Businesses Hit Hard by Costly Jones Act Regulations

Part 2 in a series

by Malia Zimmerman

Big Island small business owner Jim O’Keefe found out the hard way that his American dream, owning his own business, was too difficult to maintain in Hawaii. He closed down his 13-year-old extensive bakery wholesale and retail operation, O’Keefe & Sons Bread Bakers, in 2008 because it was too costly to maintain.

The closure left 50 people out of work, retail customers searching for other restaurants to buy deli and baked goods from, and several area businesses, grocery stores and resorts scrambling for other local places to buy wholesale baked foods.

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 flower for $6 or $7 in the mainland, and by the time it landed in Hilo, it cost me $12.50 a bag.”

O’Keefe is one of many business owners who blame the Jones Act, a federal law that says all products shipped between American ports must be shipped in American made vessels by a crew that is 75 percent American, for their exorbitant costs. He says the law limits competition from world shippers, and raises the cost of doing business here, in his case, by six figures over the life of his business.

The shipping rates in Hong Kong for an equivalent shipping distance are a third of the price, O’Keefe says: “The six figures I spent on paying Mattson, 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 Has Its Defenders

The Jones Act has its defenders. Matson, in a letter to employees, calls the Jones Act “The single most important piece of legislation to Matson.”

All of Hawaii’s congressional delegation members say the Jones Act ensures jobs for Americans and is a matter of protecting national security from foreign vessels.

Hawaii’s Senior U.S. Senator Daniel Inouye, says he supports the Jones Act because Hawaii enjoys high quality, regularly scheduled service.  The Jones Act “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 says.

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. Neil Abercrombie, D-Hawaii, who stepped down February 28 to run for Hawaii governor, says the Jones Act is good for America, because it “guarantees that cargo between U.S. ports is carried aboard vessels subject to U.S. labor, security, tax, environmental and safety laws and U.S. flag ships are crewed by U.S. citizens (or legal residents) who undergo extensive background checks and rigorous professional training.”

He adds: “Overall estimates are that cargo shipping companies subject to the Jones Act provide nearly 125,000 American jobs; 80,000 merchant seamen and officers and 44,000 jobs in longshore, terminals, shipyards and other supply and support facilities. In Hawaii most of the imported goods, upon which our survival depends, arrive from the U.S. mainland as ocean freight. The Jones Act is the lifeline that ties us to the rest of the nation, and I continue to support it.”

U.S. Rep. Mazie Hirono, D-Hawaii, and U.S. Senator Daniel Akaka, D-Hawaii, also expressed strong advocacy for the law.

Despite strong congressional support, not everyone in government agrees that the Jones Act is helpful.

Malia Blom Hill, a Washington DC attorney, says although originally envisioned as protectionist member to ensure the survival of America’s merchant marine fleet for reasons related to national security, the Jones Act has objectively failed in both these goals.

During the first Gulf War, a partial suspension of the Jones Act was needed in order to ensure adequate fuel supply for national defense needs.  Nicholas E. Piggott & Barry K. Goodwin, Economic Impact of a Repeal of the Jones Act for Regional Soybean Markets (Jan. 2002), available at http://www.ag-econ.ncsu.edu/faculty/piggott/jones_brief.PDF

And, following the devastation of Hurricane Katrina, she says the Jones Act was suspended for the shipping of petroleum by the Secretary of Homeland Security, who deemed it, “necessary in the interest of national defense.”


“It can come as no surprise to the federal government that the Jones Act creates a substantial burden on commerce—the very existence of a waiver system, and the emergency waivers granted after the Gulf War and Hurricane Katrina attest to the fact that the government recognizes the problematic nature of the Act in times of national emergency,” Blom Hill adds.

Repealing Jones Act Could Help Consumers, U.S. International Trade Commission Says

A 1999 report from the U.S. International Trade Commission suggests that repealing Jones Act would lower the cost of shipping (both through seaborne rates as well as through competition with other shipping methods) by approximately 22% and result in a $1.32 billion gain for the U.S. economy. Piggott & Goodwin, supra.

Hawaii transportation expert Cliff Slater, who is opposed to the Jones Act, notes that the U.S. International Trade Commission also estimates that the federal law costs consumers annually on a national level an estimated $10 billion.

“Were Hawai’i to have an exemption from the Jones Act, freight costs would be half of what they are today,” Slater says. “Because the Jones Act lobbyists have blocked any funding for studies of the issue, we have no objective evaluation of the financial impact on Hawai’i of the Jones Act. We can only look for indicators and make an educated guess.”

Slater reports:

*The U.S. International Trade Commission (USITC) studied the effects of the Jones Act and reports Jones Act vessels total costs are 82 percent higher than competitive vessels.http://www.lava.net/cslater/JonesAc2.htm – _edn3

*There would be a $2.8 billion gain for the U.S. economy if the Jones Act were repealed, according to the U.S. International Trade Commission.

*Charles Totto, the state’s former consumer advocate, said “in the Hawaii trade, the additional costs due to the Jones Act are as high as $600 million annually.” http://www.lava.net/cslater/JonesAc2.htm – _edn7

*The total of Jones Act shipping charges for Hawaii is about $750 million annually, Slater says, noting that “if this were reduced by only a third, it would save Hawai’i consumers $250 million, or $870 for a family of four.”


Hawaii Carriers Long Accused of Monopoly Pricing

For decades, groups like Hawaii’s Cattlemans’ Association, have fought for a Jones Act exemption for Hawaii or the abolishment of the 9-decade-old law altogether.

