There is no doubt that the Jones Act adds to Hawaii’s high cost of living, but what about the claim that it is essential to protecting our national security?
Colin Grabow, one of America’s foremost experts on the protectionist federal maritime law, and the special guest of our webinar on Thursday, May 28, 2020, calls that belief “more of an article of faith than the product of rigorous analysis.”
The Jones Act, of course, is that century-old law that requires all goods transported between U.S. ports to be on U.S.-built and flagged ships that are mostly crewed and owned by Americans.
In his November 2019 report, “Rust Buckets: How the Jones Act Undermines U.S. Shipbuilding and National Security,” issued by the Cato Institute, Grabow wrote that America’s “dwindling numbers of ships, mariners, and shipyards” has “deeply compromised” the U.S. military’s ability to “leverage these civilian assets during times of war.” He said this was “the predictable result of the Jones Act’s misguided protectionism, whose theoretical underpinnings are deeply at odds with both sound economics and modern maritime realities.”
Grabow is a policy analyst at the Cato Institute’s Herbert A. Stiefel Center for Trade Policy Studies. His research focuses on domestic forms of trade protectionism such as the Jones Act and the U.S. sugar program. His writings have appeared in USA Today, The Wall Street Journal, The Hill, National Review and many other publications.
Moderators for Grabow’s hourlong Hawaii webinar were Keli‘i Akina and Joe Kent, president and executive vice president, respectively, of the Grassroot Institute of Hawaii.
A full transcript of the webinar is below.
Keli’i Akina: Well, hello, everyone. I’m Keli‘i Akina, president, and CEO of the Grassroot Institute, and I want to welcome you. Thank you so much for joining us today at the Institute. We’re looking forward to a great presentation by one of our experts. Now, the topic of today’s presentation is how the Jones Act undermines national security. You might be wondering how relevant this is in the midst of the coronavirus pandemic; right now, we’ve got a lot of other issues on our mind. To give you an idea, just this weekend, we released a report produced at the Grassroot Institute called “Road map to prosperity.”
In essence, it’s a guide as to how we can reopen the economy, and not only revive the economy, but actually take it to an excellent level that it’s never achieved before. You can have a copy of this at grassrootinstitute.org. Of the 24 or so prescriptions we have for reviving the economy, one of them happens to be updating the Jones Act for the 21st century.
The Jones Act has been around a while, about 100 years this year. We’re celebrating its anniversary. It’s a law that governs all of the cargo that is transported by ship between two American ports. That came about in the 1920s.
There are four things that have to happen for the ships to take American cargo between two ports. One, that ship has to be built in the United States. That’s perhaps the most serious of the qualifications. Number two, it has to be manned by a U.S. crew. Three, it has to be U.S. flagged. And four, it has to be U.S. owned.
When ships meet all that criteria, they’re able to participate in the trade of cargo between U.S. ports like San Francisco and Honolulu, or even Honolulu in Hilo. But if they don’t meet that criteria, they can’t participate. This has cost Americans a huge amount of money. We’ll be releasing a study giving you an estimate of that soon.
The biggest impact of the Jones Act on us has been a form of protectionism that has raised the cost of ship goods, especially to places like Hawaii and Puerto Rico that are completely surrounded by water. As our speaker will point out today, it also affects other states across the United States.
My topic today is how the Jones Act undermines national security. Our guest is a good friend, Colin Grabow, who’s been a consultant with us on Jones Act issues. He’s one of America’s foremost experts on the protectionist federal maritime law by the name of the Jones Act.
Grabow is a policy analyst at the Cato Institute at the Herbert A. Stiefel Center for Trade Policy Studies. His research focuses on domestic forms of trade protectionism, as well as the U.S. sugar program. His writings — maybe you’ve read him — have been in USA Today, The Wall Street Journal, The Hill, National Review and many other publications.
Colin is going to speak for about 30 minutes. You’re going to get a tremendous introduction to the subject, and not only that, you’re going to get his own views, which are basically that the Jones Act not only doesn’t provide for national security very well, it actually harms national security. That’s an interesting point of view, but Colin has researched this very well.
Before he comes on, I just want to remind you that we’ll be back again with another webinar very soon in about a week and a half. Our guest is going to be talking about the impact of the economic shutdown upon Hawaii overall. Has Hawaii’s locked down been worth the cost? And that’s Kam Napier, editor in chief of Pacific Business News.
Once again, you can get a “Road map to prosperity” at grassrootinstitute.org.
Please welcome to our program today, Colin Grabow, after which we’ll gladly take your questions and answers. Colin, welcome to the program today, so glad to have you in Hawaii. I wish we could have brought you out in person. Sorry you have to be there all the way out in Washington, D.C. Tell us a little bit about how you’re working from home.
Colin Grabow: Well, I have two children under the age of three. So it’s been a challenge, especially with daycare closed. But (I’m) getting it done. It really forces you to prioritize and focus.
Akina: What led you to your work at the Cato Institute? How did you get into studying protectionism and other subjects like that?
Grabow: Well, I’ve always been fascinated with trade. I think trade is one of the bedrocks of prosperity. My graduate degree is in international trade, and an opportunity came up with the Cato Institute. I’ve been reading Cato stuff since I was in high school. (I’ve been) a longtime fan of the place, and to be able to have the opportunity to work there is a dream come true.
Akina: Well, I’m going to hand the audience over to you now, and you take them through the next 25 or 30 minutes, giving us a good rundown on why the Jones Act actually is not good for national security. Take it away.
Grabow: Great. Thank you. Dr. Akina, thank you very much for that kind introduction. Good afternoon. Aloha to everyone watching. I’d first like to thank the Grassroot Institute of Hawaii for giving me the opportunity to speak to all of you about the Jones Act’s impact on national security. My remarks will largely be drawn from a paper released last November entitled Rust Buckets: how the Jones Act undermines U.S. ship building and national security. If you’re interested in what I have to say and you want to learn more, please visit cato.org where you can find a copy.
