To Fix the Shipping Crisis, Start by Repealing the Jones Act

by | Oct 24, 2021 | Regulation

The Jones Act, more commonly known as Section 27 of the Merchant Marine Act of 1920, restricts foreign-owned ships from loading cargo in one US port and unloading it in another.

At 9am EDT on Friday, October 22, the informal commercial flotilla off the coast of California ports reached a new high: 79 container ships were, as of that time, waiting to dock and offload cargo. The total number of vessels offshore, including oil tankers and bulk transports has reached 169. Some have been anchored for more than a month, and there is no reason to think that number won’t continue rising in coming days, and perhaps weeks.

The recent “gamechang[ing]” concession which President Biden allegedly extracted from unions–to extend port operating hours to 24/7, the basis upon which most other ports in industrialized nations work–is hollow. In fact,

Wednesday’s announcement was a concession from port operators, not the unions [and] increased hours won’t fix the bottlenecks. The added hours will boost cargo movement by less than 10%, or an estimated 3,500 containers a week. The real problem is the unions’ tooth-and-nail opposition to labor-saving equipment. Cranes in automated ports operate at least twice as fast as cranes in outdated U.S. ports. Biden’s port envoy John Porcari let the truth out when he said last week, it’s “your grandfather’s infrastructure that we’re working with.”

There is a single measure which might be undertaken that would alleviate many of the sources of the bottlenecks in shipping but, like so much else, it is a measure fraught with political tensions. The Jones Act, more commonly known as Section 27 of the Merchant Marine Act of 1920, restricts foreign-owned ships from loading cargo in one US port and unloading it in another. It does not restrict foreign-owned vessels from discharging cargo in numerous US ports, or from loading cargo in multiple US ports. But to pick up and drop off at US ports in a single trip–known as cabotage, or intercoastal trade–a ship must be “four times” American: under a US flag, US built, US owned, and US manned.

The original purpose of the Jones Act was to ensure that US shipbuilding capacity wouldn’t be dependent upon foreign nations, as well as to keep domestic shipping American. Both, purportedly, so that in the event of war a fleet of merchant mariners could quickly and with relative ease be raised. But whether national security was the actual or nominal focus, the effects have included stifling competition, the creation of an oligopoly, and consequent effects on shipping prices and available services. And as the number of nations that the US trades with and trading volume has increased, the impact of the Jones Act has become increasingly stifling.

For two particularly prominent examples, both the state of Hawaii and the unincorporated territory of Puerto Rico both suffer extreme costs arising of the protectionist elements therein.

And the effects propagate outward from there. Rigid shipping prices owing to artificially suppressed competition beget inflexibility in the pricing structure of dock operations (where wages are often additionally subject to collective bargaining), trucking, rail transport, barges, pipelines, and beyond. Thus to the extent that maritime-related costs of transportation are embedded in the prices of final goods, the Jones Act plays a pivotal role in keeping them elevated. More employment opportunities, commercial diversity, and a wider range of goods and services from abroad are necessarily hampered by the artificial restraint upon trade that it manifests.

How is it that a century-old, obscure piece of legislation could remain on the books despite clear economic benefits to repealing it? Special interests, of course. Two of the major lobbyists in this regard are the American Maritime Partnership (representing shipbuilders) and the Seafarer’s Union, representing mariners. Federal testimony, given in March 2019, made two particularly relevant points. The first is that “[a]mong the foremost challenges to the U.S. Merchant Marine and shipbuilding industry are low-cost foreign competitors,” and that the “few remaining large U.S. commercial shipyards rely on the small U.S. domestic market.”

It seems likely that growing tensions between the US and China (and actual encounters between the US and Russia) will be cited in support of leaving the Jones Act intact, as may suggestions about the negative effect that its unwinding would allegedly have upon trade, immigration, and other issues. And touting some public obligation to a particular group of “hardworking Americans” is likely as well.

But in fact, the fetters inherent in the Act have already been acknowledged by the government, which has set aside the Jones Act requirements during emergencies, most recently including the aftermaths of Hurricanes Maria and Irma in 2017, Hurricane Sandy in 2012, and Hurricane Katrina in 2005. If not eliminating it completely (as should be the case) the Biden Administration should immediately suspend the Jones Act, at least until the shipping backlog is remedied, whether that takes weeks or months. That, instead of coddling special interests wielding ludicrous (and arguably long out-of-date) arguments, would be a true “gamechanger.”

Made available by the American Institute for Economic Research.

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Peter C. Earle is an economist and writer who joined AIER in 2018 and prior to that spent over 20 years as a trader and analyst in global financial markets on Wall Street. His research focuses on financial markets, monetary issues, and economic history. He has been quoted in the Wall Street Journal, Reuters, NPR, and in numerous other publications. Pete holds an MA in Applied Economics from American University, an MBA (Finance), and a BS in Engineering from the United States Military Academy at West Point. Follow him on Twitter.

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