The Jones Act Makes Me Want to Scream!
Protectionism - the dark side
This nasty piece of legislation - technically, The Merchant Marine Act 1920 - became law in 1920 and it has done the country no good at all.
The basic rule is that, in order for a vessel to be able to travel from one US port to another directly or to be able to use the vast network of navigable internal waterways with which the US is richly blessed, it has to be built in the US, 75% owned by US citizens, 75% crewed by US citizens and registered (flagged) in the US and therefore be subject to US administrative rules and oversight.
The goal of the legislation was to ensure the US would have, esspecially in times of war, adequate domestic shipbuilding capacity and enough merchant mariners to crew the vessels. That is not where we have ended up and it is worth reflecting on whether there are lessons to be learned as we move aggressively toward an era of industrial policy focused on reshoring the production of a wide range of goods deemed key to some core industries, chip manufacturing being one very conspicuous example.
Greg Hayes, CEO of Raytheon, a top defense contractor is on record that pulling out of, or fully decoupling from China is impossible. According to David P. Goldman, American Strategist and writer for the publication Law & Liberty and for the Asia Times, China currently has the capacity to build 1,000 cruise missiles each week. The lead time for building them in the US is 2 years. Recent procurement has not been keeping up with the rate of use, most recently in the Middle East against the Houthis. Presumably, Raytheon could build more, quicker, if instructed to do so by the armed forces, but that would require an act of political will, as well as a rapid retooling of production lines that have barely been economical to maintain in the recent past due to lack of orders.
I digress. Back to the Jones Act. The US has over 12,000 miles of commercially navigable waterways. According to geopolitcal strategist, Peter Zeihan, it costs less than 10% of the cost of truck or rail to haul cargo by water. This diagram from the Waterways Council suggests that the number is conservative.
Between 5-10% of navigable waterways' capacity is used to transport commercial traffic. The 578 million tons referenced above is worth around $158B, which suggests that we are wasting over $1.4T of traffic that could otherwise be moved an order of magnitude more efficiently than by rail or road.
The commercial argument should be clear, but some more examples may help. A foreign ship delivering goods to the port of Los Angeles from the Far East may not visit Hawaii on its return journey to drop off goods because that trip is prohibited by the Jones Act. A foreign tanker originating in Houston is not permitted by the Jones Act to deliver some of the abundant and very cheap LNG produced in Texas to ports elsewhere in the US, the Northeast, for example. Foreign vessels may not service the construction of offshore wind farms from US ports. Sadly, there is not an abundance of Jones Act-qualified vessels to serve that purpose. The workarounds add significant expense.
So, has the Jones Act been successful in its stated objective of securing the production and staffing of a domestic fleet? Not really. The cost of constructing a Jones Act-compliant coastal and feeder ship is between $190-250MM, whereas the cost to build a similar vessel in a foreign shipyard is around $30MM. The cost of operating a US-flagged vessel is 2.7x greater than those of foreign competitors. The shipbuilding industry in the US has been unable to compete and has withered. The US is number 10 in the world in terms of number of ships built (90% are either barges or tugboats) and builds less than 1% of the combined output of China and Korea. In large part this is because shipbuilders are obliged to incur the costs associated with Jones Act compliance and have not ‘benefited’ from having to compete with others whose order volumes permit improvements and enhancements to the process of producing modernized vessels.
The fleet of compliant vessels has aged and dwindled, as has the supply of people able to crew and captain US-flagged vessels. The typical economically useful life of a ship is 20 years. 75% of US container ships are more than 20 years old and 65% are more than 30 years old. Not only has the state of shipbuilding rendered the US uncompetitive in commercial shipping; but it has also become not fit for purpose for the military.
For the mainland - the Continental US - the Jones Act is effectively a tax on trade and commerce that has a workaround in the form of trucks and ralways. For Hawaii and Puerto Rico, it is much worse. The carbon produced by shipping by rail is 2x-3x that of shipping; for trucks it is 3-6x.
So, if the commercial, defense and environmental cases for repealing the Jones Act are compelling - they are - then what is standing in its way? Bureaucracy and labor. No fewer than 6 federal agencies and 16 congressional committees are charged with Jones Act enforcement and oversight. Organized labor is reluctant to let go of the special protection it enjoys because of the legislation, as are shipbuilders and those convinced it is essential to national security.
The Inflation Reduction Act offers substantial incentives to various categories of products, such as solar panels, that have been manufactured domestically. On a solar panel that attracts a 30% investment tax credit (ITC), that credit can receive an additional 10% ITC if the steel used in the facility is sourced and manufactured domestically. Certifying that is not straightforward, but is attracting lots of investment activity. The hope is that the additional 10% does not simply disappear into an inflated cost basis...
If the US is planning to prosper from reshoring and remain competitive in providing the manufactured goods that reshoring effort is targeting, it needs to pay attention to costs, unless the sole purpose is to supply domestic consumers with nowhere else to go...