One of the issues that has been very important to the Grassroot Institute of Hawaii through the years has been the protectionist federal maritime law known as the Jones Act.
Following up on the release our our groundbreaking study, “Quantifying the cost of the Jones Act to Hawaii,” institute President Keli’i Akina invited maritime attorney Wayne Parker to appear on his “Hawaii Together” program on the ThinkTechHawaii network to address the topic, “Why It’s Time to Update the Jones Act.”
Parker is a graduate of the United States Naval Academy and the University of Southern California Gould School of Law. His experience as a corporate and maritime attorney includes serving as an associate general counsel with Horizon Lines and a former assistant general counsel at Matson.
“In other words,” said Akina, institute president and CEO, “he’s got a great deal of experience in corporate law and in maritime law — a wonderful combination for someone who has been studying and knows up close the workings of the Jones Act.”
See the video and full transcript below.
Keli’i Akina: Aloha, and welcome to “Hawaii Together” on the ThinkTech Hawaii Broadcast Network. I’m Keli’i Akina, president of the Grassroot Institute of Hawaii. We’re an independent public-policy think tank that takes a hard look at the economy and government policy.
One of the issues that’s been very important to us has been a set of shipping laws known as the Jones Act. It’s now about 100 years old, and it’s a good time to reflect upon its impact on our state, our economy and whether something can be done about that. The title of our episode today is “Why It’s Time to Update the Jones Act.”
I’m delighted that I have a guest from San Francisco here today, and he is an attorney, Wayne Parker, a graduate of the United States Naval Academy and the University of Southern California Gould School of Law. He was associate general counsel with Horizon and assistant general counsel at Matson until 2018. In other words, he’s got a great deal of experience in corporate law and in maritime law — a wonderful combination for someone who has been studying and knows up close the workings of the Jones Act.
Please welcome to the program today, Wayne Parker. Wayne, glad to have you onboard from San Francisco. Aloha.
Wayne Parker: Aloha, Keli’i, and thank you for having me on your show.
Akina: In your own work you’ve spent time here in Hawaii, right?
Parker: Myself, I’ve traveled to Hawaii a couple of times on behalf of Matson, and when I was with Horizon, often dealt with our issues with our trade lane from the West Coast to Hawaii.
Akina: Well, Wayne, you’ve been in the Navy, and you have practiced law, and you’ve been very close to decisions involving the implications of the Jones Act with various corporations. Tell me a little bit more about your background and how you’ve come to your knowledge of the Jones Act.
Parker: Yes. I started practicing law in New York City in 2003 with the maritime group at Holland & Knight, which is when I first heard about the Jones Act. I’d never heard of the law before. Several of our clients were domestic carriers, ocean carriers who carried cargoes from CONUS (continental United States) to Puerto Rico, Alaska, Hawaii and Guam.
After three-and-a-half, almost four years, with Holland & Knight, I went to Seward & Kissel to learn, basically, transportation finance, vessel finance. Worked there until, basically, the recession hit in 2009-2010, eventually ended up after about a year or so with Horizon Lines.
At that time when I joined Horizon in 2011, Horizon operated container vessels on all three of the Jones Act noncontiguous trade lanes. That would be CONUS to Puerto Rico, west coast CONUS to Hawaii and Guam, and Pacific Northwest and California to Alaska. After 2015, when Horizon was purchased by Matson and merged into the company, I was asked to basically relocate to San Francisco, and I worked with Matson for about another two-and-a-half, almost three years.
Akina: Well, that’s a tremendous pedigree in terms of practical knowledge about the Jones Act. I’ve got a question for you that is totally nontechnical. If you’re just talking with someone who has no maritime background, no legal background, no political background, how would you explain what the Jones Act is?
Parker: Good question. I’ve actually had to do that with my parents and friends. As I normally explain it to them, I use this because my mom and dad are big into cruises, into taking cruise ships. What I told them is, “Well, did you know that when you went on your cruise trip from Florida to, say, New York and trips up the East Coast, and all the ports of call were U.S. ports of call?”
