Mayday for American protectionism
Anne O. Krueger

Editor's note: Anne O. Krueger is a former World Bank chief economist and former first deputy managing director of the International Monetary Fund, a senior research professor of International Economics at the School of Advanced International Studies, Johns Hopkins University, and a senior fellow at the Center for International Development, Stanford University. The article reflects the author's opinion, and not necessarily the views of CGTN. 

When you try something for 99 years and the situation keeps getting worse, it is time to try something else. The United States Congress passed the Merchant Marine Act of 1920 (also known as the Jones Act) in order to protect America's shipping industry and strengthen national security. But the law has almost destroyed the industry and imposed huge costs on America's businesses, consumers, and the environment. It needs to be sunk.

The Jones Act requires all cargo shipped between American ports to be carried on U.S.-flagged vessels that are assembled entirely in America, and that have some of their major components manufactured in the U.S. These ships must be at least 75 percent owned and crewed by Americans. And if a U.S.-flagged ship needs to be repaired overseas, the U.S. charges a 50 percent tax on the price.

Shipping goods between two ports in the same country is called "cabotage." The World Economic Forum has called the Jones Act the world's most restrictive cabotage law, and the OECD ranks the U.S. behind only China and Indonesia in the restrictiveness of its maritime-services regulations.

Jones Act requirements have long been a protectionist drag on the U.S. economy and are increasingly detrimental to national security – as Colin Grabow, Inu Manak, and Daniel Ikenson of the Cato Institute pointed out in an important paper last year. (This commentary draws heavily on their work.)

Consider national security. Since 2000, the number of American ships of at least 1,000 tons that comply with the Jones Act has fallen from 193 to 99. When the U.S. military sent materiel to the Persian Gulf in 2002-03, American commercial ships took only 6.3 percent of the total, and foreign-flagged vessels a further 16 percent. (The U.S. military transported the rest.)

A tugboat passes a man fishing in the Houston Ship Channel, part of the Port of Houston in Pasadena, Texas. ‍March 6, 2019 /VCG Photo 

A tugboat passes a man fishing in the Houston Ship Channel, part of the Port of Houston in Pasadena, Texas. ‍March 6, 2019 /VCG Photo 

Shipbuilding and shipping operations in the U.S. have also become inordinately expensive. 

American-built coastal-size container ships are estimated to cost between 190 million  U.S. dollars and 250 million U.S. dollars each, compared to about 30 million U.S. dollars for foreign-made equivalents.

And because Jones-compliant ships are so expensive, their owners do not replace them. A ship's economically useful life is generally considered to be about 20 years, but more than 65 percent of the Jones fleet is over 30 years old, making it inefficient and even dangerous. And whereas America built less than one million gross tons of ships between 2014 and 2016, South Korea and China produced a combined 140 million tons.

According to some estimates, the daily operating costs of U.S.-flagged ships are almost three times higher than those of foreign vessels. Crewing costs on American ships are reported to be about five times greater. And whereas transporting crude oil from the Gulf Coast to the U.S. Northeast on a Jones-compliant ship costs five to six U.S. dollars per barrel, it costs only two U.S. dollars per barrel to carry crude from the Gulf Coast to Eastern Canada on a foreign-flagged vessel.

Because of the high cost of U.S. coastal and Great Lakes shipping, the volume of American goods carried on these routes has fallen by about half since 1960. Over the same period, U.S. railroad cargo has increased by 50 percent, and intercity truck freight by over 200 percent. Today, only two percent of U.S. domestic freight is carried by water, compared to 40 percent in Europe.

If the Jones Act were repealed, many goods could be transported within the U.S. more cheaply by water than on land. Tellingly, U.S. waterborne freight to and from Canada and Mexico, which is not subject to the Act, has increased by 300 percent since 1960.

By pushing companies to use land-based transport, the Jones Act increases costs for U.S. firms, raises prices for consumers, and causes more congestion on the country's highways. Moreover, truck, rail, and air transport produce up to 145 times more carbon dioxide emissions than cargo ships do.

A home damaged by Hurricane Maria stands abandoned in El Negro, Yabucoa, Puerto Rico, September 17, 2018. /VCG Photo

A home damaged by Hurricane Maria stands abandoned in El Negro, Yabucoa, Puerto Rico, September 17, 2018. /VCG Photo

The law's negative effects do not end there. Puerto Rico, which has no overland route to the rest of the U.S., pays a particularly heavy price because only a handful of Jones-compliant ships regularly serve the island. 

Whereas the neighboring Dominican Republic buys oil from the U.S., shipments of imported supplies from Venezuela and other countries cost Puerto Rico less (even though U.S.-sourced oil itself is cheaper). And when Hurricane Maria devastated the island in 2017, U.S. President Donald Trump authorized only a ten-day waiver of the Jones Act – not long enough for some foreign-owned ships to bring much-needed aid.

Subjecting Puerto Rico and other U.S. territories and states to higher shipping charges serves no useful purpose and discriminates against fellow Americans. And with foreign ships and crews entering U.S. ports every day, it makes no sense to argue that commercial sailors should be American for national-security reasons. Environmentalists, too, ought to be outraged, given the costly and unnecessary damage resulting from increased CO2 emissions.

Having destroyed U.S. merchant shipping over the past 99 years, the Jones Act needs to be repealed. Ships plying U.S. waters should be obtained wherever they are cheapest. And without protectionist laws, America's shipbuilding industry might well start rationalizing and become more competitive.

The longer the Jones Act remains on the books, the more expensive U.S. commercial shipping will become and the further it will decline. Rather than celebrating the centenary of a damaging protectionist law, policymakers should throw it overboard.

Copyright: Project Syndicate, 2019

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