Jones Act supporter labels Puerto Rico report “Gobbledygook”

by Michael Hansen, Hawaii Shippers Council, August 5, 2019

The American Shipper magazine on July 23, 2019 published an op-ed, “Cato’s Jones Act numbers wrong,” critiquing a report that attempted to estimate the Jones Act’s impact on Puerto Rico. The op-ed calls the report “gobbledygook” and misleadingly implies it was the product of the Cato Institute of Washington, D.C.

The American Shipper is focused on U.S. domestic and foreign transportation with an emphasis on ocean shipping from the point of view of “shippers” or merchant cargo owners (as opposed to the ship owners referred to as carriers).

The op-ed was written by John McCown who was closely associated with Malcolm McLean (1913 – 2001). Upon his death, former Transportation Secretary Norman Mineta said McLean was “a man of vision, the ‘father of containerization’,” and Forbes Magazine called him “one of the few men who changed the world.”

McLean founded Sea-Land Service Inc. (established 1957), owned United States Lines (1978 – 1987), and founded Trailer Bridge Inc. (established 1991). Trailer Bridge is a Jones Act container barge service that continues to operate between Jacksonville, Florida, and San Juan, Puerto Rico.

McCown’s association with McLean included serving as the CFO of McLean Industries Inc. (1980 – 1988), the CEO of Trailer Bridge (1991 – 2008) and the executor of McLean’s estate (2001 – 2004).

The report McCown critiqued is “The Jones Act: A Legacy of Economic Ruin for Puerto Rico,” by John Dunham & Associates (JDA), of Brooklyn, New York.

The JDA study and another report on the domestic Puerto Rico trade were published in February 2019 and commissioned by the Puerto Rico Chamber of Food Marketing, Industry & Distribution, known locally as Camara de Mercadeo, Industria y Distribucion de Alimentos and commonly referred to as MIDA.

Both reports were highlighted at a public forum, “Unnatural Disaster: Assessing the Jones Act’s Impact on Puerto Rico,” hosted by the Cato Institute on April 30, 2019, at their Washington headquarters. McCown states he attended the forum but only refers to Dunham’s report and largely attributes it to Cato.

However, Cato did not author either study, financially support them, or arrange for their publication.

McCown’s characterization of Dunham’s report as “gobbledygook” relates to JDA’s derivation of a 88.9% rate differential applicable to container cargo in the domestic Puerto Rico common carrier trade. That defines the quantitative difference between probable international freight rates in the complete absence of the Jones Act and estimated current Jones Act ocean freight rates between Puerto Rico and the Contiguous United States (CONUS). Accurately establishing this differential is key to estimating the Jones Act’s economic impact on domestic coastwise trades such as that with Puerto Rico.

There are several problems inherent with accomplishing the task of quantitatively establishing a countermodel and base case for Jones Act trades generally and the Puerto Rico trade lane specifically. Because there is no existing foreign ocean shipping between CONUS and Puerto Rico (which is prohibited by the Jones Act), probable international freight rates for the countermodel must be extrapolated from other comparable international trade lanes.

Current Jones Act rates for the base case must be estimated from anecdotal evidence provided by shippers (i.e., merchant cargo owners). This is due to nature of the domestic ocean common carriers’ rate setting process, which does not make their effective contract rates public. These methodologies, if not handled properly, can introduce a great deal of uncertainty into the process.

Regarding Dunham’s appearance at the Cato forum, McCown states, “The highlight was a presentation by a consultant on the findings of his just-published 40-page study. Its key conclusion was that container rates to Puerto Rico would decline 88.9% if there were no Jones Act.” Although McCown’s statement can only be a reference to the Dunham report, he doesn’t identify the consultant by name nor Dunham’s contractual relationship with MIDA (as opposed to Cato).

However, McCown correctly points out what Dunham unreasonably asserted, a foreign ocean carrier, in the absence of Jones Act restrictions, could transport container cargo between CONUS and Puerto Rico for approximately one tenth the current freight rates charged under the Jones Act. Or, conversely, the differential attributable to the Jones Act in the Puerto Rico liner trade is approximately 90%. This can’t possibly be true hence McCown’s gobbledygook characterization.

McCown’s only other reference to the Dunham report being the product of someone else besides Cato was this oblique statement, “In my event follow-up communication to Cato, I expressed surprise that it linked itself to such an erroneous and misleading study.” Obviously McCown felt justified in characterizing the Dunham report as a Cato product because of the “link” purportedly established by Cato hosting a forum at which Dunham presented his report’s findings.

