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Jones Act beneficiaries schizophrenic about China
By Grassroot Institute @ 3:43 PM :: 817 Views :: Jones Act

Jones Act beneficiaries schizophrenic about China

Carriers such as Matson and Pasha say the Jones Act is a “line of defense” against China, yet are happy to do business with China when it suits them

By Mark Coleman and Melissa Newsham, Grassroot Institute, May 20, 2024

Jones Act supporters have long been on shaky ground in claiming that the protectionist federal maritime law is critical to national security and the strength of the U.S. maritime industry.

This perhaps explains why they have recently been focusing on China as a main reason the 1920 law should be retained.

For example, America’s foremost Jones Act defender, the American Maritime Partnership, has made it one of its principal arguments that the Jones Act comprises a “line of defense against reliance on the Communist Party of China to build American ships, and the CCP’s desire to control American commerce.”[1]

However, far from sticking it to China, the Jones Act instead has inflicted significant damage mostly on the U.S., both economically and in terms of national security.

Meanwhile, some key supporters of the Jones Act actually derive much of their profits and cost savings from China, calling into question why they are being so intransigent toward that nation.

Jones Act background

Enacted as Section 27 of the Merchant Marine Act of 1920, the Jones Act mandates that all cargo transported between U.S. ports be carried by ships that are U.S. flagged, built and mostly owned and crewed by Americans.

U.S. Sen. Wesley Jones, after whom the federal maritime law was named, argued in 1922 that such restrictions were “necessary for our commercial growth, our national defense and national independence.”[2]

But more than a century later, things for the U.S. maritime industry don’t seem to be going how Sen. Jones intended.

Between 1953 and 2013, the U.S. lost approximately 300 shipyards,[3] leaving just four shipyards capable of building large ocean-going vessels.[4]

In 2023, those shipyards had a mere four ocean-going vessels in their orderbooks, compared with 2,400 for shipyards in China, 731 in South Korea and 645 in Japan. European shipyards combined had 333, while “the rest of the world” had 245, including the four in the U.S.[5]

In the global context, the world’s merchant fleet in January 2023 consisted of 56,500 vessels of at least 1000 gross tons,[6] of which fewer than 100 were Jones Act ships — down from over 200 40 years ago.[7]

The fact that the prices of U.S.-built vessels now range from four to five times higher than in the international market helps explain their low sales volume.[8]

Their high replacement cost is also why most ships in the Jones Act fleet are far older than the international average,[9] which unfortunately means they cost more to operate, are less environmentally friendly, are less safe and have less military value.[10]

America’s merchant marine force similarly has declined from about 25,000 in 1970 to 11,000, since fewer ships means fewer sailors.[11]

U.S. Rep. Mike Gallagher, chairman of the House Select Committee on the Chinese Communist Party, recently stated that “the small and aging U.S. sealift fleet, crewed by a shrinking workforce of mariners, may not be ready to respond to a crisis.”[12]

Then there’s China

Proponents of the Jones Act insist the law is not a part of the problem.

As previously mentioned, the American Maritime Partnership, America’s foremost Jones Act lobbyist, has singled out China as a main reason U.S. lawmakers should support the Jones Act.

Similarly, the president of the Shipbuilders Council of America, another vociferous Jones Act proponent, recently pegged China as a major threat to the U.S. shipping industry, claiming it has been acting to “saturate the shipbuilding market and drive out global competitors.”[13]

Touting the Jones Act as America’s “fundamental national security law,” Matt Paxton wrote that “without a strong, forward-thinking comprehensive American maritime strategy, advancing predictable budgeting and other market-building policies and strengthening the Jones Act, other nations like China will continue to invest in their commercial and military maritime capacity and will continue to overtake us as the world’s maritime leader.”[14]

In addition, a coalition of trade unions recently filed a formal complaint with the U.S. Office of the Trade Representative stating that the “American commercial shipbuilding industry is a shell of its former self” — and that China is to blame.[15]

The group accused the Chinese government of giving China’s shipbuilders unfair advantages and called for a fee on every Chinese-built vessel that docks at a U.S. port.

It also urged the Biden administration to “strengthen the implementation of the Jones Act to ensure that it is being faithfully enforced to stimulate demand for U.S.-built vessels to the maximum extent possible” — which presumably would involve extending the requirement to vessels that are not directly involved in transporting merchandise between U.S. ports.[16]

In response, U.S. Trade Representative Ambassador Katherine Tai agreed to investigate the complaint, with strong support from the White House, which stated in a news release that “ it is critical to understand China’s uniquely aggressive set of interventions in these sectors, and to take actions that address distortions to the global market for commercial vessels, maritime shipping, and logistics that harm American workers and shipbuilders.”[17]

Oh, the irony — or is it hypocrisy?

The irony of singling out China to support the Jones Act is that U.S. Jones Act carriers are among the biggest beneficiaries of China’s shipyards and international trade.[18]

For example, Matson, the largest of the two Jones Act carriers that dominate the Hawaii market, relies heavily on the China trade.[19] According to the company’s latest financial report, its China service accounts for the second largest portion of its cargo volume.[20]

Matson and its primary competitor, Pasha Hawaii, also rely heavily on Chinese shipyards to service and maintain their Jones Act vessels.

