Webinar makes powerful case for Jones Act reform
From Grassroot Institute of Hawaii, July 13, 2021
Watch our successful webinar about the Jones Act that involved participants and viewers from one end of the nation to the other, from Guam to Puerto Rico, with Hawaii and Alaska in between.
Sponsored by the Grassroot Institute of Hawaii, the July 12, 2021, webinar promised to explain how the protectionist federal maritime law known as the Jones Act complicates life in the these outlying states and territories, and it truly delivered.
The event was one hour, but it seemed to go by quicker than that because it was chock-full of first-hand observations and scholarly but interesting factoids that in total made a powerful case that the 1920 Jones Act needs to be either repealed or reformed.
Background: How Jones Act complicates life in Hawaii, Alaska, Puerto Rico and Guam
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7-12-21 ‘How the Jones Act complicates life in Hawaii, Alaska, Puerto Rico and Guam,’
with guests Bob Gunter, Bethany Marcum, Rafael Velez and Colin Grabow; moderator Keli‘i Akina; and audience liaison Joe Kent.
Keli’i Akina: Aloha and welcome, everyone, to the Grassroot Institute of Hawaii. I’m Keli’i Akina, president of the institute. I want to thank you so much for taking time to chime in today. Our webinar topic is truly interesting. It’s “How’s the Jones Act complicates life in Hawaii, Alaska, Puerto Rico, and Guam.”
The 101-year-old Jones Act, also known as Section 27 of the Merchant Marine Act of 1920, requires that ships that operate in transporting cargo between two U.S. American ports be flagged American, built in the United States, mostly owned by Americans and crewed by Americans.
Now, those requirements, as simple as they seem, have led to the steady decline of America’s ocean-going merchant marine fleet and its labor force. That has increased costs [for] everybody who is served by ships from the Jones Act fleet; that raises prices for American consumers on almost everything. Nowhere have the effects been felt more obviously than in Hawaii, Alaska, Puerto Rico and Guam, which rely almost wholly on waterborne imports to survive.
Now, today, you’re going to hear directly from representatives from these regions who can speak to why the protectionist Jones Act needs to be updated for the 21st century. In fact, right now, this very moment, we are going to be hearing from participants from Anchorage, Alaska; San Juan, Puerto Rico; Washington, D.C.; and our own Kalaheo, Kauai. It’s truly a nationwide webinar.
I’ll spend about half an hour chatting with them, and then afterward, we want to welcome your questions. Make sure that you get those questions in, and we’ll go to a rapid-fire question-and-answer session in about 25 minutes.
Right now, I’d like to introduce our wonderful guests who are friends of the Grassroot Institute and who have worked with us for many years. The first one here locally on the island of Kauai is Bob Gunter. Bob, glad to have you on board with us. Bob is the president and CEO of the Kōloa Rum Co. Bob joined Kōloa Rum in 2008 as chief operations officer and he was promoted to president and CEO in May of 2010. Currently, Bob is responsible for all aspects of the company’s daily operations. He’s also a member of the Kauai Chamber of Commerce and currently serves on its board of directors. Bob, good to have you on the program today. Aloha.
Bob Gunter: Aloha, Keli’i. It’s a pleasure being here. Thank you.
Akina: Looking forward to hearing from you. We also have a colleague from Alaska, Bethany Marcum, in the think tank world. She’s a chief executive officer of the Alaska Policy Forum. In this role, she directs the policy priorities and strategic initiatives of the organization. Now, by educating the public and elected officials on Alaskan issues, Bethany works to maximize individual opportunities and freedom for Alaskans, something we believe in. Prior to the Forum, Bethany worked in the Alaska State Legislature. Bethany, good to have you on the program. Thanks for joining us today.
Bethany Marcum: Thank you, Keli’i. Good to be here.
Akina: Thank you. Our third guest today will be Rafael Velez. Rafael is a businessman from Puerto Rico, who is the president of the Atabey Capital and president of Putney Capital Management. In addition to that, Rafael is a constant learner in life. He’s gone back to school and is enrolled in the master’s program for public policy at Georgetown University, where he’s doing research on the effects of the Jones Act in Puerto Rico and Hawaii. Rafael, good to have you all the way from San Juan, Puerto Rico.
Rafael Velez: Thank you for inviting me, Keli’i, and hi to everybody over there.
Akina: Good to see you again. Another colleague with whom we’ve worked closely on the Jones Act issue is Colin Grabow. Colin is a policy analyst at Cato Institute’s Herbert A. Stiefel Center for Trade Policy Studies, where his research focuses on domestic forms of trade protectionism like the Jones Act and also the U.S. sugar program, which is of interest to us here in Hawaii. His writings have been published in a number of outlets, including USA Today, The Hill, National Review and Wall Street Journal. With that said, I welcome you, Colin. Thanks for joining us again.
Colin Grabow: Aloha and thanks for having me.
Akina: Well, we’re going to start right here at home. It’s been wonderful visiting with you from time to time, Bob, on the island of Kauai at your Kōloa Rum Co., and your product is circulated all across the world. Let me give you a couple of questions. If you take just a couple of minutes to answer each of them, I’d appreciate it.
Here’s my first question for you: You’ve got a lot of personal experience with the Jones Act. In fact, that’s why you called us up at the Grassroot Institute many, many years ago, and we struck up a friendship. The Jones Act has proven an obstacle to your company in the past, and you’ve shared that across the country. Could you explain that a little bit?
Gunter: Sure, and thank you again for the opportunity, Keli’i. I have lived in Hawaii for more than 40 years and, frankly, was never aware of the Jones Act until I became associated with Kōloa Rum Co., and we began building our business and began bringing in input supplies and ingredients from the mainland U.S., and then shipping our products back to the mainland and, of course, internationally.
