Repealing the Jones Act would leave an uncertain shipping environment

Under the Jones Act, foreign-flagged and foreign-built ships are prohibited from moving cargo between U.S. ports. (Photo: Shutterstock)

Under the Jones Act, foreign-flagged and foreign-built ships are prohibited from moving cargo between U.S. ports. (Photo: Shutterstock)

Until Hurricane Maria slammed into Puerto Rico, few people had ever heard of the Jones Act. Now, armed with a basic knowledge, many are wondering if the Jones Act is actually harming the U.S. and whether lifting it might benefit shipping and logistics in this country.

The Jones Act was created in 1920. Officially known as the Merchant Marine Act of 1920, it prohibits the movement of any commercial cargo from one U.S. port to another U.S. port by a foreign-flagged or foreign-built ship. The law was created at the time to boost the U.S. maritime industry and shipbuilding.

But critics say that the law raises the costs of goods for residents of places like Puerto Rico, as well as Alaska and Hawaii, which must pay higher shipping costs to have goods moved from the U.S. mainland on U.S. ships, rather than competitively bidding those movements to the world shipping market. It has come under the spotlight as rebuilding efforts from the devastation brought by Hurricane Maria have faced slow going in Puerto Rico.

The Trump administration suspended the Jones Act initially, allowing relief supplies to flow into the country on any ship, but that suspension expired on Sunday and the administration has said it will not extend the lifting of the act.

“We believe that extending the waiver is unnecessary to support the humanitarian relief efforts on the island,” Homeland Security Press Secretary David Lapan wrote to CBS News. “There is an ample supply of Jones Act-qualified vessels to ensure that cargo is able to reach Puerto Rico.”

That is a position that is disputed by Puerto Rico Gov. Ricardo Rossello, who said he would like to see another extension.

“I think we should have it,” Rossello told CBS News’ David Begnaud. “In this emergency phase, while we’re looking to sustain and save lives, we should have all of the assets at hand.”

Sen. John McCain along with Sen. Mike Lee of Utah and Sen. James Lankford of Oklahoma have introduced a bill to permanently exempt Puerto Rico from the act.

“Now that the temporary Jones Act waiver for Puerto Rico has expired, it is more important than ever for Congress to pass my bill to permanently exempt Puerto Rico from this archaic and burdensome law," McCain said in a statement. “Until we provide Puerto Rico with long-term relief, the Jones Act will continue to hinder much-needed efforts to help the people of Puerto Rico recover and rebuild from Hurricane Maria.”

Could lifting of the Act, though, benefit the U.S. shipping and logistics industries? If the Jones Act was repealed, foreign-flagged ships could conceivably drop off a partial load of containers at the Port of Miami and then make additional stops in Virginia and/or New York, for instance.

Because it has never been studied to the best of anyone’s knowledge, it is uncertain whether ships could operate in this manner, and if so, whether they would choose to.

“I think the coordination on the front end [would be too difficult],” Kevin Sterling, managing director and senior equity research analyst for Airfreight and Logistics & Marine for Seaport Global Securities, told FreightWaves. “Let’s say that ship from China is coming to Miami and then going to New York. When they are loading all that freight in China, they would have to load the top half of the ship for Miami and the bottom half for New York. If it was general freight going to New York but automobiles for Miami, that means the heavier freight would be on top.”

To balance the ship properly, it would have to go to New York first, adding time and cost to the route.

Sterling believes the logistics related to such endeavors might not make them cost-effective. “When they load ships, they want to load them as fast as they can,” he says, adding that the complications of loading for multiple stops slows down the process.

Potentially, a foreign ship could move goods from one U.S. port to another, perhaps up and down the Mississippi even, although Sterling doesn’t think that is likely either.

“The locks and dams are very old on the Mississippi and these international ships can’t go up and down the Mississippi,” he says. “It really wouldn’t be practical for these ships to travel through the inland waterways.”

Loading up at one U.S. port and moving to another also might not make sense. The question is how much time could be saved moving goods up and down the East Coast or West Coast under this scenario? Again, though, because it can’t be done today, any research on its advantages is limited.

John Larkin, managing director with Stifel Equity Research’s Transportation & Logistics business, also points out that most locations are still not attached to navigable waters, meaning trucks or rail will still be required to move freight.

“I am not sure how much freight would be taken away from the rails and the truckers if the Jones Act were to be repealed,” he says. “My sense is that most freight cannot be economically handled by barge or coastwise ships already,” and the freight that can is already being moved that way because “even Jones Act ships and barges can move freight much more cheaply in most lanes when compared to rail or truck.”

The idea of ships stopping at multiple U.S. ports could have an impact on rail shipments, but the impact on trucking shipments may not be much more than redistributing where the freight is located and what ports truckers are hauling out of. It could be a boon to individual ports, though, as more freight flows into them.

Ted Loch-Temzelides, professor of economics and Rice Scholar at the Baker Institute for Public Policy’s Center for Energy Studies, in commentary for Forbes.com, noted this.

“The Jones Act has other far-reaching implications for the entire U.S. transportation sector and beyond. Such effects are very hard to capture in their entirety,” he wrote. “As an example, the U.S. trucking and rail industries, as well as the ports, would be affected in complex ways if the Jones Act were to be repealed. Trains have been used as a substitute for maritime transportation in the U.S., when this leads to costs savings. If maritime transportation becomes less expensive due to increased competition, there will be a corresponding shift away from rail, resulting in loss of revenue in that sector. Ports, on the other hand, could benefit from the increased number of foreign vessels served, due to economies of scale.”

It is likely a moot point as the Jones Act is unlikely to be repealed – at least in its entirety, Sterling says.

“I don’t see it getting repealed because the military is a big proponent of it because it wants to ensure the U.S. maintains shipbuilding expertise,” he observes. “The U.S. doesn’t want its aircraft carriers being built in China.”

There is also a very large maritime workforce in places like Alaska and Hawaii, that would be part of any argument to eliminate the Jones Act. Add in a national security argument, and full repeal faces a long uphill battle.