There’s widespread recognition that the Jones Act, or formerly section 27 of the Merchant Marine Act of 1920, is an economic burden on the United States. It raises the cost of transportation, degrades our infrastructure, angers and invites retaliation from our trading partners, and it pollutes our environment by deterring the use of environmentally friendly water transportation.
The law is a self-inflicted wound. But when such concerns are raised, we are inevitably told that the law must be maintained due to its alleged contributions to U.S. national security.
When the debate is framed as increased economic efficiency, a lowered cost on one hand, the protection of the U.S. homeland on the other, there’s only ever going to be one winner.
What if the Jones Act’s alleged contributions to national security are grossly overstated? What if they are nonexistent? What if, on net, the law is actually a national security liability? Well, then we’re having an entirely different debate. The idea that the Jones Act bolsters national security is basically an article of faith in Washington. Few people, at least few inside the halls of power, bother to question it.
When scrutiny is applied, what we find should raise profound questions about the wisdom of maintaining this law.
What is the national security argument in favor of the Jones Act? There’s basically two strains. One holds that absent the Jones Act, our coastal and inland waterways will be overrun with Chinese ships, North Korean barges and Iranian vessels servicing offshore wind farms. These are all actual arguments that I’ve heard and read, by the way, that these vessels serve as potential vectors for spies and saboteurs. This argument is completely ridiculous.
The fact is that the Jones Act does not prohibit foreign ships from sailing our inland coastal waters. They do it all the time, even right now as we speak. The Jones Act doesn’t keep foreign vessels out; it just means we can’t use them to transport goods within the United States.
The argument I’m going to be focusing on is the idea that the law’s creation of a captive market for shipping and shipbuilding bolsters natural security by assuring the United States access to a merchant marine that can be used to transport military supplies and equipment in times of war.
Mariners [indecipherable 08:08] government seal of ships in a shipbuilding in a repair capacity. That, at least, is the theory, that Jones Act means shipyards, ships and Mariners to crew those ships in time of war. The reality is somewhat different. I’d like to go back to 1990 when, following Iraq’s invasion of Kuwait, the United States faced an urgent need for sea lift to transport military equipment and supplies to Saudi Arabia. This seems to be the situation that Jones Act was designed for.
As the military found itself with an urgent need to transport large amounts of equipment and supplies, thanks to the Jones Act, it found itself with plentiful commercial ships and mariners at the ready, right? Not quite. Rather than having an ample supply of U.S.-flagged ships, the United States found itself dependent on foreign-flagged ships for transportation. No fewer than 177 foreign-flagged commercial ships were chartered by the United States, which transported more than 20% of total dry cargo and more than 25% of total unit cargo.
In fact, the United States found itself so short of needed sea lift capacity that it had twice requested the use of a Soviet Union-flagged ship that was rejected both times. And of the Jones Act fleet, only a single ship, a dilapidated RORO, roll-on/roll-off ship, called the Ponce, was pulled out of domestic service to transport equipment from the United States to Saudi Arabia. The situation was little better on the manpower front, with the promise to pull all Jones Act mariners to crew government-owned sea lift ships found rather shallow.
Here’s what the U.S. military’s official industry of the transportation and commands performance in that conflict had to say: “To crew the government-owned already reserved force of seal of ships, the United States was forced to rely on retirees who were veterans of Vietnam, Korea and World War II. Nearly 200 cadets from the U.S. Merchant Marine Academy also served, as did six students and six professors from Massachusetts Maritime College. Some were raw recruits. The Seafarers International Union expanded its entry-level training program from 60 to 200 students per month to help put bodies on ships fast.”
In 1990, the average age of the U.S. merchant seaman was 49 years old, which meant many of the mariners who manned the Ready Reserve fleet during Operation Desert Shield and Desert Storm were in their 60s and 70s. At least two were in their 80s. The oldest was 92. Remember, this was 30 years ago. Since that time, the Jones Act fleet, both in terms of ocean-going ships and Mariners, has only further declined.
The impact of this decline on mariners was underscored by a 2017 report from the Maritime Administration, which warned that in a wartime scenario, the United States would be at least 1,800 mariners short of those needed to both perform sustained sealift operations and crew the U.S. commercial fleet. Alarmingly, that projection represents a best-case scenario, which assumes that all mariners with unlimited tonnage licenses are available.
Nothing about this maritime decline should surprise us. Indeed, it should seem inevitable. The decline in the U.S. domestic fleet is merely the Jones Act reaching its logical outcome. Why do I say this?
Let’s begin with perhaps the most notorious restriction imposed by the Jones Act: It’s a U.S. build requirement that Dr. Akina mentioned. This provision basically guarantees shipbuilding inferiority and mediocrity. Experience teaches us that competition produces excellence, and the U.S. build requirement is the opposite of that. It’s axiomatic that the firms that don’t have to compete won’t be competitive. They won’t incorporate the latest technology and methods to boost productivity. As a consequence, they won’t be able to offer the lowest prices.
In U.S. commercial shipyards, this is not just intuitive, but documented. Numerous government reports speak to the sorry state of U.S. commercial shipbuilding. A 1983 government report, for example, said the U.S. shipyards, “generally employed lower levels of technology” than their foreign counterparts, “not installing the level of modern shipbuilding technology necessary for high productivity in the construction of today’s major merchant ships.”
Comparing U.S. shipyards to those of Japan and South Korea, they reported some numerous ways in which the former fell short, which would range from inferior levels of research and development to the reduced adoption and use of automation robotics. Two years later, in 1985, another government report found that U.S. shipyards “lag behind many of its foreign competitors in the use of modular construction techniques and tooling, and the degree of automation and the use of robotics, and in the methods of processing, joining and assembling materials.” The report said that the U.S. commercial shipyards “require approximately 40% to 60% more man hours to construct the same ship as many foreign yards.”
