New Reports Detail the Jones Act’s Cost to Puerto Rico

by Colin Grabow, CATO Institute, Feb 25, 2019

Last year the American Maritime Partnership released a report claiming that the Jones Act, a protectionist law which requires domestic water transport to be performed by vessels that are U.S.-made, crewed, owned, and flagged, imposes no cost on consumers in Puerto Rico. Riddled with apples-to-oranges comparisons and an opaque methodology—the no cost assertion was in large part based on a cost comparison of a mere 13 items sold by Walmart at its stores in Jacksonville, Florida and San Juan, Puerto Rico—the report was deeply flawed.

Just how flawed became more apparent last week when several Puerto Rico-based business groups released two analyses examining the Jones Act’s economic impact on the territory.

The first analysis, prepared by Puerto Rico-based Advantage Business Consulting, focused on the food and beverages sector where it found a Jones Act cost of $367 million. The methodology used is transparent. After surveying food industry companies in the territory about their transportation costs, the report’s authors found Jones Act vessels to have shipping prices 2.5 greater than non-Jones Act shipping from foreign ports ($3,027 versus $1,206) after adjusting for container size and distance. Total maritime transportation costs, meanwhile, were found to be 12 percent of the value of imports. By multiplying 60 percent (the percentage differential between $3,027 and $1,206) by the 12 percent figure, the report’s authors were able to derive a de facto Jones Act tax of 7.2 percent (.60 * .12).

When this 7.2 percent tax was applied to the $4.154 billion estimated to be imported from the U.S. mainland in FY 2018 ($4.615 billion in food and beverages were imported while survey data indicates 90 percent of this originated from the U.S. mainland), the result was a cost of nearly $300 million. Again, this is just for food and beverages.  

The report points out, however, that other factors no doubt push this $300 million figure still higher.  One such factor is the need to first transport the goods to a port for shipment to Puerto Rico. While as recently as 1996 there were ten mainland ports from which goods could be transported to Puerto Rico, that number has since shrunk to a mere four. Furthermore, survey data indicates that just a single port—Jacksonville, Florida—accounts for 88 percent of containers sent to the territory.

In other words, to ship goods to Puerto Rico likely first means sending them to Jacksonville, which can mean significant added expense in a country as vast as the United States. The cost of transporting a 40-foot container from California to Jacksonville, the report noted, is $7,000.

Another factor cited is a “cascade effect” from markups in the distribution chain being higher than would otherwise be the case owing to the artificially high cost of transportation. In addition, the increased cost of inputs used by producers in Puerto Rico, such as farmers who must use fertilizers imported from the mainland, means a higher cost for final goods. According to Advantage Business Consulting the incorporation of these factors results in a total Jones Act cost to the food and beverage sector of $367 million.

The second analysis, meanwhile, took a more comprehensive look at the Jones Act’s impact on Puerto Rico. Produced by John Dunham and Associates, it used a model of international shipping costs for 260 different commodities and compared it against six different estimates of Jones Act shipping cost differentials. After controlling for distance and terminal handling charges the analysis estimated these differentials to range from 89 percent to roughly 30 percent.

Using the firm’s recommended model, the analysis finds the Jones Act raises the price of shipping cargo to Puerto Rico by $568.9 million and that prices are $1.1 billion higher than would be the case without the Jones Act. This, in turn, is estimated to mean 13,250 fewer jobs. Were they to exist, such jobs would mean $337.3 million more in wages and over $1.5 billion in increased economic activity. Tax revenue would be $106.4 million higher without the Jones Act.

Such costs are significant in almost any context. For a territory with a lower per capita GDP than every U.S. state, high unemployment, and still reeling from the impact of Hurricane Maria, they are even more so.

It should be stressed that these reports are but the latest evidence of the harm wrought by the Jones Act on Puerto Rico. Indeed, what was already known prior to their release constitutes quite an indictment. For example:

• Earlier this decade three Jones Act carriers pled guilty to price collusion in the Puerto Rico trade, with $46.2 million in fines handed out and six executives sent to prison. Since this episode one of the guilty carriers announced its withdrawalfrom the market, further reducing competition. 
• A 2012 report issued by the Federal Reserve Bank of New York found that shipping a twenty-foot container of household and commercial goods from the East Coast to Puerto Rico—a Jones Act voyage—was estimated to cost $3,063 versus $1,504 to the nearby Dominican Republic and $1,687 to Jamaica.
• A 2013 GAO report pointed out that feed shipped to Puerto Rico from New Jersey by Jones Act carriers “costs more per ton than shipping from Saint John, Canada, by a foreign carrier—even though Saint John is 500 miles further away.” The same report also cited the example of jet fuel being imported from Venezuela rather than the Gulf Coast due to concerns about Jones Act vessel availability and costs.
• Puerto Rico’s government has applied for a ten-year waiver from the Jones Actbecause the law prevents the U.S. territory from importing U.S. LNG due a lack of Jones Act eligible ships capable of transporting it. As a result, Puerto Rico largely meets its LNG needs via more expensive imports from Trinidad and Tobago.

That the Jones Act imposes costs on Puerto Rico is beyond dispute. Rather, the only real question is how much this cost is. Given these latest studies, it appears significant indeed. The time has come to scrap this law and spare Puerto Rico—along with the rest of the United States—from its continued ravages.

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