I explained that, well, that vessel has to be a U.S. flag vessel because under the Jones Act and related laws, they’re taking passengers from one point in the United States to another. And when that’s the carriage that’s being undertaken, then the vessel has to be a Jones Act-qualified vessel, which means, among other things, the crew has to be 75% US citizens or U.S. permanent resident aliens. It also means that the ownership of the company operating and owning the vessel must be 75% owned by U.S. citizens.
There’s a lot of intricacies to it. I explained it that way. Most people are just unaware that the Jones Act exists, nevermind what it means to them in terms of either riding as passengers on the vessel or what it means to them if they’re shipping goods from the continental United States to either Hawaii, Alaska, Guam, or Puerto Rico.
Akina: For purposes of our program today, we’re going to be talking about that feature of the Jones Act, which is that it governs the transportation of cargo by ship between any two U.S. ports. One of the features is that, such a ship under the Jones Act, has to be built in the United States. Let me ask you a question about the impact of the Jones Act.
Over time, about 100 years that the Jones Act has been around, what kind of economic impact has it had on a place like Hawaii or a place like Puerto Rico that is completely surrounded by water — in terms of the cost of shipping, I should specify.
Parker: I understood your question to be in that regards. The short answer is that it basically raises the cost of the goods that you and Hawaii get from the continental United States. The reason is simply this: Jones Act vessels cost more to operate than vessels that are foreign-flagged and that are bringing goods in from, say, overseas to Hawaii. If you transport anything from California or anywhere in the United States, for that matter, any point in the United States, to Hawaii, it has to be on the Jones Act vessel. That means that Hawaii’s residents are — and most people don’t realize it — paying a premium on anything that they get from the United States.
Akina: Why, in particular, does it cost more to ship goods on a Jones Act-compliant ship than one that isn’t?
Parker: There are a number of factors. The first factor is that Jones Act vessels are required by statute to be U.S.-built. That U.S. build requirement effectively, in this day and age, means that if you want to buy a container ship so that you can use it to carry boxes from California or Oregon or Washington state to Hawaii, you have to have it built in a U.S. shipyard.
The latest studies show that U.S. shipyards building a certain design of container ship will likely charge, or it will be five times as expensive to build that vessel in a U.S. shipyard, as it would be in, say, a Korean, Japanese, or Chinese shipyard. Right off the bat, you have a much higher cost of capital investment in your mode of transportation for your goods.
Another factor is the cost of crews. U.S. crews typically make much more than crews on foreign-flag vessels. I forget the exact figure, but I want to say they make about twice as much as foreign crews do. That varies from what flag or registry you’re talking about from one to another. That’s another cost that carriers are going to pass along to the customers. There’s another premium that a resident of Hawaii will pay for goods shipped on a Jones Act vessel.
Then there are just other little factors that just all combined add to additional costs that U.S. Jones Act carriers have that other carriers don’t have. Inevitably, like any business, the carriers have to pass those along to the customer, or they have to eat those costs. Depending on the costs, that may or may not affect profitability to the extent that they just have to charge the customer the full amount of that cost. Hawaii’s residents pay for Jones Act-delivered cargo at a higher rate than they would for foreign cargo.
Akina: Now, Wayne, one of the aims of the Jones Act originally was to protect the U.S. shipbuilding industry, and shipping itself. Today, our ships cost so much that they’re almost unaffordable, and we produce fewer and fewer shifts as the years go on. The industry is clearly struggling. Why is that?
Parker: A lot of it is just that U.S. shipbuilding has consistently been much more expensive than it’s foreign counterparts. There are some studies that indicate that a significant portion of the U.S.-build cost is the cost of labor. Shipbuilding is a high-skilled labor industry. In the United States, and this is the problem that’s gone back since the — really, to the days when this act was initially passed.
