Trump administration chooses growth over Jones Act protectionism
by Michael Hansen, Hawaii Shippers Council, May 11, 2017
In a dramatic move yesterday the U.S. Customs and Boarder Protection (CBP) withdrew a controversial General Notice of January 18, 2017, which proposed revoking a series of ruling letters dating back to 1976 closing a Jones Act loophole. The rulings covered marine operations supporting the offshore oil and gas industry primarily on the U.S. outer continental shelf (OCS) in the Gulf of Mexico (GoM).
The CBP Notice of January 18th was released two days before former President Barack H Obama left office, leaving incoming administration of President Donald J Trump with the responsibility of deciding whether or not to implement it. A similar notice was issued on July 17, 2009 by the Obama Administration, and was subsequently withdrawn in 2010.
The CBP decision to withdraw the General Notice of January 18th was released on Wednesday, May 10, 2017, in their regular publication of Customs Bulletin and Decisions, Vol. 51, No. 19 (see pages 11 -12). The issuing officer, Glen E. Vereb, Director Border Security and Trade Compliance Division, wrote in the decision dated May 3, 2017, “Based on the many substantive comments CBP received, both supporting and opposing the proposed action, and CBP’s further research on the issue, we conclude that the Agency’s notice of proposed modification and revocation of the various ruling letters relating to the Jones Act should be reconsidered.”
At issue was the use of the offshore industry of vessels not Jones Act eligible including foreign flag vessels to support operations on the OCS in the GoM, which is currently allowed by the series of Customs ruling letters.
The offshore industry led by the American Petroleum Institute (API) with nine other trade associations actively supported the status quo and opposed the General Notice of January 18th, and they submitted on April 18th substantive comments in 49-page letter with two attached studies documenting their position. On May 10th, API issued a press release welcoming CBP’s withdrawal of their General Notice of January 18th.
In support of the CBP Notice of January 18th was the U.S. maritime industry (or, alternatively, the Jones Act industry) through three key Jones Act trade associations led by the Offshore Marine Service Association (OSMA) and supported by the Shipbuilders Council of America (SCA) and the American Maritime Partnership (AMP). The U.S. maritime industry wished to close what they see as an “illegal loophole” to the Jones Act and force the offshore industry to use their Jones Act vessels, which are U.S. built, U.S. flag, U.S. owned and U.S. manned.
The U.S. maritime industry issued two press releases expressing their disappointment with the Trump administration for withdrawing the CBP General Notice of January 18th. The OSMA release indicated that, “Obliging to foreign interests, the Office of Management and Budget (OMB) recommended a regulatory review process that will significantly delay the lawful and correct enforcement of the Jones Act.” And, “We call on President Trump to take immediate action and correct these damaging rulings that have continued to put foreign companies first and American companies and workers last.” The SCA in their release stated, “"We are disappointed the Administration chose to indefinitely kick this job-destroying regulatory can down the road.”
The Obama era CBP Notice of January 18th had some support in Congress. U.S. Senator John Neely Kennedy (R-LA) led a group of nine other senators (total 3 Republicans & 7 Democrats) in submitting a letter on April 4, 2017, and addressed to the Secretary John Kelly of the Department of Homeland Security (DHS) supporting the CBP General Notice of January 18th. Those signing include Senators Brian Schatz (D-HI), Mazie Hirono (D-HI) and Tammy Baldwin (D-IL). A similar letter was submitted by 33 members of the U.S. House of Representatives.
The House Majority Whip Steve Scalise (R-La.) issued a statement commenting on CBP’s withdrawal of the General Notice, “I urge the Administration to tread carefully in this process and to thoroughly consider its implications on our national security, and I am committed to doing everything I can to make sure that the Jones Act isn’t undermined in this process.”
At the end of the day, the Trump Administration had to make a decision between economic growth and jobs that the offshore oil and gas industry represents or supporting a strict interpretation of the Jones Act to protect the offshore marine service industry that would have resulted in less development of offshore oil and gas. This conflict is inherent in President Trump’s approach and in this case his administration chose economic growth.
The question now will be whether or not the Trump Administration might take this same approach to other Jones Act issues in particular the U.S. domestic ship build requirement. Jones Act protections effectively deny important waterborne transportation options to other domestic industries resulting in lower aggregate employment and economic growth and welfare. Effective reform would go a long way to resolving these impediments.
