The Jones Act, the obscure 1920 shipping regulation strangling Puerto Rico, explained

The island of Puerto Rico is devastated, with millions lacking power, infrastructure destroyed, homes damaged, and an entire year’s worth of agricultural output essentially ruined. Like any disaster-struck place, it will be in need of supplies brought it from elsewhere in the country.

But getting goods from the US mainland to Puerto Rico is much more expensive than sending them to Texas or even to other Caribbean islands as a result of a century-old man-made disaster that’s been crippling the island’s economy for a long time.

Meet the Jones Act, an obscure 1920 regulation that requires that goods shipped from one American port to another be transported on a ship that is American-built, American-owned, and crewed by US citizens or permanent residents.

For most Americans, this isn’t a big deal — it enriches a small number of American shipowners while introducing some weird distortions into the overall pattern of economic activity in the United States.

For the residents of the island of Puerto Rico, though, the Jones Act is huge. Basic shipments of goods from the island to the US mainland, and vice versa, must be conducted via expensive protected ships rather than exposing them to global competition. That makes everything Puerto Ricans buy unnecessarily expensive relative to goods purchased on either the US mainland or other Caribbean islands, and drives up the cost of living on the island overall.

And while it’s fairly common for American presidents to temporarily suspend the Jones Act in the face of a natural disaster, the Trump administration hasn’t yet done so for Puerto Rico.

“A humanitarian crisis is about to explode in Puerto Rico,” Nelson Denis, a former New York State Assembly member who’s written a book on Puerto Rico, wrote in a New York Times op-ed on “The Law Strangling Puerto Rico.” “But the consequences of Jones Act relief would be immediate and powerful.”

More broadly, the island faces a staggering array of economic challenges beyond the hurricane, and the Jones Act serves as a major impediment to addressing any of them. If it can’t be simply repealed altogether, exempting Puerto Rico from the law would be an easy way for Congress to boost the island’s fortunes at no cost to the average American.

The Jones Act is a 97-year-old law protecting American shipbuilding

The Jones Act is the shorthand name for the Merchant Marine Act of 1920, whose primary author was Sen. Wesley Jones of Washington. (It’s not to be confused with the Jones-Shafroth Act of 1917, which is also critically important to Puerto Rican history but which was sponsored by Rep. William Atkinson Jones of Virginia and relates to the legal status of the island.)

The goal of the legislation was to ensure the existence of a thriving US-owned commercial shipping industry, a topic that had become salient during World War I, when blockades underscored the close link between maritime commerce and warfare.

One section of the law requires goods transported by ship from one US destination to another to be carried on US-flagged ships that were constructed in the United States, owned by US citizens, and crewed by US legal permanent residents and citizens. The idea, basically, is that in case of war there should always be a big supply of American-made, American-owned, American-crewed ships that could be counted on (and, if necessary, conscripted) to supply American commerce even in hazardous conditions.

One could certainly imagine an alternative universe in which the law was a smashing success. Protectionism for US merchant shipbuilding and US-owned and US-crewed merchant ships could have nurtured an infant industry and turned the United States into a globally competitive maritime powerhouse.

That’s not what happened. Instead, global oceanic shipbuilding is dominated by Asian countries, with China, South Korea, Japan, the Philippines, and Taiwan dwarfing American production. US output of merchant ships is even fairly tiny compared to combined European production. According to Daniel Pearson of the Cato Institute, US merchant vessels carry about 2 percent of the world’s cargo, far down from the 25 percent they carried 60 years ago.

Rather than nurturing the creation of a global shipping powerhouse, protectionism for US shipbuilders has allowed the industry to survive despite being laughably uncompetitive in global terms. In most cases, that works out okay in practice because the United States has one of the world’s most robust networks of freight rail. The problem is that when disaster strikes, it would often be useful to mobilize boats quickly. And of course you can’t ship anything by train to Puerto Rico.

The Jones Act is often waived in a disaster

The Jones Act survives because it prevents a handful of US shipbuilding and merchant shipping operations from going out of business, and nobody else with political clout really cares.

But the executive branch has the authority to waive the act in special circumstances, as it has done in the past whenever the downside of making it excessively expensive to ship American goods from one place in America to another becomes a high-profile issue.

  • The Bush administration issued Jones Act waivers after Hurricanes Katrina and Hurricane to speed the shipment of fuel to the Gulf Coast.
  • The Obama administration issued a more limited waiver after Hurricane Sandy, again to speed the shipment of fuel.
  • On September 8, the Trump administration issued Jones Act waivers for areas impacted by Hurricane Harvey.

As Keith Hennessey, formerly the top economic adviser to President Bush, recounted in a 2010 blog post, the politics of Jones Act waivers are difficult. Emergency waivers in rare periods of spiking demand don’t put anyone out of business, but they still do have a long-term cost for the industry. If American-owned ships could count on windfall profits derived from price gouging arising every time a hurricane causes acute fuel shortages in a coastal location, that would support the creation of a slightly larger stock of domestic boats.

