Category: Hawaii Maritime Shipping

Project Syndicate
by ANNE O. KRUEGER

In a sweeping new executive order, US President Joe Biden has called on regulators to push for greater competition across a wide array of sectors and industries. But sometimes regulation itself is a big part of the problem.

US President Joe Biden recently issued an executive order calling on regulators to “further competition” in the shipping and rail industries, among others, because high and rising freight costs and delivery delays constitute a drag on economic activity by preventing businesses from obtaining timely inputs. But regulatory interventions won’t ameliorate that problem; deregulation will.

For over a century, US maritime transport has been regulated under the Merchant Marine Act of 1920 (the “Jones Act”) and the Foreign Dredge Act of 1906, both of which greatly restrict competition and raise costs. The Jones Act requires all shipping between domestic ports to be on vessels that are American-built (made with a majority of American-made parts), American-owned, American-operated, and manned by a crew that is at least 75% American.

The Case Against the Jones Act, a collection of essays edited by Colin Grabow and Inu Manak, details the many problems with this rule. For starters, the law both ignores and contributes to the fact that coastal cargo ships built in the United States cost six to eight times more than similar vessels built elsewhere. Moreover, labor costs are substantially higher for US ships, both because wages are relatively higher in the US and because the legally required size of coastal ship crews has remained unchanged, even as automation has enabled foreign shipping companies to reduce crew size and lower their costs. Restrictions on US dredging further exacerbate the problem.

The paradox of this protectionist rule is that it has led to a sustained decline in US shipbuilding, an increase in land-based transportation, unnecessary highway congestion, greater environmental damage, and an aging, smaller fleet that employs far fewer people than it once did.

Citing high and rising costs, Biden’s executive order aims to enhance US competitiveness and economic growth, improve occupational conditions for American workers, reduce environmental damage, safeguard national security, strengthen US infrastructure, and increase the number of “good” jobs.

It is rare to find a policy instrument that can achieve so much for so little. But that is exactly what repealing America’s damaging shipping regulations would do. Hawaii, Alaska, and Puerto Rico, in particular, would benefit immensely, because maritime shipping between them and the US mainland costs significantly more than it would without the Jones Act (which has even resulted in cattle being transported by air from Hawaii.)

The benefits of repeal would be far-reaching, starting with the effect on competitiveness and growth. High shipping costs raise the prices of imports used in manufacturing, which in turn raises the prices charged to consumers, making US businesses less competitive in foreign countries where other producers bear no such costs. An inefficient and costly transportation sector reduces the entire economy’s overall growth rate.

By unnecessarily increasing the cost of ships, the Jones Act deters US shipping companies from buying new vessels. Not surprisingly, at least half the US coastal shipping fleet is more than 30 years old, even though the ships’ economic life expectancy is about 20 years. It is estimated that there are only 99 active Jones Act ships, supporting 3,380 jobs at most. With deregulation, the industry could add more ships and thus more jobs. And the newer ships would be better for the environment and less accident-prone, providing a healthier workplace for more crew.

The environmental benefits would not end there. Freight carried by ship causes greenhouse-gas emissions that are 70% lower per ton-mile than freight carried by rail, and over 80% lower than freight carried by trucks. By allowing for much more freight to be shipped by water (at significantly reduced cost), repealing the Jones Act would relieve traffic congestion and delays on major US trucking routes. This also would further Biden’s infrastructure goals, by freeing up resources that otherwise would go to maintain the country’s over-burdened highways.

Since the Jones Act was enacted, the number of shipyards and ships built in the US has diminished greatly, except in the case of barges and related small vessels. As former US Maritime Commissioner Rob Quartel concludes in his contribution to The Case Against the Jones Act, the law’s restrictions “have led to the demise of American ships and shipbuilding and the subsequent loss of military support capacity, to the detriment of our national security.”

He also notes that the Jones Act has been suspended “for national emergencies…on the grounds that it was an impediment to national security.” More broadly, the national-security argument for requiring ships to employ American citizens makes little sense: foreign-flagged and foreign-manned ships enter US ports from overseas every day, and the airline industry may employ anyone who is authorized to work in the US.

In sum, the Jones Act has not served any of the purposes that its defenders cite. It has been detrimental to workers, the environment, and the overall economy, while benefiting only a very small group of people.

