Could Compensation Smooth the Path for Jones Act Reform?

by Colin Grabow, Cato Foundation, March 29, 2021

Despite overwhelming evidence of the Jones Act’s costs to the U.S. economy and even national security, reform of the nearly 101‐​year‐​old law remains stubbornly elusive. That’s not entirely surprising. Those that reap the concentrated rewards of the law’s reduced competition have formed numerous special interest groups dedicated to its preservation. In contrast, due to the costs of the Jones Act being dispersed across the breadth of the U.S. economy, there are no lobbying groups that place its repeal or reform as a top priority.

It’s anything but a fair fight on Capitol Hill.

Those favoring the law’s retention will not easily relent, so for reform to be viable some kind of compensation for the loss of their Jones Act privileges will probably have to be provided. This is the messy reality of politics that must be acknowledged.

For illustrative purposes, let’s consider the Jones Act’s requirement that vessels transporting goods within the United States be built in U.S. shipyards. What kind of compensation might be warranted in exchange for the removal of the provision’s application to large, oceangoing ships (but retained for smaller vessels where price differences with foreign shipyards are less ghastly)?

There are two main groups that would immediately oppose any such move. The first, of course, is U.S. shipyards. The second and perhaps less obvious group is the very shipping companies forced to buy these vessels for four to five times the price of those built abroad. If the Jones Act’s U.S.-built requirement for large, oceangoing ships was to be scrapped, the value of these vessels—purchased by their owners for eye‐​watering sums—would immediately plummet. In addition, high ship prices serve as a barrier to market entry that helps keep potential competitors to these shipping companies at bay.

Both the shipbuilders and ship operators would be reluctant in the extreme to see the U.S.-built requirement removed, no matter how narrowly. Some kind of compensation would be needed to grease the legislative wheels for reform.

With regard to the latter group, one approach would be the granting of tax credits or write‐​offs. Ships could be assigned a generous 50‐​year lifecycle and their owners compensated based on the vessels’ useful remaining life and inflation‐​adjusted purchase price. Take, for example, the most recent Jones Act containership built. Named the Kaimana Hila, it was delivered in 2019 at a cost of $209 million. With 96 percent of its useful life remaining and factoring in inflation, the ship would qualify for a tax deduction of over $206 million.

And so it would go for the ships of the Jones Act oceangoing fleet. Somewhat perversely, the shrunken and aged nature of the Jones Act fleet—a mere 97 ships, one‐​third of which are at least 20 years old—would serve as an advantage by helping to limit the cost of such tax credits to the U.S. treasury.

Compensating U.S. shipyards could prove a trickier proposition. But again, the good news from a fiscal perspective is that—in another testament to the Jones Act’s failure—the domestic commercial shipbuilding industry is small. From 2000 through last year, these shipyards have collectively produced an average of just three ships per year—and that output appears set to decline.

To compensate these shipyards for the loss of Jones Act work, the government could provide aid in the form of lucrative contracts. Currently the ships of the Ready Reserve Force (RRF)—the fleet that serves as the mainstay of government‐​owned sealift—average 46 years old. That’s roughly double the age at which international merchant ships are scrapped. Relying upon these rust buckets is an invitation to maintenance issues and reduced readiness.

To remedy this the U.S. government could renew the fleet by contracting with the few remaining shipyards that build large oceangoing commercial ships to construct a new generation of sealift vessels. Providing many years of work, such contracts should provide ample time and resources for these shipyards to find a competitive niche in the international marketplace and prepare for life after the Jones Act.

As the American shipbuilding industry continues to shrink, the cost of compensation for the removal of their Jones Act privileges could further decline in the future. The industry’s diminished size would likely be accompanied by a commensurate reduction of its lobbying power. There may be a point in the future where the domestic build requirement could be cleanly repealed without compensation for the losers. If the shipyards realize they face a ticking clock then they should be more willing to deal now so they can at least gain something on the way out.

New York City taxi medallion holders surely wish they had opted for a similar kind of buy‐​out before that cartel was smashed by ride‐​hailing apps such as Uber and Lyft.

Admittedly, none of this would be cheap. Indeed, the entire arrangement is far from ideal. These firms have benefitted tremendously at the expense of Americans for over a century. The best approach—the deserved approach—would be to repeal not just the U.S.-build requirement but the Jones Act in its entirety without delay or compensation.

The political reality on the ground, however, makes that currently infeasible, and so second‐​best solutions that include the payment of compensation must be considered. While costly, compared to the toll exacted by the Jones Act—inflicted daily and compounding into ever‐​higher sums—it’s a bargain. All that is required is for Jones Act supporters to set aside their unyielding devotion to a law whose manifest failure becomes more glaring by the day.