It was at that time that I began to realize that there was a disparity, or discrepancy, between the cost of shipping in Hawaii as compared to using foreign carriers and shipping to other points. It became glaringly apparent to me when we first landed our distribution agreement in Australia and we contracted to send a container load of our rum to Sydney. Of course, there, at the time, was no reliable or timely method of shipping directly from Hawaii to Australia, so we had to ship that container to the West Coast and then from the West Coast on to Sydney.
As I recall, and this was, of course, six or seven years ago, I guess, the cost of shipping that container to the West Coast, California, was about $6,000. The cost from getting it from Los Angeles to Sydney was $1,900. At first, I didn’t believe it and, of course, did some research and found that, well, yes, indeed, that’s the case. That was my first inkling that we were paying some pretty high rates here in Hawaii.
We are totally dependent on ocean freight here, not only for our business but for our island economy, because so much of our goods are transported by ocean freight. As time has gone on and we’ve expanded our distribution and increased the demand for input supplies, which, of course, we ship in from the mainland, it’s become more and more clear that that is a major component of the costs that we incur for doing business here. We’re very much challenged here in Hawaii anyway in terms of manufacturing, and that is an impediment to our continued growth and viability.
Akina: Well, that’s really something. Bob, you became aware of the Jones Act because you as a businessman saw the extraordinary costs added to your product and couldn’t explain it otherwise, but is this true only of your industry or your business? As you’ve talked to other businesses in Hawaii, have you seen the same thing?
Gunter: Absolutely. First and foremost, as a resident, longtime resident here and homeowner in Hawaii, I’m certainly aware now that the cost of everything that we consume, or at least 90% of that, which comes in by ocean freight, has that premium attached to it and, therefore, costs more. It’s not just a factor, as far as my interest and concern. It’s not just on behalf of Kōloa Rum Co., but it’s being a resident of the state of Hawaii because it affects us all in many different ways, and it’s compounded.
In terms of other industries, yes, cattle ranchers, for example, who traditionally send their cattle to the mainland for finishing before slaughter. There’s no Jones Act-compliant vessels that can transport the cattle back and forth. Correct me if I’m wrong, but I believe the same holds true for natural gas, as there are no natural gas, at least Jones Act-compliant vessels, that can carry natural gas from the mainland U.S. to Hawaii. On the energy side of things here, the Jones Act is a major contributing factor to additional cost.
Akina: That’s right, Bob. There are no container ships that can carry, under the Jones Act, LNG in large quantities to Hawaii. Thanks for that comment. By the way, we all know stories from the neighbor islands where you live, where cattlemen have sometimes had to send their cattle by plane because they found that to be a little cheaper but not very fun. Anyway, we’re going to switch to Alaska now, our colleague, Bethany Marcum.
Bethany, you and I have talked about this issue many times, and you’ve observed it both as a public policy leader and as somebody who has worked in the legislature in Alaska. Now, Alaska is a little bit different from Hawaii, Puerto Rico and Guam in that it’s not so dependent upon shipping for all of its produce because you also are connected to the continent. But nonetheless, the Jones Act makes products much more expensive in the Last Frontier, is that right?
Marcum: Yes, that’s correct. For those of you who aren’t geography buffs, we’re not an island, and so we are connected to the Lower 48 through Canada. But we have many industries that rely on ocean transportation to move most of their products. In Alaska, it’s very commonly known that most of the food that is on the grocery store shelves comes into the Port of Anchorage via container ship. It’s one of those things we talk about.
Internally, we talk about the Port of Anchorage being a risk, but it’s also the fact that because it comes through that route, it becomes more expensive. It’s restricted to those particular ships that meet those criteria that you listed earlier, and that impacts our economy, of course. It’s interesting because this act was really created as a monopoly. It was sponsored by someone from the state of Washington.
The sponsor from Washington had the intention of creating a monopoly for his constituents in the Seattle area, because what it did was create a market for the Seattle-based shipping lines. The state of Alaska actually sued at the time. Although we weren’t a state, we were a territory at the time. That’s, in fact, why we lost the case. It was a technicality more so than it was the merits of the case, because it didn’t apply to us directly because we were considered a territory at the time and not the state of Alaska. 1920, right? That was a long time ago, long before Alaska was a state.
Akina: That’s right, and many people from Alaska have been speaking up about the need to update the Jones Act. Now, one of the things that we have in common between Alaska and Hawaii is our love of ocean-going cruising. People who are on cruises love to come to the destinations of Hawaii and Alaska. I may make everybody’s eyes glaze over. There’s a law similar to the Jones Act called the Passenger Vessel Services Act, the PVSA, which complicates all of that. Can you tell us a little bit about that and how that has impacted Alaska?
Marcum: Yes. Alaskans’ eyes certainly aren’t glazed over about the PVSA. It has been in the news very heavily since the pandemic began. Basically, the PVSA is to passengers and people what the Jones Act is to cargo and merchandise. It says that the transportation of passengers requires that those foreign cruise ships have to stop somewhere along the way between the Lower 48 and Alaska. That usually means Canada. If you’ve been on an Alaska cruise, you know that that’s — I’m sorry. It usually means Vancouver in Canada.
Canada loves this, of course, because this is a big boost of tourism for them. We’re essentially subsidizing tourism for Vancouver, Canada, by requiring these stops in Vancouver. Canada actually lobbies the U.S. government to keep this law in place. It’s good for them. Normally, it’s not that much of a problem for us, but the pandemic made it a big problem for us because Canada banned cruises for a period of time. In fact, they’re still banned. That’s a big problem for Alaska because we rely very heavily on our tourism industry for the summer. An important part of our seasonal employment is the tourism industry here.
