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Do it for Hawaii: Reform the Jones Act and PVSA

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The 1920 Jones Act and the 1886 Passenger Vessel Services Act have been in the national news recently, so Keli’i Akina, president of the Grassroot Institute of Hawaii, devoted his latest “Hawaii Together” program on ThinkTech Hawaii to the topic of why both of these destructive, protectionist federal maritime laws need to be reformed.

His guests on Monday, June 7, 2021, were Colin Grabow, a Grassroot Scholar, policy analyst for the Cato Institute and one of the nation’s leading Jones Act and PVSA experts; and Jonathan Helton, a Grassroot Institute research associate who also specializes in the Jones Act and the PVSA.

Grabow explained that by requiring all ships that transport goods between U.S. ports to be U.S. flagged and built, and mostly owned and crewed by Americans, “the Jones Act serves to increase the cost of transportation, which of course, that impacts all aspects of our economy. … Why does it drive up the cost? Two factors I’d point out:

“[First], the ships have to be U.S.-registered. There’s something like 50,000 ships in the world, [and] out of those, only 180 are U.S.-flagged. Then out of those 180, only 96 are U.S.-built.

“[Second], a ship built in the United States is usually anywhere from four to five times more expensive than one built in another country. [So] we have … ships that are expensive to build, expensive to operate, … and there are very few to choose from. It doesn’t take an advanced degree in economics to understand that when you have restricted supply, very costly inputs, the result is very expensive shipping.”

Helton said the PVSA is “essentially everything that Colin said about the Jones Act.… but it applies to the transportation of passengers instead of the transportation of goods.” However, “instead of there being 96 Jones Act-compliant ships, as Colin mentioned, there’s actually only one PVSA- compliant ship. … That ship operates exclusively in Hawaii. It’s the Pride of America. So because of that, Americans have much more limited options for choosing a ship to cruise on than they would otherwise, if we were to have some looser restrictions on what ships can move passengers between U.S. points.”

To learn more about how both laws are destructive to America’s economy and national security, while benefiting a lucky, rent-seeking few, watch the half-hour interview below. A complete transcript also is below.

6-7-21 Colin Grabow and Jonathan Helton with Keli‘i Akina on “Hawaii Together”

Keli’i Akina: Aloha, everyone. Welcome to “Hawaii Together” on the ThinkTech Hawaii broadcast network. I’m your host Keli’i Akina, president of the Grassroot Institute of Hawaii. That’s a place where we like to research esoteric issues like the Jones Act. 

Now, if your eyes are rolling when I say that, I’ve got two fellows here today who are outstanding experts at understanding the issue, researching it and communicating it, and they’ll be able to answer your questions.

We’re going to take a little bit of an update, because the Jones Act has been in the news. For those of you who will recall, the Jones Act is a set of laws that governs the transport cargo between two American ports. We’re going to take a look at that as well as a law that has to do with transporting people between American ports. President Joe Biden recently issued two Jones Act waivers to help facilitate fuel transport from Texas to the East Coast after that debacle with regard to the Colonial Pipeline, when it was shut down recently.

He also waived the Passenger Vessel Services Act, that’s called the PVSA. It’s like the Jones Act, to help Alaska’s cruise ship industry. With this activity going on, one might ask, do you think we might see some changes with regard to the Jones Act and the PVSA? I’m going to ask my guests that question today. I’m really honored today to have with us two tremendous individuals when it comes to understanding the Jones Act.

The first has been a friend for a long time with the Grassroots Institute, Colin Grabow. He is a research analyst, a policy analyst at the Cato Institute, a very prestigious position. He has also served us at the Grassroot Institute as a scholar. Colin, aloha, and welcome to the program.

Colin Grabow: Aloha, thanks for having me.

Akina: I’m so glad you’re here. Thanks for staying up. It’s about 8 o’clock there in Washington, DC.

Grabow: Oh, it’s my pleasure. I still have a few more hours before it’s time to go to bed.

Akina: All right. We won’t keep you up too long. Along with Colin, we’ve got the policy analyst Jonathan Helton, or at least one of our research associates, all the way in Tennessee right now. Jonathan, thanks for joining us this evening.

