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Thursday, October 03, 2013
Jones Act Does Not Bar International Trade From Hawaii
By Michael Hansen @ 3:22 AM :: 4683 Views :: Jones Act

Jones Act Does Not Bar International Trade From Hawaii

by Michael Hansen, Hawaii Shippers Council

Several popular notions circulating around Hawaii today postulate the domestic shipping law commonly known as the Jones Act restricts international shipping from engaging in the foreign trade of the United States adversely affecting Hawaii. The purveyors of these notions say that the Jones Act discourages and even prohibits the operators of international shipping from providing direct services from foreign ports, especially in Asia, to ports in Hawaii. These notions are simply not true.

Mistaken Jones Act Notions

First there is the notion that foreign flag ships (i.e., vessels registered in a country other than the U.S.) operating in international trade (as opposed to the domestic trade) of the U.S. are prohibited by the Jones Act from discharging foreign trade cargo at Hawaii. Believers in this idea further maintain foreign cargo, which was loaded at a foreign port, is being carried on board a foreign flag ship and destined for Hawaii, must first be transported to and discharged at a U.S. West Coast port before being shipped to Hawaii on a Jones Act qualified vessel. This notion is false.

A second notion claims that a foreign flag ship arriving from a foreign port can discharge foreign cargo at a port of entry in Hawaii, providing it is the ship’s first U.S. port of call on its current voyage. However, those who assert this view, say if the ship proceeds directly to other U.S. ports, it is prohibited from discharging additional foreign cargo at those ports until it calls first at a foreign port. And, by some accounts, the ship must return to the foreign port where it’s voyage began. Proponents of this notion say while it does not prohibit international ship operators from routing their foreign flag ships directly to Hawaii for discharging foreign cargo, it discourages them from doing so. That would be the case if the notion were true, but it is not.

Believers in the second notion often cite the example of a South Korean-flag Pure Car and Truck Carrier (PCTC) making its first port of call in the U.S. at Honolulu and discharging a part cargo of new vehicles manufactured and loaded in South Korea. According to this narrative, the same foreign flag ship could proceed to U.S. West Coast ports including Long Beach, but it would not be allowed to discharge the balance of its foreign cargo at those U.S. ports. That ship would have to either call at a foreign port before being allowed to discharge the balance of its foreign cargo or return to the port where the voyage originated.  In contrast to this assertion, foreign-flag PCTCs call at Honolulu approximately thirty times per year to discharge foreign manufactured vehicles loaded at a foreign port and proceed to U.S. West Coast ports to complete discharging their cargo.

Transpacific Trade Logistics

Many people blame these mistaken Jones Act notions for two transportation phenomena they claim negatively impact Hawaii: (1) the paucity of Eastbound Transpacific liner container services calling directly at Honolulu en route from Asia to North America; and, (2) the routing of so much Asian-origin cargo ultimately destined for Hawaii through the U.S. West Coast (as opposed to by direct call at Honolulu).

The real reason for these maritime traffic patterns in the Pacific is logistics and transportation economics. The mainline Transpacific liner container services do not call Eastbound at Honolulu because the scale of the Transpacific trade volumes is so great that it does not make economic sense for the large ships employed in this trade to call for the small cargo volumes at Honolulu. While shippers (i.e., cargo owners) find that it is more efficient to ship much of their Asian-origin merchandise destined for Hawaii via the U.S. West Coast. This routing via the U.S. West Coast allows shippers to take advantage of the large Transpacific trade flows and resulting greater frequencies of service and significantly lower freight rates (as opposed to the two existing direct services to Hawaii). On the U.S. West Coast the imported merchandise is handled through large regional warehouses, where items are broken-out and staged for domestic shipment to stores in Hawaii.