It was really good that Alaskans came together about this. Our state legislature, our governor, our federal delegation all worked together. They were able to get a bill sponsored in Congress that exempted Alaska from the PVSA until Canada decides to lift the ban, which hasn’t happened yet. The cruise ships are finally starting to come back. The big one, the first one, docked two days ago and we’re happy that — it’s been almost two years since we’ve actually had cruises coming to Alaska, which is a big hit for the economy.
Akina: Right, Bethany, in fact, we were delighted to go to battle with you and your think tank, the Grassroot Institute working hand-in-hand with our Alaska counterpart in order to get that bill passed. We celebrated together when President Biden signed the act into law in May to exempt Alaska from the PVSA [until] Canada opens up. That’s a great boost. We hope we can do that for Hawaii as well. Thank you for your insights.
Now, we go to San Juan, Puerto Rico. Rafael standing by right now. I’m sure your heart has been broken as ours has been over the last many, many years with natural disaster after natural disaster just devastating Puerto Rico and revealing the vulnerabilities that it has. Fewer people understand the extent to which the Jones Act has had a major impact upon the economy of Puerto Rico. Do you want to tell us a little bit about that?
Velez: Sure, of course. Thank you for having me again, Keli’i. Well, Puerto Rico, like Hawaii, it’s an island. Because it’s an island, it’s extremely reliant on ocean transportation to get its supplies, right? Even though we are in the Caribbean, we’re not considered a state. We’re a U.S. territory. We’re surrounded by other countries. But given the fact that the United States has such a huge economy, it is basically our biggest trade partner.
Puerto Rico, for example, we currently consume 85% of the produce that’s actually imported into Puerto Rico. The transportation rates of these fruits and vegetables from the U.S. is sometimes three to four times more expensive than world corn markets. Another example is, like we were talking about earlier, the liquid natural gas. The U.S. is the largest producer of LNG. Puerto Rico relies on LNG to fuel about 29% of their electricity generated.
Puerto Rico cannot have access to this cheap LNG from the United States, because as we discussed earlier, there’s actually no tankers that are Jones Act-qualified. Instead, we have to import our LNG, more expensive, from other places such as Trinidad and Tobago and even as far as Russia. In this case, it doesn’t only affect us Puerto Ricans, but it also affects businesses in the U.S. In the wake of Hurricane Maria, there have been several studies that presented this conclusion.
There was a study that basically stated that the direct costs associated with the Jones Act to Puerto Rico could sum up, up to $1.5 billion a year. There is another study commissioned that actually said that direct and indirect costs both could amount up to $3 billion a year. The Chamber of Marketing, Industry, and Food Distribution did another study that said that the Jones Act was the equivalent of having a 7.2% tax on all food and beverages in Puerto Rico. As you can imagine, definitely, we can conclude that the Jones Act is very harmful to the island.
Akina: Well, Rafael, there has been a growing amount of talk about the Jones Act’s impact upon Puerto Rico during the past many years. In fact, there was a major study that was done by John Dunham & Associates that showed the high cost that Puerto Rico bears because of the Jones Act. People in Washington, D.C., know about it and they certainly have had Puerto Rico put on the map because of the need for emergency assistance.
What kind of progress has been made? What kind of direction are we going as a nation overall in terms of being able to do something on behalf of Puerto Rico, and maybe even exempting Puerto Rico from the Jones Act or some of its provisions?
Velez: Well, some of the politicians on the island actually have taken an active stand against the Jones Act. Keep in mind that, again, Puerto Rico being a territory, it is bound by the Jones Act, which contrary to Guam. In Guam, the Jones Act applies, but there’s one of the requirements of the Jones Act, which is U.S.-built, does not apply. In Puerto Rico, all four [criteria] apply. We have a neighbor, the U.S. Virgin Islands, which is actually only 10 nautical miles away.
In the U.S. Virgin Islands, the Jones Act does not apply at all. Given this, in 2013, Puerto Rico’s no-voting representative in the U.S. House, the resident commissioner, he introduced legislation to just exempt the foreign-built bulk carriers from the Jones Act. In the same manner, it is exempting one. Today, actually, we can say that this person that actually tried to promote this bill, this resident commissioner today is the governor of Puerto Rico.
He’s definitely trying, as well, in some manner to actually see if we could be exempt of that, keeping in mind that cargoes of both goods from the mainland return empty, given that Puerto Rico imports a lot of the goods and it doesn’t export that many to the mainland. These empty cargoes are basically paid by the products we import. Currently, Puerto Rico imports a lot of its bulk goods. With this exemption, actually, the ships, instead of returning empty to the mainland, they could actually make another stop in another country such as the Dominican Republic or any other country and, that way, pay part of that empty leg of the trip, if you will.
Also, in 2015, the Senate of Puerto Rico actually put out a report where he recommended the full exemption of the U.S. cargo that is lost for Puerto Rico as a U.S. territory as well. As recently as 2019, the then-governor, she requested a 10-year waiver from the Jones Act just for the LNG shipment. Given that after Maria, we got an exemption on the Jones Act only for 10 days since we want to promote LNG in Puerto Rico. She actually wanted that exemption to be for a 10-year period.
Akina: Well, Rafael, thank you. Apparently, there are a lot of politicians in Puerto Rico who are active in trying to oppose solutions even if it’s a 10-year waiver and that sort of thing. I wish that we had more activity coming from Hawaii. We do have one of our four congressional members in favor of reforming the Jones Act. Other than that, there’s not a lot of sentiment on the part of public officials. We feel we have to do a lot more work in terms of getting the message out.
Now, for our viewers, let me say this: After I talk with Colin Grabow in just a few minutes, we’re going to open up to questions and answers from any of you out there. We thank you for being here. If you would go ahead and register your question at this time, we’ll make sure it gets asked, or at least do our very best, because we have a lot of participants on the call today. Now, let me go to Colin Grabow.