Jonathan Helton: Of course, it’s my pleasure.

Akina: Let me just get started by asking each of you to define the terms we’re talking about today, before we go into an update. Colin, what exactly is the Jones Act? How long has it been around, and what does it do?

Grabow: The term “Jones Act” refers to Section 27 of the Merchant Marine Act of 1920, which essentially says that to move goods from one point in the United States to another point in the United States by water, that the vessel used in that transportation has to meet four conditions. The vessel has to be U.S.-flagged and registered, just like you registered your car in a particular state, the vessel has to be registered in the United States.

It has to be mostly U.S. crewed with American citizens or permanent residents. It has to be owned by Americans, at least, again, by 75% American ownership. Lastly, and most unusually, the vessel has to be built in the United States.

Akina: What kind of impact does this law have on our cost of living across the country and in particular, in places that are dear to us like Hawaii and some of the other noncontiguous regions?

Grabow: The Jones Act serves to increase the cost of transportation, which of course impacts all aspects of our economy — everyone relies on transportation. Why does it drive up the cost? Two factors I’d point out: Again, the ships have to be U.S.-registered. There’s something like 50,000 ships in the world; out of those, only 180 are U.S.-flagged. Then out of those 180, only 96 are U.S.-built.

So you have very few ships to choose from, and then the ships, those 96 ships, they’re very expensive to build. A ship built in the United States is usually anywhere from four to five times more expensive than one built in another country. We have very expensive ships that are expensive to build, expensive to operate, all crewed with Americans, very well paid, and there are very few to choose from. It doesn’t take an advanced degree in economics to understand that when you have restricted supply, very costly inputs, the result is very expensive shipping.

Akina: Thank you, Colin. I’m going to switch over to Jonathan. Jonathan, you heard Colin and you’re very familiar with the Jones Act as well as the PVSA, Passenger Vessels Services Act. In some ways, they’re very similar. Both of them have to deal with transporting items from one U.S. port to another. In the case of the PVSA, we’re talking about transporting people, and the Jones Act, we’re transporting cargo. They have some features that are similar to each of them. You want to tell us what the PVSA is, and why it raises costs for us?

Helton: Yes. The PVSA is essentially everything that Colin said about the Jones Act. It requires ships that must be U.S.-built, mostly U.S.-owned, mostly U.S.-crewed, and U.S.-registered, but it applies to the transportation of passengers instead of the transportation of goods. It’s like the Jones Act, but for passenger ships, essentially.

Akina: Why does it raise the cost of living for us here in the United States?

Helton: Instead of there being 96 Jones Act-compliant ships, as Colin mentioned, there’s actually only one PVSA-compliant ship. That’s a problem when you’re trying to transport anyone who wants to go on a cruise, for example, from say, somewhere on the West coast to the East coast. There’s only one U.S. ship that is qualified under the PVSA. That ship operates exclusively in Hawaii. It’s the Pride of America, and so because of that, Americans have much more limited options for choosing a ship to cruise on than they would otherwise, if we were to have some looser restrictions on what ships can move passengers between U.S. points.

Akina: We might talk about this later on, but “limited options,” it sounds like a mild way of talking about the impact of this law, especially if only one ship servicing our country qualifies under the PVSA. I think we’re going to miss out on a lot of tourism, especially here in Hawaii, with that.

Helton: Yes.

Akina: Now, on May 7th, an ominous thing took place. The Colonial Pipeline, which transports fuel from Houston, Texas, to the East coast was shut down, and that’s the result of an almost science fiction-type scenario, a cyber attack, and then finally it was opened up. But in the meantime, the Jones Act figured as part of the solution to getting the oil to needed places. Colin, tell us a little bit about that.

Grabow: As many viewers are probably aware, the Colonial Pipeline, which goes from Houston all the way to New York City along the East Coast, transports about 40% of the fuel used by residents in this part of the country. After it went down, questions began to be asked about alternative means of transporting fuel. The Energy Administration released a blog post about the shutdown, which noted that the one way of moving fuel in the absence of the pipeline along the East Coast was through maritime transport to ports like Charleston, Savannah, Wilmington, Norfolk. But unfortunately, because of the Jones Act, fuel can be quite expensive to move this way, and ships and barges can be in short supply.