When considering the Katrina waivers, Hennessey recounts, “the pushback was not just from maritime unions, but also from the U.S.-flagged shipping industry, including shippers and shipbuilders, and including Rs and Ds on Capitol Hill who were close to the industry.”

At the end of the day, “without a strong lean from President Bush on his Cabinet to ‘do everything we can,’ the waivers would not have happened,” given the intensity of the political pushback.

Of course, one advantage that residents of Louisiana, Texas, and New Jersey have had in seeking Jones Act waivers is that they are represented in Congress by senators and House members. These congressional representatives wouldn’t ordinarily pick a big fight with shipbuilding and maritime union interests, but in the moment of a crisis, they certainly can and do.

Puerto Rico, however, lacks congressional representation, which is surely a factor in the island’s inability to secure a waiver, even though the Trump administration issued waivers for areas affected by Hurricane Harvey just a few weeks ago. But another issue is that the specific application of the Jones Act to Puerto Rico actually is a really big deal economically even when a hurricane doesn’t strike.

The Jones Act is a big deal for Puerto Rico

The result of all of this is that in Puerto Rico — where incomes are much lower on average than in the mainland US — the cost of living is far higher than it needs to be.

According to John Frittelli’s 2014 analysis for the Congressional Research Service, it costs about twice as much to operate a ship complying with the Jones Act as a typical ship used for international cargo. Drewry Maritime Research concluded in 2013 that US-built, Jones-compliant vessels cost about four times as much to build as comparable foreign ships.

More expensive ships that are more expensive to operate add up to a situation in which Jones-compliant shipping is much more expensive than non-Jones shipping.

“The cost of shipping a standard-size container from New York to Puerto Rico has been much higher than shipping it to Jamaica,” writes North Carolina State University economics professor Thomas Grennes. “Similarly, the cost of shipping from Los Angeles to Hawaii has been higher than the cost of shipping the same product from Los Angeles to Shanghai.”

An absence of domestic port-to-port shipping is an occasional distortion for the US mainland, but it’s a systemic economic impediment for places like Hawaii and Puerto Rico. Puerto Rico, in particular, is so close to the United States that the most cost-effective way to transport many goods there would be for ships to stop off en route to a mainland port. But under the Jones Act, foreign-originating goods must be dropped off in Jacksonville and then shipped to Puerto Rico via an exorbitantly expensive Jones-compliant vessel. Likewise, it costs far more to ship US-produced goods to Puerto Rico than it does to Jamaica.

This raises the cost of living on Puerto Rico, makes Puerto Rico an unattractive place to produce goods bound for the US mainland, and has the bizarre effect of putting Puerto Rico at a competitive disadvantage to other Caribbean islands as a destination for American tourists.

In the US Virgin Islands, which are exempt from the law, US-made goods are about half as expensive, while the cost of living in Puerto Rico is 13 percent higher than on the American mainland. Food on Puerto Rico costs twice as much as it does in Florida, and that’s before the devastation of the island’s agriculture by Hurricane Maria.

There are a few policy options for relief

In the short term, the Trump administration should issue a broad temporary waiver of the Jones Act so that supplies could more easily reach Puerto Rico from the American mainland. While the American people will likely be generous with their charitable contributions of both money and supplies, it’s fairly perverse to have a healthy chunk of that generosity soaked up by monopolist shipowners rather than going to the actual delivery of food and medicine to people in need.

But the Jones Act relief shouldn’t stop there.

Unlike Houston, Puerto Rico isn’t a thriving place that happens to have been hit by a serious natural disaster. It’s a poor place by American standards whose economy has been in shambles for about a decade and whose bankrupt government is now hamstrung by its creditors. It badly needs an overall improvement in economic conditions — some kind of prospect for long-term growth — and permanently lifting the Jones Act is one of the more powerful levers at federal disposal for doing that. Reducing the cost of living on the island will make it a more attractive destination for tourism and retirees, while giving the island at least some shot of developing export industries and raising living standards for residents.

This could, of course, be achieved by simply repealing the Jones Act, as Sen. John McCain has proposed several times, most recently in July.

If that’s too much for the shipbuilding industry to swallow, a narrow law exempting Puerto Rico from its reach could be a helpful idea. Alternatively, a midsize law that would narrow the Jones Act to the contiguous 48 states might pick up the congressional delegations of Alaska and Hawaii as champions while lifting Puerto Rico incidentally.

But the risk for the island is that while the immediate devastation of Hurricane Maria is leading to a brief surge in attention, the subject of maritime regulation will likely soon slip back into its customary obscurity — dragging down Puerto Rico’s economy more out of indifference than malice.

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