Sinking U.S. Shipping: Ineffective Law Creates Waves for American Economy

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Host Joe Selvaggi talks with Cato Institute research fellow Colin Grabow about the failure of the Jones Act, a law that sought to protect the U.S. shipbuilding and merchant marine capacity. They examine its downstream effects on inflation, supply chain fragility, and energy access that directly affect every American.

Guest:

Colin Grabow is a research fellow at the Cato Institute’s Herbert A. Stiefel Center for Trade Policy Studies where his research focuses on domestic forms of trade protectionism such as the Jones Act and the U.S. sugar program.

His writings have been published in a number of outlets, including USA TodayThe HillNational Review, and The Wall Street Journal.

Prior to joining the Cato Institute, he performed political and economic analysis for a Japan-based trading and investment firm and published research and analysis for an international affairs consulting firm with a focus on U.S.-Asia relations.

Grabow holds a BA in international affairs from James Madison University and an MA in international trade and investment policy from George Washington University.

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Please excuse typos.

Joe Selvaggi:

This is Hubwonk. I’m Joe Selvaggi.

Joe Selvaggi:

Welcome to Hubwonk, a podcast of Pioneer Institute, a think tank in Boston. The U.S. is the world’s largest economy, flanked by two enormous oceans with trade and security interests around the globe. The same was true in 1920 when Section 27 of the Merchant Marine Act, better known as the Jones Act, was presented as a way to ensure adequate domestic ship building and merchant marine capacity to serve in times of war or national emergency. It did so by restricting all domestic shipping, the vessels that were U.S.-built U.S.-owned, U.S. flag, and U.S. crude. Now, in 2023, policymakers have the benefit of 102 years of data to measure the benefits and cost of this law to determine its success. Has the law helped to cultivate a healthy, competitive and growing American ship building and domestic sea merchant capability beyond the Jones Acts effect on domestic shipping?

Does the law have unintended negative effects on inflation, supply chain disruption, pollution and American competitiveness? Were policy makers to learn that the Jones Act failed in its intended mission, while also exacerbating many problems facing the American economy, what they look toward its reform to improve our financial and national security. My guest today is Colin Grabow, research fellow at the Herbert A. Stifle Center for Trade Policy Studies at the Cato Institute. Mr. Grabow co-authored a book in 2020, entitled The Case Against the Jones Act, and has written extensively on how this 1920 law affects our modern economy. Mr. Grabow will explain how a law that’s set out to protect American national security and a vital seagoing industry in its workers has failed at its intended mission, while also aggravating many of the most pernicious problems of our national economy. He’ll also share his views on policy alternatives that could help resuscitate our domestic shipping capabilities, while also protecting our strategic national interests. When I return, I’ll be joined by the Cato Institute Research Fellow. Okay, we’re back. This is Hubwonk. I’m Joe Selvaggi, and I’m now pleased to be joined by Cato Institute Research fellow Colin Grabow. Welcome to Hubwonk, Colin.

Colin Grabow:

Sure. Thanks for having me on the show.

Joe Selvaggi:

Well, we’re glad to have you. This is your first visit to Hubwonk, and as such, we would like to give you to give our listeners a little sense of your background. We’re gonna be talking about the Jones Act today, which has to do with trade, has to do with shipping overseas. But I want to know a little bit about how you got interested in this topic.

Colin Grabow:

Well, so first off, I started working at Cato in September of 2017, September 25th. Actually, a few days earlier Puerto Rico was hit by Hurricane Maria and the Jones Act was in the news, and people were saying, we need to waive the Jones Act to make it easier to provide relief supplies to Puerto Rico. And in fact, one of the first op-eds I wrote as a Cato employee was arguing just for that, for getting rid of the Jones Act to help Puerto Rico. So that was kinda my first introduction to the law, but then I started to really dig deeper into it. And the more I dug, the stranger the law sounds, the more destructive its effects, more apparent the effect of the destructive impact became to me. And it touches so many things. You know, it’s transportation, which touches so many parts of our lives and helps shape our economy. And I just thought there was a real opportunity there to really dig into this law and try to educate people on why it’s important, why it matters, and why reform or repeal of it is so important.

Joe Selvaggi:

Okay. So we, we know it’s important and we know you don’t think it’s a good idea. So let’s, let’s start with a little bit of history. You’ve been focused on the topic and at least, from your perspective, it’s been unresolved for now more than a hundred years. It’s 1920 that it passed, if I’ve got my facts right. Tell us, what is the Jones Act and why was why was the guy a good idea to somebody in 1920?