Eventually, the U.S. Maritime Administration conducted a survey of Jones Act shipping to see what was available, and they ended up issuing two waivers for individual ships to transport fuel within the United States, presumably because the survey found that no needed Jones Act ships allowed under the law to transport goods within the United States — in this case, fuel — were available or well-positioned to meet the needs of shippers after the pipeline shutdown.

Akina: If it was necessary to issue waivers with respect to the Jones Act in order to secure the oil that we needed, why not just exempt those ships from the Jones Act altogether, not only during times of crisis? What are your thoughts on that?

Grabow: I think it’s an excellent argument, observation. Indeed, when you have a time of crisis, I think you need maximum flexibility. You need options, you need creative ways to work around the issue; in this case, the shutdown of the pipeline. The Jones Act means less flexibility, means fewer options. In this particular instance, I think there are other couple of things worth perhaps pointing out here, highlighting. No. 1, I think there’s a psychological element in crises. A lot of people point out that when the Colonial Pipeline shut down, that there was panic buying. A lot of people thought, “The pipeline shutdown; that means there’s no fuel. I need to go gas my car now.” That made the situation a lot worse for obvious reasons.

Also, the Jones Act makes infrastructure, I think, a more inviting target. If we didn’t have the Jones Act, people would think to themselves, logically, that if the pipeline goes down well, that’s OK, because there’s still plenty of ships out there that can also transport that fuel. They would know that there are backup systems in place, but because of the Jones Act, we lacked that, or our backup systems are much less rigorous than would otherwise be the case. Then again, if you shut down these hackers, they knew if you shut down the pipeline, it’s a very inviting target because there aren’t those redundancies in the system. There aren’t those backup systems available, because our maritime sectors are going to be decimated by this law.

We have only something like 56 tankers in the entire country to move fuel. If you have an environment like that, and you know if you shut down this one method of transport, and there aren’t backups, that makes it more inviting, because it’s more of a crisis. But it’s a less inviting target if people know, you shut that down, there are other means of moving fuel, and it’s not quite as consequential.

Akina: Colin, when President Biden signed these two waivers, did it represent an openness to Jones Act reform or was it just, as you might put it, a one-off occurrence? Something that’s occurred under previous administrations? What I’m really asking is, has the issuance of those waivers in any way politically shifted the discourse on Jones Act reform?

Grabow: Unfortunately, I’d say no. We did see a few editorials critical of the Jones Act, voices like Bloomberg, and Wall Street Journal editorial boards. That’s always welcome and good to see. But ultimately, as Puerto Ricans discovered in 2017 after Hurricane Maria, these emergencies or crises are relatively brief. Once it fades from the news and all the talk of the Jones Act disappears, then the country’s collective consciousness moves on to other things. We don’t hear about the Jones Act and all the damage it causes until the next crisis hits.

With regard to President Biden, President Biden, of course, during the presidential campaign last year, he explicitly endorsed the Jones Act. He repeated his support for the Jones Act a few days after taking office. Transportation Secretary Pete Buttigieg stated his support for the Jones Act under questioning. I think my read on the situation is that essentially, the president’s hand was forced.

We have millions of angry, frustrated motorists out there that couldn’t get fuel. They were looking for action from the government. This was an action that he could take — two waivers for two ships. This isn’t a big game changer in the overall calculus of the Jones Act issue. When his hand was forced, he’s willing to act, but I don’t think this reveals any deep-seated desire to make any changes to the Jones Act, unfortunately.

Akina: Let me bring this closer to home for those of us in Hawaii. How does the Jones Act affect Hawaii’s energy needs? Would waivers help in the solution to that?

Grabow: The Jones Act figures pretty prominently when it comes to Hawaii and their sourcing of energy. For one example, the U.S. mainland is the world’s largest exporter of propane. Hawaii imports propane. They don’t buy any of it from the U.S. mainland. Why? Because there are no ships to transport it. There are zero ships in the Jones Act fleet capable of transporting propane, so Hawaii has to buy it from foreign sources.