Fortunately, the law could easily be phased out over time, with offsets for any reduction in wages to seamen already in the industry. During the phase-out period, waivers could allow shipping to Hawaii, Puerto Rico, and Alaska. These could also be granted in cases where Jones-eligible shipping is not available, or where the costs or delays of using it are unreasonably burdensome.

Not all regulation is bad, and not all regulation is good. There is no question about how to categorize the Jones Act. If the Biden administration is serious about promoting competition and economic growth, it should look at regulations that do far more harm than good.

Bloomberg Opinion –

For more than a century it has benefited the few over the many, while failing to maintain a robust maritime industry. –

Another domestic energy crisis, another waiver of the Jones Act.

In response to the ransomware attack on the Colonial Pipeline, which delivers about 45% of the fuel for the eastern seaboard, President Joe Biden’s administration said that it would allow two exemptions to the 101-year-old act, which restricts waterborne commerce between U.S. ports to ships that are built, crewed and owned by Americans. Citgo Petroleum Corp. and Valero Energy Corp. now have permission to use foreign vessels to transport oil products between the Gulf Coast and the East Coast

Hurricanes forced previous presidents to suspend the law to ensure deliveries of food, fuel and other goods. This time, Biden should face reality and bury it under the waves.

As with most protectionist measures, the Jones Act harms the very people it purports to help. Because oceangoing Jones Act-compliant ships are more expensive, and there aren’t that many of them, the law leads to higher prices for goods, more congested roadways and pipelines, and additional pollution from greater reliance on carbon-intensive transportation.

Its market-bending distortions could scarcely be exaggerated. As a direct result of the law, refineries on both coasts can find it cheaper to import foreign oil than to use domestic sources. Refineries in the Gulf Coast choose to send their products to Latin America instead of the East Coast. The U.S. may be a natural gas powerhouse, but it has no Jones Act-compliant liquefied natural gas carriers, which would cost two to three times as much as equivalent ships from South Korea. So Puerto Rico and Hawaii source their LNG from overseas, northeast ports look to Trinidad and Tobago, and U.S. natural gas goes abroad.

The act is even undermining the Biden administration’s vaunted green-energy plans. Offshore wind projects need Jones Act-compliant turbine-installation vessels. Right now, the U.S. has one — under construction, that is, and due to launch in 2023 at a cost of $500 million. Hitting the administration’s goal of 30 gigawatts of offshore wind-energy production by 2030 will require more vessels, which the law will only make more expensive.

It would be one thing if the Jones Act met its stated goal of sustaining a robust merchant fleet. But the number of Jones Act-eligible U.S. vessels in 2019 was 99, versus 193 in 2000. From 1960 to 2014, even as U.S. output more than quadrupled, the tonnage of domestic contiguous coastal shipping dropped by 44%. America’s few remaining commercial shipyards are expensive and superannuated: Indeed, some companies that shamelessly defend their Jones Act monopolies send their ships to China for repairs, which is cheaper even with the 50% tariff that they pay the U.S. government for the privilege.

The Jones Act survives because it supports the narrow interests of a handful of shipping companies and maritime unions, which pump out a reliable stream of campaign cash to the Congressional Shipbuilding Caucus. Never mind the costs to all Americans — especially those in Alaska, Hawaii and Puerto Rico, who depend heavily on maritime commerce.

There are better ways to build up coastal commerce and the maritime industry, from investing in neglected port infrastructure and public shipyards to changing the tax treatment of U.S.-flagged ships. Yet the Biden administration seems committed to preserving the Jones Act, whatever the consequences. Here’s a question for the White House to ponder: If this law is so successful and so vital, why does it so often need to be waived in cases of emergency?

His proposals would amend the century-old Jones Act to combat monopolies in domestic shipping –

(Honolulu, HI) – Congressman Ed Case (HI-01) re-introduced three bills in Congress to reform the century-old Merchant Marine Act of 1920 (commonly referred to as the “Jones Act”), which is widely credited with artificially inflating the cost of shipping goods to Hawai’i.

“These three bills are meant to end a century of monopolistic closed market domestic cargo shipping to and from my isolated home state of Hawai‘i as well as the other island and separated jurisdictions of our country that lie outside the continental United States,” said Case.