Colin Grabow:

So the, the, as you mentioned, the Jones Act was passed in 1920, but you know, let’s not pretend that prior 1920, we had this total free market environment where people could ship, you know, anything they wanted. So the Jones Act, first off, it’s section 27 of the Merchant Marine Act of 1920, which states that essentially to move goods by water between 82 points in the United States, you have to use a vessel that is flagged and registered to the United States. It’s built in the United States, it’s crewed by Americans, and it’s owned by Americans. Now, like I said, this, these kinds of laws go back to the country’s founding, but the context is very much different than today. If you went back to the late seventeen hundreds, U.S. ship builders are some of the cheapest and most efficient in the world. U.S. ship ships shipping firms were some of the best in the world.

So being forced to use American ships was really not that big of a deal. And furthermore, there were national security implications, very clear there. You could take these merchant ships and a time of war, put some canon on them and turn them into a private tier. They could go hunt enemy shipping. And back then, our major enemy, our rival was the British with the Royal Navy. And we had obviously fought a war against them. And we had, we were a small poor country, and we didn’t have a big navy. So this was a way of supplementing that navy and ensuring there were lots of ships in the event of hostilities. Well, time goes on, and that starts to change around the mid-to-late- eighteen hundreds. American shipbuilding goes from being some of the world’s best to increasingly less efficient, less competitive.

This is large part because we switched from wooden ships. This is the age of wooden sail, which gave way to the age of iron and steam powered ships. Americans protected American shipbuilding to keep pace with the rest of the world. So American ships, to build them and use them becomes much more expensive than foreign ships. In fact, by the late eighteen hundreds, we had a court case where there was someone that wanted to ship kegs of nails from the East Coast to California by way of Belgium, because they would send it to Belgium on a foreign ship and use another foreign ship from Belgium to California. And evidently they thought this was cheaper than using an American ship just to go directly to California, which I think speaks to the inefficiency.

Well, Congress changed that to eliminate that, you know, loophole or workaround. But there was another one, and this was people in Alaska they could ship goods to. And from the lower 48 going through Canadian ports, what you happen is you couldn’t take a foreign ship to a foreign port and then to an American port. What you could do is take something over land to a foreign port. So people would transport goods up to Vancouver by rail, and then from there to Alaska. Well, Seattle shipping companies did not like this. They didn’t want foreign competition. They thought, “this is our trade. This should be for us.” And who are they represented by in Congress? Well, Senator Wesley Jones of Washington State. The end of World War I comes along, and the U.S. had built a big fleet. And we, cuz we didn’t have enough ships to transport all the equipment and soldiers over to France and the U.S. had to get rid of those ships, so they decide to auction off those ships, get rid of ’em. Also, just to kinda revisit maritime policy in general, and in the Merchant Marine Act in 1920, Senator Wesley Jones inserts Section 27, which changed the law to remove the ability to ship goods through Canada basically as to keep shipping interests there in Seattle.

Joe Selvaggi:

So, shipping interests, although I do think any American U.S. historian will say that we don’t like standing armies. We don’t like standing navies. We’d like to be able to flip a switch and have the ability to commandeer domestic ships. That seemed like a reasonable pretextual justification for this law. But for our listeners, just so we know, this 1920 law still is more or less intact to this day. In 2023 the law still mandates that if I’m going from Texas, to Alaska to, to California or Texas to Boston, I still have – if I wanna do that via sea– the ship has to be built in the U.S., crewed in the US and owned by a U.S. interest. Is that still the case?

Colin Grabow:

That is still the case, yes. This law is basically is more or less untouched since 1920.

Joe Selvaggi:

So for our listeners who are, you know, many of our listeners are “put America first.” We know we’ve heard these kinds of sentiments in other industries. This mandate means we’re gonna have, perhaps intuitively, more ship building than we would otherwise have more domestic seamen than we would otherwise have. Why is this not a good idea?

Colin Grabow:

Yeah, it’s a great question. You know, on its face, what could be the Jones Act is actually just very pro-American, using American-built ships, employing Americans. What could be wrong with that? What kind of monster would wanna take on this law? Exactly. Well, the, the problem is that these ships are incredibly expensive to build and crew. A U.S.-built ship today, a tanker ship, is roughly four times as much as a foreign-built ship. So we’re talking, you know, $40 million overseas versus, you know, $175 million. I’ve heard estimates up to $200 million in the U.S. for a container ship. The most recent order for a Jones Act container ship costs $330 million per ship over in Asia. That’s closer to a $60 million ship. So these costs get passed along, operating these ships costs about three times more than foreign ships. So the ships are very expensive to operate, which means that people don’t really use them because they’re so expensive.