Even in the instances or the cases of ships, where they do exist in the Jones Act fleet like oil tankers, for example. When in 2008 Hawaiian Electric released a pie chart showing where all their imports were sourced from, only 4% came from the U.S., from Alaska. In comparison, 8% came from China. They were getting it from Indonesia, Saudi Arabia, places much further away. Despite this oil abundance, Hawaii buys very little. In fact, right now, here’s an interesting example: Earlier today, I noticed that there was a Singaporean flagged tanker sailing to Barbers Point from South Korea. South Korea is a major refiner; they produce refined products. Yet, it’s coming all the way from South Korea, which is 4,100 nautical miles away.

In contrast, the West Coast, Los Angeles, is about 2,200 nautical miles away. It speaks to the impact that the Jones Act has, because when you raise the cost of transport, even when the ships are available, it’s a huge disincentive to buy American. They end up buying foreign products from further away. You’d have to think that absent the Jones Act, that they could buy these products from American sources at even lower cost, if not for the high cost of Jones Act transport.

Akina: Is what you said about propane not available to us except through import from overseas also true of liquid natural gas?

Grabow: Yes, this is something we’ve seen elsewhere in the country. The propane specific to Hawaii, but also Puerto Rico, for example. They source 100% of their bulk natural gas imports from foreign countries. Why? Again, the exact same situation. There are zero Jones Act qualified tankers capable of transporting liquified natural gas. The United States, again, we’re one of the world’s largest exporters of natural gas, and yet Puerto Rico buys none of it from the United States. That’s not despite being part of the United States, it’s because it’s part of the United States, because it’s subject to the Jones Act.

All of the natural gas importers in Latin America that buy natural gas, they all buy at least some of it from the United States. The only one that doesn’t is Puerto Rico, and it’s directly because of the Jones Act. By the way, we also see the same dynamic up in New England, where they don’t have enough pipeline capacity, so in the winter when demand for natural gas spikes, they have to import it by ship, and it all comes from abroad, even though there’s an LNG export facility just a couple hours from me in Maryland. They can’t get it because the ships don’t exist.

Akina: When we come back from a brief break, I’m going to ask you why we put up with the Jones Act. What value do we get from what you’ve just described? I’m Keli’i Akina with the ThinkTech Hawaii Program, “Hawaii Together.” We’ll be right back with my two guests in just a moment. Don’t go away.

[music]

Akina: Welcome back from our break. We’re “Hawaii Together”’s ThinkTech Hawaii program talking about the Jones Act today. My guests Colin Grabow and Jonathan Helton. I want to get back to Colin and ask you this: Given the exorbitant increase in cost of living due to the Jones Act and the increase in the cost of our energy, why do we put up with it? What do supporters of the Jones Act tell us we get out of it?

Grabow: We spent a lot of time in this discussion so far highlighting the cost of the Jones Act, so logically, the question is: Why do we have this law? What is the argument for the Jones Act? The theory behind the Jones Act is that, for example, by requiring that vessels be built in the United States, that will assure us a strong shipbuilding sector that can be utilized in times of war to support our military, that the U.S.-crewed requirement, that ensures that in time of war we have plenty of mariners that can crew our ships and transport goods for the military. The U.S.-flagged requirement ensures that in time of war there will be ships there that can be utilized again by the military to transport goods and supplies to where they’re needed. That’s the theory.

Unfortunately, the reality is that while those costs are very real, these benefits have either failed to materialize or haven’t really lived up to the theory. In terms of ships, the number of ships in the Jones Act fleet has been on decline for decades. I think as recently as 1980, there were well over 200 ships. Again, now we’re down to 96. In terms of mariners, there was a government study done in 2017 that calculated that in a best-case scenario, that we wouldn’t have enough mariners, something like 1,800 mariners short of those needed to crew our commercial and sealift fleets in time of a sustained sealift operation. In terms of shipyards, we’ve seen plenty of shipyards fold over the decades, dozens of them. Why? Because when your ships are not internationally competitive, they cost triple, quadruple, quintuple the price of what’s being built abroad. There’s not a lot of demand for those ships. The law does not produce the benefits that we’ve been promised. We’re in the situation [where] we have very real costs and benefits that really underwhelm.