In a 2009 report by economist Daniel Brackins, he notes that many Hawaii cattle ranchers use airplanes to ship cattle because it is cheaper and more efficient than shipping them on U.S. flagged ships.  “These cattle fly on 747s in livestock containers at 30 cents a pound (Little, 2001).  They have no other choice since foreign flagged vessels are not allowed to ship cargo from one U.S. port to another,” Brackins writes.

John Carroll, a former Hawaii state Representative who is an opponent of Cabotage laws including the Jones Act, has done his own informal study of the cost of the legislation on the 50th state.

In comparisons between grocery products such as eggs, bread and milk on the mainland, Hawaii prices are 50 percent higher. “The reason that a gallon of milk costs $9 in Hawaii and half that on the mainland is in large part because of the Jones Act, which prevents competition and raises the cost of all goods imported by ship here,” Carroll says.

He sued the federal government this year to get Hawaii an exemption from the law, claiming the law results in inflated prices and has caused some businesses to fold or suffer financially because an unlawful restraint on interstate commerce. But Carroll’s case was dismissed in December 2009 by Chief District Judge David Ezra of the District of Hawaii, after Ezra ruled Carroll’s plaintiffs do not have standing.

Federal Government Looks Into Shippers’ Pricing in U.S. Justice Department Anti-Trust Probe

While the Jones Act challenge didn’t pass muster in Hawaii’s federal court, there are some in the justice department looking into the nation’s shipping monopolies.

There still has been no public announcement from the Anti-trust division of the U.S. Justice Department about the 2008 investigation into 5 shipping companies, according to Elliot Enoki of the US Attorney’s office, who would not comment further.

In April 2008, Hawaii-based Alexander & Baldwin (NASDAQ:ALEX) Inc. issued a statement saying documents related to its subsidiary Matson Navigation were being subpoenaed by the U.S. Justice Department as part of a larger federal probe.

The company is one of at least five major American shipping companies operating in Hawaii and Puerto Rico ordered to hand over documents to the Justice Department’s anti trust division — the agency that is reportedly investigating pricing practices of ocean carriers.

Federal agents visited and seized files from all four major container carriers between the U.S. mainland and Puerto Rico including Horizon Lines, Crowley Maritime, Sea Star Line and Trailer Bridge, according to American Shipper News.

In a statement, Alexander & Baldwin said in 2008: “Matson Navigation, A&B’s ocean transportation subsidiary, does not operate vessels in the Puerto Rico trade,” but will “cooperate fully” with the Department of Justice.”

Horizon Lines, the other major ocean carrier in Hawaii, which operates between Hawaii, Guam, Alaska and Puerto Rico, also was served with warrants and a grand jury subpoena. The company issued a statement in April 2008: “Horizon Lines, Inc (NYSE:HRZ) has confirmed federal agents today served search warrants and a grand jury subpoena relating to an investigation of pricing practices of ocean carriers operating in the Puerto Rico trade. Horizon Lines is cooperating fully with the government officials. The company has not been informed of the specific subject matter of the inquiry, being conducted by the U.S. Department of Justice’s Antitrust Division.”

The fact that Matson was also subpoenaed — even though it does not participate in the Puerto Rico trade — could either mean investigators are comparing their books or probing the industry more widely, the publication American Shipper speculated that year.

In one of the sentencing hearings for the Puerto Rico case, John Terzaken, the U.S. Department of Justice prosecutor stated: “The ongoing investigation is far broader than simply the US and Puerto Rico. This is a nationwide investigation that involves other trade lanes (Alaska, Hawaii and Guam). There will be charges in these other aspects of the case as well. And those are those are to come down the road.” (Transcript of hearing, United States of America v. Gill, case no. 3:08-cr-351-J-32TEM, United States District Court, Middle District of Florida, Jacksonville Division.)


Economic Solutions to Controversy

While the shipping companies and shipping unions are happy with the Jones Act law remaining in place, internationally-known economist and author Ken Schoolland, a professor at Hawaii Pacific University, say the Jones Act is protectionism at its worst.

“Famed economist Henry George once declared that protectionism, in all of its forms, does to a nation in peacetime what an enemy would do to us in wartime. The Jones Act is the perfect example. If we went to war, enemies would try to eliminate shipping to the islands. So what does our Congressional delegation do in peacetime? They eliminate shipping to the islands.”

“By eliminating international competitors, our politicians make it very difficult and costly for citizens of Hawaii to buy products from all over the world. Of course the politicians don’t eliminate all shipping. They protect domestic shippers and unions that contribute heartily to their political campaigns. Politicians claim that this is for national security. This is false. It is for their own security in office.”

“Whether it is a threat from wars or hurricanes, the best security is to have an abundance of providers at the lowest of costs. The whole economy benefits from this, not just privileged and powerful insiders. Indeed, it is the corruption of politicians from which we need the greatest of protection.”

Malia Zimmerman, editor and president of Hawaii Reporter, has worked for ABC 20/20, FOX News and the Wall Street Journal. Hawaii Reporter researchers Laura Brown and Pam Smith assisted with this report.



Jones Act Legislation: “No merchandise, including merchandise owned by the United States Government, a State (as defined in section 2101 of the title 46), or a subdivision of a State, shall be transported by water, or by land and water, on penalty of forfeiture of the merchandise (or a monetary amount up to the value thereof as determined by the Secretary of the Treasury, or the actual cost of the transportation, whichever is greater, to be recovered from any consignor, seller, owner, importer, consignee, agent, or other person or persons so transporting or causing said merchandise to be transported), between points in the United States, including Districts, Territories, and possessions thereof embraced within the coastwise laws, either directly or via a foreign port, or for any part of the transportation, in any other vessel than a vessel built in and documented under the laws of the United States and owned by persons who are citizens of the United States, or vessels to which the privilege of engaging in the coastwise trade is extended by section 808 of this Appendix or section 22 of this Act.”


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