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Is the Jones Act a help or hindrance in confronting China?

If China is assumed to be a grave geopolitical threat, is the 100-year-old Jones Act an asset? If the United States and China are on a collision course – be it a Cold War-style confrontation or worse – does the Jones Act leave the United States better prepared or at a disadvantage?

The Jones Act of 1920, introduced by Senator Wesley Jones, is a federal law that regulates maritime commerce in the United States, requiring goods shipped between U.S. ports to be transported on ships that are built, owned, and operated by United States citizens or permanent residents.

Writing for the Cato Institute, Colin Grabow recently explained why concerns about China are no reason to allow the Jones Act status quo to fester and feel that the analysis can be taken a step further.

United States flag - Jones Act
United States flag img from MTX article Overview of cabotage laws

Grabow give some reasons to suspect the the Jones Act leaves the United States at a disadvantage:

Shipping

In the (hopefully unlikely) event of a U.S.-China military conflict, access to commercial ships will be a prized commodity. Any large-scale sealift operation will require such vessels to transport U.S. military supplies and equipment. But the Jones Act’s U.S.-build requirement means fewer U.S.-flag ships available than would otherwise be the case.

Any vessels engaged in the domestic waterborne transport of goods must be built in the United States. In other words, U.S. domestic ship operators have been effectively subjected to an international embargo for the purchase of vessels – all without China having to lift a finger. Instead of Americans having access to efficient foreign shipyards that offer competitive prices, they are restricted to domestic producers that charge up to five times as much as their international counterparts while taking longer to deliver the contracted vessels.

Such vessels must charge higher rates to compensate for their costly acquisition, and, thus, there is less demand for their services. The result is fewer of them. Anyone in China rooting for a decline in the U.S. commercial fleet can hardly believe their luck.

Shipbuilding

Jones Act supporters often claim the law’s U.S.-build requirement helps foster U.S. shipbuilding, which is often deemed key to U.S. national security. But here too the Jones Act plays the role of saboteur. Low demand for pricey U.S.-built ships means that the combined output of U.S. shipyards is typically in the low single digits. This is entirely predictable. By handing U.S. shipyards a captive domestic market, the Jones Act nearly guarantees their inferiority to shipbuilders abroad. These shipyards don’t need to be world-class to win Jones Act business – they simply need to better than the handful of other U.S. builders.

U.S. shipyards find themselves caught in a vicious cycle. Their lack of competitiveness results in minimal export business (exports accounted for just 4.6 percent of industry revenue in 2014) and little demand in the captive domestic market. This lack of demand means lower economies of scale, leading to reduced efficiencies and higher costs, further dampening the appetite for U.S.-built ships. And so it goes.

The Jones Act also harms U.S. shipbuilders in more direct ways. The law, for example, imposes severe limits on the amount of foreign-modified steel that can be used in vessel construction. In contrast, high-wage Norwegian shipyards are able to stay competitive in shipbuilding by outsourcing hull construction to cheaper yards in Eastern Europe. This allows the country’s shipyards to specialize in higher value-added aspects of the vessel construction process. Jones Act restrictions, however, make such an approach impossible for U.S. shipyards.

The Jones Act not only disincentivizes shipyards to achieve excellence but actively hamstrings their ability to reduce costs. Chalk this up too as a win for China.

Maritime Infrastructure

While China expands its investments in ports around the world, the Jones Act increases the difficulty and expense of maintaining such critical maritime infrastructure in the United States. Acting in concert with the 1906 Foreign Dredge Act, the Jones Act restricts dredging operations to vessels that are U.S.-flagged, U.S.-crewed, U.S.-built, and U.S.-owned. But the U.S. dredging fleet is comparatively smallaging, and costly. This translates into more time and money to remove the sand and silt that impedes the efficient operation of U.S. waterways.

Economic Impact

U.S. economic might is the sine qua non of both the country’s soft and hard power. Without its massive economy, the United States would be diminished in influence and less able to fund its large military. But the Jones Act undermines U.S. prosperity. Indeed, a 2019 study performed by the Organization for Economic Cooperation and Development found that the law’s repeal would boost U.S. value-added (essentially GDP) by up to $64 billion.

It’s easy to understand why. Although typically viewed as a foreign trade barrier, the Jones Act is perhaps best understood as an impediment to domestic trade. By raising the cost of transportation the law hampers Americans’ ability to trade with each other across the country’s vast expanse. It is figurative sand in the gears of the U.S. economy (more literally in the case of U.S. ports).

A lack of competitive shipping rates, or even sometimes actual ships, means that Americans purchase products from abroad despite a domestic abundance. New England ports receive liquefied natural gas (LNG) originating in Russia rather than the United States, Puerto Rico imports agricultural products instead of buying them domestically, and Hawaii meets its liquefied petroleum gas (LPG) needs from West Africa instead of the U.S. mainland.

China imports U.S. LNG and LPG while Americans in places such as Hawaii and New England cannot. That’s not defensible on the grounds of either economic efficiency or national security.

The Verdict is Clear: the Jones Act is Hurting U.S. Interests

This is far from an exhaustive list of harms caused by the Jones Act. Nonetheless, it’s hard to escape the conclusion that – assuming the worst about the path of U.S.-China relations and intentions of China’s leadership – the Jones Act actually serves Beijing’s interests. The law is a classic example of economist Henry George’s maxim that “What protection teaches us, is to do to ourselves in time of peace what enemies seek to do to us in time of war.” Concerns over China are not only a false justification for the status quo, but they actually make reform or repeal of this law even more imperative.

For the record, I do not believe that framing U.S.-China tensions as a neo-Cold War or China as the Soviet Union reincarnate is a useful or accurate depiction of the relationship. But there is a clear element of competition. The United States has traditionally been seen as a champion of free markets and free people while China’s leadership has chosen the path of authoritarianism and a greater role for economic central planning. Other countries are watching and deciding which is best.

To be an effective advocate and model, the United States must hew to its principles in both word and deed. The embrace of laws such as the Jones Act serves as a disturbing indicator that the United States lacks confidence in the ideals it espouses. The Jones Act isn’t just about what’s best for the U.S. maritime sector or even U.S. economic efficiency and prosperity, but what the country stands for. Free people ought to use foreign ships in domestic transport, or at the very least foreign-built ships. The United States does not prevail in an ideological clash by embracing policies that are at clear odds with its stated values. It only undercuts and undermines itself.

Regardless of how one views the U.S.-China relationship, be it a battle of ideals or something more foreboding, the case for the Jones Act’s repeal or reform is overwhelming. The law is not only failing to achieve its stated objective of promoting a strong maritime sector but is actively working against U.S. interests. After 100 years change is long overdue. 

By Colin Grabow, for the Cato Institute. Republished under  Creative Commons Attribution-NonCommercial-ShareAlike 4.0 International License. Read the original article.

06/05/2020. Category: Raves & Rants. Topic: , .

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