The views expressed here are solely those of the author and do not necessarily represent the views of FreightWaves or its affiliates.
The Merchant Marine Act (1920) outlines one of the most consequential non-tariff barriers (NTBs) in U.S. history, and June 5th will mark its 100th anniversary. Often called the Jones Act after its sponsor, Sen. Wesley L. Jones (R-WA), the intent was to incentivize the building and maintenance of a domestic fleet of commercial ocean vessels that would be owned and operated primarily by U.S. citizens. The Jones Act set this requirement to ensure both national defense and a “proper growth of commerce” using the “best type of ships.” Regulators have since interpreted this to mean that the vessels must also be built by U.S.-owned shipyards. Most countries have some form of cabotage restrictions but the U.S. stands out with its domestic build and repair requirements in the maritime sector.
Cabotage is defined by Merriam-Webster as the “trade or transport in coastal waters or airspace or between two points within a country.” The Jones Act covers not only coastal commerce but the commerce of U.S. territories and possessions. As such, port-to-port transport of freight from the contiguous U.S. to Alaska, Guam, Hawaii, Puerto Rico, etc. can only be handled by U.S.-flagged vessels (meaning U.S.-built, U.S.-owned and U.S.-crewed). Section 27 of the act includes the same prohibitions on transport by land as well as by water. Of course, as the commercial air industry grew after World War II cabotage restrictions were applied there as well. In practice cabotage restrictions of some kind apply to all point-to-point domestic transport of passengers and/or freight regardless of mode.
Why the Jones Act was enacted
The Jones Act was certainly a creature of its times and it made some economic and political sense. Economically, the U.S. emerged from World War I with a need to expand its commercial fleet while protecting its growing domestic commerce from foreign vessels. Supporting U.S. shipbuilding capabilities to meet the expectations of the Jones Act is a classic example of the “infant industry argument” in support of trade protection. Politically, U.S. coastal states with large shipbuilding interests would benefit from the act’s restrictions on cabotage. Sen. Jones himself no doubt benefitted from giving his constituents in Washington State a near monopoly on shipping to and from Alaska. Of course, the problem with infant industries is knowing when to wean them off of the mother’s milk of trade protection so that they can try to survive and thrive in the cold world of international competition. Avoiding this simply incentivizes an industry to remain cost-heavy and uncompetitive.
As an NTB the Jones Act has its supporters as well as its detractors. Supporters laud its spirit of national defense. This means that in time of war or emergency any vessel and crew operating along U.S. coasts and rivers would be “American” and thus not of questionable loyalties if commandeered to move military equipment and/or personnel. Detractors see the Jones Act as antiquated and serving only to keep transport costs higher than they would be otherwise. This is due, the argument goes, to the stifling of foreign carrier competition in domestic freight markets and propping up U.S. shipyards with their lower economies of scale and higher labor costs than those in Asia. This is the classic conflict between free trade versus ensuring stable domestic industries and employment.
Today the Jones Act enjoys bipartisan support in Congress and it is hard to imagine President Trump setting aside his mercantilist tendencies to support any large-scale reform. Yet the Jones Act has enough wrinkles, loopholes and exceptions to keep politicians, regulators, transportation lawyers and even professors of logistics on their toes.
Political pressure for cabotage reform does arise from time to time. The latest was at the G7 Summit in August 2019 when U.K. Prime Minister Boris Johnson encouraged President Trump to consider supporting U.K. vessels wishing to engage in U.S. cabotage. Currently, EU nations can engage in multimodal cabotage among themselves. It would be interesting to see if a post-Brexit U.K. could maintain its cabotage rights with EU nations and, at the same time, successfully build such rights into a bilateral trade agreement with the U.S. However, it should be remembered that U.S. cabotage options with neighboring Canada and Mexico are very limited – despite each being a much larger merchandise trade partner than the U.K.