In fact, they save so much money having their Jones Act ships repaired in Chinese shipyards that they are willing to pay the 50% tariff the U.S. government levies on repairs conducted in overseas shipyards.[21]

Case in point: Rather than order an overly expensive new ship from a U.S. shipyard, Pasha recently opted to sail its 43-year-old Horizon Reliance to a Chinese shipyard to be significantly modified  — but not so much that it would lose its qualification as a Jones Act ship.[22]

A new YouTube video released by Pasha proudly boasts that the ship, now called the George II, is the “the first vessel to be repowered from steam to LNG [liquid natural gas]” — though it strangely omits mentioning that the conversion work was performed in China.[23]

Meanwhile, in 2019, Matson officials actually traveled to China to celebrate their 20 years of working with the COSCO shipyard in Nantong to have its Jones Act vessels maintained and repaired.[24]

The shipyard’s work on the container carrier Maunawili marked the 50th ship it had repaired for Matson.

Two years later, Matson and COSCO celebrated the Chinese shipyard’s 60th repair of a Matson ship.[25]

In a news release, COSCO stated the 2021 event marked “the new record of the most repaired ships and longest cooperation time between one shipping company and COSCO SHIPPING Shipyard (Nantong).”

It further stated that “during 22 years of cooperation, Matson has become one of the core ship repairing and conversion business customers of COSCO SHIPPING Shipyard.”

Clearly, it seems ironic, if not hypocritical, for Matson and Pasha to be affiliated with a national lobby group that claims the Jones Act is a defense against China’s maritime dominance. Both are represented on the American Maritime Partnership’s board of directors, and a Matson executive served as its president until earlier this year.

Apparently, however, their concerns about China do not extend to the maintenance and repairs of their fleets or otherwise doing business with that country.

And they are not alone. Other Jones Act carrier companies that have sent their ships to Chinese shipyards for repairs and upgrades include National Shipping of America and Seabulk Tankers Inc.[26]

As Grassroot Scholar and Cato Institute trade policy analyst Colin Grabow recently put it: “Jones Act shipping firms repair their vessels in low-cost Chinese shipyards and then use the savings to advocate for a law that prevents using shipyards in allied countries to expand and modernize the U.S. domestic fleet. All in the name of stopping China.”[27]

Matson executives did not respond to multiple requests for comment about this apparent contradiction. A Pasha spokesperson offered a statement that amounted to misdirection.

“Continued investment is needed in U.S. shipyards to create the capacity and capabilities needed for highly complex repower projects,” wrote a Pasha Hawaii spokesperson to the Grassroot Institute of Hawaii.[28] “Today we can look to U.S. yards for innovative new builds, like the two new LNG-powered container ships recently constructed in Brownsville, Texas. However, there was no availability at U.S. shipyards to meet the timeline for this repower project.”

Of course, if the Jones Act were truly critical to U.S. maritime strength, one would expect it by now to have produced greater “capacity and capabilities” in domestic shipyards.

The fact that “there was no availability at U.S. shipyards to meet the timeline” for Pasha’s repower project further illustrates the need for U.S. carriers to be able to simply buy new, less costly vessels from foreign manufacturers — or at least from allied shipyards.

The biggest losers: U.S. consumers

So, why are companies such as Matson and Pasha Hawaii among the most vocal supporters of the Jones Act?

The obvious answer is because it is in their financial interest.

After all, U.S. shipyards — the ones that are left — benefit because they have a captive market. And Jones Act carriers benefit because even though they have to pay more for the ships they buy, they can pass these wasteful expenses along to their customers who have no other choice.

This situation is especially pronounced in Hawaii, where a 2020 report commissioned by the Grassroot Institute found that the Jones Act costs the state economy $1.2 billion annually — nearly $1,800 per family — and results in the loss of 9,100 jobs and $404 million in wages.[29]

The Grassroot report also estimated that eliminating the act’s U.S.-build requirement alone would save Hawaii residents about $531.7 million, or about $300 per resident, and add 3,860 jobs.

Meanwhile, the higher cost of Jones Act ships further acts as a barrier to entry for any potential domestic competitors,[30] which sometimes means U.S. residents cannot obtain certain goods via Jones Act vessels at all.

For example, residents of some of America’s northeastern states, Hawaii and Puerto Rico are unable to buy cheap LNG from U.S. sources because no Jones Act-qualified vessels are designed to carry the fuel. Instead, they must buy from foreign sources.[31]

Similarly, Hawaii is heavily dependent on foreign oil — at one time much of it from Russia — because it is cheaper than buying it from less expensive U.S. sources and having to pay the Jones Act premium.[32]

These circumstances do not necessarily serve the causes of national security or national independence, as U.S. Senator Jones suggested. But that’s the situation America finds itself in.

At the same time, this is not to argue against free international trade. The lack of it is precisely the problem. In fact, it should be wholly acceptable for U.S. shipping companies to outsource their vessel repairs and maintenance to foreign shipyards, including in China; and for U.S. companies to buy oil and other products from overseas suppliers. And, of course, they should also be allowed to buy brand new vessels from foreign shipyards.

Economists and political scientists have noted that free trade brings people together and promotes economic prosperity and peace.[33] The Jones Act, on the other hand, has isolated the U.S. from world commerce by preventing foreign carriers from shipping goods between U.S. ports and requiring U.S. carriers to buy vessels made in U.S. shipyards. In the process, it has decimated America’s maritime industry.

If U.S. policymakers wish to stimulate shipbuilding in the U.S., encourage more waterborne transport between U.S. ports and grow the nation’s maritime workforce — they need to liberalize the Jones Act, not “strengthen” it with more regulations that will only exacerbate the problems the industry and nation already have.

Until meaningful reforms are made to the Jones Act, the true casualties of this anachronistic protectionist law are not countries such as China, but American consumers, American national security and even the U.S. maritime industry itself.
___________

Mark Coleman is communications director and Melissa Newsham is a Grassroot Institute research associate at the Grassroot Institute of Hawaii.

 

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