Fast forward to 2001, and a Commerce Department study said that productivity in the U.S. shipyard industry had not improved since the mid-1980s. Now, U.S. shipyards lag their foreign counterparts in ship construction design, shipyard layout and product engineering. Among shipbuilding nations, the report added, “U.S. shipbuilders ranked at or near the bottom in terms of productivity and the gap is widening.”
Once again, comparing U.S. shipbuilders to those in Asia, a 2009 National Defense University report found that Asian yards offered lower prices, greater efficiency and had higher industry best-practice ratings. Meanwhile, a 2016 National Defense University report argued that U.S. shipbuilding is “an average of 20 years behind international shipyards regarding advanced technology.” Just last year, the head of the Maritime Administration testified before Congress: “In the case of the large self-propelled ocean-going vessels, U.S. shipyards still lack the scale, technology and the large volume series-building order books needed to compete effectively with shipyards in other countries.”
The Jones Act is no innocent bystander here. That 1983 report noted that owing to federal shipping subsidies, which have since been discontinued, as well as the Jones Act, the United States has become an anomaly in the construction of major merchant ships. As the report states: “In many other major maritime countries, shipbuilding is viewed on a global perspective. This is not the case in the United States, where only 1% to 2% of the world merchant fleet is now built. The U.S. shipbuilding industry is basically quite different from that of Europe, Japan, and Korea. Those countries have built most of today’s modern shipping fleets and compete for orders in a world market. The United States does not.”
This is completely illogical. The Jones Act’s U.S.-build requirement has incentivized American shipyards to orient themselves away from the competitive international market and towards the captive domestic shipbuilding market. This in turn means reduced output, less competition and the failure to develop a specialized market niche. All these missing elements are vital to increased productivity and lowered costs.
As that 1983 report points out: “Briefly stated, U.S. yards have never had sufficient volume of merchant ship orders to specialize, to become truly expert or to develop high efficiency. Flexibility to build many different varieties of ships and other marine equipment has been maintained in U.S. shipyards. Thus, the economies of mass production have seldom been adopted.”
That 2009 National Defense University report later lays partial blame for the lack of U.S. shipbuilding competitiveness on “protectionist policies such as the Jones Act. They have shielded domestic shipbuilders from the pressures of global competition,” while a 2007 National Defense Report sounded a similar note: “U.S. shipyards are not currently cost competitive in any of the major classes of large ships, and their annual market is limited to the six to 10 Jones Act ships (today, it’s about two to three Jones Act ships) destined for the domestic U.S. trade.
“Since the total Jones Act requirement is only a small fraction of the output of the largest Asian yards, the U.S. industry is locked in a cost-quantity trap, one that it appears unlikely to keep.” Just to elaborate there, essentially what they are saying is that prices go up, so demand falls, which further hurts the economies of scale, which in turn boosts prices up again, which in turn causes a drop in demand. It’s a vicious cycle.
This lack of ship-building competitiveness has serious implications for the U.S. military. The high cost of U.S. shipbuilding has prompted the Department of Defense to reconsider a plan of requiring sealift ships to be built domestically, and instead, focus on the purchase of foreign-built substitutes.
Said then-Secretary of the Navy, Richard Spencer, last year: “I can’t afford a lot of $600 million ships. I can’t really afford a lot of $400 million ships, when I can go out and buy used ro-ros for $35 to $40 million.” The head of U.S. Transportation Command, meanwhile, explained the decision to pursue used foreign-built ships during a March 2019 congressional hearing by noting that such ships cost $25 to $60 million depending on their age. New domestic‐built ships, he said, would cost 26 times as much.
The U.S. military, in other words, has been effectively forced to look abroad to meet some of its ship construction needs because of cost inefficiencies encouraged by the Jones Act. As a 2015 National Defense University report states: “The Jones Act creates an environment where the U.S. government must pay a premium to buy a world-class navy.”
U.S. shipbuilding mediocrity translates into expensive ships. How expensive? When the Jones Act was passed, U.S.-built ships were estimated to be 20% more expensive than those built overseas. By the 1930s, that number had reached 50%. By the 1950s, the shipyard prices would double those of foreign yards, and by the 1990s they were triple.Today, the price of the U.S. build tanker is estimated to be about four times the global price of a similar vessel, while a U.S.-built container shipment costs five times the global price.
If expensive ships are bad for Uncle Sam, they are absolutely disastrous for domestic commercial shipping. More expensive ships means higher shipping rates and less demand for their services. Since 1980, the Jones Act fleet, both in terms of raw ship numbers and their deadweight tonnage, which is basically their carrying capacity, has more than halved. Over the same period of time, the U.S. economy has grown sevenfold and the U.S. population has grown by more than a hundred million people.
Jones Act ships today are essentially used for two purposes, supplying the noncontiguous states and territories and transporting crude oil or refined products to pipelined-constrained areas of the country. They are basically used where there is no other option. That’s how uncompetitive they are.
The Jones Act’s U.S.-build requirement doesn’t just mean fewer ships, (it means) the ones that do exist are older. Jones Act carrier Matson — I’m sure many of you in Hawaii are familiar with — employs a containership in Lihue that was constructed in 1971. Another one of its ships, the Matsoinia, was built in 1973 and in early 2019 suffered a major hull failure likely related to age-induced decrepitude. Currently, more than one-third of the Jones Act fleet, 35 of 98 ships, are at least 20 years old. To place this number in perspective, the head of the Maritime Administration testified before Congress last year that, “It’s rare to find ships in the commercial world beyond 20 years of age.” Well, not in the Jones Act fleet.
The advanced ages of these ships, and their likely degraded condition, would seem to call into question the Jones Act’s ability to serve as a naval or military auxiliary in time of war or national emergency. Allowing Americans to purchase dramatically lower-priced foreign-built ships is one obvious means to address this issue. As a 1985 government report noted, “a modernized Jones Act fleet, including some low-cost foreign-built vessels, would help not only the domestic ship operator but the U.S. consumer at large, and the nation as a whole, by enhancing the defense utility of the U.S. flag fleet.”
