing 747 aircraft,” Carroll says.

The Jones Act is a contentious subject in Hawaii politics. Those who support the Jones Act, including Hawaii’s congressional delegation and Hawaii governor Linda Lingle, reap rewards in terms of substantial campaign contributions from the shippers and the unions.

But political candidates or politicians who dare oppose the Jones Act are subject to the cold shoulder and even retaliation from those powerful companies and unions that benefit from the Jones Act duopolies.

Congressman Ed Case, D-Hawaii (2002-2007) knows that first hand. He is running for an open seat in Congress in 2010, and is one of the few Hawaii Democrats holding office who have openly opposed the Jones Act.

Ed Case

In a September 2003 Congressional speech seeking an exemption for Hawaii and other non-contiguous U.S. locations from the Jones Act, Case asked, “Is it fair that our federal government creates a monopoly over any key aspect of life in Hawaii? Is it fair that our federal government provides one company, effectively, with the ability to control, to dominate, the lifeline that we have between here and the Mainland for all of our goods? Because that’s exactly what the Jones Act does.”

Case noted that 97 percent to 98 percent of our goods come to Hawaii from the Mainland, all come by shipping. “When somebody gets a hold of our lifeline, that’s a dangerous sign for us. And we’re paying for it in spades, thousands of dollars for each and every citizen of this country and this state, far more money for businesses that employ people and have to deal with those goods and services. That’s not fair, and that’s not the way it should be. We have laws in this country against the creation of monopolies, we believe monopolies are bad. Yet in this case, a federal law creates a monopoly.”

The December 2009 hearing in federal court and the 2010 elections should generate much needed debate and media coverage on the Jones Act and whether protectionism, unionism and monopolies – or the free market and competition – are “good” for Hawaii’s economy and consumers.

While Case supports a Jones Act exemption for Hawaii, his primary opponent, Senate President Colleen Hanabusa, supports the Jones Act. She is backed by Hawaii’s sitting delegation. Carroll also is up against opponents in the governor’s race who support the Jones Act, and opponents in the court who want Hawaii’s shipping monopoly to stay intact.

“As will be shown at trial, the cost of everything from automobiles to paper towels is significantly higher because of the enforcement of the Jones Act provisions,” Carroll says.

Matson photo provided by Mel Ah Ching Photography

Reach Malia Zimmerman, editor of Hawaii Reporter, at mailto:Malia@hawaiireporter.com

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