NRO: Sink the Jones Act: It’s devastating to the nation’s economy, environment, and defense capability
by Eftychis John Gregos-Mourginakis & Joshua Jacobs, National Review Online March 1, 2013
Few industries have done more to shape our nation’s history than shipping. Among the first waves of colonists to our shores were those seeking to make use of our abundant forests to compete with European shipbuilders. Shipping helped lay the foundations of our country and its position as an economic power.
From the beginning, the United States was a sea-trading nation. Today, though, after centuries of flourishing, the American shipping industry is moribund. In 1979 the U.S., already suffering a steady decline in its shipbuilding prowess, built roughly a tenth of the world’s commercial vessels. Today, that figure is less than 1 percent. The reason for the decline has little to do with capability, labor markets, or technical prowess and almost everything to do with the regulatory burdens imposed by the Jones Act.
The Jones Act — or, more formally, the Merchant Marine Act of 1920 — is a federal law that prohibits the transfer of maritime goods between U.S. ports on anything other than U.S.-flagged vessels. For example, a Chinese vessel can bring goods from China to San Francisco, but it cannot bring cargo from San Francisco to another port of call in the U.S. In order to trade between ports, a ship must be U.S.-flagged.
The Jones Act further stipulates that a ship can be U.S.-flagged only if it is built in the U.S., owned by U.S. interests, and manned by a U.S. crew. It must bear the burden of U.S. corporate taxes, from which foreign shipping companies are largely exempt. Moreover, foreign companies can fly flags of convenience — that is, avoid corporate taxes anywhere by registering their ships with countries, particularly tax havens such as Panama or Liberia, that are different from the countries in which the companies are based. Then the requirement that the entire crew of U.S. commercial vessels be U.S. merchant mariners dramatically raises the cost of labor and further reduces the competitiveness of the U.S. shipping industry.
The result of all these regulatory burdens is that, over the course of the past century, what had been one of America’s most profitable and high-employment industries has slowly collapsed, even though the cost (as measured in miles times tons of cargo) of shipping goods by sea is lower than that of any other mode of transportation.
U.S. commercial ships built under the Jones Act cost as much as four or five times more, it is estimated, than do their Korean, Japanese, or Norwegian counterparts, let alone Chinese ships, whose construction costs are even lower. In January 2008, for example, when the U.S. had new ship orders for a combined tonnage of 53,176, Japan had orders for tonnage of 5,581,658. The value of the contracts in the U.S. was $527 million, compared with $4.3 billion for Japan’s. And what was the price per ton paid to build these ships? According to the Shipping Intelligence Network, $769.80 in Japan and, in the United States, a mind-shattering $9,910.48.
It costs 1,200 percent more to build a ship in the U.S. than it does in Japan, even though Japan’s labor costs are, according to the Bureau of Labor Statistics, slightly higher than those of the U.S. Take into account the fact that economic inputs in the U.S. are cheaper than in Japan and it is clear that only market distortions could drive such absurd increases in capital costs.
Despite the enormous economic ramifications of the Jones Act, it has on its face persisted primarily as a “strategic investment.” With the exception of a few U.S. shipping companies that receive hundreds of millions of dollars in government subsidies, the handful of remaining shipyards in the U.S. conduct business almost exclusively at the behest of the U.S. Navy. Many Pentagon officials wrongly believe that the Jones Act ensures their access to shipyards and protects the perpetuation of naval architecture and shipbuilding knowledge.
In fact, the Achilles heel of the Navy is the shipbuilding industry — specifically, the industry’s dysfunction resulting from the perpetuation of the Jones Act. Our heavily unionized shipyards are increasingly uncompetitive. Their work force is short on experience because their contracts are few. They have lost engineering talent to foreign competition, and the unsustainable economic model they have been saddled with has led to yard consolidations and closings. Why would any talented naval architect or engineer work in a U.S. shipyard when he can be more profitably employed working for oil-service firms or in Norwegian, Korean, Japanese, or Chinese shipyards?
Nor does the failure of the U.S. shipbuilding industry exist in a vacuum. Since the 2008 recession, Chinese shipbuilders, who control 31 percent of the global shipbuilding market, have received prioritized subsidies and support from Beijing. The Chinese realize that across all shipping sectors — from crude to container to dry-bulk — there is tremendous overcapacity in the global shipping fleet. Appreciating this, policymakers in Beijing continue to support their shipbuilding industry for critical strategic reasons. They recognize that maintaining the quality of human capital in their shipbuilding sector is not just good for employment and their economy. It improves their technical capacity and is instrumental to Chinese ambitions for a substantial blue-water navy.
Another unsustainably high cost of the Jones Act is environmental. Of all means of transporting goods, shipping has the lowest carbon output per ton per mile of cargo. It is estimated that in 2012 Americans wasted 28 million tons of carbon just sitting in traffic, compared with a total annual carbon output of 600 million tons for the entire global shipping industry. In roughly two decades, the annual carbon output of Americans stuck in traffic will equal a year’s worth of the carbon output from the global seaborne trade.
Ninety percent of all global trade occurs at sea, but seaborne trade between U.S. ports is banned for 99 percent of the world’s fleet, driving most intra-U.S. trade to planes, trains, and especially trucks, even though 53 percent of the U.S. population lives in coastal counties. In the U.S., cargo that would have been transported by sea is transported — inefficiently — overland instead. Tomorrow morning when you sit behind that 18-wheeler in bumper-to-bumper traffic, you’ll have the Jones Act to thank.
As we aim for a recovery and ponder new economic frontiers, we must remember that the future will be built in part around the economic engine that is the shipping industry. It’s time for American industry to return to the top of the world, and it will do so by getting back onto the waves.
Eftychis John Gregos-Mourginakis and Joshua Jacobs are co-founders and members of the board of the Conservative Future Project, a think tank in Washington, D.C.