In the 1920s, if I remember the statistics right, U.S. shipyards generally charge about 30% more than their foreign competitors to build the same design ship. By the 1950s, that was up to about a 50% higher cost. By the 1990s, that was literally three times what the foreign yards in the dominant competitors at the time, which are Japan and Korea, would charge. Today, it’s five times as much for container vessels and four times as much for tankers. Most of that is because of the cost of labor. There are other factors, but that’s usually the biggest one that comes out
Akina: Now, if U.S. companies were allowed to purchase ships for cargo trade within the country, purchase those ships from our allies, let’s say, they would spend a lot less and be able to afford better more technologically efficient ships and so forth. What kind of impact would that have on the U.S. shipbuilding industry? Would it put our own companies out of business, or would it in some way generate the kind of competition that would revitalize the industry?
Parker: My personal opinion is, given the relatively small number of ocean-going vessels that are built by U.S. shipyards, I believe that if we were to open up the Jones Act to foreign-flag vessels, the impact would be minimal. I’ll give a couple of statistics to give you the basis for my assertion. Between 2007 and 2017, the records indicate a total of 991 U.S.-flag Jones Act vessels were built by U.S. shipyards. The overwhelming majority of them, 91% were for U.S. domestic carriage.
Very little competition is actually happening between a U.S. shipyard and foreign shipyards for those vessels. If you open up the competition to foreign shipyards for those vessels, then theoretically, somebody could say, “Now the U.S. shipyards are going to have to compete with much cheaper foreign yards.” Here’s something else that most people don’t know. Those U.S. shipyards, the merchant ships they build are only a very small percentage of their overall order books.
The great majority of the work and the money they make is off of DOD contracts, Department of Defense contracts. Even if they were to see a shrinking share of the commercial vessel market for Jones Act vessels, that’s really going to be a very small percentage of loss for them, when they can fall back as they do now, and rely on DOD contracts. Of course, they’re not going to want to lose even that small share if they they can fight that.
Akina: Now, that’s very interesting. I wonder as well whether we might see some revitalization of the commercial shipbuilding industry if we did open up to competition.
I recall the history of the American auto industry and how at one time it was subject to some of the highest forms of protectionism tariffs and so forth. It made the purchase in the United States of some of the foreign cars by Honda, Toyota and others exorbitant. But when some of that protectionism was lifted, we didn’t see the demise of our auto industry. We saw the revitalization of it.
Could you see something like that in the shipbuilding industry as well?
Parker: Yes. I actually believe one of the biggest problems we have in our U.S. shipbuilding industry, and in the Jones Act carriage industry, is that there is basically a protectionist system put in place. When companies know that they have a protected monopoly or market, they’re not efficient. They’re not only not efficient, they’re not very innovative. Once you introduce an element of competition that requires them to innovate and requires them to be efficient, then one of two things either happens. They either get better at what they’re doing, or they sink. It’s a sink-or-swim reality of business.
Akina: Very good.
Parker: In the past, U.S. companies have been able to meet that challenge, as you described with the auto industry. I don’t think the U.S. shipbuilding industry or the ocean carriage industry wouldn’t be able to do the same.
Akina: Well, my guest today is Wayne Parker, a corporate and maritime attorney. We’re going to take a 1-minute break. Don’t go away because he’s got some fascinating things to say on the topic of whether it’s time to update the Jones Act for the 21st century. I’m Keli’i Akina with ThinkTech Hawaii’s Hawaii Together. Aloha.
Krista Stadler: Aloha, I’m Krista Stadler, the host of Nonprofits Mean Business Too, on ThinkTech Hawaii. Nonprofits Means Business Too investigates the operational challenges and costs related to managing nonprofit organizations, while encouraging our viewers to find a nonprofit organization that you’re passionate about in our community. We are streamed live on ThinkTech Hawaii bi-weekly at 12:00 PM on Thursdays. Thank you so much for watching our show. We look forward to seeing you then. Mahalo.
