JONES ACT, A MISSED OPPORTUNITY FOR  NAFTA

United States (US) represents one fifth of the world economy (GDP of 17 400 billion $). It is considered the world’s largest economy. It also counts for 19 924 kilometers of marine coastline, 6 000 kilometers of river length and  250 000 km2 area of its Great Lakes. [1]  With all these assets, why doesn’t it hold  shipping capacity in the world  ?  The  US has become international success in many fields such as automotive, information technology, aeronautics , chemistry, and culture sectors.  But, why not in maritime sector ?

Those following figures illustrate the paradox.  In 2015, among the twenty main world groups of maritime transport in the world, only three were American.  These accounted for 3% of the world’s capacity.  In the shipbuilding industry, the situation was similar.  In 2015, top 15 global merchant shipyards were all Asian, mainly from Korea, China and  Japan.  None were American.  [2]  According to a study by the US Department of Commerce (2001), shipbuilding in the United States accounts for only 1% of merchant marine construction in the world .  [3]

The Federal Merchant Shipping Act 

Federal Merchant Shipping Act of 1920, (Also called the Jones Act) could explain this situation.  Often pointed out as an example of excessive protectionism in US, it has had, over time,  the opposite effect to what was initially anticipated on economic development.   Its purpose is to regulate maritime trade across the inland waters of the United States and between ports (short sea shipping).  It requires that all goods transported on those areas (section 27) must be carried by ships registered under American flags, built in the United States, owned by US entities and run by american crews [4].

According to critics, its impact has been to increase the cost of transportation in US, cost of energy, reduce competition and innovation in maritime sector, and therefore consumer prices. Cost of construction of a new ship in American shipyards is currently 4 to 5 times higher than in foreign shipyards.  Salaries of crews working on american ships are 5 times higher than the one on foreign ships.  [5] Advocates of the Act, for their part, argue that the it is an essential element of national security and that it is necessary to avoid dependence on foreign nations.  [6]

 What would happen if the Jones Act were abolished?

Several attempts have been done to modernise the law. But opposition seems to come rather from American transportation sector himself,  not only from traditionally favorable groups to protectionism,  such as unions.   Fear of takeingadvantage of the real benefits of competition could explain it. It is also considered that the actual law,  in fact, protects the  interest of a few individuals at the expense of the entire country.  This recalls , as in many other areas,  the power of the American lobbies and their influence on the American Congress.

Republican senator, John McCain, has made its point to modernize the law.  His last attempt was the introduction of the  ” Open America’s Waters Act of 2017″ bill in the congress. This was the fourth attempt since 2010.  [7]  Despite his hard work and support of multiple groups and industries, including that of the oil industry and many States (Alaska, Hawaii and Puerto Rico), all modernization proposals of this law have failed.  [8] Now the current political climate in the United States, fueled by the protectionist US president,  doesn’t seem  well timed for possible amendments to this Act.[9]

The question however rremains relevant. What would happen if we succeeded in abolishing the Jones Act?  Here are some answers ?

On one hand, the principle of free trade advocates the elimination of trade barriers in order to improve the flow of goods between countries.  According to this principle, trade is adjusted according to the relative costs of production between countries, that is to say,  according to the most competitive enterprises. Because, Jones Act is restricting  access to competitive foreign companies, it limits competition, generates higher transportation costs that reverberates throughout prices in the US economy.  So one can conclude that  its repeal should have the opposite effect.  A study conducted by the US International Trade Commission (ITC) confirms this analysis.  Accordling, a reform or repeal of the Jones Act  would bring an economic gain for consumers from $ 5 billion to $ 15 billion annually .  [10]

There would also be greater integration of US and international transport systems, with the effect of creating an industry reinforced by mutual advantages of each party, foreign and domestic.  Markets would become extensive and open, US merchant marine companies would be larger, better capitalized and would take advantage of low labor costs.  They would be  much more competitive  and active in international markets, resulting in a substantial increase in productivity.  From a logistic point of view,  it would have the effect of reducing handling and transhipment operations, which would lead to greater efficiency.  There would be no need to tranship goods from a foreign to american ship in order to access hinterland.

Finally, it would favor the use of marine transportation on US inland water systems.  Increased integration of the marine sector would result in less pollution and be more suitable for sustainable development .  Again, the ITC study shows that the cost of coastal shipping could be reduced by 60% and would benefit the energy, chemicals, air transport and steel sectors.

The sad story of Puerto Rico

Last September, Hurricane Maria completely devastated Puerto Rico, a Caribbean island of 3.4 million people under the jurisdiction of the United States.  Hundreds died, it destroyed infrastructures, cut electricity, communications and caused floods.  [11] The state of emergency was decreed.  For reasons of efficiency, it was decided to suspend the provisions of the Jones Act for 10 days.  Puerto Rico is an island heavily dependent on maritime commerce, it became de facto a natural laboratory to measure the impact of Jones Act.  In the midst of a state of emergency, at the time of the announcement , some 3,000 aid containers were stranded in the island port due to disagreements over their distribution and lack of availability of local transport services  [12].  Paradoxically, Jones, who for more than 100 years has always been maintained for reasons of national security, had to be suspended in order to facilitate the urgent movement of goods , services and essential commodities.  The world upside down!

Pressures are being made to permanently maintain the exemption.  The economy of Puerto Rico, dependent on tourism, has been strongly shaken by Hurricane Maria and is struggling to recover.  Moreover, its government is crumbling under an abysmal debt.  [13]  The permanent exemption could contribute to revival of its economy.    According to Carmen Yulin Cruz, mayor of the capital San Juan, the price of all goods transported by sea are about 30% higher due to the Jones Act.    Moreover, according to a report by economists from the International Monetary Fund, Puerto Rico would pay twice as much for  imported goods than its neighbourg, Vigin Islands, witch is exempted from the Act.  [14]  Despite all these difficulties, the US Congress refuses to grant permanent exemption.  Puerto Rico remains a victim of a protectionist ideology described as archaic by many, including Senator McCain himself.

 The Canadian position

Canada , as well as other countries, protects its  domestic maritime industry. However, the Canadian market remains more open.  The Canada Shipping Act provides that in order to operate on Canadian inland waters, vessels must be Canadian-owned , fly the Canadian flag, and be operated with Canadian seamen.

The law  allows ships to be built abroad, subject to an import tax  of 25%.  ( except for ships built by NAFTA countries ).  It also provides a waiver system that allow foreign-owned vessels to operate in canadian waters when no Canadian vessel  is available.  This exists also on the American side but for very exceptional cases.  [15]

Short sea shipping markets remain largely protected in North America, the reason being that the United States does not seem open to any negociation. This stubbornness has a direct impact on North American competitiveness in international markets. For political reasons, any attempt to change the situation has been unsuccessfull.

Since January 2017, at the request of the President of the United States, negotiations have taken  place in order to modernize NAFTA.  It seems that once again, the notion of revisiting the Jones Act is out of question.

 

 

 Louis Bellemare

References

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[1] United States, Wikipedia, ,  https://en.wikipedia.org/wiki/United States

[2]  The Economic Atlas of the Sea, 2016, Chap.  9 and 10, Commercial Fleets and Shipbuilding

[3] Report Shipbuilding-2015, , http://es.ndu.edu/ Eisenhower School of National Security and Resource Strategy

[4]  Marine Merchant Act of 1920, Cornwall University Law School Legal Information Institute, https://www.law.cornell.edu/uscode/html/uscode46a/usc_sup_05_46_10_24.html

[5]  Facts and comments about the Jones Act , Marginal Revolution, http://marginalrevolution.com/marginalrevolution/2017/09/facts-observations-jones-act.html

[6]  The Maritime Executive, Why America needs the Jones Act, https://www.maritime-executive.com/article/why-america-needs-the-jones-act

[7]  Senator John McCain seeks to repeat the Jones Act,,

https : //maritimelegalhelp.com/senator-john-mccain-seeks-repeal-jones-act/

[8] Senator McCain’s Latest Jones Act Repeal Effort Unlikely to Progress – Holland & Knight,  http://gcaptain.com/senator-mccains-latest-jones-act-repeal-effort-unlikely-to-progress-holland-knight/

[9] Put The Jones Act out of sea, US News, https://www.usnews.com/opinion/economic-intelligence/articles/2017-05-15/donald-trump-should-repeal-the-costly-jones-act-on-shipping

[10]  The Jones Act in perspective, a survey of the costs and effects of the 1920 Merchant Marine Act, http://www.grassrootinstitute.org/2017/04/the-jones-act-in-perspective/

[11]    Hurricane Maria devastates Puerto Rico , The Journal of Montreal, http://www.journaldemontreal.com/2017/09/21/louragan-maria-devaste-porto-rico

[12]  After Maria, new measures to help Puerto Rico, http://www.lapresse.ca/international/etats-unis/201709/28/01-5137533-apres-maria-de-nouvelles-mesures-pour-aider-porto-rico.php

[13] Puerto Rico, Caribbean Debt Crisis, CADTM,  http://www.cadtm.org/Puerto-Rico-Crise-de-la-dette-a-la

[14]   A law designed to protect American ship-building, A law designed to protect American ship-building  https://qz.com/1087325/what-is-the-jones-act-and-how-is-it-affecting-puerto-ricos-hurricane-recovery/

[15]  The Jones Act Under NAFTA and Its Effects on the Canadian Shipbuilding Industry.  Mary R. Brooks, AIMS Market Studies, 2006,  http://maryrbrooks.ca/wp-content/up

 

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