Members of the U.S. military have also recognized the harmful role of the U.S.-build requirement on the U.S. domestic fleet. Writing on the Defense Transportation Journal in 1993, former commander of the U.S. Transportation Command, Gen. Duane Cassidy, said if he was king for a day, one of his decrees would be to decouple U.S.-flagged shipping industry and the shipbuilding industry: “The continuing yoking of these two industries stifles competition for both. Carriers, to be competitive, need to buy new ships where the market dictates, like any other U.S. business.”
The Jones Act and its U.S.-build requirement means inferior shipbuilding, fewer ships, and fewer mariners, which, again, is a logical outcome.
But the Jones Act problems don’t end there. Let’s keep in mind that this law is 100 years old — actually, next Friday is the 100-year anniversary. Let’s further keep in mind that the Jones Act was basically a tweak to existing policy at the time, and that maritime protectionism dates to the country’s founding. A lot has changed since then, and the Jones Act is a law sharply at odds with modern realities.
Let’s start with the cost of shipbuilding, which we already mentioned. When U.S. maritime protectionism first began in 1789, the United States was blessed with both old-class shipbuilding and mariners. That’s not a huge surprise. The 13 colonies all had coastline, and timber for shipbuilding was abundant. In fact, the United States was so competitive in shipping and shipbuilding that some maritime experts have argued this firm protectionism was essentially cost-free. Suffice to say, that is no longer the case today.
Newer shipbuilding, meanwhile, is not just expensive, but there also isn’t very much of it. In 2018, U.S. shipyards built a total of three Jones Act ocean-going ships. Last year, they built two. This year, they’re scheduled to deliver two and next year just one. 2022 is currently slated to see zero. Jones Act ship production is typically in the low single digits.
To those who say we need to protect U.S. commercial shipbuilding, I say, what’s shipbuilding? Around two-thirds in U.S. shipbuilding is funded by the U.S. government unrelated to the Jones Act, and the remaining one-third is mostly for smaller vessels.
But even if plentiful shipbuilding existed, it’s an open question how much it matters. Since the Jones Act passage, the United States there’s only been in one conflict, World War II, that required a large increase in shipbuilding. In many of the other military interventions, such as the Persian Gulf War, the conflict ended long before a new ship could even have been built.
A 1985 government report notes: “Seamless requirements for the initial stages of a modern major conflict depend more on the sufficiency of U.S.-controlled shipping and on train crews than on shipbuilding capacity.”
In other words, in the critical early stages of a conflict, a country’s shipbuilding capacity is less important than its ability to mobilize ships and crews, and the Jones Act’s domestic-build provision results in fewer of each. We also need to think about our dependence on foreigners to build these ships. Now, some people may be tempted to believe that the high cost of the U.S.-built ships is a small price to pay for freeing the United States from dependence on foreign shipbuilding.
This independence is an illusion. To comply with the Jones Act’s domestic-build mandate, ships must be assembled in the United States, and “major components of the whole and superstructure,” fabricated domestically. This means, however, that other key parts of a ship can be, and often are, produced abroad. Even the steel plating used in a vessel’s construction can be of foreign origin, provided that it is delivered in standard shapes, [indecipherable 23:27] the shapes and size.
A container ship delivered by the Finlay Ship Guard last year, the Matson ship Kaimana Hila, serves as a good example. While Jones Act eligible, the ship includes numerous components that were sourced from foreign firms, including the main generator engines from Hyundai, the steering gear from Rolls-Royce, the auxiliary boiler from a company in Denmark, the propulsion engine from a German company, the maneuvering thruster from the Norwegian company and the propeller which was, again, from Hyundai. Beyond components, foreign know-how is also frequently required to construct many of the Jones Act fleet’s large ships. General Dynamics’ NASSCO shipyard in San Diego, for example, has a partnership with Daewoo of South Korea.
They designed the last ship that was built for Matson, the Lurline. Philly Shipyard, which has built roughly half of all Jones Act ships since 2000, highlighted in its 2018 annual report that it has “access to global shipbuilding and design expertise with partners in Asia and Europe.”
We need foreigners for the components to build the ships or we need them to help design the ships. Shipyards in the United States may be engaged in a limited construction of ocean-going commercial ships at frightfully high cost, but it’s an open question just how truly American new ships are or how meaningful the practical difference is between manufacturing these ships in the United States versus buying them from foreign yards.
For the Jones Act ships that are assembled in U.S. shipyards using [indecipherable 24:59] foreign components, it’s clear how much benefit they offer in a wartime scenario. They’re built for commercial purposes, and those capabilities don’t always line up with those demanded by the U.S. military. As a 1984 Congressional Budget Office study noted, “There’s a growing dichotomy between those features that produce a commercially efficient ship and those that yield ships more useful for support of military operations.”
In general, the most military-useful ships tend to be relatively small, able to go in and out shallow or otherwise restricted waters; they’re flexible, able to carry a variety of cargoes; and they’re self-sustaining, they’re able to load an [indecipherable 25:37] load without specialized shore facilities.
Unfortunately, these characteristics are at odds with those with the most efficient commercial ships, which tend to be large, specialized and dependent on port facilities for efficient loading and off-loading.
The difference in the quality is to provide military utility as opposed to those that produce commercial efficiency leads to some fundamental difficulties in developing an effective national maritime policy. This gap between military and commercial needs appears to have only widened in the years since that report was authored. The 2016 report of the National Defense University, for example, noted that the ships needed to transport military personnel and cargo “do not always line up with the vessels demanded by the market for moving commercial merchandise across waterways.”
A 2015 Congressional Research Service report [indecipherable 26:23] quote: “The trend towards highly specialized larger ships in the commercial sector appears inconsistent with the military shipping needs.” A 2010 Congressional Research Service report flatly stated, “Very few commercial ships with high military utility have been constructed in U.S. shipyards in the past 20 years.” Consequently, the military Sealift command has the need to charter a vessel. The report added, “Nearly all the offers are for foreign-built ships.”
