Part three in a series
A national battle is raging over whether foreign crews on foreign vessels with the latest technology will be permitted to help in the BP oil spill disaster in the Gulf of Mexico.
Remarkably, President Barack Obama for the last 8 weeks has refused to issue a waiver from the Jones Act, a federal law also known as the Merchant Marine Act of 1920, which mandates that all goods shipped between U.S. ports be transported in U.S.-built, U.S. owned and U.S. manned ships.
While 15 foreign ships are currently being used, their technology was offered just after April 20 when the oil rig explosion first occurred. However, the U.S. turned down the opportunity until American workers could learn the new technology. In addition, several dozen more foreign ships are prepared to help the U.S., but so far have not been permitted.
Meanwhile thousands of gallons of oil continue to spew into the gulf every day, killing wildlife, ocean life and destroying the water quality – and decimating the fishing industry and the economy in Louisiana and other gulf coast states impacted by the spill.
Congress, which cannot issue the waiver, is divided on the issue of the Jones Act, and members continue to hold hearings with BP executives to get to the bottom of why the explosion occurred and what is being done to stop the leaks and clean up the mess.
Hawaii’s newest Congressman, Charles Djou, R-HI, D1, is calling on the President to issue the Jones Act waiver, and he’s taking flak from Hawaii’s powerful senior senator, Daniel Inouye, and fellow congresswoman, Mazie Hirono, D-HI-D2, who say the law should be kept in place.
“That is not necessary,” Inouye says. “American vessels from the Navy, Coast Guard, state and county governments are working with private citizens and foreign vessels in support of the clean-up effort.” Inouye says the suggestion to suspend the Jones Act to allow foreign ships into the Gulf “is more about pushing a political agenda than any genuine interest in helping Gulf coast communities with their clean up.”
“We are already at the mercy of foreign competitors when it comes to oil, we should not add shipping to that list,” Inouye adds.
Djou responded today: “While some members may be satisfied with the situation in the Gulf, I agree with the President that we should ‘do whatever is necessary’ to address the Gulf disaster. I believe the Administration should provide a blanket waiver as allowed under the Jones Act rather than follow bureaucratic formalities. In times of crisis, we should accept help from our friends, even if they are from foreign countries. Protectionism isn’t the answer especially in times of disaster.”
He added that the 90-year old Jones Act blocks foreign vessels from operating in U.S. waters. Multiple foreign nations, including Mexico, Canada, and Belgium, have offered to assist the U.S. in cleaning up the BP oil spill, but have been prevented from doing so because of the Jones Act.
“European companies with advanced environmental clean-up technologies could dramatically speed the Gulf Coast clean up. The prior administration had waived the Jones Act to help with relief efforts in the wake of Hurricane Katrina and Hurricane Rita,” said Djou.
The battle over the Jones Act waiver is far from over nationally, but there is another twist on the local front.
Djou continues to buck Inouye, Hirono and US Senator Daniel Akaka, D-HI, and the labor unions and transportation companies, by introducing legislation this week to exempt Hawaii from the Jones Act permanently.
Pushing for Another Jones Act Exemption
The federal law, established to protect the American shipping industry’s labor union workforce, was established three decades before Hawaii became a state in 1959.
Critics of the law say the Jones Act, and the resulting lack of competition in Hawaii shipping, has a large impact on the rates paid directly by Hawaii businesses and indirectly by Hawaii consumers.
Djou points out that the law hurts Hawaii much more than other states because the only practical way to get cargo to the islands is by ship, while other states also can rely on ground transportation via trains and trucks.
Inouye, Akaka and Hirono, along with other cabotage supporters including labor unions and transportation companies, say the law is needed to keep America safe and to protect American jobs and American shipping companies from foreigners.
Shipping Companies Charge Hawaii Consumers More for Their Goods Than Foreign Companies Would
Foreign owned or manned shipping companies cannot transport goods between U.S. ports under the Jones Act.
Those knowledgeable about the shipping industry say the impact on local consumers is evident when comparing Matson/Horizon rates with the rates paid in the competitive transpacific international trades.
One example is the cost of a 40-foot container from Hong Kong to Long Beach, as compiled by Drewry Shipping Consultants and reported in the Journal of Commerce (JoC). The distance from Los Angeles to Honolulu is 2,233 nautical miles, while the distance from Hong Kong to Los Angeles is 6,380 nautical miles, almost three times as far.
The week of September 8, 2008 the rate for a 40-foot container from Hong Kong to Long Beach was $2,078 (March 2, 2009 JoC).
The average Matson Hawaii rate at that time, inclusive of surcharges, was approximately $4,977 ($3,077 base rate* plus a 42.25% fuel surcharge and a $600 terminal handling charge).
That was the week the Lehman Brothers failure hit the news and the financial crisis and resulting recession set in.
Over the next months as demand and oil prices (a major cost driver) dropped, rates in the international trades dropped too.
By the week of February 8, 2009, the Hong Kong-L.A. rate had dropped to $1,425 (February 10, 2010 JoC).
