The Jones Act Debate in Puerto Rico: Urban Legend or a Never-Ending Story?

by Robert Kunkel

The Merchant Marine Act of 1920, a Federal statute regulating shipping between U.S. ports and known in maritime circles as the Jones Act, requires all goods carried at sea between U.S. ports be transported in U.S.-fl ag ships, built in the United States, owned by U.S. citizens, and crewed by American seamen.  Many compare the law’s requirements to a “three legged stool” with all three U.S.-based requirements supporting the other. The purpose of the 92 year-old law and the subject of this never-ending saga is the support of the U.S. Merchant Marine.

To assure there is no misunderstanding, the “crewed by American seamen” is the most important requirement of the statute. Maintaining those seafaring jobs is paramount when considering the diminishing size of the “bluewater” U.S. flag fleet and questioning whether the law actually helps to support the industry within the context of a weak economy. That said, we would argue that the stool needs to balance on two legs as the U.S. build section of the Act should be modified in certain trades of domestic shipping in order to support the U.S. Merchant Marine.

The Cost of the Jones Act

Highlighting those seafaring jobs as the most important part of the law may be selfish. Under the current economic climate, protecting jobs in the United States is a concern in every industry. On April 10, 2012 the United States Government Accountability Office (GAO) confirmed their commitment to examine the Jones Act application to Puerto Rico.

That commitment follows a request to the GAO from the Honorable Pedro R. Pierluisi and the Honorable Gregorio Kilili Camacho Sablan of the U.S. House of Representatives to determine whether the Jones Act negatively affects the Islands’ economy.

The results of the examination would seem to be straight-forward. A 1999 U.S. International Trade Commission economic study suggested a repeal of the Jones Act would lower overall shipping costs by 22 percent. A 2002 report by the same commission found that repealing the Jones Act would produce an annual positive welfare effect of $646 million dollars on the U.S economy.

Discounting those findings, a 1988 GAO report also determined that the Jones Act cost Alaskan families between $1,921 and $4,821 annually for prices on goods shipped from the mainland.

And, in 1997, the Hawaiian government asserted that Hawaii residents pay an additional $1 billion per year in higher prices for consumer goods because of the Jones Act.

Sunset Waivers?

According to the April 10, 2012 GAO letter, their report should be published by February 28, 2013, ten (10) months after the initial review and three (3) months after Presidential elections. Let’s assume the results of this new report targeting the island economy produce similar facts as summarized above. Leaving aside the expense of yet another government report, the solution would be to create a way to lower or recover those costs. Modifying or creating a “sunset waiver” around the U.S. build requirement of the Jones Act to lower construction costs and provide new tonnage, works to achieve that end.

Using the previous economic reports as record, Senator John McCain introduced the Open America’s Waters Act in 2010, a bill designed to repeal the Jones Act.  McCain insists that the Jones Act restricts shipping and raises costs to consumers in Hawaii, Alaska, Puerto Rico and Guam. Fortunately, the Bill as proposed did not pass Congress. And while I do not support complete repeal of the Merchant Marine Act of 1920, the statute should be revised and adapted to modern times.

Almost 100 years ago, the U.S. and the world itself was a different place. Ignoring those changes will eventually result in complete repeal. Cost and efficiencies will eventually win the debate. There seems no doubt, short of global economic collapse, that transportation activity in Puerto Rico will continue to grow at a formidable pace in the near future. The Caribbean Business report highlighting the San Juan Bay Pilots Association port call tally of 5,632 ships in 2011 and the fact that the calls represented a 4 to 1 ratio of foreign registry to U.S. flag supports that statement. What is lost in the data is true support of our U.S. Merchant Marine would work to reverse the ratio. To reverse it, you need new ships.  Waiving the U.S build portion of the Act in this trade sector will provide a catalyst to that movement and a rebirth of coastal shipping.

Drilling Deeper

The shape of worldwide transportation demand is changing and depends on several new factors. Cabotage is no longer the single market that the legislation looked to protect in the 1920’s. The market is divided into detailed sectors of trade, ship type, and cargo types each one with its own economics, efficiency and profitability.