Colin, you’re a policy analyst at Cato Institute. You know this issue like the back of your hand and understand the regional dynamics as well, but you particularly understand Guam. We’d like to talk about that a bit because a lot of times, Guam gets left out of the conversation in terms of the Jones Act. Many people actually believe that there’s no impact upon the Jones Act. They say because Guam is not actually under the Jones Act per se, but is it a little more complicated than that? Can you give us an explanation?
Grabow: Yes, so unlike Hawaii, Alaska and Puerto Rico, Guam’s a little bit of a special case because it’s not subject to the Jones Act U.S.-built requirement. That means that you can use a foreign-built ship with a U.S.-crewed, U.S.-flagged vessel to service the island. Now, that’s how the law is written. But on a de facto basis, that exemption traditionally hasn’t done Guam a lot of good. The ships go into Guam from the U.S. mainland, which usually stop by Hawaii along the way. Guam is a very small market, so it makes sense to stop by Hawaii.
Hawaii, of course, is fully subject to the Jones Act. You have to use a U.S.-built, flagged, U.S.-crewed, and all the rest. On a functional basis, it usually has been fully subject to the Jones Act. You take being fully subject to the Jones Act and you have limited competition, sometimes only a single Jones Act carrier serving Guam. That’s meant high shipping costs and negative impact on Guam’s economy. In fact, in the mid-1990s, the government of Guam sponsored, or they commissioned a study, rather, to examine the cost of the Jones Act on Guam.
They found the cost of anywhere from $40 million to $50 million. Guam is very small. Current population is somewhere around 165,000, I believe. They calculated per family. That was about $1,200, which is about $1,800 in 2021 dollars. Now, I talked about that monopoly and on a de facto basis being subject to that U.S.-built requirement. Fortunately, in 2017, U.S.-flag carrier APL, which uses foreign-built ships, actually entered the Guam trade with its Guam Saipan Express service offering some competition to Matson, which previously had the market to itself for shipment to and from U.S. ports.
Now, unlike Matson, APL has foreign-built ships that cost much less than those purchased by Matson. They’re able to offer lower shipping rates. They also get subsidies from the U.S. government, given another comparative advantage. That competition has made Matson quite unhappy, and they’re currently pursuing legal action to try to force APL out of the market.
Akina: Now, many people defend the Jones Act by saying that it’s essential for national security. There is a lot of military infrastructure in Guam. But isn’t it the case that the Jones Act somewhat interferes with military transport and its mission? Your thoughts on this.
Grabow: Yes, it’s funny. Yes, a big part of Guam’s economy centers around all the military infrastructure that you do find on the island. Of course, the military has to spend a lot of money to ship goods to the island to support its military operations there. In fact, in 1995, the U.S. Navy sent a letter stating [in which] they referenced the high cost of operating in Guam and Hawaii.
They stated that there was little competition in these markets and the transportation costs are extremely high, so high that according to the Navy, they’re actually considering shipping personnel and operations to Japan in order to save money. Because apparently, going all the way to Japan would actually be cheaper than going to another part of the United States because of the limited shipping options because of the Jones Act.
Akina: Before I let you go and we move into the Q&A section, you’ve observed the impact of the Jones Act on the national level for quite a while now. How would you assess it? What has been the impact of the Jones Act over the last 100 years on the United States?
Grabow: Well, it’s been clearly negative. It’s been clearly negative for the U.S. economy. Raising the cost of transportation by water and making it more difficult for Americans to trade and do business with one another is not great for the economy. Of course, the Jones Act hasn’t been great for the maritime sector it’s been meant to help as well. We’ve seen a dramatic decline in the number of Jones Act ships.
Measuring the number of ships, measuring it in tonnage, it’s been in decline for decades. It turns out that forcing Americans to pay for ships that cost four to five times the world price is not a great way of fostering a strong maritime industry. It’s been a failure. It imposes high costs. You try to put a number on this. In 2019, the OECD did a study, calculating that if the Jones Act was repealed or removed that the economic gains would be anywhere from, I believe, $19 billion to $64 billion.
That’s real money, an increase in economic output by up to $135 billion. To put that in perspective, I think that’s roughly on par with the gains from the Trans-Pacific Partnership free trade agreement we’re supposed to bring. That’s money just being left on the table that we’re not taking advantage of because we keep this law in place.
Akina: Well, thank you, Colin. I’ll hear more from you later on. Now, back to our viewers today. Again, thank you so much for being with us. We’re going to move in just a moment into a time of rapid-fire questions and answers. We want you to get your questions in. In advance, I need to apologize that we will end on time in half an hour at 2:00 Hawaii time.
We may not answer all your questions, but we would welcome you to send them to us, and we’ll respond to any of them. We’ll have our panelists respond if you do send your questions later, but get your questions in. To take us during this time through the Q&A period, executive vice president of the Grassroot Institute, Joe Kent. I’m going to step out into the bleachers and let Joe take over at this point. Joe, go ahead.
Joe Kent: OK. Aloha, everyone. Thanks that we see the questions rolling in already, so we appreciate those. If we see some duplicated questions, we’ll just try to consolidate those. The first one is from Tom Jones. He asked: “How do we make politicians act? Who are the power brokers that are influencing Congress to keep the Jones Act as is?” Does anyone have thoughts about that?
Grabow: I could take a stab at it. I would just say that right now, in Washington, the Jones Act debate is very asymmetrical. I can probably name a dozen organizations off the top of my head that are here in Washington that place one of their top three priorities as maintaining the Jones Act. These are the groups that profit from the Jones Act. Very rarely, there is no concentrated anti-Jones Act coalition here in Washington.