Akina: Back on Hawaii Together with the ThinkTech Hawaii Broadcast Network. I’m Keli’i Akina. My guest Wayne Parker is a corporate and maritime attorney. We’re talking about whether it’s time to update the Jones Act. Wayne, you’ve given some fascinating information. Now, if the Jones Act had worked out the way it should have worked out, we would see a booming shipbuilding industry, we’d see large numbers of American-made ships, we’d see a great deal of tonnage, in fact, a growing amount that we carry across the seas in our ships. But that’s clearly not the case. Tell us a bit about how the Jones Act has actually impacted the industry.
Parker: Sadly, it just hasn’t done what it was advertised to do in 1920 when it was passed. To give you some statistics to work with: In 1950, the number of Jones Act-compliant vessels that were actually engaged in the domestic trade was 454. By 2018, that was down to 99. Now, in that roughly 48-year period, there were a lot of substantial and significant changes in the industry. Containerization was introduced, vessels became larger, crews became smaller due to automation and other factors.
One thing that is rather very significant is that the overall tonnage that’s carried by Jone’s Act carriers actually went down. It peaked in about 1975 at about 11 million deadweight tons. Today, it’s about 5.8 to 6 million, depending on how it’s calculated.
Even though the Act has been in place for 100 years, roughly in the last 70 years or so, we’ve seen a decline in the numbers of vessels and the tonnage carried by the vessels. This has occurred at a time when Hawaii’s population has grown, Alaska’s population has grown, Puerto Rico’s population has grown, and the demand for carriage of goods has not gone down.
Akina: Now, you’ve worked with companies dealing with the Jones Act. Have you seen the Jones Act actually hurt those companies?
Parker: I think it does in a number of ways. I would say first and foremost, there are ownership requirements under the Jones Act, and one of the impacts of the ownership requirements … I should explain. Under the Jones Act, 75% of the controlling interest of the entity owning and operating a vessel must be held by U.S. citizens. “U.S. citizens” is nowhere specifically defined in the Jones Act.
So you’re relying on the Coast Guard and the Maritime Administration [to define] what’s called a documentation citizen and a Jones Act citizen. This is language that’s only really used among legal experts and government bureaucrats to talk about whether or not a company is or is not Jones Act-qualified. Without getting into the weeds, it’s a much harder prospect to show that compliance with the government’s Jones Act 75% ownership requirement than you would think. It’s doable, but there’s a lot more work to it than you would think at first glance.
One of the impacts to that is that it restricts the abilities of Jones Act companies to go out and get investment from other non-U.S. sources. That can really restrict the ability of companies to get the capital needed to upgrade vessels, to upgrade facilities if they’re terminal operators, and to engage in other necessary innovations and to increase efficiencies. You’re basically telling them that they’re restricted to a certain part of the capital markets. That, to me, is one of the first and most obvious and, really, most significant limitations of the Jones Act on a Jones Act company. There are others we can talk about, but that’s the one that really stands out for me.
Akina: With some of the disincentives and problems of the Jones Act for companies, are companies taking measures to try to get around the Jones Act, to try to work around it in some way?
Parker: Yes, definitely they do. For example, a lot of Jones Act companies, because the law permits them to do so, and the Coast Guard and Maritime Administration have signed off on it — for those of you listeners that don’t know, vessels every three to five years, depending on age of the vessel and other factors, they basically have to go on the dry dock and go through some renovations and repair work and then get what’s called a “classification certificate” issued.
This is a certificate issued by what’s called a “classification society” that basically says the vessel is seaworthy in all mechanical and engineering respects. You need this certification if you want to get your vessel insured and if you want the necessary flag state authorities, in this case, the United States, to issue the necessary licenses and permits for the vessel to actually operate so that you can actually carry cargo.
One of the practices of the last 20 years or so, and arguably much longer than that, is that these carriers like Matson and, before that, Horizon when I worked with them, is we would send our vessels to foreign ports, China or Korea, and that’s where this work would get done, this renovation and upgrading and other work necessary to get your class certification. They almost never do it in a U.S. shipyard.