Over time, since 1980, the number of Jones Act ships has declined from 257 to, it’s a little, around 90 today – I think maybe 92, something like that. Today we’ve taken what should be a very attractive method of transportation and turned it into a very unattractive method of transportation. And for a country as big as the United States, that’s a big deal. Transportation is efficient. Transportation is a way of overcoming distance and allowing Americans to trade with one another. We have a great pipeline system. We have efficient rail, we have trucking – but we don’t have efficient shipping in this country, which basically means that when it comes time to buy things someone in New England they say, well, I need, for example, diesel fuel, and I can buy that from Texas, theoretically with the Jones Act ship.

Or I can buy it from, say, a refinery in the Netherlands over in Northwest Europe and bring that over. And oftentimes actually makes more sense to buy the, the European fuel. Notoriously back in 2018, Boston imported Russian liquified natural gas, you know, natural gas originated in Russia because it doesn’t make sense to buy the American product once you factor in the cost of transportation. So basically, the Jones Act disincentivizes, domestic chains and, and kind of gums up the works and makes it more difficult for Americans to buy and trade with each other.

Joe Selvaggi:

So the stated interest was to preserve American shipbuilding capabilities, shipowning to have an American flag flying on above those ships. And the result is, it’s exactly the opposite, which is: if I’m gonna move something from one domestic port to another, I can either use a very expensive U.S. ship, or I can use a much less expensive foreign ship. So ironically, what was intended to preserve an industry has had the opposite effect, which is to say most, let’s say, profit-driven shippers choose a foreign ship and naturally a foreign port to get it from. Do I have that about right?

Colin Grabow:

Yeah, that’s correct. You know, essentially you have the choice of: Well, I can buy the American product, or I can use a foreign ship provided that it comes from a foreign port, so I can import the product, or I can buy American, and after I factor in the cost of transportation you know, I’m gonna buy the foreign product. And, and you have some extreme examples, like, you know, I mentioned liquefied natural gas (LNG), where buying the American product is not even an option because the ships to transport it don’t exist. To transport LNG, you need a specialized LNG tanker, and there are none in the Jones Act fleet. So New England has no choice but to buy imported LNG to meet its natural gas needs. And then, you know, as you mentioned, we have seen the fleet decline.

And this is because the Jones Act, it tries to do two things. It tries to subsidize the U.S. merit and the shipping fleet, but then it also tries to subsidize the shipbuilding industry by forcing the operators of ships to buy from American shipyards that cost, you know, four to five times more. Well, when ships cost, you know $300 million instead of $60 million, you’re gonna get fewer ships. And then to top it all off, we don’t even have that. You know, I talked about the decline in the fleet. We don’t even have that much ship building last year and the entire United States, there are only two ships built, one for the ocean and one in the Great Lakes. But the one in the Great Lakes, by the way, that was the first ship built since, I think 1983, ‘84, something like that. In 2021, there are actually zero Jones Act ships delivered. The year before that, there was one over the last, I think since the year 2000, on average year, there are about three Jones Act ships built for context. You know, a single shipyard in South Korea might build 60, 70, or more ships per year.

Joe Selvaggi:

So a topic on, on listeners’ mind when we think about buying goods and services, at least in the last year, is inflation. And we talk about everything becoming more expensive, fuel being the most conspicuous item that’s clearly much more expensive than it was a year ago. I read in one of your papers that it’s true that though we’re more or less self-sufficient when it comes to natural gas, we’re actually loading up these natural liquified natural gas tankers and sending them abroad and buying our liquified natural gas from, as you say, Russia. What effect does that have on the price? Ultimately, if it’s, you know, six, one half dozen of another, we don’t care. But what does that do to the ultimate price for the consumer at the pump, or when he pays his gas bill at the end of the month?

