The Jones Act: Distorting American Energy Markets Since 1920

One notable consequence of this hurricane season has been the renewed interest in the controversial Jones Act. Enacted in 1920, it mandates that only vessels that are built, owned, crewed, and flagged in the United States can participate in maritime shipping between domestic ports. In the wake of Hurricane Harvey and Hurricane Irma, the Department of Homeland Security temporarily suspended the controversial law in order to increase the supply of refined fuel to areas affected by the storms. Yesterday, President Trump also waived Jones Act shipping restrictions to Puerto Rico as they were holding back response efforts to Hurricane Maria. The temporary suspension of the legislation is noteworthy because one of the stated purposes of the Jones Act is to better prepare the country for natural disasters. Waiving these provisions in the wake of these recent hurricanes is an admission that the legislation actually hinders disaster relief by limiting the supply of ships that can legally be used to transport goods between American ports.

National Security or Protectionism?

The alleged purpose of the Jones Act is to improve national defense by protecting the country’s ability to build and maintain a fleet of ships for use in foreign military conflict and respond to natural disasters. Several federal agencies enforce the legislation, including U.S. Customs and Border Protection, the Coast Guard, and the Federal Maritime Commission. These agencies have interpreted the Jones Act and subsequent legislation to include nearly every kind of commercial vessel. Although advocates of the Jones Act are quick to cite national security as its primary purpose, the Mercatus Center’s Thomas Grennes points out there is little evidence the legislation actually contributes to national defense. He writes:

Whatever the act might have contributed to US military operations abroad in the past, the potential contribution must be diminishing. The Jones Act–eligible fleet continues to get smaller and older. The number of large Jones Act commercial ships was 193 in 2000, but by 2014 there were only 90. The total Jones Act fleet of all sizes contains more ships, but a large percentage of the vessels are ferries or tugboats, which would contribute little to distant military actions. The earlier contributions of Jones Act ships to US military operations in Afghanistan and Iraq were judged to be minimal by prominent analysts. Rob Quartel, former US federal maritime commissioner and maritime security analyst, has written unfavorably about the contributions of Jones Act ships during the Gulf War: Of the “armada” of 460 ships that transported military materials into Saudi ports, “no Jones Act vessels participated… The success of the military sealift—a brilliant feat of logistics—occurred despite (rather than because of)” the Jones Act. The Jones Act had to be suspended to provide for fueling of ships.

It’s clear that proponents of the Jones Act have cleverly framed the need for this legislation on the basis of national security in order to distract from its actual purpose: the Jones Act is economic protectionism in its rankest form. Like all protectionist legislation, the Jones Act is able to reward concentrated benefits to a select few because the perception of those benefits significantly outweighs the dispersed costs imposed on everyone else. By prohibiting foreign ships from entering the domestic maritime shipping market in the United States, special interests have affectively shielded the American shipping industry from 90 percent of their competition in the world shipping market. This protection comes at a great cost to the American consumer.

A quick look at who exactly supports the Jones Act reveals the cronyism and economic protectionism at play. The act currently has support from members of both parties in Congress and was supported previously by the Obama administration. One of its strongest supporters is Representative Duncan Hunter of California whose district is home to the NASSCO shipyard—the largest U.S. shipyard employer as of 2014. Not surprisingly, groups that benefit most from the protection from foreign competition also largely support the act; they include shipbuilding companies and labor unions that represent the merchant marine. The fact that special interests have expanded their lobbying efforts to influence the enforcement of the law reveals the degree of influence these groups have on the legislation. Recently, a group called the Offshore Marine Services Association successfully pushed U.S. Customs and Border Protection to dedicate resources to an enforcement unit called the Jones Act Division of Enforcement.

