Hurricane Maria’s damage to Puerto Rico and delays in getting needed supplies to the island were a reminder that shipping within the U.S. is controlled by the Jones Act, a vestige of 1920s protectionism.
The Jones Act, also known as the cabotage act, establishes rules for waterborne cargo transportation within U.S. boundaries. It requires that all vessels carrying cargo between U.S. ports be built in U.S. shipyards, be at least 75 percent U.S.-owned, be registered in the U.S. and manned by primarily by U.S. citizens.
{mosads}The purpose of these constraints was to maintain a strong merchant marine and domestic shipbuilding capacity for national security purposes. Almost 50 years ago, there were 2,926 large ships in the U.S. fleet, now there less that 200 and only 97 are Jones-Act ships.
In addition, wages on American ships are five-times higher than on comparable foreign-flag vessels, while construction costs are four-to-five-times more expensive.
These higher costs are passed through the supply chain to consumers, with those in Hawaii and territories bearing the brunt of higher costs for what they can’t produce themselves, unless they turn to foreign imports. The Jones Act has had a very detrimental effect on Puerto Rico’s economy, which had serious financial problems before Maria and will face even worse ones unless a permanent waiver is granted.
The Jones Act is just one more example of protectionism that benefits the few — the US maritime industry — at the expense of the many. The national security argument that we need a robust ship-building industry for times of war has been undermined by the steady shrinkage of domestic capacity, which also has led to escalating costs and declining quality.
The Obama administration fought to remove all Jones Act exemptions but President Trump sensibly reversed that action in May. The president has pushed deregulation as part of his economic agenda and with the impact the Jones Act will have on rebuilding Puerto Rico, he should start reversing implementing regulations and challenge Congress to repeal it.
Repeal would benefit more than just Puerto Rico, the Virgin Islands, Guam and Hawaii. It would benefit East Coast refineries that have to rely on foreign crude oil instead of domestic crude from shale that is cheaper to ship to the western coast of Canada than to eastern coast of the U.S.
A study by the Mercatus Center documented the perversity on the Jones Act and made a strong case for repeal. In its conclusion, it pointed out that criticism of this form of mercantilist protectionism goes back to Adam Smith’s Wealth of Nations, published in 1776.
With over 200 years of evidence of the harm caused by protectionism, Congress has an abundance of evidence, if it chooses, to see its way to do the right thing. If it can’t stand up to the maritime special interests, how will it be able to stand up to the much stronger ones in attempting real tax reform?
William O’Keefe is the founder and president of Solutions Consulting. He formerly served as CEO of the George C. Marshall Institute, an organization that conducted technical assessments of scientific issues with an impact on public policy.