by Michael Hansen, Hawaii Shippers Council, December 7, 2015

The Pacific Business News (PBN) published on Thursday, December 3, 2015, a 'response' to their December 2 article covering the Hawaii Shippers Council (HSC) Jones Act reform proposals. The 'response' incorporates the remarks of a not previously “reported” December 7, 2006 letter from the late U.S. Senator Daniel K. Inouye (D-HI) addressed to former Hawaii State Governor Linda Lingle (R-HI). In that letter, Sen Inouye stated why he believed the U.S. build requirement of Jones Act cabotage is “necessary.” The original PBN article highlighted the HSC’s noncontiguous trades Jones Act reform proposal, which focuses on eliminating the domestic build requirement.

The PBN did not disclose the source of the newly “reported” Inouye letter nor make a facsimile of the letter available publicly. PBN did respond to HSC’s request and provided a copy of the Senator’s letter, but would not disclose its source. It seems fairly obvious that the source would have been a Jones Act industry supporter, who provided it in response to PBN’s original article.

PBN’s BIZ Blog recounted six reasons given by the Senator in his 2006 letter supporting the U.S. build requirement almost exclusively on the grounds of national defense. This justification of the domestic build requirement is typically referenced as the “shipbuilding industrial base” defense of the Jones Act, which contends the construction of commercial ships by U.S. shipbuilding yards is critical to maintaining sufficient capacity to build combatant and other military useful ships.

Sen Inouye repeated the hackneyed arguments that have been made by the Jones Act industry for many years containing very little factual foundation, which may be elucidated as follows:

(1) Sen Inouye wrote, “The U.S.-build requirement is part of a larger U.S. shipbuilding policy.”

This statement is correct in as far as it goes, but that doesn’t mean it’s a good thing. The U.S. build requirement is in fact the cornerstone of the U.S. shipbuilding policy. However, it has failed to adequately promote the construction of large oceangoing ships of the kind that provide the vast majority of the transportation between the contiguous mainland U.S. and the noncontiguous jurisdictions, including Hawaii. In fact, it has resulted in an artificial shortage of ships in Jones Act trades adversely affecting the economy and decreasing the general welfare. Currently there are only three major U.S. shipbuilding yards constructing large oceangoing commercial ships building on average approximately three ships per annum at a cost of approximately five times that for comparable ships built in South Korea or Japan. For at least the past twenty years, all of these U.S. built oceangoing ships are being constructed under license to foreign shipyards who design the ships and supply much of the installed equipment. The first tier, major U.S. shipbuilding yards are a long term declining industry unable to compete internationally and provide reasonably priced ships to their domestic customers.

(2) Sen Inouye wrote, “It, too, is tied directly to national security and the importance of ensuing healthy American shipyards that may be called upon in times of national emergency.”

This statement is typically made in reference to a major defense buildup for a world war type contingency. For example, during World War II (WWII) the U.S. built a large number of cargo ships particularly the dry cargo “Liberty Ships” and petroleum products carrying “T-2 Tankers.” However, today, the number of existing major shipbuilding yards and their annual production are so small – especially on the commercial side -- that they would be unable to respond to such a crisis. It is also doubtful that such a dramatic event as a world war would develop in the same fashion as the last one, especially given the existence of intercontinental ballistic missiles (ICBM)s that would likely make large scale field operations redundant. Even during WWII, the country did not depend on existing shipyards for the construction of cargo ships. Entrepreneurs such as Henry J Kaiser developed shipbuilding yards from scratch to accomplish their impressive feats of series cargo ship production.

(3) Sen Inouye wrote, “The ‘build requirement endeavors to counterbalance the practice of many of our trading partners who heavily subsidize their shipyards as a vital part of their nation’s defense and infrastructure.”

This belies the fact that the U.S. government provides significant financial assistance to domestic shipowners to build ships in the U.S. These financial assistance programs include the Title XI Federal Ship Finance Program and the Capital Construction Fund (CCF); both are overseen by the U.S. Maritime Administration (MARAD). European shipbuilding yards receive very little in the way of subsidy today, and their production has been reduced substantially from several decades ago and now focus on specialty ships for which they have an international competitive advantage. The primary builders of oceangoing ships today – Japan, South Korea and China, which build over 90% of these vessels annually – do receive subsidies. For example, South Korean shipbuilding yards receive a subsidy which amounts to approximately 15 to 20% of the price of the ships they build. However, that rate of subsidy pales in comparison to the price differential between comparable ships built in South Korea and the U.S. of 500%, which make foreign subsidies irrelevant.

(4) Sen Inouye wrote, “As international relations are becoming more complex by the day, having U.S. built ships in many of the far flung parts of the nation is ever more important.”

Given the overall reference of Sen Inouye’s letter to the domestic build requirement of the Jones Act, this statement is immaterial. There are only a handful of U.S. built commercial ships that regularly call at foreign ports and this is not a meaningful presence. The primary set of U.S. registered ships that provide worldwide transportation of U.S. military cargoes is the “U.S. flag international trade fleet” currently comprised of 79 oceangoing ships. All these ships are foreign-built, operating U.S. flag and about half are foreign owned through U.S. trusts.

(5) Sen Inouye wrote, “The U.S.-build requirement of the Jones Act was “the basis for many benefits accruing to Hawaii in terms of workers hired, small businesses contracted and taxes paid.”

This statement cannot possibly be true, and in fact the opposite is. There are no shipbuilding yards constructing large oceangoing ships in Hawaii or any of the other noncontiguous jurisdictions. The people and businesses in the noncontiguous jurisdictions pay a very high price indeed for ships built in three states, California, Pennsylvania and Mississippi. The imposition of the Jones Act U.S. build requirement on the noncontiguous trades results in a transfer of funds from those jurisdictions to the shipbuilding states.

(6) Sen Inouye wrote, “The cost associated with this requirement continues to decrease as our shipyards become more competitive.”

This statement is clearly false. The disparity between U.S. and foreign build ship prices has been increasing over time, and the number of shipyards is in decline.

The underlying problem of ever escalating prices for the construction of large commercial ships in the U.S. is mirrored on the naval ship construction side too. The extraordinarily high cost of capital ship construction crowds out the new construction budget and impairs the U.S. Navy’s ability to maintain an adequate fleet to project U.S. power and mount an sufficient defense.

While Sen Inouye made many important contributions to modern Hawaii, he was clearly wrong regarding his assessment of the Jones Act U.S. ship build requirement.

PDF: Inouye Letter

PBN: Hawaii Shippers Council expects Hawaii Legislature to discuss Jones Act reform next year

PBN: Sen. Daniel Inouye countered the Hawaii Shippers Council’s Jones Act points in a 2006 letter