“The bills aim directly at one of the key drivers of our astronomically high cost of living in Hawai‘i and other similarly located jurisdictions.”

Case continued: “Because the Jones Act severely limits the supply of shipping to and from our communities, it has allowed a very few companies to control our very lifeline to the outside world and as a result command shipping rates way higher than the rest of the world.

“The Jones Act mandates that all cargo shipping between U.S. ports occur exclusively on U.S., not foreign, flagged vessels. Additionally, the law requires that these vessels are built in the U.S. and owned and crewed by U.S. citizens. Because Jones Act shipping has shrunken and international shipping has increased dramatically, especially in the last quarter-century, the Jones Act results in a very few carriers serving all domestic shipping needs.

“And those few U.S. flag cargo lines that remain have maneuvered the Jones Act to develop virtual monopolies over domestic cargo shipping to, from and within our most isolated and exposed locales – our island and offshore states and territories – that have no alternative modes of transportation such as trucking or rail.

“Hawai‘i is a classic example. Located almost 2,500 miles off the West Coast, we import well over 90 percent of our life necessities by ocean cargo. There are plenty of international cargo lines who could and would compete for a share of that market. Yet only two U.S. flag domestic cargo lines—Matson Navigation and Pasha Hawai‘i—operate a virtual duopoly over our lifeline.

‘While they are nominally subject to federal regulation, the fact of the matter is that cargo prices have gone in only one direction–up, fast and repeatedly, despite a surplus of international shipping–and it is indisputable that there is no downward market pressure which would otherwise result from meaningful competition.

“These accelerating cargo prices are not absorbed by the shipping lines, but passed through all the way down the chain, to the transporters, wholesalers, retailers, small businesses, mom-n-pops and ultimately consumers, of all of the elementals of life, from food to medical supplies, clothes, housing and virtually all other goods.”

“More broadly, there is much evidence about the direct impact of the Jones Act on shipping prices to noncontiguous areas. At a basic level, the everyday goods that we rely on in Hawai‘i cost much more than on the Mainland, a difference which largely cannot be attributed to anything other than shipping costs,” said Case.

Last year, the Grassroot Institute of Hawai‘i published a thorough and first-of-it-kind report, “Quantifying the Cost of the Jones Act to Hawai‘i.” The report found that:

• The median annual cost of the Jones Act to the Hawai‘i economy is $1.2 billion.
• The annual cost of shipping to Hawai‘i is estimated to be $654 million higher and prices $916 million higher.
• The Jones Act annually costs each Hawai‘i resident more than $645.
• Thanks to the Jones Act, Hawai‘i has approximately 9,100 fewer jobs, representing $404 million in wages.
• Hawai‘i families across all income groups would benefit from Jones Act reform. In the absence of Jones Act restrictions, those making between $15,000 and $70,000 annually would see an annual across-the-board economic benefit ranging from $78 million to $154 million.
• Annual tax revenues would be $148.2 million higher.
• Focusing solely on the Jones Act requirement that vessels be built in the United States, they found that the build provision results in a 1.2% shipping cost increase for Hawaii. This translates annually to an added cost of $531.7 million to the state’s economy, or about $296 per resident.
• It also means a loss of 3,860 jobs, and $30.8 million less in state and local tax revenues.

Case’s three measures and their proposed amendments to the Jones Act are:

• the Noncontiguous Shipping Relief Act, which exempts all noncontiguous U.S. locations, including Hawai‘i, from the Jones Act;
• the Noncontiguous Shipping Reasonable Rate Act, which benchmarks the definition of a “reasonable rate” which domestic shippers can charge as no more than ten percent above international shipping rates for comparable routes; and
• the Noncontiguous Shipping Competition Act, which rescinds the Jones Act wherever monopolies or duopolies in noncontiguous Jones Act shipping develop.

“These long-overdue bills are of the utmost importance to the unique localities which have been left undefended to bear the brunt of the Jones Act. It is often difficult to pierce the veil of longstanding custom and understanding to see the real negative impacts of a law and what should instead be. It is even more difficult to change a law which provides a federally created and endorsed monopoly under which no competition exists to hold down prices. Yet clearly the time for these measures is overdue.”