This trading pattern is unlikely to change as the regularly-scheduled Transpacific liner container carriers are expected to increase the size of their containerships over time to achieve lower unit costs and counter rising operating expenses. Those expenses include: higher bunker (marine fuel for the ships) costs; higher port costs (port fees, customs fees, tug assistance, union lines handling); and, higher cargo handling costs. In addition to higher port costs, there are deviation costs for a ship on Transpacific routing to call at Honolulu. The deviation cost for a ship is the additional cost arising from leaving the most economical routing to call at a particular port (deviation costs are aggravated by higher bunker costs). The cost of deviating ships to Hawaii typically involve great circle routing which Transpacific operators use to significantly shorten the time it takes their ships to transit the Pacific. As great circle routing takes ships well north of Hawaii, deviating large ships south to Honolulu substantially increases the cost. These irreversible trends have led international carriers to curtail Hawaii services.

There is a Westbound corollary to the Eastbound Transpacific trade economics.  Many people in Hawaii and Guam believe that if the two jurisdictions were fully exempt from the Jones Act, operators of international containerships in Transpacific trade would call Westbound at Honolulu and Apra Harbors on a pass-by basis. And this would lead to high frequency service from the U.S. West Coast at very low backhaul freight rates. This presumption is based upon the low Westbound utilization rates which are approximately 55% leaving much unused cargo capacity; and, the Westbound Transpacific freight rates that are much lower than Jones Act rates from the U.S. West Coast and the headhaul (the opposite of backhaul) Eastbound Transpacific freight rates.  Although very seductive, it is not a realistic expectation. Westbound service employing large Transpacific containerships and calling on a pass-by basis at Honolulu and Apra Harbors will not develop. The existing Transpacific containerships are physically too large for the island ports and future ships are expected to be larger.  Even if there were no physical port constraints, it would still not be economical for these large ships to call Westbound at Hawaii and Guam because the cargo volume for the islands is too small.

Another corollary is the notion that Honolulu Harbor (together with Kalaeloa Barbers Point Harbor) could act as a Mid-Pacific logistical center between Asia and North America. This is also not realistic for many of the same reasons the Transpacific containerships do not call in the islands either Eastbound or Westbound.

To convey a sense of the difference in scale between the Hawaii and Transpacific trades it is useful to examine the TEU (twenty-foot equivalent unit) capacities of the containerships employed in those services.

Hawaii-based Matson Inc. with a 70% share of the domestic Hawaii trade and 100% of the domestic Guam trade operates a fleet of nine Jones Act qualified containerships in three separate services that have an average capacity of approximately 2,250 TEUs each. Matson is planning to place an order for two new containerships of 3,000 TEUs capacity each during the next two to five years. A containership of this capacity is in the upper limit of container feeder ships known as “feedermax”, and typically used to feed larger containerships.

The controlling draft in Apra Harbor is 36 feet and the container cranes there have a maximum reach of 13 container rows (across the ship) limiting Guam’s ability to handle only containerships up to approximately 3,500 TEU. The controlling draft in Honolulu Harbor is 40 feet and the maximum draft alongside the container terminals at Piers 1 and 51 is 39 feet and at Piers 52 and 53 is 40 feet effectively limiting access to containerships of up to approximately 3,800 TEU.

In contrast, the average size of a containership operating in the Transpacific trades and calling at U.S. West Coast ports was 5,077 TEUs in 2008 and containerships between 10,000 and 13,000 TEU are now calling regularly there. The Panama Canal Expansion Project due to be completed in late 2015 will mean the Canal can accept containerships up to 14,000 TEUs each. This will add to the impetus shifting the economies of scale in Pacific shipping to larger containerships. At present, the largest containerships in the world fleet, known as “mega-ships” have a capacity of 18,000 TEUs and are being deployed in the world’s largest single container trade lane between Europe and Asia via the Suez Canal. As the larger mega-containerships enter the Asia-Europe trade, they will displace smaller containerships up to 12,000 to 13,000 TEUs that will be redeployed to the Transpacific and other trades.

The Jones Act

The Jones Act (formally Section 27 of the Merchant Marine Act of 1920) is a domestic shipping law of the kind generically known as cabotage that regulates domestic transportation, not international trade.

