McCain Bill to exempt Puerto Rico from Jones Act
by Michael Hansen, Hawaii Shippers Council, September 29, 2017
U.S. Senators John S McCain III (R-AZ) and Michael S Lee (R-UT) introduced on Thursday, September 28, 2017, a bill, “To exempt Puerto Rico from the coastwise laws of the United States (commonly known as the ‘Jones Act’).”
This measure would amend United States Code, Title 46 Shipping Section 55101 “Application of coastwise laws” (46 USC § 55101) by adding the Commonwealth of Puerto Rico to those noncontiguous jurisdictions currently exempt from the coastwise laws of the United States. Those exempt jurisdictions are: The Territory of American Samoa, the Commonwealth of the Northern Mariana Islands (CNMI) and the Territory of the Virgin Islands of the U.S. commonly known as the U.S. Virgin Islands (USVI).
In its narrowest usage, the Jones Act is the informal name for Section 27 of the Merchant Marine Act of 1920, which restricts the transportation of merchandise – meaning cargo – by water to vessels that are U.S. –built, -flag, -crewed and –owned. There are several other specific coastwise laws of the same tenor that apply to the transportation of passengers by water (1886), dredging (1906), towing (1940), salvage (1940) and the fisheries (1950, 1976 & 1998).
Because the Jones Act is the best known of the various coastwise laws, it’s often used to mean that whole body of law, and that is the sense in which Sens McCain and Lee used it in the title of their bill.
Internationally, these kinds of protectionist transportation laws are known generically as cabotage, and refer not only to the maritime, but also aviation, rail and trucking (motor carriers).
MCCAIN’S PREVIOUS JONES ACT REFORM MEASURES
Previously, Sen McCain introduced four measures to eliminate the U.S. domestic ship build requirement of the coastwise laws or Jones Act cabotage.
The first and the basis for the others was the “Open America’s Waters Act of 2010.” Five years later, Sen McCain unsuccessfully attempted to attach what was essentially his 2010 legislation as an amendment to the keystone XL Pipeline Act of 2015. A year later, McCain unsuccessfully attempted to attach an amendment to the Energy Policy Modernization Act of 2015 (S. 2012), which would have eliminated the U.S. build requirement for self-propelled seagoing tank ships. In July 2017, Sen McCain reintroduce his original 2010 bill as the “Open America’s Waters Act of 2017.”
Although his press release states, “In 2010, Senator McCain introduced legislation to fully repeal the Jones Act. He reintroduced the same piece of legislation in 2015 and again this July,” those measures would not have repealed the Jones Act. All those measures addressed the U.S. build and not the other requirements of Jones Act cabotage.
Given Sen McCain’s inability to obtain cosponsors and hearings for his previous Jones Act reform measures much less a floor vote, I think it’s reasonable to assume that there will be significant difficulties in obtaining passage of his instant legislation.
JONES ACT WAIVERS
I am not aware of any Jones Act waivers that have been requested or granted for Hawaii since Statehood in 1959, to alleviate some emergency or national security situation.
It should be recognized that until 1950, all Jones Act waivers had to be authorized by the Congress in specific legislation making them much more difficult to obtain as compared with the administrative procedures that followed. The authorizing statute is 46 USC § 501, “Waiver of navigation and vessel-inspection laws,” which was last amended in 2008.
However, on an interesting historical note, during World War I (WWI), the Territory of Hawaii sought and obtained waivers from the coastwise laws to allow foreign flag ships to carry cargo and passengers in the domestic Hawaii trade. The waivers became necessary because so many U.S. “steamers” had been requisitioned for the war effort. This left the islands without sufficient tonnage to meet both cargo and passenger requirements. (At the time there was no commercial air service to Hawaii and all passenger traffic including interisland was seaborne.)
After the Armistice ending WWI, U.S. Representative Jonah Kuhio Kalanianaole (R-HI) introduced a joint resolution in the Congress calling on the President Woodrow Wilson (D) administration to extend Hawaii’s wartime coastwise waivers because sufficient U.S. steamers had not yet returned to the trade. The resolution was adopted and the administration did extend the waivers.
JONES ACT REPEAL VS REFORM
A typical question often asked is what would be the impact of fully exempting Hawaii from the Jones Act writ large – i.e., all the coastwise laws or federal U.S. maritime cabotage laws, regulations and rulings.
The results might not be what most people would expect. That is due to all the other non-cabotage federal and state laws and regulations – including immigration, customs, wage and hour, labor, business registration, taxation, health and safety, etc. -- that would impinge on the continuous operation of a foreign flag vessel in a purely domestic trade.
That is a full and complete repeal of Jones Act cabotage is an insufficient condition for the unfettered operation of foreign flag vessels in purely domestic coastwise trading.
That would mean, assuming the complete absence of any U.S. maritime cabotage laws, for example, that all inter Hawaiian island vessels would still have to be registered U.S. flag and comply with crewing and U.S. Coast Guard inspection requirements for U.S. flag vessels – though they could certainly be foreign-built. Likewise, all vessels employed exclusively between U.S. West Coast (USWC) ports and Hawaii – largely containerships – would also need to operate U.S. flag, but could be foreign built.
