From UHERO, October 7, 2019
The Merchant Marine Act of 1920, commonly known as the Jones Act, is a cabotage law that requires that all goods transported via water between two U.S. points be carried on ships that are American built, owned, crewed, and flagged1. The Jones Act was passed in response to World War I, with the goal of ensuring that the U.S. had a merchant marine fleet that was capable of assisting in times of war or emergency. Proponents also contend that the Jones Act supports domestic employment in the maritime industry.
While other countries also place limitations on international vessels, the U.S. is ranked as having the most restrictive maritime transport industry among all OECD countries. Critics argue that the Jones Act is a form of protectionism that impedes domestic trade and increases prices. The Act has been politically controversial, especially during recent hurricanes when the U.S. has temporarily waived these restrictions. The need for these waivers raises questions about whether the Jones Act has successfully maintained a domestic fleet capable of assisting in times of emergency. Furthermore, the U.S. does not impose similar American-built restrictions on rail, truck, or air transportation.
In the century since the Jones Act was passed there has been a dramatic rise in the Asian shipbuilding industry, due to improved production methods, specialization, and standardized designs. It cost about 20% more to build a large merchant ship in the U.S. than in a foreign shipyard in the 1920s, but now it costs approximately 400-500% more (see Figure 1) The number of private U.S. shipyards capable of making large merchant ships has plummeted (from 64 post-WWII to 3 today). As a result, the number of American-built Jones-Act-eligible ships has decreased from 195 in 1997 to 92 in 2016, while the number of non-Jones Act eligible has remained relatively stable (see Figure 2). The U.S. was the preeminent shipbuilding nation post WWII, but now 91% of large merchant ships are built in Japan, Korea, and China. Thus, the requirement that domestic water shipments be transported on American-built vessels has become more onerous over time.
In a recent UHERO working paper titled “Cabotage Sabotage: The Curious Case of the Jones Act,” I use a large data set on the movement of 43 different commodities by mode of transport (i.e. air, water, truck, rail) between every U.S. state over the period 1997 to 2016, to investigate whether the Jones Act has indeed reduced domestic water shipments. Using consumer price data, the paper also examines whether the Jones Act has increased prices. The causal effect of the declining capacity of Jones Act ships on both domestic shipments and prices is identified using econometric techniques.
The first set of results show that the Jones Act has reduced domestic water shipments relative to shipments via other modes of transport and relative to imports from abroad. These are useful counterfactual groups because neither imports nor shipments via other modes of transport are regulated by the Jones Act. The findings show that a ten percent decline in the capacity of Jones Act ships reduces domestic waterborne shipments by 4.7% relative to other modes of transport and by 11.4% relative to waterborne imports. The effect of the Jones Act on domestic water shipments is found to be stronger in coastal states and for commodities that are typically transported via water. Overall these findings confirm an intuitive but important point that as domestic water trade becomes more difficult, due to the Jones Act, shipments shift to other modes of transport or the U.S. acquires these goods from abroad instead.
The second set of results show that as domestic shipments into coastal states decline, due to the Jones Act, prices increase. Using a back of the envelope calculation, these findings indicate the decline in Jones Act ship capacity can explain 2.6% of the observed increase in prices from 1997 to 2016.
These findings support common, but to date unverified, claims that the Jones Act has reduced domestic water trade between U.S. states and this in turn has increased domestic prices. Whether these drawbacks outweigh the potential benefits to the domestic maritime industry is an open question. However, at the very least these findings indicate that the costs associated with the Jones Act are empirically important and should be taken into account by policy makers.
- Will Olney
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1 -- In order to be classified as American built the hull and superstructure of the ship must be produced in the U.S. and all assembly must occur in the U.S. American ownership is defined as U.S. citizens holding at least a 75% controlling interest in the business entity. The ship must be flagged (i.e. registered) in the U.S. and is thus subject to U.S. laws. Finally, the crew is required to be U.S. citizens or permanent residents, but no more than 25% of the crew can be permanent residents and all officers and engineers must be U.S. citizens.