Colin Grabow:

Yeah, it’s hard to put an exact figure on it. If you wanna just talk about you, you mentioned drivers at the pump you know, so we’re talking motor gasoline, and that example there was an analysis last year, I think from JP Morgan that said, drivers on the East Coast would see the price of gas go down by 10 cents a gallon if the Jones Act was waived or repealed and not applied to the transportation of, of gasoline. I saw another estimate from I think, Bloomberg Intelligence, which had some similar impact. It was in the billions of dollars just for motor gasoline. And then if you look at, you know, I think Puerto Rico is an interesting example because right next to Puerto Rico is the Dominican Republic, and if you wanna ship something to the Dominican Republic, no Jones Act, you wanna send it to Puerto Rico where there’s Jones Act.

Well, Dominican Republic buys the vast majority of its natural gas from the United States. Puerto Rico buys basically none, because again, it can’t, so it has to buy it from as far away. You know, a lot of it comes from Trini Tobago, but also last year came from Oman, came from Nigeria, Spain. So these are longer distances, and I think as evidenced by the fact that Dominican Republic buys its gas from the U.S. that’s the best deal to be had. And that’s kind of instructive. So we know there’s some kind of savings there. Presumably that dynamic also applies to New England. So we can, we know there’s a cost you know, putting in an exact number on this, it is difficult. Also depends, do you buy from a spot market? Do you assign a lo sign a long-term contract? So, so a lot of different factors here, but we know there is a cost.

Joe Selvaggi:

So I don’t wanna pin you down then on that cost, but let’s just talk about another aspect of, of fuel. One doesn’t need to read too much about the news to know there’s shocks to global supply that is Russia and their supply lines or the war in Ukraine. You know, if we have a very cold winter, both here in the U.S. and in Europe the lights start going dark and our homes start getting cold. What kind of vulnerability is there, would you say, if we can only import natural gas to Boston from somewhere else that’s not U.S.-based? What kind of vulnerability does that introduce into our supply lines?

Colin Grabow:

Well, I know that back in the late eighties, I think there was an example of there was a very cold winter, and New England was screaming for home heating fuel. And there happened to be a foreign ship heading out of Texas on its way, I think, to Italy. And New England said, let’s waive the Jones Act so we can divert that ship up here. And they never got that waiver and it ended up going to Italy. But these are the kinds of things that happen. There’s a ship with something you need and you can’t get it. You know, in terms of LNG we are the world’s leading exporter of it. You know, we ship it as far away as China, but we can’t send it to New England. So you’re kinda taking supplies off the table. It’s fewer options that you have at your disposal, which I think introduces vulnerabilities in times of crisis. Especially, you want maximum options, maximum flexibility on the table to meet your needs. And the Jones Act means less of that.

Joe Selvaggi:

So the you know, the over the 10,000 feet view of the Jones Act is to, to preserve and perhaps cultivate a U.S. shipbuilding industry. Presumably, we can’t merely just supply ships to the U.S. We would be a global supplier. You had mentioned earlier at the top of the show that we used to be a global supplier of ships. So best in the world. In this industry we’re trying to cultivate, do we sell any U.S.-made ships to other countries that are looking for, you know, wonderfully U.S.-made products?

Colin Grabow:

No, in terms of you know, merchant cargo ships zero. No, in fact, so while these ships have to be U.S.-built in many ways, these ships are actually already foreign. Kind of one of the dirty secrets of Jones ships is that while the steel, the hull of the ship is American, all the components that go into the ship to make it work like the propeller, the engine the anchors all, all these other parts, you know, the boilers, etc., these are foreign – they’re imported. To give you one example, take the Philly Shipyard/. I think about 15 years ago, there they were building a series of tankers, and each ship required 500 containers worth of parts coming from South Korea as well as 25, what they call bulk shipments. Things, you know, good bulky items like the engine or the propeller, things like that.

And the designs are foreign, too. So they buy foreign designs. They use foreign components to put them all together. So one of the sad things about the Jones Act is some people may think, well, in time of war, the Jones Act means that we can build our own ships, and we don’t have to rely on foreigners. But the reality is we’re absolutely dependent on foreigners for our ships. So we don’t export ships. We build a very small number of them. And the ones that we do build are highly dependent on foreign expertise and components.

Joe Selvaggi:

I can anticipate our listeners who, you know, this might be like fingernails on the chalkboard because it sounds like we’re casting aspersions on U.S. manufacturing that we can’t make things anymore. And we’re not saying that because I’m thinking about other industries that are similar to the shipbuilding. You know, what springs to mind, of course, when we talk about transportation is airplanes, right? Airlines? Boeing is a powerhouse, right? That both, of course, supplies domestic airlines. But of course you know, you can fly a 747 at British Airways or Hanza or, you know, Alaia. The whole world uses our airplanes. Why is it different? Is it merely that the airlines don’t have a Jones Act, or share with our listeners? Why is it that you think we aren’t more competitive in ships, whereas we seem to be very competitive in other large industries?