There are very few industry groups that lobby against it. Typically, organizations or industries that profit from the Jones Act, this is their No.1 issue. For a lot of other industries, it hurts them. They don’t like it, but maybe it’s number four or five in their list, and so there’s this real asymmetry here. To overcome that, you have to make politicians care.
You have to let them know that this is an issue that you’re interested in, that you think is hurting America. Because if people don’t ask for it, they won’t act. You will need a demand signal to make change happen. I think it’s up to all of us to make our views known and to try to even the playing field a little bit when it comes to the pro-Jones Act versus the anti-Jones Act sides.
Kent: We have a technical question from Corey Correa. He asks: “How much does it cost to ship to Hawaii today, and how much do they think it will cost when the Jones Act is dismantled?” Any thoughts about that?
Grabow: I’ll just say that Bob, obviously, he gave the example earlier of paying dramatically more to ship from Hawaii to the West Coast, which, by the way, that’s a backhaul route. The headhaul route, Hawaii imports more than exports, of course, so sending something to Hawaii is going to be even more expensive than sending it from Hawaii back to the mainland. I think that’s a fairly instructive example there. How much would be reduced?
That’s a matter of legitimate debate, but something we can also point out that we know for sure is that, again, Matson, Pasha, they’re paying dramatically more for their ships than what foreign-flag carriers pay. A small container ship, the type we use in the Hawaii trade typically cost anywhere, say, around $40 million or so. Maybe $50 million. Matson’s last ships that they had delivered, the Matsonia and the Lurline, those cost $255 million each. Who ends up paying? Well, it’s the consumers. That all gets passed along, ultimately, and so we all pay the price. We know that there is a cost premium, but there is a debate to be had over what exactly is the scale of that.
Gunter: I’d like to add to that. In our case, anyway, as a manufacturer, we import most of the input supplies and ingredients that we use. Bottles, for example, which are in the hundreds of thousands for us on an annual basis, so we pay that premium in shipping to get those products shipped to us, and then we fill them and then send them back. Essentially, the impact is doubled in our case.
Kent: I see. Bob, we had a question come in for you before the event. They asked: “Let’s assume that the Jones Act allowed you to save only a few cents per bottle. Would it be worth it?”
Gunter: Well, that’s a theoretical question. What I would like to determine or at least try to quantify is, would it be a few cents or would it be more? I’m just doing some calculations in my head now. I’m thinking that just for glass bottles that we ship in from the West Coast, we’re looking at 3 cents a bottle. We’re looking at probably $25,000 on an annual basis, and then you can double that because we send the bulk of that back. Then we’re looking at $50,000. That’s just for us as a very small company. As we continue to grow, that cost then it continues to escalate as well.
Kent: I’ve got a question from Mark Monoscalco. He asks: “State and local government nullification of federal regulations has been successful in many situations. Some local governments have declared themselves sanctuary cities. Does anyone have suggestions for us to use nullification to circumvent the Jones Act?”
Velez: I haven’t heard that one before, but I guess it will be a good try. [Laughs]
Grabow: I think that that probably has a low percentage chance of working, shall we say. But something that state legislators can do, that they can be very much part of this conversation, I think it’d be incredibly useful if they’d pass resolution just saying, “We call upon Congress to act on this law and relieve some of the costs and the burden that’s being placed on us,” and send that demand signal and let them know in Washington that people in the states do care about that. That’s something that state and local governments — that’s a way they can get involved in this debate.
Kent: Another question for Hawaii: “Repeal would likely result in Hawaii being served mostly as a stopover by foreign carriers continuing on to Asia. This would result in current direct shipments to the mainland now going the long way around, which would take about three times the time it would take and would cause sharply higher rates in effect now tied to inbound rates from Asia to the mainland.” That very complicated question, to summarize: Reform or repeal of the Jones Act might make things worse. Any response?
Bob: Colin may have a perspective on this as well, but let me say that is certainly an assumption at best. It’s not something that is an absolute, that that would happen if there were to be a repeal or some sort of modification to the Jones Act. I would like to think that, actually, it would increase opportunities for the maritime industry here to have a repeal or some serious modifications. And also, I don’t think it necessarily follows that it would be injurious to Matson or Pasha lines, as they would be presumably then brought out from under the foreign-ship build requirement, which would mean they could operate at a lower cost and more efficiently, and then hopefully pass those costs on to us here.
I appreciate the question, but I think it was based on some assumptions that are not necessarily assured.
Kent: Another one for you, Mr. Gunter: “Why doesn’t Bob Gunter ship direct to Asia on foreign carriers that serve Hawaii and then transship to Australia?”
Gunter: Well, that’s something that I suppose we could look at, but for us, timeliness of delivery is extremely important. We operate in a very competitive industry, and it’s a global industry. We are competing from brands around the world who don’t necessarily have the same cost and other burdens and challenges that we have here in Hawaii. But timeliness of delivery, and also having service to some of the other locations that we now serve. For example, we just opened up distribution in Europe, so shipping to Asia first and then onto Europe, I don’t know, maybe that’s a possibility.
I would think it would add time to the equation, but it gets terribly complicated, which is part of the issue I think that we’re dealing with. It’s not only cost, but its complexity, timeliness to market, and flexibility in terms of being able to source and ship in a timely and efficient manner.
Kent: I wanted to ask one to Bethany and Rafael: Do people generally know about the Jones Act where you live?
Marcum: I’ll go ahead and answer that, Joe. It’s funny, I was at a dinner last week and someone had seen the advertisement for the Jones Act, and suddenly everyone at the table started talking about the Jones Act. They’re like, “Wow, I haven’t heard about the Jones Act in a long time. It’s exciting that it’s being talked about again.” I think in the back of a lot of people’s minds, they know it’s a problem for Alaska, but it’s not something that has really come to fruition, until the passenger cruise ship issue this year really brought it to people’s minds when they realized that this is a problem for our cruise ships, for our tourism industry, and it’s still a problem for our cargo and our freight industry.