In a section entitled “mistakes don’t make the cut,” McCown identifies the issues relative to quantitatively establishing the countermodel and addresses what he perceives are Dunham’s shortcomings in these regards. McCown correctly notes when extrapolating data from international trades to construct a countermodel for a Jones Act trade, it should be based upon international trade lanes with economies of scale comparable to that of the base case.

As McCown noted, the parameters of comparability would include: total cargo volume moving in the trade; the relative capacity of ships (in this instance twenty-foot equivalent units or TEU for containerships); trade imbalances (the ratio between inbound and outbound cargo volumes); transit distances (the distance over which the cargo is transported by sea); directional rates (the difference between headhaul and backhaul rates); and, the proportion of ship-related costs (those liner shipping service expenses attributable to the ship’s registry as opposed to costs any service would face regardless of their ships’ registries). McCown makes a convincing argument that Dunham’s report didn’t stick closely enough to these principles of comparability and thus the improbable 90% differential result.

In his subsequent section entitled, “analytical gobbledygook,” after adjusting for the various comparability parameters, McCown states Dunham’s “. . . methodology would result in a 9.1% decline. In other words, the study Cato promoted at its April 30 event was off by a factor of 10 when it was adjusted for clear math and logic errors.”

In his penultimate “keeping up” section, McCown states his analysis of the Dunham report and his own independent analysis of the Puerto Rico trade were made available in spreadsheet form to Cato. To that end, he wrote, “. . . my own analysis shows a total repeal of the Jones Act would likely result in a 12% decline in rates in the Puerto Rico container trade, that assumes the current gap between foreign and domestic crewing and building costs doesn’t change.” As McCown has not made his spreadsheet analyses public, it’s not possible to further evaluate his reported findings.

McCown made a further qualification, “. . . that gap [between international and domestic ship costs] could narrow from both existing laws and regulations that would apply to foreign ships involved in domestic commerce as well as new laws and regulations that may come with any repeal.” This is a reference to the existing trade restrictions formally known as “behind the boarder barriers” imposed by the U.S. domestic regulatory system, which McCown accurately notes is a real modeling issue not addressed by Dunham.

In his final section, “credibility essential,” McCown makes several statements ignoring that theme.

McCown ironically states, “The repeal of the Jones Act will likely result in an immediate shift in the Puerto Rico market to one served exclusively by foreign carriers.” Although downplaying the impact of the Jones Act throughout his piece, he assumes in its absence the domestic Puerto Rico trade would immediately convert to international carriers. This dire prediction can only mean that McCown understands the Jones Act has a significant economic impact on shipping services, and once removed their customers (i.e., shippers) would quickly seek non-Jones Act alternatives.

He further writes, “. . . South American carriers stopping en route to Brazil and Argentina will quickly dominate the [Puerto Rico] market [with repeal of the Jones Act].” This is a canard and ignores existing reality and his own advice to use comparable trades to construct a countermodel.

Both of the main Jones Act carriers in the Puerto Rico trade operate extensive foreign flag services between CONUS, Caribbean, and Central American ports obviating any role Brazil and Argentina services might play with respect Puerto Rico in a post Jones Act scenario.

Crowley Maritime operates foreign containerships through its Liner Shipping Services Division and Saltchuk Inc. / TOTE Inc. through their foreign carrier operation, Tropical Shipping. In response to removal of the Jones Act from Puerto Rico these carriers would immediately slot in their own foreign containerships contemporaneously operating in the Caribbean.

Adding to the despair of his South American story, McCown foretells, “With this change [of removing Jones Act], the mostly empty northbound leg in the current [Puerto Rico] shuttle services and the very low rates resulting from that disappear. Large employers like Bacardi and Goya [on Puerto Rico] that send their products to the mainland could see rates going from $300 per 40-foot container to more than $3,000 to match the rates South American shippers now pay [northbound to CONUS]. The worse-case would be if this tenfold rate increase led any Puerto Rico rum makers to reallocate production to other Caribbean islands as what had been a shipping benefit was now a shipping detriment.”

As McCown characterized Dunham’s 88.9% differential to be “nonsensical” while attributing it to Cato, his preceding statement can only be labeled as such.  The international South American ocean carriers would not enter the CONUS / Puerto Rico trade upon removal of the Jones Act. The international ocean carriers operating in the CONUS / Caribbean market would call at Puerto Rico and offer backhaul rates commensurate with their lower costs as they do now for Northbound cargo shipped from other Caribbean ports. They face competitive pressures to do so under the current market conditions and would face those same pressures if allowed to enter the domestic Puerto Rico trade.

In his concluding sentence, McCown wrote, “This is too important an issue to have anything but the most credible numbers and facts put on the table for policymakers.”

I agree and entreat McCown to take his own advice.

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FW UPDATE: Cato + Michael Hansen Respond to American Shipper