A real debate on the Jones Act

A real debate on the Jones Act

Among its many challenges these days, the U.S. faces a growing problem of freight congestion, as most anyone in the logistics field will attest. One solution would be to shift cargo from overly burdened highways to the nation's abundant river and coastal waterways. Yet despite a surge of interest from states, inland ports and some entrepreneurs, the promise of so-called short-sea shipping remains unfulfilled.

One reason is skepticism by shippers, whose domestic transport needs tend toward the time-definite, just-in-time and accelerated - qualities not usually associated with waterborne transport. "It will take extraordinary conditions to make short-sea work," Mick Barr, associate director of global physical distribution at Procter & Gamble and chairman of the National Industrial Transportation League, told the JoC Domestic Maritime Conference, held last week in Hilton Head, S.C.

Yet shippers' objections are still mostly theoretical; few tangible proposals have been put on the table for them to consider. The reason is that potential operators never get to that point because of an overwhelming barrier they face: They have a nearly impossible task acquiring vessels at prices low enough to enable them to charge competitive rates to shippers. If this obstacle could be overcome, the benefits would be spread far and wide. Shipyards would open a large new market, operators would launch or expand services, port volumes would grow, and cargo would be diverted to the waterways, easing road congestion and emissions. And here's the truth: It's doable.

Under the Jones Act, vessels plying domestic routes must be built in the U.S., and owned and crewed by Americans. The law has created a vicious circle where high prices lead domestic carriers to order the bare minimum of ships - an average of 1.7 deep-water vessels a year since 1988, with many more than 30 years old still operating - and the resulting lack of orders makes shipyards inefficient and thus unable to price competitively.

"The principal reason ships cost more in the U.S. is the lack of consistent orders," said John Graykowski, a maritime consultant, former acting maritime administrator, and general counsel at Kvaerner Philadelphia Shipyard.

Those who attack the law as protectionist say the problem could be solved overnight if only operators could acquire ships outside the U.S. But that's a pipe dream. That will never be allowed, in part because lower-cost imported ships would pose unfair competition to ships acquired under current law, while undermining what is considered a militarily sensitive industry.

But dig a little deeper, and it's possible to see clear to an opportunity. Ships must be "built" in the U.S., but what does that really mean? It means that 98.5 percent of the weight of the hull and superstructure - the section that houses crew quarters, galley and bridge - must be built from scratch in the U.S. yard. More than 60 percent of the components for the four 2,600-TEU container ships built by Kvaerner Philadelphia were imported from overseas, including the engines. But while the cost of components, even imported ones, is higher for U.S. yards because their thin order books give them little buying power, the key issue is fabrication. Shipyards in Europe, hardly a developing region, compete today against South Korea, Japan and China in part because they fashion hull sections and superstructures in low-cost plants in eastern Europe. The inability to do that in the U.S. exacts a heavy toll. It goes a long way toward explaining why Kvaerner's four ships cost the buyer, Matson Navigation, between $110 million and $140 million apiece, compared with about $40 million that the ships would cost in Europe.

The solution is simple: Change the law to allow not just components, but also fabrication to be sourced overseas, with U.S. yards engaging in final assembly, the way European yards do. Restrict the vessels that result to new short-sea markets, barring competition with providers such as Matson and Totem Ocean Trailer Express with their higher-cost assets. "If this methodology has contributed to a stabilization of the European shipbuilding industries, then shouldn't we at least consider this approach for our industry?" Graykowski asked.

The answer is yes, but doing so would require a fundamental shift: U.S. shipyards must overcome their visceral objection to any alteration of the Jones Act, thinking that any change will invariably lead to the law's ultimate eradication. Nonsense. That debate is over. Just listen to the words of Mick Barr, who is no fan of the Jones Act: "Most shippers know nothing is going to happen with the Jones Act in the foreseeable future."

Peter Tirschwell is vice president and editorial director of Commonwealth Business Media's Magazine Division. He can be contacted at (973) 848-7158, or at ptirschwell@joc.com.