The U.S. inland waterway market sectors are robust and support all three legs of the stool – ownership, crew and ship construction. The domestic tanker market has grown by over 25 new ships since 2005 and produced nearly 1,000 seafaring jobs in a market where the costs and profitability associated with that trade can handle the construction and operating costs associated with the flag. Unfortunately, that economic effect does not translate to delivered costs of manufactured goods or agricultural products in container ships or Roll on-Roll off vessels.  Farmers and shop owners are not Exxon Mobil. For that reason, we have not seen the same delivery of new efficient ships in this sector of the domestic trades. The cost of the asset does not support the efficient delivery of the consumed product.

The world is Flat

The shape of worldwide economic development is migrating back to what is now described as “Compact Patterns.” It is fashionable to support local farmers and merchants. The movement is beyond fashionable and “local” and will be redefined as the cost of energy and transportation which will drive manufacturing back to the United States. In worldwide shipping, “Intra Asia” routes or “Intra European” routes are now more profitable than the globalization trend of the twentieth century where all roads lead to China. Europe moves nearly 40% of its cargo by water whereas the U.S. moves only 2%. What is our transportation plan when energy independence in Brazil, Cuba or the United States returns manufacturing back to these locals and “Intra Americas” becomes our trading future?

The problem of highway and rail congestion has been identified in the continental United States as a barrier to increased export activity. The Department of Defense identified the same problem as a National Security issue.  After years of research and a National “Marine Highway” program initiated by the U.S. Department of Transportation, the return of coastal shipping as a relief to this congestion was presented as the solution. U.S. build construction costs shelved the majority of the projects – and there are many on the shelf.

American business stands by waiting for Cuba to “open.” Where are the U.S flag ships that will service the trade? Brazil, Venezuela, Chile were once ports of call for the U.S flag. Those calls have all disappeared as construction costs and operating costs rose. If efficient and economically priced shipping assets are placed into the domestic trades all of these “Intra-Americas” trade routes become available to us again and Puerto Rico will find itself strategically centered in the triangular trade.  They maintain the “niche” of being able to trade between U.S ports but only competitive building costs will allow them to move into those surrounding trades in the compact patterns.

The Environmental Argument

Several factors shape the coming changes and so will the rapid changes in transportation technology. Puerto Rico is now part of the North American “ECA” or emission control area designated by the IMO. Unfortunately, the “Bluewater” U.S flag vessels currently operating in the Puerto Rico trade cannot meet the ECA requirements and therefore continue to exceed NOx and Sox emissions limited by the regulations.

“Eco-Ships” and a promise of a nearly 30% reduction of fuel costs through associated emission control is the number one concern of the international fleet. Some believe fifteen year old tonnage will soon be technically obsolete as this new technology enters the market place.  The fact that the U.S. Domestic fleet is not broadly engaged in meeting those concerns is disturbing. However, the lack of engagement is understood when considering the cost of construction and facilitating new technologies such as LNG propulsion, fuel cells, or common rail electronic engines when these are limited to a U.S build arena. The lack of engagement because of negative return on investment is another factor when determining the application of a sunset waiver to the Jones Act in this sector as these environmental considerations and restrictions will only become more stringent in the future.

Following the Leader?

Many other countries have abolished their domestic build requirement, yet maintained their Cabotage regulations.  Other U.S. transportation modes have learned to balance on two legs. Canada, recognizing the Intra-Americas movement recently repealed their 25% duty to build outside of the country in an effort to move coastal shipping forward and has been rewarded with new construction and ship deliveries under Canadian flag since the decision. We believe the state of the U.S. Merchant

Marine demands that we follow Canada’s lead and waive the Jones Act U.S. build requirement in this dry sector before it is too late.

Let’s offer the three-legged domestic shipping stool a chance to balance on two legs. The result can only be increased investment in the sector, reduced congestion on our coastal highways, cleaner air to breathe, reduced costs to the shippers, more jobs for our seafarers.

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About the author:  Robert Kunkel, President of Alternative Marine Technologies, is currently serving as the technical advisor to Coastal Connect (www.CoastalConnect.com) a U.S. company actively developing LNG propulsion as a maritime component of short sea shipping.  He is a past Vice President of the Connecticut Maritime Association, Past Chairman of the Federal Short Sea Shipping Cooperative Program and a member of the ABS Special Committee on Ship Operations.