I also wanted to mention, you were talking about workarounds, Joe, and so it’s interesting because they’re very strategic about this, but people will sometimes ask, “Well, why doesn’t Alaska just use foreign ships to get to Vancouver, and then go by rail across the border to Seattle.” But they were pretty strategic about this and they actually put a provision in the Jones Act to prohibit us from doing that, so even the workarounds that we might try to use, they’ve already put the quash on those.
Velez: In the case of Puerto Rico, actually, I started hearing a lot about the Jones Act after Hurricane Maria, and particularly the effect that it has had on the economy, given that Puerto Rico has been going through a bad time, economically speaking, since 2008. One of the things that they have said is, just liberating us from the Jones Act will actually give us a boost economically, or modifying the Jones Act. But a lot of people, they just know that but they don’t really understand what the Jones Act is about and what the requirements are and how is it that it works. They just know that somehow repealing the Jones Act will be economically good for Puerto Rico.
Kent: OK, this one’s for Colin: “Can you provide examples of how the Jones Act increases the cost of products on Guam? How would repealing the Jones Act reduce the cost of shipping on products in Guam?”
Grabow: Well, I think it would be the same as everywhere else. If we have more competition and more efficient operators, that can only help with the cost of goods. Again, there’s a debate to be had over exactly the scale of the reductions in freight rates, but I think it’s pretty much an ironclad law the more competition and having a lower cost structure, that’s only going to be good for consumers.
Kent: From Peter: “Hi, thanks to the participants. Could Alaska, Guam and Hawaii, and Puerto Rico, come to an agreement on choosing one element such as relaxing the requirement that ships be U.S.-built, so that there’s enough consensus to potentially start chipping away at the Jones Act? If so, what would that element be?” Do you folks think that there could be some kind of consensus on targeted reform?
Grabow: I think that would be useful. I’ll just point out that I believe back in, say, 10 years ago, roughly, there was an effort to try to get some of the noncontiguous states and territories aligned on this. Actually, Guam passed a resolution back then calling for the U.S.-built requirement an exemption to be applied to Hawaii, and I believe the other noncontiguous states and territories, because there was a recognition there that although nominally, they are exempt from that, that on a de facto basis that very much was an imposition on them. I believe there was some coordination with other parts of the country, Alaska and Hawaii, to try to present a unified front on that.
I think that that would be a good strategy going forward.
Kent: Well, Rafael, do you think that if the Jones Act were reformed, that this would cause a loss in jobs in Puerto Rico? It’s one of our questioners asks.
Velez: No, no. I actually don’t think that it will be a cost of jobs. I think like Colin said, it will bring about more competition. It’ll bring about, actually, the fact that the cost of goods will be lower, probably we’ll be consuming more goods, so probably we’ll be having more ships. So I would say, on the contrary, I think it will actually increase the amount of jobs in Puerto Rico.
Kent: A question for Bethany: “How has the Jones Act and the Alaska cruise ship 2021 season worked out?” How is the season working out, basically?”
Marcum: Just to be clear, the Jones Act doesn’t directly affect cruise ships. That is its a little sister, I guess I’ve heard it referred to as — the PVSA, the Passenger Vessel Services Act. But the PVSA had a big impact. There was no cruise season at all last year because of the requirement that we stop in Canada or elsewhere on the way — that the cruise ship stopped there. Like I mentioned, the legislation that was passed in Congress this year really is the only thing that rescued us — an exemption if you will. So waivers and exemptions are really the only thing that have kept us alive during this, and that’s true in a variety of situations.
You have energy companies out there that have a problem with a ship and they need to be able to bring something in, to bring something to move product, and they have to get a waiver, and those waivers can be very expensive to do that. If you don’t do it just right, you can get fined, on top of the fact that you’ve had to go through all the administrative bureaucracy of getting a waiver. So it’s not just the passenger ship industry that was impacted by it this year, but there’s a continual impact on the other resource development industries that Alaska relies on so heavily.
Kent: Thank you, and thanks for keeping your responses short. We’ve got a lot of questions I’m trying to get to. I apologize to those who I don’t get to, but one from Ed. He says: “What foreign carriers would serve Hawaii, and when I say Hawaii, you can imagine your jurisdiction too, would serve your jurisdiction if the Jones Act were dropped? Would they provide better or more timely service and adjust in time trade lane? Do we know the foreign carriers that would actually charge less freight rates, and what proof can you offer and so on?” This is a compound question. Rafael, how do you respond to that?
Velez: Sure. In the case of Puerto Rico, given our location, we could actually serve as a hub to actually bring about products around the Caribbean. That is something that we’re missing because of the Jones Act, and other countries are actually taking advantage of it such as the Dominican Republic and Jamaica. That alone will tell you it will bring about more companies. Which companies? I mean, there are many.
Kent: Bethany, do you have a response there?
Marcum: Yes. I would say don’t just think about the carriers, but even think about the build requirement. In Alaska, there are three main ships that serve our Alaska trade through Matson, and all three of those ships were built in 1987, but the average lifespan of a cargo ship is like 20 years. Those are 37 years old now. If we have to get those ships replaced, and they will have to be replaced, the cost, about six to eight times I’ve heard, four to six to eight times higher to build those ships. Think about the impact of that extra cost that gets passed onto the consumers. Not just about the carriers and the carrier rates, but also the build requirements of the Jones Act.
Kent: Great point. Mr. Grabow, your colleague, Scott, wrote a Cato blog post last week discussing the incoherence of President Biden’s support for the Jones Act, given the recent executive order targeting industry concentration and competitiveness. He noted that you assisted with that article. Could you speak to this dichotomy? Do you understand the question?
