China a threat to Jones Act lobby, except when it’s not

Jones Act carriers claim China is a threat to America’s maritime industry, but when they need cheap repairs, they know where to go

by Jonathan Helton, Grassroot Institute, May 4, 2021

One of the great disconnects of the Jones Act is that it requires vessels carrying goods between U.S. ports to be U.S.-built, but it doesn’t say anything about where those vessels must be maintained or repaired.

Thus, we have the spectacle of large transportation companies such as Matson and Pasha Hawaii posturing on behalf of the Jones Act, allegedly to protect American shipyards and national security, while at the same time sending their own expensive U.S.-built vessels to shipyards overseas to be maintained and repaired.1

Ships built in the U.S. are expensive? 

Indeed, they are — four to five times more expensive than ships on the world market.2

Probably not coincidentally, there is a dearth of demand for these costly vessels, contributing substantially to the closure of 300 U.S. shipyards between 1983 and 2013, leaving only four U.S. shipyards today that are capable of building large oceangoing ships.3 Since 2000, Jones Act-qualified vessels have dropped in number from 193 to 99 in 2020.4 U.S. shipbuilders have simply priced themselves out of the world market, and possibly would not even exist anymore were it not for “Buy America” military contracts5 and the Jones Act’s U.S.-build requirement for the domestic U.S. merchant fleet.6

You might ask, “If U.S. ships are so expensive, why do companies such as Matson not oppose being required to buy them?

The likely answer is that they can pass their extra costs onto consumers, since they have no meaningful competition.

A recent Grassroot Institute of Hawaii study, for example, found that Hawaii residents pay an extra $1.2 billion a year, or about $1,800 per average family, because of the Jones Act,7 and that eliminating the U.S.-build requirement alone would save Hawaii residents annually about $531.7 million, or about $300 per resident, and add 3,860 jobs.8

Another likely reason is that the higher capital costs make it more expensive for potential U.S. competitors to enter the trade, which suits companies like Matson and Pasha Hawaii just fine since they are already entrenched in the market. 

As Matson states in its 2019 annual report: “If the Jones Act [were] to be repealed, substantially amended, or waived and, as a consequence, competitors were to enter the Hawaii or Alaska markets with lower operating costs by utilizing their ability to acquire and operate foreign-flag and foreign-built vessels, the company’s business would be adversely affected.”9

As for potential foreign competitors, U.S. companies don’t have to worry because of the Jones Act’s U.S. flag, ownership and crewing requirements. But to the extent that they do worry about them, they often argue that without the Jones Act, merchant ships from countries such as China would dominate the U.S. domestic trade because of their lower capital and labor costs.10 The Jones Act is presumed to be a bulwark against that possibility, with violators facing strict fines or forfeiture of their cargo.11

A crack in the Jones Act alliance?

So back to the great disconnect: While U.S. shipyards and domestic ocean carriers collude to keep the Jones Act in place, the latter actually are undermining the former by sending much of their needed ship repair and maintenance work overseas — mainly to China. 

They do this even though a separate U.S. law, the Tariff Act of 1930, requires in many cases that any U.S.-flagged vessel repaired in a foreign shipyard pay a 50% tariff to the U.S. government. The law’s intent is to keep U.S. shipyards busy and punish any U.S. company looking for a lower-cost alternative. The tariff clearly is an additional burden on Jones Act carriers,12 but it’s not enough to discourage companies such as Matson and Pasha from sending their ships overseas for repair and maintenance. 

A 2011 U.S. Maritime Administration review of U.S.- and foreign-flag vessel operating costs found the daily average maintenance expense for U.S. ships totaled $2,994 versus $2,390 for foreign ships — a $600 dollar difference.13 Over the course of a year, that difference adds up. 

The MARAD study also found that many U.S. carriers regularly use foreign shipyards to have their vessels maintained and repaired, since even with the tariff they are cheaper than U.S. yards. 

Matson, for example, has partnered with Chinese-owned COSCO Shipping Shipyard for more than 20 years to have its vessels repaired at the company’s shipyard in Nantong, China. During that period, COSCO has performed work on 23 of Matson’s vessels.14

In July 2019, COSCO even greeted Matson executives with a celebration of their 20 years of doing business together. The festivities took place while Matson’s M.V. Maunawili — a Jones Act ship used in the mainland-Hawaii trade — was docked at the Nantong shipyard for repairs. 

Nevertheless, Matson — which did not respond to repeated requests for comment on why it has its ships repaired and maintained overseas — continues to maintain that the Jones Act is “important to homeland security and national defense.”15 It and other Jones Act proponents frequently suggest — on their own or through their corporate lobbying group, the American Maritime Partnership — that China is a threat to the U.S. maritime industry.16 But if that is the case, why do they send their ships to China for maintenance and repairs? 

Matson accused of hypocrisy

On occasion, U.S. shipyards have complained about this situation. In 2004, for example, Matson received permission from the U.S. Coast Guard to have substantial work done in China on three of its Jones Act ships. The work allegedly went beyond typical repairs, as Matson paid to have the ships converted to partial roll-on/roll-off vessels used for carrying automobiles. 