That’s work that U.S. shipyard workers don’t get, and it’s their way to work around the Jones Act because the way it’s worded and the way it’s enforced by Coast Guard and MARAD, they’re permitted to do it. Sometimes that work can be very significant work.
Akina: Wayne, is there anything you see that’s good about the Jones Act? The reason I’m asking this is that, very often, the debate over the Jones Act is bifurcated with those who are calling for a total repeal of this 100-year-old set of shipping laws and others who are saying, “No, we need to keep the status quo exactly as it is.” I’m wondering if there is some good there that warrants not throwing the baby out with the bathwater.
Parker: I think there is some good. I think the Jones Act or cabotage laws in and of themselves are a necessary component. We’re not the only country with cabotage laws. Pretty much all the major maritime seafaring nations have cabotage laws. That’s not really a problem, the idea that only U.S.-flagged vessels should carry cargoes from Point A to Point B within the United States. Conceptually, I don’t have a problem with that, and I don’t think practically it hurts us.
The problem is when you dive down into the details of, well, where do those vessels come from? How are they paid for? Who can crew them? What happens is the restrictions of the Jones Act results, as we’ve discussed, in just much higher costs of operation. As a result, we have an industry that’s not as efficient as it could be. It’s more expensive to run than it should be, and consumers are forced to pay higher prices.
Akina: What if we’d just made some tweaks to the Jones Act. Let’s leave in place some of the provisions you’ve talked about, U.S. ownership, U.S. flagging, U.S. crewing, and so forth. What if we modified or removed the requirement that the ships be purchased from the United States and opened up to purchasing these ships from overseas. What do you envision would happen to the shipping industry and the shipping companies?
Parker: Well, your suggestion there is actually one that’s been around since before the Jones Act even existed. It’s the old 19th-century argument of what was called in its day “free shipping.” That was because we’ve had domestic coastal carriage laws really since the beginning of the republic, since the 1790s. They’ve always been controversial because what they essentially do is they subordinate the interests of one portion of society to a particular part that the government wants to protect. Sometimes there’s very good valid public policy reasons to do that.
But one of the results of the way the system has evolved in the U.S. is, of course, our vessels built in the U.S. shipyard are so much more expensive, as we’ve discussed, that the companies that operate them have to really — Matson as an example spent $250 million on its most recent vessel acquisition. Had they been able to go to a Korean yard, they probably could have gotten that for $50 million. That $50 million on their books would be far less than a $250 million secured loan, which means that they could basically charge less to meet the debt obligations, they could charge their customers less, and still meet their debt obligations for that vessel.
It would also go a long way towards forcing the U.S. shipyards to realize, if they want that business, they’d better come up with other ways to be efficient and to be able to build the same vessels for comparable costs. May not be quite as low, but what you maybe offer is, “Okay, we’ll do better and offer you some higher quality aspects, and some better capabilities for those vessels for that additional cost.”
There’s a point in there somewhere where the U.S. carriers that would buy the vessels, and maybe even if you’re competitive enough, you get foreign carriers interested in buying ships from U.S. shipyards. Right now, that doesn’t happen because they’re just so high priced, and they don’t offer anything that a foreign carrier couldn’t get from a Japanese, Korean or Chinese shipyard.
Akina: Well, Wayne, thank you very much. It sounds as though we have much to gain by updating the Jones Act at this time, 100 years after its inception. I thank you so much for being with us today and providing your insights and consultation. Wish you the very best in San Francisco. Stay safe and healthy.
Parker: Thank you, and mahalo.
Akina: Yes, my guest Wayne Parker is an expert in maritime and corporate law, and he has given us his insights on updating the Jones Act. I’m Keli’i Akina, president of the Grassroot Institute. Thank you for watching ThinkTech Hawaii. We’ll be with you next week. Aloha.