Grabow: I do understand the question. For those who are not aware, last week, President Biden issued an executive order trying to address the phenomenon of extremely high shipping rates in foreign trade. U.S. exports, for example, going to other countries, there’s been a tremendous run-up in shipping rates due to various factors, a lot of pent-up demand, people during the pandemic buying a lot of stuff, a lot of imports coming from Asia, and wanting to promote more competition. Well, what’s interesting here is that the United States, we don’t have a lot of control over international trade.
This is international, of course. What we can control, or we have much more influence over, is ocean-going shipping within our own borders, Americans shipping between two U.S. ports, but that’s subject to the Jones Act. And Biden is a strong supporter of the Jones Act, so the area where he can make a real difference and bring his influence to bear on the Jones Act, he’s totally quiet. In fact, he’s on the wrong side of this. Instead, he’s focusing on an area — he says that we need to promote more competition in foreign shipping. I’m glad that he recognizes that we need more competition in shipping, but of course, then he supports a law that does the opposite, which is unfortunate.
Kent: One argument we get often is about if the Jones Act were repealed or reformed, then international shippers would not be able to service the market as reliably. For example, we have just-in-time shipping in Hawaii, where the business owner needs the product just in time. If that were disrupted, if the Jones Act were changed, then we would lose that just-in-time shipping, and we would see long time frames in which we would get our products. The same is true with other areas, or is said about other areas, anyway. I guess they’re “what if” scenarios. What do you say to “what if” scenarios?
Grabow: Well, I think we don’t have to do a lot of guessing here. Well, number one , I’ll just say from a big picture perspective, competition is always good. I’m not aware of examples where you introduced competition and service gets worse. That’s just not something we see very often. The second thing I’d say is let’s let the market vote. I’m sure there’ll be a trade-off between more frequent service and the cost of service, and let people, if they really place a premium on frequent shipping and reliable shipping, they think they’re getting that, and there’s more of that from the status quo, then presumably Matson and Pasha would have no problem.
The other thing I just point out is, let’s look at the U.S. Virgin Islands. As Rafael pointed out earlier, they are exempt from the Jones Act. I have never heard anybody in the Virgin Islands clamoring for the Jones Act to be applied to them because they think it will improve their shipping options. That’s never happened. Let’s remember, there are parts of the United States that are exempt. I think it’s only upside. The fact that no one there is clamoring for the Jones Act to be applied to them should be very instructive.
Velez: I want to expand a little bit on what Colin just said. I mean, here in Puerto Rico, we only have four carriers, and out of those four, two of them basically represent like 80% of the transshipment here in Puerto Rico, so there’s really not a lot to choose from.
Kent: OK. Kevin asks: “In a time when we’re trying to buy local and use more American-made products and services, wouldn’t repeal of the Jones Act outsource jobs to flags of convenience shippers, and further decimate the U.S. maritime industry that has struggled for decades?”
Grabow: Well, I would just say the U.S. maritime industry, you’re right, it has struggled for decades with the Jones Act in place. Again, forcing Americans to pay outrageous prices for new ships is not a great way of promoting either waterborne commerce or the U.S. Merchant Marine. If we purely just got rid of the U.S.-build requirement, I think it would be all upside, certainly for the shipping industry and the ship operators, and there would be more Americans employed on these ships. You talk about full Jones Act repeal, well, on the one hand, I do think under their current cost structure, yes, they will not be competitive, but we have to balance that against other industries. They’re also losing jobs because of the Jones Act.
I don’t think the government should be picking winners and losers in the economy and saying that, “No, maritime jobs are more important than other people’s jobs.” If we do have a consensus that we want to have a lot of U.S. flagships, then the government should subsidize those ships, and we should all pay that subsidy. I think something that we haven’t talked about in this conversation is that the whole thinking behind the Jones Act is that by requiring U.S.-built U.S. cruise ships, that we have ships that the military can use in time of war.
Well, if we’re going to subscribe to that logic, then why are we putting so much of the burden on the noncontiguous states and territories that are a tiny percentage of the U.S. population but are bearing a wildly disproportionate amount of that burden? If this is truly all about national security, then all Americans should pay for this, and the burden should be spread much more equitably. Even if nothing else, we should recognize the Jones Act is just simply unfair, even if we buy into this national security rationale.
Kent: I want to go through a little speed round here, if you don’t mind. There’s a few questions that have been piling up that are short, but sweet. Barry asks: “For what industries is the Jones Act most beneficial?” I think it affects most industries, but any ideas there?
Marcum: Certainly the maritime industry.
Kent: Next, we’ve got: “Anyone with the elimination of the Jones Act truly open and globalized business?
Grabow: I think so, shipping is one of those globalized businesses in the world. You can have a foreign-owned ship, a ship is owned by one country, crewed by another, flagged from another. It’s an incredibly globalized business. I see no reason why that wouldn’t continue to be the case in the Jones Act’s absence.
Kent: Another: “Do you recommend any books or resources for those who wish to learn more about the Jones Act?” I’ll take this moment to plug grassrootsinstitute.org to learn more, but also cato.org. We’ve got Alaska Policy Forum as well. Any other resources you can think of?
Grabow: I’ll plug this book right here, “The Case Against The Jones Act.” Another great book that was written by some extremely knowledgeable maritime historians, “The Abandoned Ocean.” I think that’s a great book. It’s a great perspective on U.S. maritime history.
Kent: Another quicky: “How are the limitations imposed by the Jones Act constitutional? Isn’t this an overreach of the Commerce Clause?” Maybe Colin has that one.
Grabow: I’m not a lawyer so I can’t speak to that in detail. Plainly, it’s been around for over 100 years. We’ve had cabotage restrictions in this country dating back to 1789, I believe. I would have to think that if it didn’t pass constitutional muster, that someone would have identified that by now.