Colin Grabow:

Yeah, I think this is a very logical question. A lot of people think, “Well, wait a minute. You know, Americans are pretty competitive people.” We do a lot of, a lot of things really well. You mentioned airplanes, you know, SpaceX, we can build rockets that go open and the atmosphere and come back and land themselves. We do incredible things. Why not ships? And there’s a few different factors here. I think number one is, well, you have the Jones Act, which says you don’t have to compete. Well, if you don’t have to compete, you’re almost by definition going to be uncompetitive. There’s no one to keep you on your toes and push you. Also, I think the Jones Act has actually harmed American shipbuilding by disincentivizing them from finding a niche. I, to be really successful at something, you need to compete on the international market, build at scale, and find your little niche.

If you look around the world, for example I think Finland, they are world class at building ice breakers. You look at the Dutch, they’re very good at dredging vessels. You look at South Korea, they’re renowned for their LNG tankers. I go down a list. People tend to develop cast specialties. Well, American shipbuilders don’t really have a specialty. They’re kind of a jack of all trades, master of none. Because they build for a captive U.S. market, which means, you know, one year they get an order for this kind of vessel the next year, that kind of vessel, they’re kind of all over the place in what they build. So they don’t develop these specialties. They don’t build for the international market. So they don’t get scale. I mean, scale is just a huge factor here. If you’re a ship builder and you’re building, you know, 60 ships a year, well, you’re ordering 60 engines per year.

And if you’re a Jones Act shipyard, and you maybe build one or two ships a year, and you go and negotiate a price for these components, well, the guy ordering 60 ships, he’s gonna get a much different price than the guy that orders one ship, or you order, you know, vast amounts of steel. So there’s real economies of scale here that Americans miss out on because they, they built for a very small market. So, you know, and this to me is people that think, well, we Americans need to be protected foreigners we can’t compete against. And I think, wow, you really have a low opinion of Americans. I think that in many industries, we’ve shown an ability to compete. And what with the Jones Act has shown is that this is absolutely the wrong way of going about trying to encourage an industry.

Joe Selvaggi:

So another example where protectionism has the unintended effect of making U.S. companies less competitive. Yes. Let, let’s shift gears a little bit and say, okay, look, we’re a both a economic superpower, but a a military superpower. We’re, we’ve got oceans on both sides and more or less keep the the oceans free for trade. Where are all those ships built that we that we use to protect our shores and other, other country’s shores? Are we, are we jeopardizing our ability to make warships by, in a sense perhaps advocating for more competitive domestic fleet?

Colin Grabow:

Yeah, so if I were to advocate for the Jones Act, I would tell you that, well, we need the Jones Act because we need to give business to the shipyards to ensure that they can also produce, you know, warships for our Navy and meet our national security needs. That’s at least the argument you’ll hear. But when you subject it to some kind of scrutiny, you’ll find it, it doesn’t hold as much water as you might think. For example, if you’re in New England, there’s Bath Iron Works up in Maine they produce frigates, you know, for the Navy. They haven’t built a Jones Act ship, a commercial cargo ship since I think 1984. If you go down the coast to Newport News shipyard that builds aircraft carriers, this shipyard has not built a commercial ship since the late 1990s.

If you go over to Huntington Engles in Pascagoula, Mississippi again, they build, you know, I think frigate destroyers, cruisers. They have not built a commercial ship or even tried to since the late nineties. So, you know, and then electric boat they, you know, build submarines. They don’t build merchant vessels. So there’s a limited amount, there’s some overlap. For example, the NASCO Shipyard in San Diego. They they build non-combat ships. They build, you know, support ships, oilers fleet support ships, and they build an occasional Jones Act ship. You know, they delivered one, I think in 2020 was the last Jones Act ship, but their bread and butter is building for the Navy. That’s, you know, say 80 percent of their work. In fact, there was a government report released in 2021 that showed in terms of industry revenue for ship building US ship building industry, almost 80 percent of revenue in 2019 was government contracts to build for the Navy. So that’s what’s really driving a lot of the big US shipyards. And then the one, the shipyards that do build Jones Act ships, like the last Jones Act ship was delivered by a shipyard in Texas. They’ve built nothing for the Navy. They’re exclusively focused on commercial work. Also, Philly Shipyard, they’ve built roughly half of all Jones Act ships. They do not build war ships or, or ships to the Navy or Coast Guard. So there’s some overlap in some places, but it’s quite limited.