Given such facts, it’s perhaps not surprising that the Congressional Research Service also stated in 2015 that the military value of the U.S. Merchant Marine, of which the Jones Act fleet is a key component: “I now have more to deal with the crews than the ships themselves.”
Even if Jones Act ships had high military utility, how many of them could be offered up in time of war to support the military? As already mentioned, during the Persian Gulf War, only a single Jones Act ship was taken out of commercial service to support the military logistical needs.
The reason for this may be that the limited number of Jones Act ships had to remain at home because they’re vital to the country’s domestic transportation needs. This is particularly true in the case of the noncontiguous states and territories where the fleets container and ro-ro ships exclusively operate. If Matson and Pasha’s ships were transporting supplies to the military, who’s transporting goods to Hawaii? It’s for this reason that even defenders of the Jones Act admit to the limited wartime utility of such vessels. Said Loren Thompson, chief operating officer of the Lexington Institute, “Today, the only commercial ships being built in the U.S. are those destined for Jones Act routes. That’s not a lot of vessels. If war broke out, most of them would already be engaged in other tasks.”
Just this week an op-ed appeared from two national security scholars. Tim Walton and Bryan Clark of the Hudson Institute wrote about the shortage of U.S.-flagged tankers to support the military. They admitted that “there are nearly 60 American-flagged tankers that transport cargo along American ports” — in other words, Jones Act tankers. These ships “would need to mostly stay at home to keep the domestic economy running.”
All right, so some concluding thoughts:
The Jones Act is a fatally flawed law, not just from an economic perspective, but from a national security perspective as well. It turns out that fostering an uncompetitive shipping sector and saddling domestic shipping companies with ships that cost up to five times more than those built abroad is a pretty poor way of promoting the U.S. maritime sector.
What to do?
First off, repealing the U.S.-build requirement should be a no brainer. This is protectionism with huge downsides for a sector that barely exists. Get rid of this provision alone, and the number of U.S.-flagged ships and mariners both go up. Cheaper ships, more ships; more ships, more mariners.
For me, the ideal outcome would be to repeal the Jones Act entirely and then meet U.S. national security obligations through subsidies or government programs. For example, the Jones Act’s only real contribution to national security is mariners, and even then, it’s clearly insufficient given the projected deficit in mariner numbers. Well, rather than impose this very costly protections law, why not set up a merchant marine reserve to ensure sufficient mariners, or grant wage subsidies to companies that employ those mariners with the provision they can be called upon in time of war. Or even let some foreign mariners serve just as we allow foreigners to serve in the U.S. military.
If we want more ships, why not expand the maritime security program, which is a program that gives $5 million to ship owners in exchange for being able to use those ships in time of war. It’s currently 60 ships, and we could make it more ships. Also, point out, this would be a more equitable means of meeting our national security obligations. Why should the noncontiguous states and territories, which account for a tiny amount of the U.S. population, have such a disproportionate burden of funding this alleged national security benefit of paying for these ships? It’s not fair. It’s not equitable.
This would be an incredibly more efficient way of meeting the country’s national security needs, if we adopted such programs or subsidies. The problem with the Jones Act isn’t just that it is inefficient, but that it’s failed. It’s not working. The fleet is in decline, the ships are old, there’s not enough mariners.
We need to stop doing more of the same. It’s time for a radical rethink. It’s time to get rid of this archaic law, both for our economy and our national security. Thank you. Mahalo. I’m happy to take any questions.
Akina: Very good. Thank you very much Colin. I appreciate that. As Colin said, he’s open to questions at this time. We invite you to write your questions down, and Joe Kent will moderate that and call your question out and give Colin the opportunity to respond.
Before we get started with this, Colin, you’ve talked about potentially repealing the Jones Act, and you’ve suggested some alternatives for ensuring national defense. Alternately, what if we didn’t go so far? What if we simply modified or updated the Jones Act and got rid of the U.S.-build requirement? Hypothetically, what if, for example, we allowed our military and civilian shippers to buy ships from our allies? They could still, under the Jones Act, be U.S.-flagged, U.S.-owned and U.S.-crewed. Would there be a national security issue here?
Grabow: No, I think that’s actually a great idea. To the extent there’s any silver lining in having the world’s most restrictive cabotage law, which is what the Jones Act is, it’s that there are lots of opportunities for reform.
If that fell well short of repeal, that would still be incredibly useful. You mentioned the domestic build requirement. We could even go narrower than that and just say, you can buy foreign-built ships beyond a certain size. We could restrict it just to large ocean-going ships that the military wants. You can take it further and say, and if you’re concerned about China, well, you can’t buy ships from China but you can buy from, say, any country that has a military alliance or treaty with the United States, like our NATO allies, or Japan, or South Korea, countries that we have our military already stationed in.
I think there are lots of opportunities to reduce the burden of the Jones Act and improve our national security that fall well short or repeal.
Akina: Very good, thank you. Well, are you ready for a rapid round of Q&A now?
Grabow: I’m ready.
Akina: All right, here we go. Joe, take it away.
Joe Kent: Okay, well, there are a lot of people who are asking a lot of different questions in one. I’ll just ask them one at a time. Ken Schoolland asks: Did the Jones Act kill off the Hawaii sugar industry? Do you know anything about that?
Grabow: I don’t know, although I used to do some work looking at the sugar industry. I suspect there’s more than one factor that goes into determining that. Clearly, the cost of transportation is going to figure in that. I’m sure it was a factor. Was it the decisive factor? Would sugar growing still take place in Hawaii absent the Jones Act? I don’t know. Clearly, the Jones Act raises the cost of Hawaii’s exports and figures into the competitiveness of any Hawaiian industry.
Kent: Okay, great. Ken also asks: Do foreign companies own U.S. shipbuilding yards?
