New York Fed recommends Jones Act exemption for Puerto Rico

by Michael N Hansen, President Hawaii Shippers Council

The Federal Reserve Bank of New York commonly known as the New York Fed issued on June 29, 2012, a report on the competitiveness of the Puerto Rican economy that recommended an exemption from the Jones Act for the Commonwealth.

Among several economic issues confronting the Commonwealth of Puerto Rico, the New York Fed identified the Jones Act as a major impediment to the Island’s prosperity.  The Fed found that the Jones Act cause surface transportation costs with the U.S. mainland to be much higher than with other nearby island countries not affected by U.S. maritime cabotage.  It has also resulted in a loss of economically important maritime traffic to other Caribbean ports.

Although the report asserts that this is a unique problem for Puerto Rico, it is not.  In fact, it negatively impacts all the coastwise noncontiguous domestic trades of the U.S. – Alaska, Guam, Hawaii and Puerto Rico.

The New York Fed recognized that the Jones Act industry objects to their findings and there has been a longstanding dispute over what are the true costs of the Jones Act to Puerto Rico, but concludes there is some substantial cost to the island’s economy.

As such, the New York Fed recommends that the noncontiguous domestic Puerto Rico trade be fully exempted from the Jones Act for a trial period of five years so that an accurate assessment of economic costs can be made, and further recommended that the exemption become permanent if it is found beneficial.

The full exemption recommended by the New York Fed for Puerto Rico would be modeled on the exemption that applies to the Virgin Islands of the United States, which allows foreign flag ships to engage in the domestic U.S. Virgin Island trade.

The Hawaii Shippers Council (HSC) has proposed a much more limited exemption from only the U.S.-build requirement of the Jones Act for large deep draft ships.  The HSC proposal would apply to all four (4) coastwise noncontiguous domestic trades.  It would leave all the current requirements in place for the shallow draft Jones Act tug and barge industry, and the U.S.-flag, U.S. crew and U.S. ownership requirements for the deep draft self-propelled ship segment.

The HSC’s proposal targets the main cost driver in the U.S. Jones Act industry – the extraordinarily high cost of deep draft U.S. shipbuilding in contrast to the cost of constructing comparable ships in the main shipbuilding countries of Japan, South Korea and China.

The Jones Act industry continues to oppose the HSC’s very limited exemption proposal that would bring greater efficiencies but not eliminate the market incumbents.  In contrast, if the New York Fed’s recommendation of a full Jones Act exemption were applied to all the noncontiguous domestic trades for a trail period of five years, it would eliminate the shipping carriers currently operating in those trades.

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The Hawaii Shippers Council (HSC) is a business league organization incorporated in 1997 to represent cargo interests – known as “shippers” – who tender goods for shipment with the ocean carriers operating the Hawaii trade.  Please contact the HSC at email pacmar@hawaiiantel.net if you wish to be placed on our email list.

Full Text: New York Fed report is attached 

Chart:  Noncontiguous domestic trades of the U.S. 

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The Federal Reserve Bank of New York

Research and Statistics Group

REPORT ON THE COMPETITIVENESS of PUERTO RICO’S ECONOMY (Excerpts)

June 29, 2012

CHALLENGES TO PUERTO RICO’S COMPETITIVENESS

Improving Transportation Infrastructure

Two key aspects of the transportation infrastructure are frequently mentioned as raising business costs and impeding business activity on the Island. One of these is the Jones Act, which affects Puerto Rico’s outward and inward trade activity, and the other is an underdeveloped and inadequate local transportation infrastructure.

The Merchant Marine Act of 1920, known as the Jones Act, requires that all goods shipped or passengers conveyed by water between U.S. ports (including Puerto Rico) be carried in U.S. flagships, constructed primarily in the United States, owned by U.S. citizens, and crewed by U.S. citizens and permanent residents. While the Jones Act is often cited as a factor that raises business costs, there is no comprehensive, objective study assessing its potential effects on Puerto Rico’s shipping costs or the Island’s economy as a whole.

Experts on the Island have varying views on the magnitude of the act’s effect, but most agree that the net effect is negative—largely because the act boosts the cost of imported goods to Island residents but also because it makes exports less competitive and diminishes the viability of the Island as a major regional trans-shipment port. However, some in the shipping industry argue that the net effect is minimal—that the restrictions effectively help establish incentives for more reliable service and create jobs for American workers, many of whom are Puerto Ricans themselves, largely offsetting the adverse effects of higher costs.

Available data show that shipping is more costly to Puerto Rico than to regional peers and that Puerto Rican ports have lagged other regional ports in activity in recent years. While causality from the Jones Act has not been established, it stands to reason that the act is an important contributor insofar as it reduces competition (shipments between the Island and the U.S. mainland are handled by just four carriers). 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.

More broadly, it should be noted that shipping costs between the commonwealth and the U.S. mainland are much more stable than international market-driven rates. Thus, the incremental cost varies over time and is most pronounced when there is excess worldwide shipping capacity or when oil prices are low. Furthermore,over the past decade, the port of Kingston in Jamaica has overtaken the port of San Juan in total container volume, despite the fact that Puerto Rico’s population is roughly a third larger and its economy more than triple the size of Jamaica’s. The trends are stark: between 2000 and 2010, the volume of twenty-foot containers more than doubled in Jamaica, while it fell more than 20 percent in Puerto Rico.

Pending the outcome of further studies—including the recently announced study of the Jones Act by the U.S. Government Accountability Office (GAO)—it would appear that, to the extent that it inhibits free trade, the Jones Act does indeed have a negative effect on the Puerto Rican economy, although the magnitude of the effect is unclear. Some have advocated seeking an exemption, arguing as a precedent that the nearby U.S. Virgin Islands have been exempt from Jones Act restrictions since 1922.

POLICY RECOMMENDATIONS

Recommendation 3: Lower the Costs of Doing Business

Shipping goods to and from Puerto Rico costs considerably more than shipping to and from the Island’s regional peers, imposing an important cost on Puerto Rican businesses and dampening the economy’s competitiveness. Much of this relatively high cost of shipping is widely attributed to the Jones Act. Moreover, Jones Act restrictions may put the Port of Ponce at a competitive disadvantage in its potential role as a major trans-shipment port. As an island economy, Puerto Rico differs from the mainland in that it has few alternatives to shipping for the bulk transportation of goods, so it represents a unique case with respect to the Jones Act.

There have been few systematic empirical efforts to decompose the causes of the Island’s high shipping costs. However, economic theory suggests that in the case of Puerto Rico, greater competition would reduce shipping costs, increase efficiency in import-related sectors, and improve export competitiveness. The recently announced review of the Jones Act by the GAO represents an important step toward clarifying the drivers of Puerto Rico’s high shipping costs and identifying further policy options to address the issue.

A temporary exemption from the Jones Act—for a period of perhaps five years—could potentially be warranted. During this period, trends in shipping costs, volumes, and business practices could be monitored; at the end of the period, a review could assess the costs and benefits to determine if this exemption should be made permanent.

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