Century-old law hurts our modern economy
Antiquated requirement not needed, costs the nation up to ‘$200 million’ annually
By Glenn Hegar
December 2, 2015
If I were to tell you that a federal requirement is making life difficult for America’s petroleum and petrochemical industries – well, given the current administration, you probably wouldn’t be surprised at all. But if I told you it was signed into law by President Woodrow Wilson, you might wonder whether we still need it.
You’d be right to wonder.
The Merchant Marine Act of 1920, better known as the Jones Act for its long-forgotten Senate sponsor, addresses various aspects of U.S. commercial shipping. One of the most important of these concerns is what’s known as cabotage, or naval transport in U.S. coastal waters and between American ports. The Jones Act bans foreign vessels from these domestic routes, restricting them to American-built vessels flying the U.S. flag and crewed primarily by American citizens.
Supporters of the Jones Act often raise the issue of security. Should we allow foreign-flagged ships to freely roam our coastal waters?
But then, the most recent federal data indicate that more than 160 foreign vessels berth in American ports every single day. It’s also important to note that there are no similar limitations on the origin, ownership or crews of aircraft, which range freely in our skies more or less constantly.
But then, the Jones Act isn’t really about safety. It’s actually a classic piece of protectionist legislation, drafted when Britain still ruled the waves. It became law to help boost America’s shipping industry and, as with all protectionism, it ensures profits for a relatively small group while raising prices for everyone else.
America pays a pretty high price for all-U.S. cabotage. American-made ships can cost three times as much as foreign ones. According to the U.S. Department of Transportation’s Maritime Administration (MARAD), crews on U.S.-flagged vessels are paid five times as much as those on foreign ships. In all, MARAD says the average operating cost of a U.S.-flagged vessel is 2.7 times higher than that of its foreign counterparts.
And one of the first things you learn in business is, “costs are passed along.” The World Economic Forum believes the Jones Act costs the nation’s economy $200 million annually.
The implications of the Jones Act are particularly serious for Texas oil producers. Unfortunately, Texas refineries are geared largely toward processing the heavier, “sour” crudes of the Middle East, and that’s not going to change soon. That means that the light, sweet crudes produced from our shale formations generally have to be shipped to northeastern refineries.
And here’s where you can really see the economic distortions produced by protectionism: Due to the Jones Act, it’s actually cheaper to ship oil to the Northeast from halfway around the world than it is from the Gulf Coast. The Congressional Research Service has estimated the per-barrel shipping rate for oil bound for the Northeast at $1.90 for Saudi crude; up to $1.70 for Nigerian oil; and $5 to $6 for Texas products.
The Heritage Foundation estimates the Jones Act adds up to 15 cents per gallon to gas prices at the pump.
Due to higher costs in the U.S., shipbuilding has largely moved overseas. There are only a few remaining American shipyards that make commercial vessels, so there’s a perennial shortage of them for cabotage. America’s ports are already overburdened, and the Jones Act makes shipping even more delay-filled and frustrating.
Furthermore, the remaining U.S. ships in cabotage are getting steadily older, raising safety issues exemplified by the loss with all hands of the U.S.-flagged cargo ship El Faro in October. According to the New York Times, El Faro was 40 years old, about four times older than the global average.
As you might guess, however, the Jones Act has the enthusiastic support of vested interests that benefit from it. Naturally, shipbuilders and members of maritime unions are perfectly happy with protectionism. As recently as last year, U.S. Sen. John McCain, R-Ariz., floated a proposal to eliminate the cabotage provisions of the Jones Act. It went nowhere.
But in economic and safety terms, Jones Act protectionism makes no sense. It supports a small and declining segment of our economy at the expense of American businesses and farmers who depend on coastal shipping. It hinders the free flow of goods that leads to economic growth. It raises the prices paid by American consumers. It subsidizes shipbuilders who can’t compete in global markets, and encourages the operation of aging and unsafe vessels.
There are winners and losers in any economic shift, but in this case the winners greatly outnumber the losers. It’s time to get rid of this antiquated law.