Joe Selvaggi:

So what you’re saying is almost, but not entirely, but almost a, a complete bifurcation of production, right?

Colin Grabow:

Some, that’s what we’ve seen, yeah. The skillset to build, you know, say an aircraft carrier or you know, a destroyer or something like that, is quite different from building a merchant ship. And you don’t just switch easily back and forth between the two of them. In fact, you know, I mentioned Newport News, last buildings, some commercial ships, the nineties. This was back when we had defense cuts after the Cold War had ended. And they thought, okay, well, we know how to build ships, we’ll get in the commercial game. And they got a contract to build several tankers, and they ended up losing, I think, a few hundred million on it. They were not good at it. So these are kind of fairly distinct you know, ship types,

Joe Selvaggi:

Which ties back to your idea that the best business in this industry is to be highly specialized, high volume. You gain an expertise in a particular type of ship. But what you’re saying, with our listeners who might be concerned by, let’s say, any disruption to the Jones Act, any change to it would have a detrimental effect on our ability to make warships is really very little overlap: it would have almost no impact on those, those shipyards making war ships and, and logistical ships for the Navy and the Coast Guard.

Colin Grabow:

Yes, yes. I just lastly point out, you know, we can even rethink some of that as well with regard to what our Coast Guard Navy buys, for example the Coast Guard is currently building or they signed a contract to build an icebreaker called a Polar Security Cutter, because I think there’s only like two ice breakers in the Coast Guard fleet. And they want more. So they asked a US shipyard to build it, which has zero expertise in building these ships. So far, they’re already suffering from cost overruns and delays. And, in Finland, which is trying to join NATO, these are potential NATO allies of ours. You know, they say we could build it like a third of the cost, and in just two or three years. So these are all building in the United States, that’s great. There are advantages to it, but they’re also disadvantages. And we need to weigh these things pretty carefully.

Joe Selvaggi:

So we’ve spent our time talking about all the problems with the Jones Act, but of course, it still exists, and, as I mentioned at the top of the show, for more than a hundred years. So I’ll give you an open-ended question. We clearly seem to think that it might not be a good idea. But to be fair to the other side, who supports this law in 2023, given all the observations you’ve made, and certainly others can also make.

Colin Grabow:

So the, the Jones X support has three basic components. It’s going to be U.S. shipyards Ship Builders Council of America, for example. That’s not a huge surprise. This, after all, is the law that says we have to buy from them. We cannot buy from foreign competitors. So they very much like the law and support it. And then you have vessel operators. These are the guys that run the ships, the shipping companies. They certainly don’t want any foreign competition to come in and try to take business from them, you know, running supplies to Hawaii or Puerto Rico or Alaska or, or tankers, you know, along the East Coast. And then you also have seafare mariners, such as Mariner Unions folks, like Sea Fairs International Union, the Master’s made some pilots, or the marine engineer’s beneficial association, organized labor because they crew these ships, and of course, they don’t want to compete with, with, with foreign labor. So those are the three main elements of what you could refer to as the Jones Act lobby that are constantly in Washington. A lot of them have offices here are making the case on an almost daily basis for the law. And maintaining it while you’re average American probably has no idea the law even exists. And so the forces that work here are pretty asymmetrical. And our policy reflects that.

Joe Selvaggi:

So we often talk about the classic case of concentrated benefits and diffuse costs, as you say, as somebody pays for the more expensive ship, somebody pays for the more expensive crew, somebody pays for the more expensive operation. And that’s consumers. Anybody who pumps gas or buys products, we pay those additional costs. So if, I may ask if you, there’s a nuance in reading your paper that suggests there may be some middle way. We, we touched on it briefly. The Jones Act mandates it has to be both U.S.-built and U.S.-operated. But you said even the U.S. operators are frustrated in that they’d rather buy a cheaper foreign ship and have a better bottom line. Did I misread that? Or might we be able to at least take a small measure and at least relieve the obligation to buy a U.S. ship, buy a foreign ship, and mandate that it has to have a U.S. crew and a U.S. ownership, perhaps, you know, for strategic reasons?

