Jones Act reform anew: Efforts underway to loosen restrictions on which ships, companies participate in domestic shipping trades

By Chris Dupin, American Shipper, October 31, 2011

As Horizon Lines, the nation’s largest domestic container carrier, completed a financial restructuring this fall, and one of its competitors in the Puerto Rico trade, Trailer Bridge, continued its efforts to refinance, there were renewed efforts to examine or loosen restrictions on which ships and companies can participate in domestic shipping trades.

Pedro Pierluisi, the resident commissioner of Puerto Rico, said at the end of September that the Government Accountability Office had agreed to his request earlier this year for a detailed study on the effect of the Jones Act in Puerto Rico, specifically its impact on the island’s economy and the United States.

The Jones Act requires that goods moving between points within the United States, including between the mainland and Puerto Rico, Hawaii, and Alaska, be carried on ships that are built and registered in the United States. They must also be owned by and employ U.S. citizens.

While Pierluisi’s announcement of the GAO study did not directly call for repeal of the law, he said “a broad array of economists in Puerto Rico have expressed concern that the Jones Act hinders the island’s economic growth, since a majority of Puerto Rico’s imports come from the U.S. mainland, and most of those imported products are transported by ship. Likewise, on the export side, about 70 percent of what Puerto Rico produces for sale outside the island — generally manufactured goods — is destined for the U.S. market, and most of those goods are moved by ship.”

The resident commissioner, who is the non-voting representative of the commonwealth in the U.S. House of Representatives, claimed the study has strong public support in Puerto Rico.

“The purpose of the study is to determine, once and for all, the impact that the Jones Act has on our economy. The GAO has the credibility and expertise to analyze this issue, and to present its conclusions to members of Congress who, in the final analysis, are the only ones who can make a change to the underlying law,” Pierluisi said.

He said he requested the study “based on the belief that the best way to obtain any modification to federal law is to demonstrate the effect that the law has on the Puerto Rico economy, including the future development of the Port of the Americas,” which is a large new green field port on the south side of the island, far from San Juan.

He did recognize in his request that a 1979 study by a federal interagency task force had concluded exemption from cabotage laws “would not provide a lasting remedy” in the form of lower freight rates. “Whether the task force properly analyzed the issue, and, if so, whether its conclusion is still valid over 30 years later—are open questions,” wrote Pierluisi.

William Riefkohl, executive vice president of the Puerto Rico Manufacturers Association, said the Jones Act has put both industrial companies in Puerto Rico and companies trying to develop the country as a transshipment hub at a disadvantage when competing with businesses on nearby islands in the Caribbean. He also said that Homeland Security Department regulations also handicap Puerto Rico when competing for transshipment business.

Riefkohl praised the request for a GAO study, noting that past calls for Jones Act reform are often enmeshed in politics. An objective study will give those calling for change better facts to draw on.

Another group is focusing its effort on Jones Act reform more narrowly, calling for repeal of the requirement that ships in the Puerto Rico, Hawaii and Alaska trades be built in the United States.

Michael N. Hansen, president of the Hawaii Shippers Council, said he is concerned about the need for Horizon and other Jones Act carriers to replace their aging fleets.

Hansen, who has worked as a ship agent and operator, said he was a supporter of efforts by former Federal Maritime Commissioner Rob Quartel’s Jones Act Reform Coalition in the 1990s. The shippers council has been inactive for about a decade and is now taking steps to revive itself and has about a dozen members.

He noted efforts in the past decade by a couple of Hawaii congressmen – Democrat Ed Case and Republican Charles Djou – to get Hawaii exempt from the Jones Act also failed to gain traction.

So he said his group has decided to focus on a more narrow reform – elimination of the “build American” requirement, but broadly across all the non-contiguous trades. The proposal still needs to be fleshed out, he said, but he said it would include restrictions on ship size and require ships being built or reflagged for the Jones Act trade to be relatively new so that very old ships would not be used as replacements.

Pierluisi said such a change could bring to the Puerto Rico market “faster, new less expensive alternatives to what we have now.”

Noting that reform of the Jones Act has been called for in Puerto Rico as far back as the 1940s and 50s, he did not have any strong expectation that the effort will achieve congressional approval easily. But said members of his association have always believed the Jones Act requirements affect the economy by both making products consumed more expensive and its manufactured products cost more.

Hansen said his proposal has also gained interest from businesses on Guam which is served by both Matson Navigation and Horizon.

Horizon today employs foreign-built vessels in Guam, but he said Horizon has a hard time competing effectively, because Matson employs U.S.-built ships that can move cargo between the West Coast, Hawaii, and Guam on the same voyages.

Hansen believes that his proposal would benefit all the existing Jones Act carriers to Hawaii, Puerto Rico, Guam and Alaska, with the possible exception of Pasha which is in the process of building a new vessel for the Hawaii trade.

Hansen estimates it costs two-and-a-half to three-times as much to build a new containership in the United States than in a foreign shipyard.

Matt Paxton, president of the Shipbuilders Council of America, however, pointed to a U.S. Transportation Department study that showed over the life of a ship, capital costs were only a small portion of the overall cost of a service and that the differential between building in a U.S. versus a foreign yard is relatively small.

Paxton also argued that if a large number of Jones Act ships could be built for fleet renewal, their cost would drop significantly, highlighting a series of tankers built by the General Dynamics NASSCO shipyard in San Diego.

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