“Forced use of higher-cost U.S.-flag vessels has benefitted domestic water carrier firms, shipbuilding companies, and associated labor at the expense of consumers. This advantage, however, has been diluted because inflated shipping costs has reduced the attractiveness of barge and tanker transport compared to other alternatives.”
The Puerto Rico recovery effort has brought attention to an arcane special-interest cabotage regulation that delayed shipments to the imperiled island–and required a waiver from President Trump: Section 27 of the Merchant Marine Act of 1920, [(Public Law 261, 41 Stat. 988 (1920)], commonly known as the Jones Act.
Previous posts at MasterResource (here and here) examined the history of oil-export regulation by the federal government; this post surveys the history of water-vessel restrictions from Washington, D.C. directly or indirectly impacting oceanic commerce.
Prehistory/History of Jones Act
In 1808 and 1817, the United States first passed legislation reserving coastwise and intercoastal trade to U.S.-built and registered vessels. [1] Section 27 of the Jones Act (1920) reaffirmed this policy and extended it to the noncontiguous U.S. by declaring:
No merchandise shall be transported by water . . . between points in the United States . . . in any other vessel than a vessel built in and documented under the laws of the United States and owned by persons who are citizens of the United States.
The rationale was stated in Section 1 of the law:
It is necessary for the national defense and for the proper growth of its foreign and domestic commerce that the United States shall have a merchant marine of the best equipped and most suitable types of vessels sufficient to carry the greater portion of its commerce and serve as a naval or military auxiliary in time of war or national emergency, ultimately to be owned and operated privately by citizens of the United States;
National defense–what would later become “national security”–has grown weaker and weaker over time. But maritime cronyism is alive and well today, as recently noted by Alexander Stevens of the Institute for Energy Research:
One of its strongest supporters [of the Jones Act] is Representative Duncan Hunter of California whose district is home to the NASSCO shipyard—the largest U.S. shipyard employer as of 2014. Not surprisingly, groups that benefit most from the protection from foreign competition also largely support the act; they include shipbuilding companies and labor unions that represent the merchant marine…. Recently, a group called the Offshore Marine Services Association successfully pushed U.S. Customs and Border Protection to dedicate resources to an enforcement unit called the Jones Act Division of Enforcement.
The “national security’ rationale would come to be used to protect US oil production from competition from the world oil market beginning in the 1930s, a multi-decade story of tariffs and quotas told elsewhere. [2]
Later Maritime Regulation
The second part of the ‘Purpose’ section of the Merchant Marine Act of 1920 (Jones Act) stated:
… and it is declared to be the policy of the United States to do whatever may be necessary to develop and encourage the maintenance of such a merchant marine, and, in so far as may not be inconsistent with the express provisions of this Act, the Secretary of Transportation shall, in the disposition of vessels and shipping property as hereinafter provided, in the making of rules and regulations, and in the administration of the shipping laws keep always in view this purpose and object as the primary end to be attained.
And so the cronyism would expand.
Public Resolution 17 on March 26, 1934, expanded the U.S.-flag requirement to any shipper receiving a loan from the Reconstruction Finance Corporation or receiving any other government assistance. [3]
On August 26, 1954, the Merchant Marine Act was amended pursuant to this resolution to require at least one-half of government cargos to be moved by private U.S.-flag ships. [4] This became particularly important with the Strategic Petroleum Reserve (SPR), which received imported oil by tanker. Although not adhered to early in the program, an agreement between the Department of Energy and Department of Transportation regarding SPR gave lucrative preference to American bottoms. [5]
Two other petroleum-related cabotage laws were passed in the 1970s.
A provision in the Trans-Alaska Pipeline Authorization Act of 1973 banned exports of Alaskan oil unless strict conditions were met. [6] This special-interest coup single handedly pushed water carriers past oil pipelines as the leading transportation source as measured in ton miles by 1980. [7]
The logical scenario would have been to export oil by tanker to Japan and import more oil from traditional sources into the East Coast. But maritime interest groups pushed to “domesticate” Alaskan supply to require transport from Valdez in U.S. flag vessels.
The National Maritime Council reported that as of October 1, 1982, 75 U.S. flag ships aggregating over 6.3 million deadweight tons were transporting crude through the Panama Canal to Gulf Coast and even East Coast refiners. [8]
A third protectionist element of petroleum transport by water came with an Interior Department appropriations bill in 1979 that gave a 50 percent entitlements benefit for oil shipped by U.S.-flag tankers to refineries located in the U.S. Virgin Islands. This political element raised acquisition costs and distorted the refinery equalization program.