Akina: We’re paying a hefty price for benefits that are not really accruing to a great deal. 

Jonathan, you’ve been monitoring and researching the Passenger Vessels Services Act, the PVSA. That came back in the news recently, surprising a lot of people when during the COVID crisis Canada decided to ban cruise ships. This had a particular impact upon Alaska, which needs a ship to be able to go to a foreign port in order to operate. Do you want to explain what took place?

Helton: Yes, back in February, Canada announced a one-year ban on all cruise ships coming into its ports. This mattered for Alaska because under the PVSA, what happens is, for a foreign ship to move passengers between, say, Seattle and a port in Alaska, that foreign ship would have to stop somewhere in Canada or another foreign country somewhere along its itinerary. Since Canada closed off its ports to any foreign ship, any ships, that of any cruise ships whatsoever, that meant Alaska couldn’t get any tourists from the United States via cruise ship, or at least via large cruise ship. What happened is people started complaining because Alaska had already lost its 2020 cruise season to COVID. There were practically no cruises during 2020 to Alaska from the United States, so they were facing the prospect of losing their 2021 cruise season as well.

Back in March, for example, we spoke to Craig Dahl from the Greater Juneau Chamber of Commerce, and he noted that for a city like Juneau that depends on cruise tourism revenue for about 33% of its revenue, if they were to lose the 2021 cruise season, it was going to be a significant economic blow to them. We at the Grassroot Institute worked with the Alaska Policy Forum, and we sent joint testimony to the Alaska sSatae Legislature talking about why a limited waiver for the PVSA would be the bare minimum that we could ask for right now so that foreign ships, instead of having to stop in Canada, could bypass that stop and move from Washington to Alaska.

Akina: Now, apparently those efforts bore fruit because the Legislature went ahead and passed that resolution up to its governor, and that led to the President of the United States ultimately signing the Alaska Tourism Restoration Act. What exactly does that do for Alaska, and what could that possibly do for Hawaii?

Helton: That bill creates a limited exemption for Alaska from the Passenger Vessel Services Act. What it does is it says, basically, that this exemption remains in place until the time that Canada repeals its ban on cruise ships or March 2021, whichever one is sooner. Foreign-flag cruise ships that otherwise wouldn’t have come, wouldn’t fall under the PVSA’s regulations, now can move passengers from the U.S. mainland to Alaska and back without having to make a stop at a foreign port.

Already we’ve seen several major cruise lines, cruise lines like Norwegian and Princess that would already normally operate in the Alaska market, we’ve seen them decide to come back this summer, because they didn’t think they were going to be able to operate in the Alaska market because of this Canada cruise ban and the PVSA. But once the law was changed, for ships to be able to skip the stop in Canada, cruises decided to come back, and we’re going to see, definitely, a good portion of the Alaska 2021 cruise season salvaged because of the change to the law.

For Hawaii, this is a testament to the fact that when times get tough, legislators might amend the law. We saw this back in the early 2000s when there were no large ocean-going cruise ships that complied with the PVSA. What legislators from Hawaii and from other states were able to work together to get a limited exemption to a couple of cruise ships that Norwegian Cruise Line owned, and it operated them in the Hawaii market and eventually, it pulled a couple of them out. Now, there’s only one ship left that’s actually qualified under the PVSA, and that’s the Pride of America. It was only qualified because it was able to get a waiver from Congress because they thought that there wasn’t going to be any other way to actually get a ship qualified under the PVSA other than to waive the law.

Akina: At least the ball is starting to roll in terms of PVSA reform. I hope that Hawaii will follow suit in terms of Alaska’s example. 

Colin, last month you wrote an excellent blog that talked about shipbuilding subsidies. Good job. Can you tell us a little bit about what that was and what your concern is, how that fits into the Jones Act discussion in particular?