Colin Grabow:

Well certainly, I think, you know, we often talk about the Jones Act and binary fashion, do we keep it? Do we get rid of it? But you know, as you’ve kind of hinted at there are many other options for changes in reform. And one obvious candidate would be revisiting the U.S. built requirement and allowing Americans to buy, you know, vessels from anyone they want. Or you could even just limit it, say to NATO allies or allies in Japan and South Korea. But many people may think that, well, on the one hand of U.S. vessel operators they like the protection of the Jones Act against foreign competitors. But they must really hate the U.S.-built requirement cause they have to pay an arm and a leg for new ships. But one of the perverse consequences of the Jones Act is, in fact, these vessel operators very much support that.

Now, why would they do that? Well, it’s because these guys, as I just said, they paid, you know, very large amounts for, for these new ships. And then the last thing they want is someone to say, “Oh, great. There’s no U.S.-built requirement. Aha. Go buy some cheap ships from, you know Japan or South Korea, and I’m gonna drive the existing guys out of business cause I’m gonna be able to offer much lower, you know, rates.” So unfortunately, even the people that pay these extreme prices for new ships, they actually support that because it helps fend off competitors. If you, if the way to get in the shipping game is you have to buy a ship that costs hundreds of millions of dollars. ?hat’s a great, you know, kind of moat around your industry to keep out pot potential entry.

?n contrast, we have the U.S. airline industry where you can lease some, some, some, some jets and kind of, you know, hire some crew in your, more or less in business. You can’t really do that in Jones Act world. But to your point, this would actually be, I think, an excellent opportunity for reform. And it’s one that’s not even, it’s, I can’t consider it very radical because all it would do is bring the Jones Act in line with all of our other transportation sectors. We can use Airbus, you know, foreign-built airplanes. We can use foreign-built trucks, foreign-built rail stock in this country. And I think those industries are all better off for it. So this would be absolutely an obvious reform. And I’ll just throw another one out there while we’re at it, which is, let’s say if you wanna ship something from one part of the United States to another, and there’s no American ship available, then you can use a foreign ship you know, LNG being a classic example. We don’t have any of those tankers in our fleet. Let’s see, let’s let Americans use foreign ones. And, and those examples, no loss to U.S. maritime ministry, and it’s a gain to, to American businesses.

Joe Selvaggi:

So we have a carve out then for particular industries where there is no domestic equivalent or substitute. I don’t wanna miss the, the concept though. I think I breezed right over it. There may be some people who say, “Look, we’ve got all these ships out there, be they American or foreign made. What about the ability to maintain all these ships? If we can’t, if we don’t build them, would we also not be able to maintain?” In other words, would an old U.S. ship not be able to, let’s say, in a time of conflict where would we get our ships as serviced if, if not in these U.S. Jones Act ports?

Colin Grabow:

Well, one of the interesting things about the Jones Act is while that it does mandate that you have to use a U.S. built ship, it doesn’t say anything about where you have to maintain repair it. What U.S. law says is actually, you can repair it wherever you want, but you have to pay a 50 percent tax on those foreign repairs with a few exemptions for countries that we’ve signed free trade agreements with, like Canada and Singapore. And what happens is, in fact Jones ship operators particularly those that serve Alaska and Hawaii out there in the Pacific, they send their ships to China to state owned shipyards in China to get repaired. And sometimes the work is actually pretty extensive that they get done. There are two Jones Act ships, I’m aware of that basically were overhauled nearly completely rebuilt in Chinese shipyards.

So  what’s really perverse here is that because we have the Jones Act, which makes it very expensive to buy new ships, people tend to hold on for ships a lot longer than what you find internationally. Internationally, ships tend to last about, say, 20 to 25 years, whereas Jones Act ships tend to be used at least until age 40, their early forties. Older ships, yeah, you can use them, but they need more maintenance. So by requiring that we have, you know, U.S.-built ships that are more expensive, we encourage them to last to, to be in service longer, which means more maintenance, which means more work for Chinese shipyards. Again, this is one of the, the perverse things. So I, you know, the ability to repair ships doesn’t dovetail that overlap that much with the Jones Act, because under current law, you don’t have to maintain them in US shipyards.

Joe Selvaggi:

So I’ve tried to come up with all the reasonable defenses of the Jones Act. We’ve even talked to some sort of touching around the edges. We’re running out of time here. I always like to give, I guess, the ability to be king for a day. I think we’ve already talked about some of the tweaks you might make to the Jones Act. But if you were king for the day, I guess, I’ll ask it directly: Would you just simply repeal the Jones Act? Will we all be better without this 102 year old law flat out?