Grabow: That’s a great point. We talked about the use of foreign components in U.S. shipbuilding. Many of the yards that built these ships are foreign-owned. There are four major U.S. shipbuilding yards that are in the business of building large ocean-going Jones Act ships. These are the Philly Shipyard, VT Halter in Mississippi, Keppel AmFELS in Texas and NASSCO General Dynamics in San Diego.
Three of those four are foreign-owned. The Philly Shipyard is Norwegian owned, VT Halter has a Singapore-based company that owns it and Keppel AmFELS also has Singaporean parentage. If you look at some of the smaller yards, too, you’ll find foreign influence, the Austral yard in Alabama is Australian-owned, Fincantieri in Wisconsin is Italian-owned. Yes, there’s plenty of foreign influence in U.S. shipbuilding.
Kent: Well, we know what American built means, I think — except after you said, I’m not sure if I know what that means. What does it mean to be U.S.-flagged? Does that mean it just flies a U.S. flag? That’s it?
Grabow: It means that you have to be registered with the United States. Every ship has to be registered in a certain country and subject to the laws of that country. Just like you register your car in a particular state, you have to register your ship in a particular jurisdiction or country. It means that you have to fly under the U.S. flag, and with that comes various rules and restrictions. For example, if you’re under the U.S. flag, beyond the cost of the Jones Act, if you want to get your ship repaired in a foreign country, you’re going to get hit by a 50% tariff for repairs. It usually costs a fair amount more to register and operate your ship under the U.S. flag than other flags.
Kent: Can I also ask, do you have any estimates of what the Jones Act might cost Hawaii?
Grabow: That’s an excellent question. What’s interesting here is that clearly, the Jones Act has a profound impact on Hawaii. Yet, we’re groping in the dark when we look for how much it costs Hawaii. There have been GAO studies that have looked at the Jones Act’s impact on Alaska. There was a study done in the 1980s, which found that the cost to Alaska was equivalent to I think something like 2% of their personal income. There was a 2013 study that looked at the Jones Act’s impact on Puerto Rico. It didn’t quantify things, but it had a lot of interesting information.
There’s never even been a government study of the impact on Hawaii. To me, it’s just simply mind-boggling that Hawaii’s representatives in Washington who claim to be open-minded about this or interested in good information, why they don’t just request the U.S. government, like the GAO, do a study of this so we can have some good numbers. Because right now, again, we’re fumbling in the dark. Something that everybody should be able to agree on is a need for good information and right now, that’s lacking, and that’s a real problem.
Kent: That’s a good point. Mark White asks: Please review again how the protectionism of the Jones Act has discouraged competition within the U.S. shipbuilding industry. What are the economic forces that drive down the quality of U.S. shipbuilding?
Grabow: U.S. shipbuilding has any number of problems. As I pointed out, one of the reports pointed out that most countries, they look at shipbuilding from a global perspective. They’re trying to sell ships all over the world. U.S. shipbuilders don’t do that. I think there’s a 2015 report from the Maritime Administration, which said that exports account for something like 5% in the U.S. shipping revenues. It’s very inwardly focused. It’s not looking at a global perspective.
When you build for a domestic market, it’s much smaller than the global market, obviously. You’re going to get lower economies of scale. Shipbuilding involves a lot of high fixed costs. If you build, say, 20 ships, you can spread those costs across all 20 ships. Well, here in the United States, when Jones Act ships get built, they usually get built, like, two at a time.
Matson’s last few orders have been for two ships from the Philadelphia shipyard, two ships from NASSCO. Crowley built two ships a couple of years ago from VT Halter so you don’t get those economies of scale, and that pushes cost up. Also, [U.S. shipbuilders are not producing a wide variety of ships. For example,] Finland is incredibly good at ice breaking vessels. But [U.S. shipbuilders] aren’t really notable for anything, jack of trades, master of none. You look at South Korea. There are a lot of go-to countries if you want liquefied natural gas carriers. Americans don’t have that expertise. We do a little bit of everything, we’re not particularly good at anything.
Kent: I’m sorry, I might have missed some of that answer. I’m not sure if it was my connection or yours, but you were talking about economies of scale. Mark also asks: Does the U.S.’s smaller economies of scale hurt the building of U.S. warships?
Grabow: Another interesting thing here is that I think a lot of people perhaps have a belief that if we have commercial shipbuilding, that at the time of war that can be harnessed to build, say, ships for the U.S. Navy in time of war. But these industries are incredibly different. Building a commercial ship is a much different proposition than building a warship. U.S. Navy shipbuilding is notoriously expensive. Or is a lack of economies of scale that is responsible for that, I’m not sure.
My understanding is … there’s a lot of change orders. If you tell someone to build this type of ship and then leave it at that, they’ll keep costs down. But a lot of times, the Navy will say, OK, we’ll actually want to change this or change that at the last minute, and that really affects costs. I think it’s a bit of a different dynamic with Navy shipbuilding versus commercial shipbuilding.
Kent: Mark Monoscalco asks: What agency is responsible for enforcing the Jones Act and how is it enforced?
Grabow: Customs and Border Patrol has a primary responsibility for enforcing the Jones Act. There’s actually something called the Jones Act Division of Enforcement, the JAVE unit, which was set up several years ago. My understanding is they will operate in U.S. ports, and they’re always on the lookout for anybody violating cabotage laws. If you want to request a waiver from the Jones Act for national security purposes, there is no economic waiver system for the Jones Act.
If I want to use a certain type of ship, for example, if I want to send liquefied petroleum gas to Hawaii, there are no Jones Act ships that do that. There is no system for me to be able to get a waiver or an exemption to say, “I’ve got this economic need, I want to send this thing and there are no ships.” What you can do, what there is a provision for, is if national security is imperiled, you can seek a waiver, and those waivers are granted from the Department of Homeland Security, I believe.
Kent: Joe Van Brunt asks about special interests: What is the U.S. shipbuilding industry’s position on the Jones Act, and to what degree do special interests affect the maritime policy with Congress?
