Guam shows value of competition in U.S. shipping

The territory’s exemption from the U.S.-build mandate of the Jones Act should apply to all U.S. ports to boost competition and lower costs

by Jonathan Helton, Grassroot Institute, July 19, 2021

For years, Jones Act reform advocates have been urging that American shipping companies be allowed to transport goods from one U.S. port to another aboard foreign-built vessels. Such a move would lower upfront capital costs, encourage competition, provide more mariner and stevedore jobs, and lower consumer prices.

Yes, there could be some issues that would have to be worked out, since existing Jones Act ship owners are carrying overpriced U.S.-built ships on their books that would immediately fall in value if the U.S.-build requirement were eliminated.1 But there is already a case in which the U.S.-build exemption is applied, and Congress should take note of how it has worked out.

The U.S. territory of Guam in the Western Pacific has been exempt from this mandate since 1912,2 not long after it became a possession of the United States as a result of the 1898 Spanish-American War. America’s protectionist maritime legislation goes back to the nation’s founding, and this early 20th-century policy tweak was carried forward by Congress when it created the Jones Act in 1920. 

For most of Guam’s history as a U.S. territory, this exemption was relatively inconsequential, but in 2016, ocean carrier APL — a U.S. subsidiary of CMA CGM, a French company — entered the Guam-U.S. mainland and Hawaii trade, going up against Matson, virtually the sole Jones Act carrier serving the market.

Unlike Matson, APL does not own any Jones Act-qualified ships, but it does operate several ships that are part of what is known as America’s “international” fleet. They are U.S.-flagged but not U.S.-built, and thus not considered part of the “Jones Act fleet.” Currently, there are 180 large U.S.-flagged merchant ships, with 96 in the Jones Act fleet and 84 in the international fleet.3

Moving into the mainland-Guam trade, APL deployed two of its foreign-built U.S-flagged fleet ships — the APL Guam and APL Saipan — to compete with Matson’s five Jones Act container ships. APL quickly snatched up 23% of Matson’s market share in just two years,4 offering Guam lower prices and additional shipping options.5

This was a welcome relief for Guam’s residents, who buy 75% of their goods from the U.S. mainland.6 No longer did they have to rely solely on American-built vessels to bring in goods from other U.S. ports, such as Honolulu or Los Angeles. Instead, ships from America’s so-called international fleet also could bring in goods from U.S. ports. 

To put Guam in context, the 210-square-mile island is America’s most distant U.S. territory, located 3,950 miles west of Hawaii and 5,974 miles west of the U.S. West Coast. It is closer to Asia than Hawaii, being 1,600 miles south of Japan and 1,500 miles east of the Philippines. 

The major economic sectors on the island are the U.S. federal government, which provides about 33% of Guam’s annual gross domestic product, and tourism. Guam’s annual GDP in 2016 was about $5.8 billion,7 with 80% of all its imports arriving aboard ships.8

Politically, it has a democratically elected legislature and a representative in Congress with limited voting rights.9 It has been a U.S. territory since 1898, when it and Puerto Rico were ceded to the United States as spoils of the Spanish-American War.10

Before 2016, Guam’s exemption from the Jones Act’s U.S.-build mandate hadn’t made much difference. It was as if the territory was fully subject to the Jones Act, which also requires that all ships transporting goods between U.S. points be U.S. registered, and mostly crewed and owned by Americans. Not being subject to the build requirement gave Guam shipping options not available to most of the rest of America’s states and territories — but up to that point, mostly only in theory.11

As Honolulu shipping expert Michael Hansen wrote in 2014, since Matson served Guam from the mainland with many of the same ships that it used on its Hawaii routes, the territory was “functionally shackled to the domestic build requirement” of the Jones Act.12 Even the U.S. Navy complained that “little competition exists and transportation costs are extremely high.”13

Matson’s only competition before 2016 was two other lines that collectively carried just 1.8% of the mainland-Guam cargo.14 Between 1987 to 2011, Horizon Line served the market with U.S.-built ships, and even foreign-built ships for a time,15 but bailed after financial difficulties and a $15 million antitrust fine for rate collusion in its Puerto Rico trade.16

Horizon’s exit was a windfall for Matson; the Honolulu-based company’s Guam-mainland cargo volume jumped 94% in the first quarter of 2012.17

When APL entered the market in 2016, Matson was less than thrilled; it immediately challenged the legality of the move on the grounds that APL was a participant in the federal government’s Maritime Security Program, in which owners of U.S. international ships are given an annual stipend in exchange for their agreement to serve the Department of Defense in times of crisis.18

Matson alleged APL was illegally receiving the MSP subsidy while operating its ships in domestic commerce. Its first two lawsuits failed, as MSP participants had been “explicitly granted … the right to call on Guam from the U.S. mainland or while engaged in foreign trade,” according to the Sailors’ Union of the Pacific.19 Other Matson lawsuits against APL are still pending.20

APL has faced other challenges unrelated to its Matson dispute. Its vessel APL Guam was involved in a wreck in 2019 and had to be replaced with the CMA CGM Herodote.21

Still, the additional competition from APL has been beneficial to Guam. If Matson eventually succeeds in driving APL out of the Guam-mainland market, “such a change would limit competition and increase transportation costs to Guam,” then-Governor Eddie Calvo stated in 2017.22

Guam’s experience with APL demonstrates the value of competition. Hawaii’s experience with Pasha in 2005 followed a similar pattern: When Pasha’s ships entered the market, going up against Matson and Horizon, prices fell as service options rose.23

If the U.S.-build exemption were more broadly applied, shipping competition could increase and prices could potentially fall even further. After all, carriers such as Matson and Pasha pay a premium for U.S.-built ships; they cost four to five times more than their foreign-built counterparts.24 As the maritime industry itself has noted, high construction costs contribute to higher operating costs,25 and these operating costs translate to higher prices for consumers. 

A groundbreaking study issued by the Grassroot Institute of Hawaii in 2020 estimated that the Jones Act’s U.S.-build requirement alone siphons $296 a year from the average Hawaii resident.26

Ultimately, it makes little sense for the U.S. government to block U.S.-flagged, owned and crewed ships from operating in the domestic market, no matter the jurisdiction. At the very least, Hawaii, Alaska and Puerto Rico should be granted the same exemption as Guam, a proposition long supported by the Hawaii Shippers Council.27 Striking the build requirement would lower barriers to entry, increase competition and slash prices. 

America’s outlying states and territories would greatly benefit.