In order to transport cargo by water between two domestic points in the United states, the Jones Act requires a vessel must be: (1) U.S.-built; (2) U.S.-flag (i.e., be a registered vessel of the U.S.); (3) U.S.-owned (minimum 75% citizen ownership); (4) U.S.-crewed (all officers and 75% of unlicensed crew must be U.S. citizens, the balance can be resident aliens, i.e., green card holders); and, (5) U.S.-operated (the vessel’s technical managers must be U.S. citizens).

As a general rule, a foreign flag ship can proceed from port to port in the United States and discharge foreign cargo (cargo of foreign origin and loaded at a foreign port) without Jones Act restrictions.  While in U.S. ports, the same foreign flag ship can load export cargo that will subsequently discharged at foreign ports without contravening the Jones Act. Foreign flag ships (and U.S. Flag ships that are not Jones Act eligible) are prohibited by the Jones Act from carrying cargo from one domestic point to another.

There are several exemptions to the Jones Act involving the United States territories. The Territory of American Samoa, the Commonwealth of the Northern Mariana Islands (CNMI), and the Territory of the Virgin Islands of the United States (USVI) are fully exempt from the Jones Act. The Territory of Guam is exempt from the U.S. build requirement of the Jones Act.

The Base Case: Hawaii’s Existing International Trade

In contrast to the mistaken notions described here, there are many foreign flag ships operating in the international trade calling at ports in Hawaii for the purpose of discharging foreign origin cargo and loading export cargo. This activity takes place virtually every day of the year. There are approximately 232 arrivals of international ships to Hawaiian ports annually for the purpose of transacting cargo and these ships are collectively on berth in Hawaii ports for approximately 638 ship days each year.

Three foreign flag liner container shipping operators currently provide direct service to Honolulu from foreign ports. These services represent 50 arrivals at Honolulu annually. The Japanese carrier Nippon Yusen Kaisha (NYK Line) provides monthly service from Northern China, South Korea and Japan to Honolulu with a single small feeder containership (700 TEU) and returns directly to Asia. Three major European shipping companies operate a joint service calling northbound on a monthly basis at Honolulu from Australia, New Zealand and Fiji; and, after Honolulu, the ships proceed to U.S. West Coast ports for cargo operations. And, Singapore-based Marianas Express Line Limited (MELL) provides fortnightly (every two weeks) service from Hong Kong and Kaohsiung and returns via Micronesian ports.

In addition to the regularly scheduled container services, there is a wide variety of international tramp (unscheduled) shipping that calls in Hawaii directly from foreign ports to discharge foreign origin cargoes and load export cargoes for foreign ports. This activity represents approximately 182 ship arrivals annually. Typically these unscheduled ships carry bulk commodities, discharge full cargoes in Hawaii and proceed in ballast (i.e., without cargo) to their next employment. This includes dry bulk cargoes such as coal, aggregate, and ground cement. And liquid bulk cargoes such as crude petroleum oil, refined petroleum products, and liquefied petroleum gas (LPG). All these cargoes are acquired from foreign sources.

There are also international trade ships that call on an unscheduled basis to discharge part cargoes. Foreign flag dry bulk carriers call approximately three times a year at Honolulu Harbor’s Pier 23 to discharge part cargoes of wheat loaded in Canada en route to Australia and New Zealand. Foreign flag Pure Car and Truck Carriers (PCTC) call at Honolulu’s Pier 32 approximately thirty times per year with part cargoes of new vehicles manufactured in Japan and South Korea; these ships typically proceed to U.S. West Coast ports to discharge their remaining cargo.

Two commodities are exported from Hawaii on the basis of part cargoes. Foreign flag bulk carriers load part cargoes of scrap steel approximately 4 times per year at Kalaeloa Barbers Point Harbor on Oahu Island, and eucalyptus logs approximately four times a year from Kawaihae Harbor, Hawaii Island.