Grabow: The Shippers Council of America loves the Jones Act. It’s one of their top priorities to ensure that it’s maintained. This is pretty understandable. This is a law that says you have to buy what they make. That’s pretty much a home run for them. I think the fact that the Jones Act exists and has not been reformed since it was passed in 1920, hasn’t even been touched really, is almost entirely explained by the power of special interests.
Just look at Hawaii as the perfect example. I think there was a recent poll done by Hawaii Business Magazine, which indicated that the majority of Hawaiians who are aware of the Jones Act favor at least reform if not outright repeal of this law. And yet, Hawaii is represented by two senators who are some of the staunchest supporters of this law. Hawaii is not alone. Alaska also has two supporters. They’re die-hard Jones Act supporters.
How is this explained? Well, it’s explained by the fact that for most people, they may have an opinion about the Jones Act, but it’s not a litmus test issue. For those for whom it is a litmus test issue, who are aware of the law, who base their vote on the law, they tend to be supporters of the law. … Thus, unfortunately, if you are [a politician who supports] the Jones Act, it will get you a certain amount of votes. Whereas, if you oppose the Jones Act, some people may say, thanks, but is that going to be a decisive factor in how they vote? Not really has been the experience, and our policies and our politics reflect that dynamic.
Kent: More on politics, where does the governor stand on this issue? I actually don’t know where Governor Ige stands on this issue. I’ve been trying to figure that out. But maybe a follow-up question: Do you think it would make a difference if state leaders had a position on the Jones Act?
Grabow: Absolutely. I think it would be incredibly useful if people at the state level would speak up and indicate that this is something that they want their federal representatives in Washington to care about, and become active on and oppose and call for reform. Clearly, those in Washington don’t get it. I think that it would be hugely helpful if state legislatures, for example, if nothing else, passed resolutions saying we think it’s time, it’s been 100 years, that something needs to be done about the Jones Act. This is hurting us.
We need to illustrate the divide between the people and their elected representatives, and I think if nothing else, maybe we can help shame some of these federal representatives into doing the right thing on the Jones Act and to stop supporting a law that clearly hurts their constituents.
Kent: Steve Lipscomb asks: Are there any comparisons between U.S. ships and foreign built-ships? Are U.S. ships better built or safer or more fuel-efficient or what?
Grabow: No, there’s something called classification societies that examine every ship after they’re built, and they ensure that they all meet minimum standards. If you want to get insurance for your ship, you need to get one of these classification societies essentially to sign off on the ship and ensure that it meets minimum requirements. This idea that there’s a great variation in quality among shipyards — it’s not true, it’s not borne out. Again, I would think if anything, it would be the opposite given that these foreign shipyards, according to numerous reports, have better technology, just more advanced methods of making their ships. They truly are the experts. We are not.
Kent: I have a long question from Ken Middleton. He says, “Aloha, I have operated a yacht charter business here in the islands for over 30 years. Our commercial vessels are a mix of U.S.-built and foreign-built for our monohull and catamaran cruises. We have found the foreign-built to be vastly superior to U.S.-built hulls in terms of value innovation, quality of build and craftsmanship, but are limited to minimal passenger counts even with a mere add waiver in place. Let’s make sure passenger-carrying vessels are included in any legislation to roll back the Jones Act.” Do you have any comment to that?
Grabow: Yes, I do. I think he’s referring to the Passenger Vessel Services Act of 1886, which is basically the Jones Act but for vessels that carry people instead of cargo. This is a law that is just screaming for reform. If anything, it’s more absurd than the Jones Act. I talked about the Jones Act protecting a shipping industry that basically doesn’t exist. Well, in the case of large cruise ships, it doesn’t exist.
We have not built a cruise ship in this country in, I believe, something like 60 years. We don’t do that in this country. It’s absolute nonsense. There is only one ship in the United States. It complies with this law, which is the Pride of America, which operates there in the Hawaiian Islands, even though this ship was not U.S.-built; it was actually mostly built in Germany and received a waiver so they could operate here in Hawaii. To me, this law is just absolute lunacy.
Kent: Well, Ralph Sherman asks: Who opposes the repeal of the Jones Act?
Grabow: The people that mostly oppose the Jones Act repeal is going to be the Shipowners Council of America, it’s going to be the American Maritime Partnership, which represents the shipbuilders; it represents the carrier’s like Matson, for example, or Pasha, and it’s a lot of labor unions. Some people are surprised when they hear that the carriers are in favor of the entire Jones Act. I think some people wonder why. Why don’t they just call for repeal of the U.S.-built requirements so they can buy cheaper ships? I think what we need to understand is that for Jones Act carriers, it’s actually an asset to their perspective for a couple reasons.
One, the domestic-build requirement adds to the value of their ships on because people can’t buy cheaper ships. The book value would plummet. But also it would lower the barriers to entry into that market, and they could potentially have a lower-cost competition with new, cheap, foreign-built ships entering the market and driving them out. They have very much bought into the status quo and love the fact there’s a U.S.-built requirement, because keeping the price of U.S.-built ships high is great for them. It’s a barrier to entry and reduces competition.
Kent: I have a question. I’m curious about how the coronavirus situation will affect the shipbuilding industry. If it’s on its last legs, what would be the state from the Jones Act in the future?
Grabow: Well, I don’t know. What I do know is, I think I mentioned, that NASSCO yard is currently building one ship for Matson, which is the new Matsonia. That was originally scheduled to be delivered I believe June of 2020. I believe that’s been pushed back to the fourth quarter. I believe that COVID is partly responsible for that delay in shipbuilding. You mentioned shipbuilding being on its last legs. The reality is that shipbuilding will continue in the United States, Jones Act or no Jones Act, if for no other reason than the U.S. government is funding so many ships to be built.