Where foreign flag ships could transport cargoes between other U.S. ports and Hawaii (assuming alternatively a full repeal nationally, regionally for the noncontiguous trades or singularly for just the Hawaii trade), would be in the instance of a foreign flag ship remaining on a foreign voyage status and immune from domestic regulation by arriving from and proceeding to foreign in respect of U.S. ports of call on each of their voyages. This is how foreign flag vessels operate domestic transportation under a Jones Act waiver.
This, for example, would permit the employment of foreign flag ships in the kind of Transpacific liner service currently operated by Matson Navigation Company Inc. with Jones Act containerships Westbound from the USWC calling at Hawaii, Guam, Okinawa, and two ports in China, thence directly back Eastbound to the USWC. The port calls in Japan (Okinawa) and China would keep the ships on foreign voyage status.
It would also allow the Hawaii Cattlemen to spot charter livestock carriers to transport their cattle to the USWC, which they currently do by air and onboard Matson’s containerships in shipping devices known as “Cow-tainers.”
There would be the opportunity for the oil companies to spot charter foreign flag tankers off the U.S. Gulf and West Coasts to transport petroleum products to Hawaii.
However, a complete and full exemption from all the coastwise laws would be very difficult politically to achieve, and reform measures would appear to have a much greater possibility of actually being enacted.
There are reform measures that could be taken such as Sen McCain’s Open America’s Waters Acts, which would eliminate the U.S. build requirement from all the coastwise laws on a nationwide basis.
Alternatively, all the noncontiguous jurisdictions currently and fully embraced by the coastwise laws – Alaska, Hawaii and Puerto Rico -- could be legislatively granted the so-called “Guam Exemption,” which would essentially eliminate both the U.S. build and U.S. ownership requirements.
The Hawaii Shippers’ Council has and continues to advocate for an exemption from the U.S. build requirement for just the noncontiguous jurisdictions.
The most detrimental aspect of the coastwise law system is the domestic ship build requirement, because the cost of vessel construction in the U.S. has become so extraordinarily high. Eliminating the domestic build requirement not only deals with the U.S. building cost, it also achieves much that a full repeal would in a practical sense.
JONES ACT IMPACT ON HAWAII
As McCain’s latest Jones Act bill is unlikely to move in the Congress, there seems little possibility for a similar measure to be enacted for Hawaii, especially in view of the support among Hawaii Democrats and Congressional delegation for the Jones Act.
In addition, there are certain constitutional and legal issues with applying the coastwise exemption statute (i.e., 46 USC § 55101), which Sen McCain’s instant bill would amend, to Hawaii as an incorporated state of the U.S.. The statute currently applies only to three unincorporated territories, which denotes areas controlled by the U.S. but where the U.S. constitution and law don’t fully apply permitting different treatment than for states and incorporated territories. These territories are not part of the customs territory of the U.S., which is important because enforcement of the coastwise laws is a customs function (interestingly, Puerto Rico is part of the customs territory of the U.S.). The statute codifies maritime cabotage exemptions that were originally part of the international treaties that led to these three territories’ annexation by the U.S., which imposes a higher legal standard on the exemptions than simple statute.
Longer term, there have not been any thoroughgoing economic studies of the impacts of Jones Act cabotage on the State of Hawaii. There have been several studies of the Puerto Rico trade.
In the instance of Puerto Rico, it’s possible to compare existing freight rates offered by the Jones Act carriers from the mainland U.S. to Puerto Rico with those charges by foreign flag carriers from U.S. mainland ports to nearby islands such as Jamaica and the Dominican Republic on Hispaniola. In fact the main Jones Act carriers in the Puerto Rico trade all operate foreign flag services throughout the Caribbean basin. Hawaii we don’t have nearby islands for such a comparison.
The Federal Reserve Bank of New York in their June 29, 2012, “Report on the competitiveness of Puerto Rico’s economy,” reported “It costs an estimated $3,063 to ship a twenty-foot container of household and commercial goods from the East Coast of the United States to Puerto Rico; the same shipment costs $1,504 to nearby Santo Domingo (Dominican Republic) and $1,687 to Kingston (Jamaica)—destinations that are not subject to Jones Act restrictions.”
To determine the effects on the costs of living and doing business is an assessment that requires an econometric model to ascertain. At present the only group with an econometric model of the State’s economy is the University of Hawaii Economic Research Organization (HERO), and their model is limited to certain sectors and does not cover transportation.
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Update 10/02/2017: According to the official website for all congressional legislation Congress.gov the bill, “To exempt Puerto Rico from the coastwise laws of the United States (commonly known as the ‘Jones Act’),” was assigned the number Senate Bill 1894 (S. 1894) and noticed that two other cosponsors signed on the bill as of 09/28/2017 namely U.S. Senators James Langford (R-OK) and Jeff Flake (R-AZ) increasing the total number of cosponsors to three.
PDF: Text of Bill
News Release: McCAIN & LEE INTRODUCE LEGISLATION TO PERMANENTLY EXEMPT PUERTO RICO FROM THE JONES ACT