Some Jones Act wrinkles
The U.S. build and repair requirements apply only to domestic water vessels. U.S. airlines can buy airplanes from Airbus, Bombardier and Embraer, etc. U.S. motor carriers can buy Volvo trucks (or Mack trucks, which has been a Volvo subsidiary since 2000). Municipal governments offering light rail transit and bus services can buy their conveyances from Siemens and New Flyer, respectively.
Of course exceptions to the rule barring foreign companies from offering domestic transport can occur in times of emergency or when a domestic vessel is not available for the required move. These assessments are made by the Executive Branch or by Congress. Notable emergency exceptions to the Jones Act were made for foreign vessels to assist with the clean-up of the Exxon Valdez oil spill in 1989 and relief after Hurricane Katrina in 2005.
Regarding domestic vessel availability, Alaska has the dubious distinction to have played a part in the largest Jones Act fine in U.S. history. In 2011, the U.S. Department of Justice (DOJ) fined Furie Operating Alaska (then known as Escopeta Oil & Gas) $15 million for using a Chinese-flagged heavy-lift vessel to haul a jack-up drilling rig from the Gulf of Mexico to Alaska’s Cook Inlet. In 2017 both parties negotiated a settlement and the payment was reduced to $10 million. Ironically, Escopeta was granted a Jones Act waiver in 2006 to use a foreign vessel for the haul. But the haul did not proceed until March 2011 and by then the U.S. Department of Homeland Security (DHS) declined to renew the waiver. At any rate the haul proceeded from the Gulf of Mexico, around South America, and up to Vancouver, British Columbia, where U.S.-flagged tugboats took over and completed the trip in July 2011. Escopeta claimed that its tight timeline to reach Alaska before its tax breaks on drilling expired had forced it to use the foreign-flagged vessel. DHS did not agree and the fine was assessed by DOJ. Fast forward to 2019 – citing production difficulties in Alaska and unpaid debts, Furie filed for Chapter 11 bankruptcy protection in August of that year.
Special air cargo circumstances in Alaska
Alaska has a more positive cabotage story regarding foreign air cargo. Ted Stevens Anchorage International Airport (ANC) is centrally located at 9.5 hours flying time to 90% of the industrialized world. This makes it an excellent air cargo trans-shipping point. This operational advantage is accentuated by an exception to the Jones Act. ANC’s innovative air cargo transfer program allows belly-to-belly transfer of U.S. bound cargo between a foreign air carrier’s aircraft or between those of two different foreign air carriers. This would be illegal at any other airport in the contiguous U.S. Furthermore, when the foreign airplane continued to another U.S. airport it would constitute cabotage. Why is this allowed at ANC?
Basically, Alaskans can thank the advocacy of the late Sen. Ted Stevens, when he wrote this unique operation into a re-appropriation bill for the Federal Aviation Administration (FAA) back in the mid-1990s. Regulators now consider foreign air cargo landed at ANC and destined for the contiguous U.S. to still be “international” and therefore not a cabotage move in the spirit of the Jones Act. Despite this liberalization, ANC’s management team has had to work hard to convince skeptical Asia-based carriers that this quasi-cabotage activity is quite legal. What makes it hard to believe at first is why the U.S. would offer such a unilateral trade benefit to countries like China and Japan.
Transit by ship and tour buses
Now consider tourism. Many cruise ship passengers embark on their trips to Alaska from the Port of Seattle. They will cruise up the West Coast and dock at various Alaska ports. Interestingly, these foreign cruise ship companies rarely use U.S.-flagged vessels. But how is it not cabotage if the passengers are steaming from one U.S. port to another by foreign-flagged vessels? Certainly, most of Alaska’s ocean freight is delivered from the Port of Tacoma (Washington) by TOTE Maritime and Matson, which by law must use U.S.-flagged vessels. Why the difference?