Costs of the Jones Act 

The obvious economic effect of the Jones Act is that it excludes foreign ships from participating in the domestic maritime shipping market. Limiting the supply of domestic shippers increases the costs of shipping goods between domestic ports relative to what they would be in a more competitive market; these costs are then passed on to consumers.  A combination of factors cause these increased costs including the cost of producing a ship in an American shipyard (which is four to five times higher than the cost of an imported ship) as well as the increased operating costs of employing an American crew. The Congressional Research Service has shown that operating costs of American vessels bound to the Jones Act can be more than twice as high per day to comparable foreign ships. In 1999, the U.S. International Trade Commission reported the Jones Act costs $1.32 billion annually to American consumers. Areas like Alaska, Hawaii, Puerto Rico, and Guam disproportionally feel the effects of these costs because their geographic locations limit their ability to use alternative forms of transportation such as rail or freight to move goods.

Excluding foreign competition in the domestic maritime shipping market also reduces competition for services and grants American shipping companies increased monopoly power in the market. This allows domestic companies to charge higher prices and prevents them from adapting to better meet consumer demand.

The Jones Act and Energy Markets

The economic effects of the Jones Act have had a substantial impact on the U.S. energy market due to the scope of the industry’s supply chain. These effects have been amplified in recent years as the shale revolution has increased the demand for domestic transportation of goods by the energy industry. The new supply of domestic crude oil made accessible by the shale revolution is replacing our former demand for imports, raising demand for domestic transportation of crude oil in the process. In the past, pipelines have predominantly been the preferred method for transporting oil within the United States, but the existing pipeline network is not designed to access the new sources of domestic crude. When you combine this with the fact that there has been strong opposition to the construction of new pipelines—particularly the Keystone XL and Dakota Extension—it’s clear that maritime shipping could play a larger role in our domestic energy supply chain. Unfortunately, the Jones Act continues to prevent foreign ships from participating in the transportation of crude oil between domestic ports, raising the cost of domestic shipping in the process and preventing maritime shipping from taking a larger role in the energy supply chain.

Higher costs on domestic shipping have caused two notable distortions to the energy industry’s supply chain. First, the limited supply of Jones Act approved shipping tankers and the higher costs associated with the legislation has caused a sharp increase in costlier rail shipments of crude oil. These increased costs are then passed on to American energy consumers, which is to say practically everyone in the United States. Second, the Jones Act also affects where products are shipped because the costs of domestic transportation largely determines the pattern of energy trade. This being the case, in order to avoid the added costs caused by the Jones Act, some companies opt to hire foreign ships to export crude oil to Canada instead of shipping it to a domestic refinery. This increases costs to energy consumers relative to what they would be absent the Jones Act and also diverts the economic activity created by the refining process away from the United States. In other words, the protection of American maritime jobs by the Jones Act comes at the cost of higher energy prices for everyone and diversion of economic growth to other countries.

Repeal the Jones Act

Although many groups are quick to defend the Jones Act on the basis that it protects American jobs, it’s clear that this outdated law is doing more harm than good—this has become especially apparent following this recent string of natural disasters. By placing strict limitations on the types of ships that may be used to move goods between domestic ports, the Jones Act forces American consumers to pay higher prices for goods simply to protect the American shipping industry from foreign competition. The impact of the legislation is especially apparent in the American energy industry, as the added costs of domestic shipping have severely distorted the industry’s supply chain. Worse than that, during natural disasters when an efficient supply chain can be the difference between life and death, the Jones Act limits the supply of ships that can legally transport goods to areas affected by the disasters, driving up prices and adding another obstacle to the recovery process.

Defenders of outdated, protectionist legislation like the Jones Act often claim they put American jobs and the American people first, yet their policies do no such thing. Sure, these people can point to a slew of jobs that are protected by this legislation, but these jobs come at a cost to all of us. Going forward, the administration should follow the line of thinking that led to this temporary suspension of the Jones Act as it is consistent with a fairer approach to American business. A push by the administration to repeal the Jones Act—or at the very least, a push to reform it to make it less restrictive—would lower domestic shipping costs substantially, savings that would then be passed on to the American people in the form of lower prices. In the process, the administration would be sending a strong signal that the American economy should not operate based on the protection of entrenched interests in Washington, and instead by the competition and cooperation that defines a dynamic market economy.