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President Trump’s Jones Act dilemma
by Michael Hansen, Hawaii Shippers Council, May 2, 2017
The Houston Chronicle reported in a news article, “Trump faces dilemma as maritime fleets face off in Gulf,” published on May 1, 2017, that President Donald J. Trump is facing a difficult decision regarding a pending U.S. Customs and Boarder Protection (CBP) general notice of January 10, 2017, proposing to revoke previous rulings regarding application of the Jones Act to the offshore oil and gas industry.
The instant CBP 2017 general notice is entitled, “proposed modification and revocation of ruling letters relating to Customs application of the Jones Act to the transportation of certain merchandise and equipment between coastwise points.”
CBP issued a very similar general notice on July 17, 2009, which proposed to revoke essentially the same set of rulings approximately six months after President Barak H. Obama administration came into office in January 2009. However, the 2009 notice was never finalized. The 2017 notice was issued on January 10th ten days before Obama’s second term ended. Clearly, both notices were issued by the Obama administration to respond to maritime industry and labor pressure. The 2017 notice left the final decision to Trump.
The offshore oil and gas industry submitted their comments to CBP on April 18, 2017 in respect of the 2017 notice and among the many points they made was to note that:
President Trump signed Executive Order 13783, 82 Fed. Reg. 16,093, on Promoting Energy Independence and Economic Growth on March 28, 2017. Executive Order 13783 states that “[i]t is in the national interest to . . . avoid regulatory burdens that unnecessarily encumber energy production, constrain economic growth, and prevent job creation.” It further states that the policy of the United States includes suspension, revision, or rescission of regulatory actions that unduly burden the development of domestic energy resources.” The discussion above and the attached economic analysis show that the action proposed in the 2017 notice would impose significant burdens on development of the county’s offshore oil and natural gas resources, which directly conflicts with the policy of the United States as stated in this Executive Order. (See industry letter, page 46, second paragraph.)
The offshore industry’s reference to that Executive Order highlights the dilemma facing the Trump administration between “protectionism” and “growth” specifically in the context of the Jones Act and the 2017 CBP notice regarding the employment of foreign-flag vessels by the domestic offshore industry.
The way in which Trump chooses to handle the CBP 2017 notice may foreshadow how his administration may more broadly approach other Jones Act reform issues especially the U.S. domestic ship build requirement.
If the Trump CBP decides in favor of the domestic U.S. maritime industry and against the offshore industry revoking the previous rulings, it is unlikely there will be any opportunity for Jones Act reform during the Trump tenure.
On the other hand, if the Trump CBP decides in favor of the offshore industry leaving the existing rulings in place, then perhaps the Trump administration might seriously consider Jones Act reform.
For years, international ships and crews have traveled in and out of the Gulf of Mexico to construct the offshore platforms and deep-sea pipelines that allow oil and gas thousands of feet below the surface of the ocean to get to market.
But now a long-running fight between U.S. energy and maritime companies about what work international crews can do under U.S. law has come to a head, forcing a decision from the Trump administration. At issue is whether to require offshore oil and gas drillers to shift work handled by international construction crews to domestic ones, something oil lobbyists warn could decimate deep-sea drilling in the Gulf.
For President Donald Trump, who has promised to both grow the domestic energy industry and preserve American jobs for American workers, finding a path forward is fraught with political pitfalls. Whatever decision he makes, he is bound to end up alienating one of his key constituencies.
Under a century-old law known as the Jones Act, only U.S.-owned vessels are allowed to perform such work within American waters. But over the decades U.S. customs officials made a series of exemptions, allowing oil and gas companies to employ foreign vessels to perform specific tasks such as moving the fluid that drillers use to lubricate wells between sites or laying down massive subsea equipment that can weigh hundreds of tons forward is fraught with political pitfalls. Whatever decision he makes, he is bound to end up alienating one of his key constituencies.
Then in 2009, former President Barack Obama ordered a review of those rules, setting off a panic in the offshore industry that gradually abated over the next eight years as no action was taken. Then, just days before leaving office, the Obama administration released a proposal that would repeal decades of U.S. Customs and Border Protection rulings that allowed the exemptions, forcing offshore oil companies to use U.S. ships and crews.