Matson and Horizon also saw a drop in demand and the same reduction in oil prices, however, the month before, on January 4, 2009, Matson and Horizon both made rate increases.
In fact, the $295 per container increase ($120 on base rates and $175 on the terminal handling charge) was the largest increase in the history of the trade, and in the middle of the deepest recession since the Great Depression.
By the week of July 9, 2009, the Hong Kong-L.A. rate had dropped 68 percent from the previous September to $871 (Aug. 12, 2009 JoC).
Meanwhile the average Matson rate was approximately $4,817 ($3,158 base rate* plus 28 percent fuel surcharge and $775 terminal handling), only 3 percent less, despite a dramatic decrease in the price of oil.
At that point, shipping experts consulted for this story say it cost almost $4,000 more for the container to go from L.A. to Honolulu as for the same container to go from Hong Kong to L.A, or 5.5 times as much.
In the international trades and in Hawaii, the carriers responded to the decrease in demand by withdrawing capacity.
This, plus an increase in oil prices and a strengthening of trade, pushed the rates in the international trades back close to their former levels.
As of the week of Feb. 12, 2010, the Hong Kong-L.A. rate was back to $2,012.
The month before, on January 3, 2010, Matson and Horizon again raised rates, this time by $245 ($120 on base rates and $125 on terminal handling).
Last month (May 2010) the Hong Kong –Los Angeles benchmark rate increased to $2,189 per FEU.
If these rate increases are fully reflected in average rates, the average Matson rate as of the week of February 8, 2010 would be $5,079 ($3,158 + $120 base rate plus 27.5% fuel surcharge and $900 terminal handling).
The westbound rate in the transpacific (L.A. to Hong Kong) is generally half the rate eastbound.
Business Owners Say High Rates Hurting Ability to Operate
Big Island small business owner Jim O’Keefe blames the Jones Act for the closure of his 13-year-old extensive bakery wholesale and retail operation, O’Keefe & Sons Bread Bakers. He is among several business owners who say the law limits competition from world shippers, thus raising the cost of doing business here, in O’Keefe’s case, by six figures over the life of his business.
Hawaii already is ranked one of the most expensive places to operate a business, but a large part of the bakery’s costs were for shipping flour and other food ingredients to the island of Hawaii, O’Keefe says: “I would buy a 50 pound bag of flour for $6 or $7 in the mainland, and by the time it landed in Hilo, it cost me $12.50 a bag.”
The closure in 2008 left 50 people out of work, and several area businesses, grocery stores and resorts scrambling for other local places to buy wholesale baked foods.
The shipping rates in Hong Kong for an equivalent shipping distance are one-third of the price, O’Keefe says: “The six figures I spent on paying Matson, labor unions and shipping owners could have been spent on local salaries, growth for my business, and during the economic downturn, could have meant the survival of my business.”
Jones Act Defended by Shipping Industry, Hawaii’s Powerful Senior Senator
The Jones Act has its defenders. Matson, in a 2010 letter to employees reviewing its endorsements for Hawaii’s electoral candidates, calls the Jones Act “The single most important piece of legislation to Matson.”
Inouye says he supports the Jones Act because Hawaii enjoys high quality, regularly scheduled service and it “helps to balance against foreign subsidies, maintains national security and makes certain that companies comply with U.S. tax, labor, health and safety requirements.
He adds national security concerns: “With our nation at war in two theaters, we are reminded that a strong merchant marine fleet is vital to the security of this nation and a critical supply link for our troops fighting overseas. The U.S. merchant marine fleet has supplied more than 90 percent of the needed equipment for troops fighting in Iraq and Afghanistan. At anytime, Jones Act vessels are called up to provide this transport. This would not be possible if it were a foreign-owned fleet.”
U.S. Rep. Mazie Hirono, D-Hawaii, and U.S. Senator Daniel Akaka, D-Hawaii, also continue their unrelenting advocacy for the law.
Djou Steadfast in His Push for Exemption
Djou says despite opposition from the other three elected officials in Hawaii’s congressional delegation, he will push for the exemption for Hawaii.
He says the minority legal staff is reviewing his two-page legislation and comparing it to the more detailed legislation introduced by Congressman Ed Case, D-HI (2002-2007) from 5 years ago. Case lost to Djou in the special congressional election held May 22.
However both support the exemption for Hawaii, while Democrat Colleen Hanabusa, who is backed by Senator Inouye and is expected to be Djou’s main challenger in the November elections, endorses the Jones Act.
There is a great deal of money at stake, not only for the shipping companies, but also for the elected officials. Hawaii’s congressional delegates supporting the Jones Act receive between 10 and 20 percent of their political contributions fromcabotage supporters, while opposing the Jones Act brings in essentially no money.
That isn’t deterring Djou, however: “If it comes down to fighting for special interest or the people’s interest, I will fight for the people’s interest.”
*Estimate of Matson average base rate based on Matson public statements and is confirmed by the graph on page 51 of this document (support for the Q4 and 2009 A&B Earnings Call, Feb. 3, 2010