Generally speaking, the Jones Act strictly regulates how much work can be done on a ship in a foreign shipyard before it might be considered rebuilt and thus no longer a Jones Act ship. For example, no more than 7.5% of a ship’s steel weight may be from foreign components.17

The Shipbuilders Council of America18 and Pasha Hawaii — Matson’s primary competitor in the Hawaii trade — thought Matson was violating this policy, and sued the U.S. Coast Guard, the U.S. Department of Homeland Security and the National Vessel Documentation Center. Matson ultimately was exonerated, but not before two lawsuits worked their way through the courts.19

In 2006, Allen Walker, then president of the Shipbuilders Council, opined that, “Matson has been hiding behind the Jones Act for years to keep foreign competition out of its markets, but then getting pennies on the dollar for repairs in foreign shipyards. They are hypocrites.”20

He might also have said the same thing about Pasha. It also relies on foreign shipyards. Just last year, Pasha — which also did not respond to requests for comment on why it has its vessels repaired and maintained overseas — had its Horizon Spirit maintained at the COSCO shipyard in Nantong.21 It had work done on the Horizon Pacific in China in 2017 as well.22

ConocoPhillips Polar Tankers also is a fan of foreign shipyards. In 2020 it dry-docked its Polar Endeavor in Singapore, where this year it plans to dry dock three more of its Polar oil tankers: the Discovery, Enterprise and Resolution.23

Also in 2020, TOTE Maritime used the Victoria Shipyard in Canada to convert its Midnight Sun vessel into a liquified natural gas dual fuel propulsion system;24 And in 2019, TOTE sent its Perla del Caribe vessel to the Grand Bahamas Shipyard for its first dry dock since entering service in 2016.25 Meanwhile, the designated shipyard for National Shipping of America’s National Glory is the Chengxi Shipyard Co. in Jiangyin, China.26

The now-defunct Horizon Lines also relied on foreign shipyards. Edward Washburn, former Horizon general manager of engineering and technical service, told PandaNews in 2013 that his company liked using the COSCO shipyard in ZhouShan, China, because, “We like to get the best value for our dollars.”27

And so do all companies. Financial considerations are important to all business ventures, including Jones Act carriers. On the other hand, there is the issue of being consistent.

Jones Act carriers enjoy best of both worlds

The sad fact is that the Jones Act has led to U.S. shipbuilders pricing themselves out of the world market while adding to the capital costs of the existing Jones Act carriers that are required to buy their ships. Those carriers, however, apparently are fine with that arrangement, partly because they can pass the extra costs onto their customers. 

The higher capital costs also discourage potential domestic Jones Act competitors, and that, too, suits the business model of the existing Jones Act carriers.

Meanwhile, those same privileged Jones Act carriers frequently have their expensive U.S.-built ships maintained and repaired in foreign shipyards, instead of sending them to U.S. shipyards that ostensibly are their allies in support of the Jones Act. 

The 50% tariff imposed via the Tariff Act is meant to help protect U.S. shipyards, but that is not enough to keep Jones Act carriers in line. Jones Act carriers simply pay the duty and take advantage of the lower-priced shipyards in China and elsewhere for their needed maintenance and repair work — despite citing China as a threat to U.S. maritime activities.

Perhaps it has occurred to U.S. shipyard owners that the repair tariff should be increased to 100%, to lessen the incentive for Jones Act carriers to have their vessels repaired overseas. That could work for the U.S. shipyards, but not so much for the Jones Act carriers, and definitely not for U.S. consumers. 

A better path would be to eliminate the 50% tariff, since it’s not serving its purpose anyway and also adds costs for consumers. There is already precedent for this: The U.S. does not levy this charge on vessels repairs done in Canada, Mexico, Singapore or Israel.28

Scrapping the Jones Act’s U.S-build requirement would be even better. That would make it easier to expand competition within the domestic fleet, and almost surely help lower waterborne transportation prices for American consumers.

The Jones Act-protected industry probably would fight such reform, but there are ways it could be turned into a win-win situation. Jones Act expert Colin Grabow of the Cato Institute recently suggested the carriers could be offered tax credits or write-offs to compensate for the values of their U.S.-built vessels that would plummet after Jones Act reform.29

For example, he said, the most recent Jones Act containership built, Matson’s Kaimana Hila, was delivered in 2019 at a cost of $209 million.

“With 96 percent of its useful life remaining and factoring in inflation,” Grabow said, “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.”

Grabow said that for America’s commercial shipyards, the government could compensate for their loss of Jones Act work by offering them lucrative contracts. In particular, it could fund renewal of the Ready Reserve Force, the fleet that serves as the mainstay of government‐​owned sealift, and is an average 46 years old.

“Contracting with the few remaining shipyards that build large oceangoing commercial ships to construct a new generation of sealift vessels [would provide] many years of work, [and probably] ample time and resources for these shipyards to find a competitive niche in the international marketplace and prepare for life after the Jones Act.”

Grabow recommended that the Jones Act carriers and U.S. shipyards take the offer while they still have bargaining power. The Jones Act fleet is down to a mere 97 ships, one‐​third of which are at least 20 years old, and from 2000 through last year, America’s commercial shipbuilding companies have collectively produced an average of just three ships per year — “and that output appears set to decline.”30

He said that while costly, compared to the toll exacted by the Jones Act, such a deal for the Jones Act carriers and shipyards would be s a bargain.

“All that is required,” he said, “is for Jones Act supporters to set aside their unyielding devotion to a law whose manifest failure becomes more glaring by the day.”

Meanwhile, the current situation remains cozy for some — Jones Act carriers, U.S. shipbuilders and foreign shipyards — but not American consumers.

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Related:  Hawaii's Creaking Jones Act Ships Turn to Chinese Shipyards for Maintenance Needs

Link: Footnotes