The White House did not respond to a request for comment, but a spokeswoman for U.S. Customs and Border Protection said the agency, which postponed a decision by two months to allow more time for public comment, is scheduled to rule by May 18.
In response, the U.S. oil and gas industry has undertaken a fierce lobbying campaign to block a repeal. The American Petroleum Institute recently released a study forecasting 30,000 job losses in this year alone, mostly in the Gulf region, and a 23 percent drop in U.S. oil and gas production by 2030.
Among the arguments used by U.S. maritime companies is that oil and gas drillers prefer international crews, which might be drawn from the less prosperous countries like the Philippines or Eastern Europe, because they are cheaper. Leatt, chief executive of the international maritime group, described that assertion as "nice propaganda."
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How will President Trump decide between the maritime and oil industries regarding the Jones Act?
By Michael N Hansen, President, Hawaii Shippers’ Council, May 2, 2017
S&P Global Platts in their online publication “The Barrel” reported in a news article, “Path to Jones Act change faces political balancing act: Fuel for Thought,” published on April 24, 2017, that former President Barack H. Obama left the current president Donald J. Trump with a thorny problem to resolve regarding the Jones Act and the employment of foreign flag vessels by the domestic offshore industry.
The issue is whether or not the U.S. Customs and Boarder Protection (CBP) general notice issued on January 10, 2017, should be affirmed revoking a series of “ruling letters” dating back to 1976 that allow the use of foreign flag service vessels by the domestic offshore oil and gas industry primarily on the outer continental shelf (OCS).
Trump must decide between the protectionism for the U.S. domestic maritime industry by revoking the previous rulings and economic growth that favors the domestic offshore oil and gas industry by leaving the rulings in place.
At the end of their article, Platts suggests that Trump is likely to repeat what Obama did in respect of the previous and similar general notice issued six months after his inauguration in 2009, and simply not take any action in respect of the 2017 notice and leave the rulings in place.
That would in effect be a win for the offshore oil and gas industry.
On January 18, less than two days before Donald Trump’s inauguration, the US Customs and Border Protection released a 30-page general notice which could eliminate exemptions to the Jones Act and mark one of the most significant changes to domestic maritime law in decades.
Since the mid-1970s, the federal government has granted so-called “ruling letters” which allow foreign-built vessels to transport certain equipment, such as repair pipe, between coastal points.
The looming policy change could create a vessel supply crunch in the US Gulf, according to Jack Gerard, CEO of the American Petroleum Institute. In a recent press call, Gerard said his trade association was not pushing for a repeal of the Jones Act, but said the exemptions were necessary since there were not enough US-flagged vessels needed to meet demand from US Gulf operations.
In early April, an API-funded study was released claiming that the reversal of Jones Act exemptions could reduce oil and natural gas production in the US Gulf by about 500,000 b/d over the next 13 years while spending on offshore projects would decrease by about $5.4 billion over that time. Those claims are fiercely disputed by the maritime industry.
“The only relevant economic impact is the adverse impact that CBP’s erroneous rulings have had for decades on US shipowners, mariners and shipyards,” said Aaron Smith, president and CEO of the Offshore Marine Service Association. “CBP’s course correction ensures that more ships will be built in US shipyards employing US citizens.”
By pushing the order to its final hours, the Obama administration has thrust the Trump administration into a fight between the domestic maritime industry, Congress, offshore contractors and the API, arguably the world’s most influential oil and gas lobbying group.
Lifting the exemptions would have lasting ramifications for the US offshore oil and gas industry at a time when the administration is pushing forward a broad agenda aimed at bolstering domestic oil and gas production.
CBP, under the Trump administration, declined for months to comment on the proposed change, but in an emailed statement to S&P Global Platts on April 10, the agency indicated that it was moving forward with the proposal.
Rather than simply scrap the Obama administration’s proposal and start over, Katrina Skinner, a CBP spokeswoman, said the agency would accept comments on the proposed change through April 18 and then would likely issue a decision on it by mid-May.
Lobbyists for the maritime industry point to early statements by Trump cabinet officials, including Treasury Secretary Elaine Chao, in support of strengthening the Jones Act.
But it remains unclear if the administration is willing to push forward a change opposed by API and others in the oil and gas sector.
As Obama administration officials chose to do in 2009, the Trump administration may also wish to leave the question for the next administration.
RELATED: Proposed revocation of Jones Act rulings for the offshore industry