Theoretical new Jones Act Study generates very large impact numbers
by Michael Hansen, Hawaii Shippers Council, June 13, 2019
The Paris, France-based Organization of Economic Development Cooperation (OECD) recently released a new study of the local content requirements (LCR) for maritime services in Brazil’s offshore oil and gas sector and in the U.S. under the Jones Act defined as Section 27 of the Merchant Marine Act of 1920.
The OECD was established in 1948 as the Organization for European Economic Development (OEED) to operate the U.S.-funded Marshall Plan with the purpose of rebuilding Europe after World War II. The OEED became the OECD when its authorizing international convention came into force on September 30, 1961.
The study, “Local content requirements and their economic effect on shipbuilding: A quantitative assessment,” was written by Karin Gourdon, Economist, OECD, Paris, and Professor Joaquim Jose Martins Guilhoto, Economics Department, University of Sao Paulo, Brazil.
With regards to the impact of the Jones Act on the national economy, the authors defined two reform scenarios:
- elimination of the domestic build requirement only; and,
- removal of maritime cabotage restrictions on foreign vessels operating in domestic service.
They also looked separately at the U.S. shipbuilding sector assuming that the impact would be the same under either scenario 1 and 2.
The methodology was to use an inter-country input-output (ICIO) framework, the OECD’s trade-in-value added (TiVA) data base, applied static inter-country input-output model to simulate the shipbuilding sector, and applied general equilibrium (AGE) model to estimate the effects of the two scenarios on the national economy.
The estimated increases in the national economy in billions of U.S. dollars for the two scenarios are:
Scenario No. 1:
- Final Demand (FD) $22B, Total Output (TO) $40B, and Value Added (VA) $19B
Scenario No. 2:
- Final Demand (FD) $74B, Total Output (TO) $134B, and Value Added (VA) $64B
The estimated increases for the shipbuilding sector only in millions of U.S. dollars are:
- Shipbuilding: Final Demand (FD) $589M, Total Output (TO) $612M and Value Added (VA) $44M
As the authors noted, the potential gains in the national economy are far larger than current levels of the shipbuilding sector in millions of U.S. dollars annually:
- Original Shipbuilding: Final Demand (FD) $841M, Total Output (TO) $859M and Value Added (VA) $44M US dollars.
That is the potential magnitude of the increase in the national economy for either scenario 1 or 2 is orders of magnitude greater than the current contribution of the commercial shipbuilding sector on an annual basis.
The authors caveat in their report is stated:
The results refer to the economic gains in the long-term such that the US economy will have structurally adjusted to the shock associated with the abolition of the [Jones] act, i.e., the shipbuilding industry will have reached international productivity levels, water transportation services will have approached the price levels of non-Jones Act conform vessels, and the intra-US maritime trade will have been stimulated by lower freight levels.
As the numbers are very large, we contacted the authors to verify their assumptions and received their advice as follows:
The results presented in the simulation refer to the long-term, after all the effects are have taken place in the economy, with no time frame.
We didn’t assume any vessel sizes as we’re working with elasticities.
We applied a top-down rather than bottom up approach. Hence our projections include all vessels.
The projections include the inland waterways cargo volume and vessels.
No provision was made for the restrictions imposed by the domestic regulatory system and behind the border restrictions on foreign vessels operating in domestic trade.
As the inland waterways cargo volume is approximately 80% of the nation’s waterborne transportation and inland waterways vessels represent approximately 85% of all Jones Act eligible vessels (in terms of numbers of individual vessels), inclusion of this transportation mode substantially increases the potential impact of either scenario 1 and 2 on the national economy.
The inland waterways sector with push towboats and river barges is unique, highly competitive with multiple shipbuilding yards and transportation operators, fully enveloped by the domestic regulatory system, and unlikely to be displaced by foreign vessels even with a full elimination of all Jones Act cabotage.
The domestic shipbuilding industry would likely contract significantly before ever rebounding in the long-term.
Although a largely theoretical look at the impact of Jones Act cabotage on the national economy, it certainly provides insights into the potential magnitudes of these impacts.