Colin Grabow:

I think we would, but you know, I do think Jones Act supporters raise national security concerns. And in my mind, these concerns are fairly – they’re without merit. If you look at the record of the Jones Act versus was accomplished, I think the law isn’t working. But I do take very seriously the need to have a fleet of ships to transport supplies and equipment for the U.S. military. So in my perfect world, I would pair Jones Act repeal with targeted subsidies to ensure that the U.S. military does have the ability to ship goods where they need. And this isn’t, this isn’t pie in the sky thinking. This is actually nothing new. This is nothing particularly creative. In fact, right now, we already have a program called the Maritime Security Program, which gives a 5.3 million subsidy to 60 ships.

Now, these are not Jones Act ships. These are U.S.-flagged foreign-built ships. So they cannot transport goods in the United States. They can only operate internationally, you know, carrying goods from the U.S. to foreign countries, and vice versa, I would just go to the us to the Department of Defense and say, guys, how many ships do you need? Because you should absolutely have what is required, do your job. So I would, that’s what I would do. I would repeal the Jones Act, and I take very seriously US National Security needs, and I think we should have the the, the systems and the programs in place to meet those needs because the Jones Act is not meeting those needs. Today

Joe Selvaggi:

To be clear for our listeners, what you’re talking about is where the U.S. government would pay, let’s say, a foreign ship an amount of money every year to look when we need it, be it for war or, you know, some catastrophe we can’t guess. They would look – I don’t know what the right word would be –into our service whenever we want to. Is that about how that would work?

Colin Grabow:

So the, the, the Maritime Security program I described, these are actually US ships, and we can just expand that and say, “We’ll give you a subsidy.” And furthermore, you have to put your ship under the American flag. So it’s under our control more or less. And yes, and then exchange for that subsidy in return. What it gets us is the ability to use your ship. We can call upon you in time of national emergency or conflict or something to use those ships. So they’re there when we need them.

Joe Selvaggi:

All right, well, we’re getting closer to the end of our show. I think our listeners are reasonably fired up. I think we persuaded them that the Jones Act may be not such a good idea. I want you to tell us where we can read more about your work on the Jones Act. But before that, what should our listeners do, be they just engaged voters or state and federal elected officials, what would we do to put this on the radar and get it off the legal books get this law repealed once and for all and, and not have another 102 years dealing with it?

Colin Grabow:

Well, I just say you can’t get something if you don’t ask for it. And so I would absolutely reach out to your elected members of Congress to start there and say, this is a federal law. It’s a federal law. It’s not working. And I think it’s high time that either, you know, we repeal it or make some significant changes to it. It’s not working for our national security, it’s not working for our economy. And I also think that even state legislatures and governors, they can at least send a signal to Washington, say, “Hey, guys, you in Washington, this is something we care about. This is something that’s hurting us.” So by all means, I would encourage people to reach out to elected officials at all levels and let them know how you feel about this.

Joe Selvaggi:

Well, it’s a huge topic with lots of implications. Where can our listeners read more about your work on the Jones Act, and perhaps better develop their own opinion on whether this is a good idea or not?

Colin Grabow:

I would encourage readers to look for Cato Institute’s work at https://www.cato.org/jones-act. It’s pretty easy to remember. You could, if those of you that are active on Twitter and wanna follow me, where I, I have present a lot of material about this my handle is at @cpgrabow. I think those are both the excellent resources to start learning more about this law.

Joe Selvaggi:

Wonderful. Well, there they’ll start their journey and understand it better from our introduction here. So thank you very much for being on Hub Wonk today. Colin, you’ve been a, a great resource for our listeners.

Colin Grabow:

Joe, it’s been a pleasure. Thank you.

Joe Selvaggi:

This has been another episode of Hubwonk. If you enjoyed today’s episode, there’s several ways to support Hubwonk and Pioneer Institute. It’d be easier for you and better for us if you subscribe to Hubwonk on your iTunes podcatcher. It would help make it easier for others to find Hubwonk if you offer a five star rating or favorable review. We’re always grateful. If you wanna share Hubwonk with friends, if you have ideas or suggestions or comments for me about future episode topics, you’re welcome to email me at hubwonk@pioneerinstitute.org. Please join me next week for a new episode of Hubwonk.

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