Such Alaska cruises may be a cabotage move by definition but it is actually a type of cabotage move not covered by the Jones Act. Cruise ship and ferry activities in the U.S. fall under the Passenger Vessel Services Act (PVSA; 1886). As long as the domestic trip is “broken” by a visit to a foreign port along the way the cruise would be legal under the PVSA. Besides, passengers usually do not complain if their trips to Alaska are topped-up by a stop at the Port of Vancouver or Port of Victoria, British Columbia. On the other hand things might seem odd when a cruise from San Diego to Hawaii is interrupted by a quick stop at the Port of Ensenada in Baja, Mexico. Yet this move is necessary for the foreign-flagged vessel to comply with the PVSA.
Canada- and Mexico-based tour bus companies certainly do not fall under the PVSA but they do enjoy a similar protection. Foreign tour buses can pick up passengers in the U.S. and take them on a roundtrip tour of Canada or Mexico, as the case may be. The key requirements are that most of the tour takes place in a foreign country (i.e., it is international commerce) and the passengers are returned to their U.S. point of origin. Picking up and dropping off passengers at different U.S. points along either leg of the tour, however, would constitute illegal cabotage.
Motor carriers and freight
The U.S. motor carrier sector is particularly tricky since a Canada- or Mexico-based conveyance is covered under customs laws, while their drivers are covered under separate immigration laws. These laws and regulatory interpretations do not conform to one another. For example, U.S. customs regulations allow for very limited options for foreign motor carriers to engage in cabotage. The move must be “incidental” to a well-defined export or import move. Another option is to carry cabotage freight while “repositioning” between well-defined export or import moves. Typically, the cabotage move must be “outward” – meaning, for example, that the conveyance is traveling northward from the U.S. back to Canada. Canada, on the other hand, allows repositioning moves to be east-west and this creates confusion in the trans-border motor carrier sector. Simply put, different countries can have different laws and regulatory interpretations. Of course, the moves noted above apply only to conveyances. U.S. immigration regulations are not as liberal – which means, in practice, these cabotage moves are often rendered impractical.
Foreign drivers would, however, be able to undertake incidental or repositioning moves if they were dual citizens, held a Green Card or were at least 50% by-blood members of a First Nation tribe in Canada. Canada extends the same courtesy to similar persons from U.S. tribes. This derives from the Jay Treaty (1794). The quick history is that the United States and British North America, while drawing their common border, did not want to zig-zag it around tribal lands. Today, for all intents and purposes a U.S. or Canadian native with an appropriate Band (tribal) Card is treated like a dual U.S.-Canadian citizen. Trans-border motor carriers doing business in the U.S. and Canada might find it revenue-enhancing to hire such people for their fleets or use them as owner-operators.
In 2020, does the Jones Act necessarily add to U.S. national security or is it just a jobs program? If this is an example of the infant industry argument, the baby is turning 100 years old this year. Economics and politics always make for strange bedfellows.
Michael N Hansen
Hi John and Darren, With regards to the ocean shipment of seafood from Alaska to Asia the primary carrier is APL with their Eagle Express X (EXX) service which calls Westbound at Dutch Harbor in the Aleutian Islands, Alaska, after Los Angeles and enroute to Busan, South Korea, and Shanghai, China, employing foreign-flag containerships. APL operates their own terminal and shipping office at Dutch Harbor and have been active there for many years. This is another example of commercial businesses working around expensive Jones Act shipping. See: https://www.apl.com/products-services/line-services/flyer/EXXAPL
John D. McCown
The graphic that accompanies this article has significant factual inaccuracies in two numbers it contains. It says it is 3x more expensive to use U.S. built ships than foreign flag vessels. That difference relates to construction cost and resulting vessel capital cost which is a relatively small part of total operator costs in container shipping. Fuel costs, terminal costs, cargo handling cost, equipment cost, rail and trucking costs, sales cost and G&A cost, among others, are unaffected by flag registry and constitute the large majority of costs operators are responsible for. It’s an integrated transport system with the ship related costs being a small part of it. That is the simple mathematical reason that geometric differences in vessel costs ex fuel boil down to a 10-15% reduction in total costs. The second number claiming that the cost to Puerto Rico residents in higher costs between 1991 and 2010 was $16.4 billion is ludicrous as that amount exceeds the total trade lane revenue over that time. While someone may wish to think that repealing the Jones Act will reduce Puerto Rico rates by more than 100%, those stubborn math facts that go into the aforementioned 10-15% number make that assertion pure poppycock.