Kent: A question from Puerto Rico. This is Eduardo Bhatia, who says: “What states of the unions could join the effort to get rid of the Jones Act. Do both shippers and U.S. labor unions oppose getting rid of the Jones Act, and has anyone ever reached out to either group?”
Velez: I don’t know if anybody has reached out. Certainly, there are contiguous states that have been harmed by the Jones Act. For example, Massachusetts, when they have a really cold winter, they cannot get enough natural gas given, the pipelines that they have right now. Instead of actually getting more natural gas from Louisiana, they actually import it, and sometimes they have to import it from Russia also. Definitely, I think one effort that we all could do is try to make some of the contiguous states understand what the impact of the Jones Act is. We have to do a grassroots [laughter] … [
Kent: I see. Maybe we’re doing the wrong webinar. We need to do how it affects the contiguous states.
Gunter: Let me just add: That’s my perception too, evaluating this and watching this over the years, that is the Jones Act. And the impact here is that, unfortunately, Hawaii, Alaska, Guam, or Puerto Rico in particular, we’re the ones that are suffering the disparate impact. The other 48 contiguous states, by and large, with a few exceptions, as Rafael mentioned, they are not. They have the luxury of having a vibrant trucking industry, railroads, and other means and methods of getting their goods from point A to point B. For those of us who are not contiguous to the 48 states, we are the ones that are impacted with this.
Unfortunately, we’re also the smaller population base, and we just don’t have the influence at the congressional level and otherwise, and so we’re out-voiced on the subject, and we end up having webinars like this to try to generate more awareness and support.
Kent: I wonder if I can do a round-robin about the political viability. In Alaska, do Alaska’s politicians, congressional know about the Jones Act or have positions on them, Bethany?
Marcum: Yes, there have been multiple resolutions passed by the state legislature opposing the Jones Act, and in fact, the governor of Alaska is required to advocate for repeal of the Jones Act. It was a ballot measure that was passed by Alaskans in 1984. Yes, I would say Alaska’s politicians in general, the majority of them, are aware of the problems with the Jones Act for our state.
Kent: How about in Puerto Rico?
Velez: Yes, as I mentioned, the current governor, when he was commissioner, resident commissioner actually, he tried to propose a bill to modify the Jones Act for Puerto Rico and try to be more equitable to the other U.S. territories. Nevertheless, the current resident commissioner is for the Jones Act. It’s mixed, I would say.
Kent: Bob, do you have any comment on Hawaii’s politicians?
Gunter: Yes, my understanding is that none of our Hawaii delegation at the federal level is supportive of any change, certainly not repeal of the Jones Act with the exception of Rep. Ed Case, who for several years has had, I think, bills presented and has been advocating for some serious reform if not outright repeal. But otherwise, no.
What’s interesting, and I’m just basing this on some research that I’ve done, is that that’s contrary to Hawaii’s delegation dating back 20 years ago or so, with Sen. Inouye in particular, Governor Burns here, they were all strongly advocating for repeal or exemption from the Jones Act from Hawaii.
Over the last 20 or 25 years, there’s been a flip politically in terms of Hawaii’s official position.
Kent: Colin, do you know anything about Guam’s politicians’ positions on this?
Grabow: Yes, I know that back, I want to say 10 or so years ago, the governor of Guam spoke out against the Jones Act. I take that back. Back in 1989, the governor of Guam spoke out against the Jones Act, said it is an affront to the dignity of people in Guam. Again, we had a resolution passed, I believe, by the legislature there in 2012. There is a history.
One thing I just point out is that I think Bob said that to noncontiguous states and territories, again, they’re small, they don’t represent a lot of Congress. But their position is incredibly important. Because if you want to have a conversation in Washington and say,” We need to do something about the Jones Act,” and people say, “Well, I don’t hear anybody in Hawaii or Alaska complaining,” then it’s hard to get that conversation started. So those voices are a very important part of this debate.
Kent: Colin, back to you. Someone asked: “There’s a belief on Guam that the Jones Act prevents us from getting products directly from Asia, and instead results in Asian products getting shipped to the U.S. West Coast and then to Hawaii, and then finally to Guam. Is that really the case?”
Grabow: No, that’s not accurate. You can ship directly to Guam. What I will say is that because of the Jones Act — in fact, the Jones Act does a lot of favors for foreign products because it makes them more attractive to buy, because once you factor in the cost of transportation, buying a product in the U.S. mainland is much less desirable than buying a foreign product. In fact, you can make a great argument the Jones Act encourages Americans to buy foreign products, including in Guam and Hawaii and Alaska, and the rest.
Kent: OK. Well, I’m going to invite Keli’i back onto the stage here. We can end the question-and-answer section right now. I hope I got to all your questions, and thanks so much for answering them.
Akina: Thanks to Joe Kent for moderating the Q&A section. If you did have a question that you would like followed up by one of our speakers, just send it to us at firstname.lastname@example.org. That’s email@example.com. We’d love to receive your information as well and put you on the email list. You’ll get reports every week, a column that we write, and you’ll be updated on events such as this.
In closing, I want to say thank you so very much to our friend, Bob Gunter out in Kalaheo, Hawaii. Thank you, Bob, appreciate you being with us. Bethany Marcum, our colleague up in Alaska, Anchorage, thank you for being with us, Bethany. In San Juan, Puerto Rico, our good friend Rafael Velez, it was great to see you here today, and a true expert in the Jones Act, Colin Grabow, thank you so much for spending time with us from the Cato Institute in Washington, D.C.
Mahalo to all of you for being on the panel, mahalo for all of you watching. Until next time, I’m Keli’i Akina with the Grassroot Institute. Aloha.