In the past, the Parker Ranch would charter a specialized foreign flag livestock carrier to transport en mass young beef cattle from Kawaihae Harbor, Hawaii Island, to Vancouver, British Columbia, Canada. The animals would be shipped to Canada for feeding and eventual transportation to the contiguous U.S. after the animals gained sufficient weight to have been considered transformed under the U.S. Customs regulations and avoid contravening the Jones Act. That movement via Canada has become too expensive and the Hawaii cattlemen have resorted other less efficient means of transporting their young cattle to the U.S. mainland including by specialized container known as a “cowtainer” shipped on board Matson’s containerships and by airfreight.

Jones Act Reform

In the debate over whether or not to reform the Jones Act, it is important that the residents of Hawaii have a clear understanding of how the federal maritime cabotage laws affect them. Harboring misunderstandings of the Jones Act confuses the issues making progress towards real solutions more difficult.

As the Jones Act is a domestic shipping law, discussions regarding its reform need to focus on its impact on the domestic cabotage trades, and not the international trade, which the federal cabotage laws do not regulate nor directly affect.

The cabotage regulations create an artificial shortage of ships in domestic trade that particularly impacts the noncontiguous jurisdictions due to their complete reliance on ocean shipping for surface transportation without alternatives. There are 96 self-propelled ships over 1,000 gross tons in the Jones Act fleet, of which about half are employed in the noncontiguous trades. In comparison there are more than 37,000 self-propelled ships over 1,000 gross tons in the world fleet.

There are several possible approaches to reforming or repealing the Jones Act. For example, geographically, Jones Act reform (or repeal) could be enacted: (1) nationwide; (2) restricted to the noncontiguous trades – Alaska, Guam, Hawaii and Puerto Rico; or, (3) limited to one or more of the noncontiguous trades. Also, any reform proposal must address the degree to which the five Jones Act requirements imposed on vessels might be lifted. Examples are: (1) a nationwide repeal of the Jones Act would lift all requirements throughout the U.S.; (2) a full Jones Act exemption for a particular trade (e.g. the Guam trade) would lift all requirements in that trade; or, (3) one or more of the requirements could be lifted nationwide or on a trade-by-trade basis.

There are those who believe that all the noncontiguous trades should be made exempt from the Jones Act to allow international shipping to participate in all the domestic trade lanes between the U.S. mainland and the noncontiguous jurisdictions. This would open the noncontiguous trades to full international competition. It would require Congress enacting legislation to exempt the noncontiguous trades from the Jones Act, which would be a very high political hurdle to clear and is not likely to occur in the current political climate because it would allow foreign flag ships into domestic commerce.

There is an argument with some validity that states if the Hawaii and Guam trades were to be made exempt from the Jones Act, it would create new opportunities in both the domestic and international segments of those trades for international shipping. That would result in new shipping arrangements and services to be offered at lower freight rates more comparable to international ones and could increase direct international services with foreign ports through synergy. While that is all true, the extent of those new opportunities would be limited by the economics of the Transpacific trades and the U.S. regulatory environment that would make operating a foreign flag ship exclusively in domestic trade problematic even with a full Jones Act exemption.

The Hawaii Shippers’ Council (HSC) advocates an alternative reform model that would exempt the noncontiguous trades from the U.S. build requirement of the Jones Act. This would end the artificial scarcity of ships created by the Jones Act by substantially lowering the barriers to entry erected by the extraordinarily high cost of deep draft shipbuilding in the U.S. The advantage of HSC’s model is that it wouldn’t have to clear such a high political hurdle as would a full exemption proposal because the HSC model would not allow foreign flag ships into domestic commerce.

---30---

Note: 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.

LINKS:

LIST of ANNEXES

International Liner Container Services To Hawaii

I. NYK Line

II. Hapag-Lloyd / U.S. Lines / Hamburg Sud Joint Service

III. Marianas Express Line Limited (MELL)

IV. Table: Guide to Containership Particulars in International Trade

International Tramp (Unscheduled) Shipping to Hawaii

V. List of Tramp Ship Types and Cargoes Calling in Hawaii

VI. Table: Annual International Tramp Shipping To/From The State of Hawaii

VII. Bulk Shipping Case Study: Ground Cement

VIII. Bulk Shipping Case Study: Grain

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