Darren Prokop
Hello John. Here’s the original source for the graphic. You may wish to send your comment to its author. All the best. —- Darren https://www.freightwaves.com/news/keeping-up-with-the-jones-act
Colin Grabow
“It says it is 3x more expensive to use U.S. built ships than foreign flag vessels. That difference relates to construction cost and resulting vessel capital cost which is a relatively small part of total operator costs in container shipping. ”
No, it does not. This GAO report explains how the number was derived: https://www.gao.gov/assets/680/672181.pdf
“U.S.-flag vessels charge higher shipping rates than foreign-flag vessels largely because of their higher operating cost. According to a MARAD study, U.S.-flag vessels face significantly higher cost, including crew cost, maintenance and repair cost, insurance cost, and overhead cost. For 2010, MARAD found that the average U.S.-flag vessel operating cost is roughly 2.7 times higher than its foreign-flag counterpart. MARAD also found that crew cost, the largest component of U.S.-flag vessels’ operating cost, was about 5.3 times higher than that of foreign-flag vessels. While crew cost accounted for about 70 percent of U.S.-flag vessel operating cost, it accounted for about 35 percent for the foreignflag vessels.”
Further note that an August 2018 GAO study (https://www.gao.gov/assets/700/693802.pdf) states that “According to MARAD officials, the relative cost of operating a U.S.-flag vessel compared to a foreign-flag vessel has increased in recent years.”
So it is eminently plausible that US flag operating costs are now triple those of foreign flag ships. And the explanation is not found in construction costs.
John D. McCown
The Jones Act cost impact that I peg in the 10-15% range for container rates excludes any mitigating effect from a potential unintended consequence of repeal. While its certain that repeal will result in the displacement by foreign carriers, it’s not clear what the deployment framework will be. To the extent stopover service enroute to Asia becomes the norm, the very low rates to the mainland Alaska shipper now enjoy by virtue of the significant imbalance in the current shuttle framework will disappear. Shippers of frozen fish and seafood will now have to meet or exceed headhaul rates from Asia just to get a slot and will go the long way around to the mainland. People will have different views of how mitigating what could be a quadrupling of rates and transit time in the smaller lane compared to a modest decrease in the larger lane, but I see that as being pronounced. The seafood industry represents around 20% of the jobs in Alaska. I imagine those folks, along with elected officials, would be adamantly against any repeal if they were aware it could have such a devastating potential unintended consequence.
Darren Prokop
I think you meant to write that the domestic carriers would be subject to “displacement.” Note that Alaska seafood is not the best sector to use to validate the Jones Act. Why? It’s Alaska’s top export and, as such, is delivered by foreign flagged vessels already. And, in domestic and international markets, it is also delivered via air cargo (the planes of which are not subject to U.S.-build requirements). Now, to the extent that Alaska seafood helps fill the backhaul for Jones Act vessels (i.e. TOTE and Matson), there would be an impact. But then the backhaul is still a challenge even with seafood. P.S., about one-third of the seafood export volume goes to China and this level has been noticeably impacted by the U.S.-China trade war since 2018. All the best.