A continuous effort has been made since the early 1970s by the maritime lobby to require a percentage of oil imports to be transported on American tankers. In 1972, a 50 percent cargo preference proposal was defeated in the House; in 1974, President Ford vetoed a 20 percent proposal (with escalations to 30 percent by mid-1977); and in 1977, a 4.5 to 9.5 percent minimum requirement was again defeated in the House. Concern over the rising cost of oil imports prevented passage. Protectionist attempts continued in the 1980s. [9]
Winners vs. Consumers (Concentrated Benefits; Diffused Costs)
Forced use of higher-cost U.S.-flag vessels has benefitted domestic water carrier firms, shipbuilding companies, and associated labor at the expense of consumers. This advantage, however, has been diluted because inflated shipping costs has reduced the attractiveness of barge and tanker transport compared to other alternatives.
Railroads and, to a lesser extent, trucking have benefitted. [10] With petroleum, trunk pipelines have benefitted on certain routes. [11] In fact, many have argued that protective maritime legislation weakened the industry on net and point to historic declines in the U.S.-flag fleet for substantiation. [12]
United States consumers have been saddled with unnecessary oil product costs. Economist Richard Mancke estimated that cabotage regulation of oil products shipped by tanker from Texas-Louisiana refining centers cost East Coast consumers over $100 million per year in the early 1970s. [13] The total differential between lower-cost foreign-flag vessels and U.S.-flag vessels from the Jones Act, including Alaskan oil and SPR oil in addition to coastwise transport, would bring Mancke’s sum to much higher levels for subsequent years.
Current Waiver
In “Jones Act: Distorting American Energy Markets Since 1920,” Stevens outlines a case for repealing the Jones Act, post-waiver.
“Although many groups are quick to defend the Jones Act on the basis that it protects American jobs,” he states, “it’s clear that this outdated law is doing more harm than good—this has become especially apparent following this recent string of natural disasters.” He continues:
[T]he administration should follow the line of thinking that led to this temporarily suspension of the Jones Act as it is consistent with a fairer approach to American business. A push by the administration to repeal the Jones Act—or at the very least, a push to reform it to make it less restrictive—would lower domestic shipping costs substantially, savings that would then be passed on to the American people in the form of lower prices. In the process, the administration would be sending a strong signal that the American economy should not operate based on the protection of entrenched interests in Washington, and instead by the competition and cooperation that defines a dynamic market economy.
An “America First” energy policy would benefit, too, from consumers getting to the head of the line over narrow special interests.
[1] Wytze Gorter, United States Shipping Policy (New York: Harper and Brothers, 1956), p. 131.
[2] See Robert Bradley, The Mirage of Oil Protection (New York: University Press of America, 1989), chapter 2.
[3] 48 Stat. 500 (1934). This would later apply to Import/Export Bank loans.
[4] Public Law 664, 68 Stat. 832 (1954).
[5] See Bradley, Oil, Gas, and Government: The U.S. Experience, (Lanham, MD: Rowman & Littlefield, 1996), p. 1038.
[6] See Bradley, Oil, Gas, and Government, pp. 766–774.
[7] See Ibid., Table 16.2, p. 973.
[8] Press Release, National Maritime Council (December 21, 1982), p. 2.
[9] A plan to require 5 percent of imports and exports to be carried by U.S. built and registered vessels, with the amounts rising one percent a year until reaching 20 percent, titled the Competitive Shipping and Shipbuilding Act of 1983, was defeated. With under 5 percent of cargoes currently on U.S. ships, the bill was estimated to cost consumers $10 billion per year and was opposed by the American Petroleum Institute. Oil & Gas Journal, July 11, 1983, p. 43.
The decline in market share by U.S.-flag ships in oceanborne trade from the World War II era (in thousand long tons) can be seen below:
Year Cargo – Percent Year Cargo – Percent
1940 23,204 31% 1965 27,361 8%
1945 61,736 69% 1970 26,527 6%
1950 49,914 43% 1975 31,347 5%
1955 47,094 24% 1980 28,199 4%
1960 30,968 11% 1983 36,711 6%
Source: U.S. Maritime Administration
[10] See the discussion in Gorter, United States Shipping Policy, pp. 133-34.
[11] Wolbert, U.S. Oil Pipelines, p. 134.
[12] Richard Mancke, The Failure of U.S. Energy Policy (New York: Columbia University Press, 1974), p. 123.
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Note: This post draws upon my discussion of the Jones Act in Oil, Gas, and Government, pp. 1000–1002.