Grabow: Yes. Thank you. There was a recent cover story in the conservative National Review magazine about sea power that — of course, the article made the case for reinstituting shipbuilding subsidies that the U.S. had ended back in 1981, and doing so on both national security and economic grounds. I wrote a blog post that pushed back on this narrative a bit, knowing that there’s little evidence shipbuilding subsidies are a big economic winner or a more effective use of money than leaving it in the hands of private citizens to spend on as best as they see fit. I also pointed out that even with these subsidies, the United States was hardly a great shipbuilding power back at this time, building somewhere around 20 ships per year on average. In comparison, there are individual shipyards in Asia that can build around 50 ships per year.

Where the Jones Act comes into play is, I pointed out, that despite the end of direct shipbuilding subsidies back in 1981, we’re still subsidizing shipbuilding indirectly in various forms, most notably through the Jones Act U.S.-build requirement that I mentioned earlier. Essentially, I argued that if we’re going to reinstitute shipbuilding subsidies — and I’m setting aside whether this is actually a good idea or not — their reconstitution should be done in conjunction with repeal of the Jones Act U.S.-build requirement. That U.S.-build requirement is properly understood as a subsidy that’s paid for by the users of those ships. Who are the users of the Jones Act ships? Disproportionately, they’re residents of Hawaii, Puerto Rico, Alaska, Guam. If we need to subsidize shipbuilding for reasons of national security that benefits all Americans, then we need to make that burden-sharing more equitable. This is particularly true in the case of Puerto Rico, which has a 43% poverty rate, yet is forced to subsidize U.S. shipbuilding through the Jones Act.

Furthermore, this subsidy is hidden, and the costs are not transparent. My argument is that if we’re going to engage in shipbuilding subsidies, it should be done directly and transparently, and the cost more equitably shared. Bottom line, if we’re going to do this, let’s stop using hidden subsidies and switch to more direct ones.

Akina: Powerful argument. Real quickly in about 30 seconds, there’s been a lot of news about wind energy recently and how the first Jones Act-compliant turbine installation is soon going to be entering the market, in just a few years. Colin, how would that change the impact of the offshore wind market?

Grabow: There’s finally going to be a wind turbine installation vessel that meets the Jones Act’s four main conditions that I mentioned earlier. What does this mean? Currently, I believe there’s less than 20 of these specialized vessels in the world that install wind turbines offshore, and none are Jones Act compliant. But there are two ways for Americans to use these ships that don’t violate the Jones Act. First, to load the components onto the vessel in a foreign port and then sail to the U.S. installation site, making the voyage international and not subject to the Jones Act.

The second way is to have the vessel sit off the coast at the installation site and then have Jones Act-complaint barges transport the turbine components from the U.S. port out to the vessel where they’re then loaded onto the vessel and installed. Both approaches come at a substantial cost to efficiency, and we’re starting to get a better idea of how substantial that cost is. Today’s New York Times actually had a lengthy article about offshore wind that discusses the installation of two wind turbines off the coast of Virginia. To get around the Jones Act, the installation vessel had to operate out of port in Canada.

The project that would have taken a matter of weeks without the Jones Act ended up taking a year. There’s also a recent Boston Globe story, I think last week, about the efficiency gains to be had from the new Jones Act installation vessel, as you no longer need those Jones Act-compliant barges to transport the components out to the vessel. An official with a company that’s going to be using that vessel, he called this new Jones Act vessel a game-changer, presumably, because these Jones Act workarounds will no longer be needed.

I think what this really shows is that a real game-changer here would be exempting this sector if not the entire economy from this law. I think this episode is another demonstration of the myriad unseen ways in which the Jones Act hamstrings and hinders our economy.

Akina: That’s right. We’re going to be looking more into this. Colin Grabow of Cato Institute, thank you for being with us today, appreciate it greatly. Jonathan Helton from the Grassroot Institute, thank you as well. We look forward to talking with everybody again in a week or two. Stay tuned for future episodes of “Hawaii Together” on the Think Tech Hawaii broadcast network. Aloha, everyone.

 

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