John D. McCown
Darren, I believe you read too fast as I said “displacement by foreign carriers” and not “displacement of foreign carriers”. I know seafood is big international export of Alaska but understand mainland still largest market. Most moves by vessel. You minimize the volume of seafood moving to the mainland by saying “to the extent that Alaska seafood helps fill the backhaul for Jones Act vessels”. Seafood not only helps fill the backhaul, it is the large majority of the backhaul. Because of the significant trade imbalance, those seafood loads move at low rates. You should look into what seafood shippers pay now and compare that to what a foreign carrier says they get for reefer loads from Asia. That is the multiplier seafood shippers could face to get product to their largest market. As an economist, I’m sure you agree that any analysis of the Jones Act should be based on all the facts. The possible realignment from shuttle to stopover service and its devastating effect on shipping rates and transit time for one of Alaska’s most important industries must be put on the table and considered in any fact based analysis of Alaska and the Jones Act.
Darren Prokop
Hi John. The bigger market in value/volume is the international one. And the amount of Alaska seafood sent directly to the Lower 48 markets via Jones Act vessels is lower than meets eye. This is because a significant portion is first sent to Asia (China, mostly) for processing before coming back to Lower 48 markets. Of course, this part of the supply chain has been under stress because of the US-China trade dispute (but that is another issue). It is unfortunate that Alaska is burdened with a significant backhaul problem (despite some seafood backhauls). All the best. —- Darren
John D. McCown
The 3 pound bag of Wild Alaskan Sockeye Salmon in my freezer started its journey to me in a reefer container on a Jones Act container ship and then went into Costco’s distribution system where it moved most of the way to my local Costco via doublestack rail. The packaging clearly states “Product of USA” so obviously my salmon did not involve any processing in Asia. Actually puzzled as to what sort of processing of Alaska seafood occurs in Asia as it seems to me once caught its either shipped fresh (via air) or in frozen filets which go by vessel and need no further processing. My understanding that what is shipped as fresh and is never frozen is a relatively small portion, akin to prime rated beef targeted to steakhouses. Much of what is sold at grocery stores and billed as “fresh” has been frozen once and therefore also began its journey on a container ship. In any case, I don’t have a specific breakdown of where frozen Alaskan filets go but know a large amount now moves on via Jones Act as they are the majority of the backhaul. As such, the economic activity and employment directly associated with that segment is meaningful. I’ll leave it to you and Colin to explain to those folk that a potential quadrupling of their shipping rates and transit time isn’t something they should be concerned about.
RONALD KATIMS
Thank you for this article. As a former CEO of a Jones Act carrier and thus familiar with it costs I question the validity of two numbers you cited. First you state 3X “more expensive to use”. Secondly you say the cost to Puerto Rico has been 16.4 billion. Can you publish how you arrived at these numbers ? They both seem overstated.
Darren Prokop
Hello Ronald. You’re referring to an earlier article/graphic that was inserted by the editor to add color to my article. You’ll find its author here…. https://www.freightwaves.com/news/keeping-up-with-the-jones-act
All the best. —– Darren
John D. McCown
Wrinkles and all, many of us believe the Jones Act continues to serve our country well. The moderate cost I peg in the 10-15% range for container rates is more than justified by the continuing critical role our merchant marine plays in our national security. Because your article mentioned the treaty negotiated by John Jay in 1794, I thought I’d share with you his earlier insight on the importance of the merchant marine.
In 1785, Jay, the Secretary of Foreign Affairs in our federal government and one of three authors of the Federalist Papers, asked “whether it would be more wise in the United States to withdraw their attention from the sea, and permit foreigners to fetch and carry for them, or to preserve in concerting and pursuing such measures as may conduce to render them a maritime power”.
What John Jay said 235 years ago remains on point today. The U.S. learned hard lessons in the late 19th and early 20th centuries regarding the limitations of projecting sea power when you had to rely on foreign flag vessels to “fetch and carry”. Those lessons were the real catalysts for the Jones Act and it has served our country well. Any steps that would diminish our merchant marine, and a repeal of the Jones Act would most certainly do that, make no sense and go against the wise word of John Jay, one of our most esteemed founding fathers.