World Economic Forum endorses Jones Act reform to grow economy
by Michael N Hansen, President Hawaii Shippers Council
During its recent annual meeting in Davos-Klosters, Switzerland, the World Economic Forum (WEF) released their report on alleviating trade restrictions. The report focused on reductions in supply chain barriers and costs, which the WEF concluded will dramatically increase economic efficiency, promote economic growth and increase employment. One of the key barriers the report identifies is maritime cabotage, especially the U.S system commonly known as the Jones Act.
The WEF describes its self as an independent international organization committed to improving the state of the world by engaging business, political, academic and other leaders of society to shape global, regional and industry agendas. Incorporated as a not-for-profit foundation in 1971, and headquartered in Geneva, Switzerland, the Forum is tied to no political, partisan or national interests. The WEF is probably best known for its annual meeting held each January in Davos-Klosters, Switzerland, which is attended by many of the most influential people in the world.
The WEF report is entitled “Enabling Trade: Valuing Growth Opportunities” and was written in collaboration with Bain & Company and the World Bank. The report launch press conference was held in Davos-Klosters on January 23, 2013. The report is also available as web-based version.
The general conclusions of the report are remarkable. They found “reducing supply chain barriers could increase world GDP over six times more than removing all tariffs” and “could increase GDP by nearly 5% and trade by 15%.”
The report describes the potential gains: “If every country improved just two key supply chain barriers – border administration and transport and communications infrastructure and related services – even halfway to the world’s best practices, global GDP could increase by US$ 2.6 trillion (4.7%) and exports by US$ 1.6 trillion (14.5%). For comparison, completely eliminating tariffs could increase global GDP by US$ 0.4 trillion (0.7%) and exports by US$ 1.1 trillion (10.1%). The estimates of the impact of barrier reduction are conservative; they reflect improvements in only two of four major supply chain categories.”
The reason lowering barriers is so effective, the report explains, “ is that it eliminates resource waste, whereas abolishing tariffs mainly reallocates resources. Moreover, the gains from reducing barriers are more evenly distributed among nations than the gains from eliminating tariffs.”
Among a series of case studies described in Section 6 of the WEF report, a study of shipping companies addresses cabotage restrictions, which it identifies as a key supply chain barrier, especially affecting U.S. and China.
The report notes, “The most restrictive example is the United States Jones Merchant Marine Act of 1920, which states that merchandise can only be moved between American ports by vessels that are US-owned, US-crewed and US-built.” It should have also added US-flag. For that reason, the U.S. cabotage system has been referred to as “super cabotage.”
The report further states, “Despite the benefits to flag carriers or local shipyards, such barriers actually damage local economies and saddle businesses and consumers with significant costs. Lack of competition forces businesses to use high-cost logistics suppliers and requires international export/import businesses to use inefficient trans-shipment operations – which come with high environmental costs.”
The WEF report directly address two aspects of cabotage. What they have labeled as “domestic transport,” which is the carriage of domestic-origin cargoes between domestic points; and, “international relay,” which refers to in-country transshipment of international cargo, primarily moving in containers on board ships other than those of the coastal country’s flag.
In respect of domestic transport, the report recommends that the U.S. should take, “a prudent approach that gradually relaxes the strictest regulations [which] could help open markets to competition without putting security at risk. For example, the United States could continue mandating national flags but remove other Jones Act restrictions.” Essentially, that would mean removing the U.S. build requirement of the Jones Act, which is what the Hawaii Shippers’ Council (HSC) has proposed for the noncontiguous domestic trades – Alaska, Guam, Hawaii and Puerto Rico.
The widely-respected international liner shipping consulting and data collection firm, Alphaliner, extended the WEF report on cabotage with their own analysis published on February 4, 2013. Alphaliner noted the WEF report did not mention that, “In the US, the environmental costs are magnified due to the inefficiencies of maintaining a fleet of over-aged ships to ply the Jones Act trades. 20 out of the 25 US-flagged Jones Act containerships were built before 1987, with the oldest unit, the steam-powered HORIZON CHALLENGER, now approaching 45 years of age.” All those ships are employed in the U.S. noncontiguous trades.
Furthermore, Alphaliner said, “Although the US Jones’ Act fleet only accounts for 10% of the total capacity of containerships used in cabotage trades, its impact is disproportionately higher due to the requirement for vessels to be US-built, unlike most other countries which do not require ships to be of domestic construction. The cost of building ships in the US is prohibitively high, at up to five times the cost of similar ships built in Asia.”
The extreme cost of U.S. ship construction has become the key driver for shipping costs in the U.S. noncontiguous trades and is the target of the HSC’s Jones Act reform proposal. Recently, the HSC estimated the cost differential between building conventional containerships in the US and Asia to be a multiple of between three and five times. Asia is used as the shipbuilding cost standard because that’s where 90% of the world’s large deep draft ships are constructed today (primarily in Japan, South Korea and China). Alphaliner has now authoritatively confirmed the cost differential between building a ship in the U.S. as compared to Asia is closer to the higher estimate of five times.
As compared to building a conventional containership mentioned by Alphaliner, it is much more technically difficult to build specialist ships– such as Liquefied Natural Gas (LNG) Carriers. As a result, the cost of building a specialist ship in the U.S. could be even greater than five times more than the cost of building a comparable ship in Asia.
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 email@example.com if you wish to be placed on our email list.
Herewith are the links to the WEF reports done in collaboration with Bain & Company Inc. and the World Bank: