The maritime shipping world as many in the United States see it can be divided into two parts, one under the jurisdiction of the Jones Act, and everything else. The 91-year-old statute often is assailed as an outdated relic of protectionist policy, and defended as a bulwark of national security, and a protector and creator of jobs.
All of the above is true. Although the law creates a market that’s an anomaly in the realm of free-range open market competition, the Jones Act trade thrives in its own fishbowl-like environment.
The Jones Act requires any ship that operates in U.S. waters to be owned by U.S. citizens, crewed by U.S. citizens, and built in a U.S. shipyard.
The recent struggles of Horizon Lines, the largest Jones Act carrier, are putting the law’s viability in the 21st century under a new spotlight. New concerns center on how domestic shipping protections fit into a world in which trade barriers are falling and multinational carriers and shippers alike are competing in markets never envisioned when the law was written nearly a century ago.
To be clear, the law simply is not likely to be repealed. The groups that benefit most — union labor, owners of Jones Act vessels and the U.S. shipyards that built them — form three solid pillars of resistance that have beaten back all attempts.
“There are many components that are knit together. I don’t think you can take one component out without having the whole fabric unravel,” said George Pasha, president of Pasha Group, the newest entrant in the Hawaii market.
Critics say the Jones Act protects owners, labor and builders at the expense of shippers. The captive market allows carriers to charge premium rates. Shippers and politicians in Hawaii and Puerto Rico, in particular, make the Jones Act and its carriers frequent and emotional targets. Competition is stiff within both markets, however, and carriers say it keeps the rates as low as possible. Allowing foreign flags into the trade would cause cutthroat competition and market instability as too many carriers go after a finite amount of freight.
‘‘I would like to see the Jones Act repealed, but I don’t think that’s likely,’’ said Sen. John McCain, R-Ariz., one of the law’s most prominent and persistent critics. ‘‘I don’t think I would get 20 votes if I were to bring it to the floor.”
The Journal of Commerce first reported McCain’s remarks 15 years ago. Since then, he has used virtually every opportunity to take a stab at the law. Last year he filed repeal legislation after foreign-flag operators blamed the law for preventing them from taking part in the Deepwater Horizon cleanup. The statement was false, however, and Jones Act defenders had support in saying so from Adm. Thad Allen, the Coast Guard’s incident commander in the Gulf of Mexico.
Supporters and opponents of the Jones Act waged the last great political battle over the law in 1996 and 1997. The Jones Act Reform Coalition led by Rob Quartel, former member of the Federal Maritime Commission, and the Maritime Cabotage Task Force, composed of the law’s supporters, squared off in a passionate struggle. Congressional defenders of the Jones Act effectively crushed a reform bill.
The U.S. is far from alone in protecting its domestic maritime industry. In 1993, the Maritime Administration found 44 out of 57 countries had cabotage laws, but some are more restrictive than others. A review by scholars at Dalhousie University in Halifax, Nova Scotia, found a spectrum. The U.S. and Canada are among the most restrictive.
Marad’s survey, the last research the agency made on the subject, found 20 of the 57 respondents directly subsidized shipbuilding. The U.S. does not. Jones Act critics frequently complain that builders’ protected market and higher labor costs allow them to charge multiples of world market prices for any given type of ship. Take away foreign subsidies, defenders contend, and the price differential is much smaller.
The Paris-based Organization for Cooperation and Development has studied the scope of support for their members’ maritime programs. The OECD comprises 34 countries with established industrial economies. China is not a member, but participates in some programs.
“There is no doubt that shipbuilding industries around the world receive significant support from their governments,” said Danny Scorpecci, secretary to the OECD’s shipbuilding working group. He said the OECD tends to look at shipbuilding subsidies in a broader context of governments’ overall support of domestic shipping. The view includes such programs as cargo preference laws. “Cargo reservation schemes tied to domestically flagged/built vessels (the U.S. Jones Act, for example) can sustain shipbuilding enterprises without the governments having to outlay any funds.”
In 1994, the OECD began negotiations for an agreement that would phase out governments’ shipbuilding subsidies. It foundered when it failed to win U.S. support. The group tried to make an agreement that would prevent “injurious pricing” in the sale of commercial vessels. Talks stalled in 2005 when no one could agree there were pricing practices that distorted the market.
Last December, the OECD canceled the effort.
“You can get a cheap ship, but don’t say our ships are overpriced. Our ships are competitive with everybody,” said Matt Paxton, president of the Shipbuilders Council of America, which represents small and midsize U.S. shipyards. “We are still building ships for the European Union. We bid on contracts, beat the foreign yards and build them here.”
Two weeks ago, Marad signed off on a Title XI loan guarantee for a Brazilian buyer that ordered five platform service vessels for the offshore oil industry. The guarantee was a two-pronged victory, creating 300 jobs and boosting exports by $241 million.
National security is the Jones Act’s trump card. Supporters contend construction of commercial ships for Jones Act trade keeps U.S. yards in business, and preserves workers’ skills to support construction of warships for the Navy. Supporters say the law also preserves shipyards’ supply chains for vessel components that reach into virtually every state.
“People say you can’t build any ships in this country because of the Jones Act. I guess they couldn’t build any ships in World War II because of the Jones Act,” said Percy R. Pyne IV, chairman and co-founder of American Feeder Lines. “To say you can’t build ships in the United States because of the Jones Act is an excuse, not a reason.”
American Feeder Lines is proposing a network of Jones Act ships to distribute containers to ports along the East Coast. The company plans to build a series of 10 1,800-TEU vessels at two U.S. yards.
Pyne said so many foreign automobile manufacturers have set up shop in the U.S. “because our labor force is better-trained, more productive and more responsive than any in the world.” But he believes U.S. shipbuilders show no apparent interest in modernizing yards or adopting construction methods that have been successful in other countries.
China sees its shipbuilding industry as a strategic asset, Pyne said. Over the past decade, the Chinese have built 120 yards, and the quality of their products has continually improved.
“Where do you think China is building its navy? In Chinese yards, and it isn’t a ‘navy yard,’ it’s a commercial shipyard,” Pyne said.
“If you’re telling me we can’t do it, and we can, that’s a bit of frustration,” he said. “If you’re telling me we won’t do it because we don’t want to, then I’m going to say you have just defaulted to the Chinese, who are building an entire navy.”
Contact R.G. Edmonson at email@example.com.