Jones Act logic is that we need the Jones Act so we have shipbuilding so in case the government needs to build a ship, it has American shipyards it can turn to. Bu the reality is the opposite. In fact, we have basically a lot of government-built ships and then the occasional commercial ship. It’s the government orders that are keeping the commercial side viable, rather than the commercial side ensuring that we’re able to build ships for the government.
Kent: What are the restrictions on the U.S. buying military ships from abroad?
Grabow: My understanding of buying military ships from abroad has nothing to do with the Jones Act. I believe it’s subject to another law, called the Burns Tollefsen Amendment, back in the ’60s; I think [it] mandates that. To get around that, I believe you need some kind of waiver or some kind of exemption, which is how — if you look at actually today, the Ready Reserve Force of government-owned sealift ships, there are majority foreign-built, I believe, is because the waivers were secured for the military to be able to buy those foreign-built ships.
Kent: I see. That last question was asked by Mark Coleman, our editor at Grassroot Institute, by the way. I have another question. There’s so many questions here, I can’t get to them all. Keli’i?
Akina: Yes, I’m going to chime in here and encourage both of you, Joe and Colin, to move into a speed round of about 45 seconds per answer. We want to get everyone’s question. Go ahead.
Kent: Mark Monoscalco asks: The Philly Shipyard has had a multiple change in ownership and also government subsidies. Is this facility economically viable?
Grabow: That’s a great point. U.S. shipbuilders love to complain about foreign subsidies, but the reality is we have subsidies here in the United States as well. The Philly shipyard is a classic example in that it’s received hundreds of million dollars and subsidies from state local government. I believe it has a lease for $1 per year from the city government there. They ran out of ships to build last year, and they just got their bacon saved. [They’re] only viable because they just got a contract from the U.S. government to build at least three ships, I believe four for the government, possibly one or two others.
Kent: Wren asks: If the Jones Act was abolished, how would this change the economics of shipping in Hawaii?
Grabow: Clearly, if there wasn’t the Jones Act, there would be more competition, there would be cheaper ships, shipping rates would decline. We can have a debate about how great or minimal that decline would be, but I think there’s almost unanimous agreement among economists that there would be cheaper shipping to and from Hawaii.
Kent: Schoolland asks: If the Jones Act was gone, would there be more jobs for union members and better pay?
Grabow: It depends on which industries we’re talking about. It may very well be that there would be fewer jobs on ships because they’d be displaced by foreign ships, but cheaper transportation would be good for the economy, overall economy of Hawaii. Of course, there are lots of union jobs on land there in Hawaii, and it would stand to reason that there would be more of those jobs, and thus, as a whole, the unions would benefit.
Kent: Any comment on Young Brothers asking for a $25 million bailout for the coronavirus?
Grabow: I don’t have a whole lot to add there. We’ve been talking a lot about the added cost of U.S.-built ships, but Young Brothers doesn’t use ships, they tend to use barges. So I think there’s different economics at play there. I’m not as familiar with what any possible cost differences might be between, say, a U.S.-built oceangoing barge and a foreign-built oceangoing barge.
Kent: Anonymous asks: If the Jones Act would be eliminated, would that effectively be the demise of American shipbuilding, commercial and military?
Grabow: With military, absolutely not. Like I said, military has nothing to do with the Jones Act, so that would stay in place. As far as U.S. commercial shipbuilding, well, my answer is this: I think it would be somewhat kin, maybe the analogy you can use is, when foreign imports of cars from Japan start arriving in the United States. Initially, that was very bad for U.S. automakers. They had to compete, they had to adapt. There was a really rough period there, but I think they came out better, more efficient, more productive.
I think what would happen is something similar in U.S. shipbuilding. We would exit some industries, like we wouldn’t tanker ships, for example, but we would find a competitive niche. I think Americans are very competitive, inventive, industrious people. I reject the idea that the world’s biggest economy has nothing to offer in terms of shipbuilding, absent the Jones Act.
Kent: Two last questions. Maybe I’ll ask them both at once: How do we educate people? The second is, are there any U.S. senators or representatives that actually have taken the lead on repealing or modifying the Jones Act?
Grabow: With regard to the second question, yes. Thankfully, there are some that are willing to speak up in Congress about this law, Rep. Ed Case in Hawaii being one of the foremost examples of that. He introduced legislation last December that would propose various reforms for the Jones Act in Hawaii. I think one bill would exempt Hawaii, another bill, the other noncontiguous states and territories.
Another one of his bills would give an exemption to any noncontiguous state or territory that didn’t have at least, I think, three carriers serving it. Well, that would be de facto an exemption for everybody because Hawaii only has Pasha and Matson. Alaska only has TOTE and Madsen, and Puerto Rico has Crowley and TOTE has 85% of the capacity there. In addition to Rep. Ed’s Case, Sen. Mike Lee, last year produced two bills related to the Jones Act. One was a straight repeal bill, and the other would have established an economic waiver system.
Basically, if you’re in a situation where you want to ship goods from one part of the United States to another, and there’s no Jones Act ship either available or it simply doesn’t exist — for example, there are no Jones Act ships capable of transporting liquefied natural gas, so we can’t send gas from one part of the United States to another by ship — then you could use a foreign ship. You could get a waiver. That’s been done. No movement, but at least I salute the willingness to speak up and draw attention to these flaws.
As for what we do and how we educate people, I think it’s through forums like this. I mentioned that Hawaii Business poll that recently came out, the most disturbing part of that poll is even in Hawaii, a majority of respondents just weren’t aware of the Jones Act. Of those who were aware, there was widespread opposition. We need to make people aware. Say there is a law, it’s very consequential and start from there because once people get aware, the Jones Act lobby has got a real problem on its hands.
Kent: Thank you, Colin. Here’s Keli’i.
Akina: Thank you, Joe Kent, for that moderation. Colin Grabow, Cato Institute, we appreciate your presentation today and your expertise. We’re going to continue working with you in consultation as we face the Jones Act and reforming it. Thank you so much for being with us. And everybody else, thank you for your great questions and for being part of the Grassroot Institute seminar.