Author: bigwave

By Colin Grabow, Inu Manak, and Daniel J. Ikenson

How an archaic, burdensome law has been able to withstand scrutiny and persist for almost a century.

For nearly 100 years, a federal law known as the Jones Act has restricted water transportation of cargo between U.S. ports to ships that are U.S.-owned, U.S.-crewed, U.S.-registered, and U.S.-built. Justified on national security grounds as a means to bolster the U.S. maritime industry, the unsurprising result of this law has been to impose significant costs on the U.S. economy while providing few of the promised benefits.

This paper provides an overview of the Jones Act by examining its history and the various burdens it imposes on consumers and businesses alike. While the law’s most direct consequence is to raise transportation costs, which are passed down through supply chains and ultimately reflected in higher retail prices, it generates enormous collateral damage through excessive wear and tear on the country’s infrastructure, time wasted in traffic congestion, and the accumulated health and environmental toll caused by unnecessary carbon emissions and hazardous material spills from trucks and trains. Meanwhile, closer scrutiny finds the law’s national security justification to be unmoored from modern military and technological realities.

This paper examines how such an archaic, burdensome law has been able to withstand scrutiny and persist for almost a century. It turns out that, as in so many other cases of rent seeking, there is an asymmetry of motivations among those who benefit from the Jones Act’s protections and the vastly greater number who bear its costs. The protected domestic shipbuilding industry has a captive market from which it benefits handsomely and seeks to preserve by promoting fallacious arguments about the law’s necessity to national security, while the vast costs are dispersed across the economy in the form of higher prices, inefficiencies, and forgone opportunities that few people can even tie to the cause. That so many federal agencies and congressional committees have at least partial jurisdiction over different facets of the Jones Act also helps to explain its longevity. Lastly, this paper presents a series of options for reforming this archaic law and reducing its costly burdens.

Introduction
The Merchant Marine Act of 1920 has been a fixture of U.S. law and an imposition on the U.S. economy for almost 100 years. Better known as the “Jones Act,” the law was presented as a plan to ensure adequate domestic shipbuilding capacity and a ready supply of merchant mariners to be available in times of war or other national emergencies.1 The law aims to achieve those objectives by restricting domestic shipping services to vessels that are U.S.-built, U.S.-owned, U.S.-flagged, and U.S.-staffed. A century of evidence supports the conclusion that the Jones Act has failed in its main objectives while imposing substantial economic costs.

As a result of these restrictions, the U.S. economy endures artificially inflated shipping costs because the transport of cargo between U.S. ports and within the country’s vast inland waterways is off‐​limits to foreign competition and domestic shipping firms must pay vastly higher prices for the ships they use. Although higher shipping rates are the most obvious cost of the Jones Act, they are merely the first in a cascade of adverse consequences unleashed by the law’s restrictions.

Higher prices for waterborne transportation drive down demand for shipping services. When businesses move less cargo by water, shipping companies purchase fewer vessels. Reduced demand means that producers build fewer ships and, accordingly, there are fewer employment opportunities for merchant mariners. Meanwhile, artificially inflated waterborne shipping rates increase demand for alternative forms of transportation, including trucking, rail, and pipeline services, raising those modes’ rates and inflating business costs throughout the supply chain. Transportation expenses — incurred to move raw materials and intermediate goods to the next stage in the production process and final product to retailers and end users — comprise a significant portion of the cost of goods sold. Elevated transportation costs affect nearly every business in nearly every industry, rippling through supply chains, squeezing profits, curtailing business investment, disadvantaging U.S. companies relative to their foreign competitors, and depriving U.S. households of savings to spend elsewhere in the economy or to invest.

Meanwhile, heightened reliance on trucks and freight trains not only increases infrastructure and maintenance costs from wear and tear on roads, bridges, and rail, but also generates greater environmental costs. Surface transportation produces more carbon emissions than ships do, and its more intensive use increases the likelihood of highway accidents and train derailments involving hazardous materials. Relatedly, time wasted in growing traffic congestion — especially on highways running parallel to U.S. sea lanes — generates enormous opportunity costs from lost wages and lost output. Significant opportunity costs also can be observed in the loss of revenues experienced when, for example, a hog farmer in North Carolina purchases corn feed from Canada instead of from a farmer in Iowa because exorbitant delivery costs make the latter’s price uncompetitive. But even though some foreign suppliers benefit by happenstance in this manner, the Jones Act has been a persistent irritant to some of our most important trade partners, serving to prevent better access for U.S. exporters in their markets.

Despite these considerable costs and the absence of any measurable benefits, the Jones Act has persisted for nearly 100 years. Why? The answer is complex, but it boils down to the same causes that explain the persistence of rent‐​seeking behavior more generally. The small number of beneficiaries, which primarily include domestic shipyards and some labor unions, are more powerfully motivated to preserve the status quo than are the far more numerous adversely affected interests in seeking its repeal.