3D Rendering: Olekcii Mach/Alamy Stock Photo

Protectionism on Steroids


colin grabow is a research fellow at the Cato Institute’s Herbert A. Stiefel Center for Trade Policy Studies.

Published April 29, 2024


America’s enthusiasm for open

international trade and the political will to beat back protectionist interests has been an on-again, off-again thing since... practically forever. But there’s protectionism and there’s protectionism with a capital P. Few variations of it yield such limited, narrowly enjoyed benefits at such a high cost to the rest of us as the Jones Act. ¶ For over a century the waterborne movement of goods within the United States has been subject to the act – more formally, Section 27 of the Merchant Marine Act of 1920 – which requires that vessels engaged in domestic transportation be registered and built in the United States as well as crewed and at least 75 percent owned by U.S. citizens. Although maritime “cabotage” laws are common in other countries, the Jones Act stands out for its draconian nature. Indeed, the World Economic Forum has labeled it the world’s most restrictive example of such a law. ¶ Unsurprisingly, the Jones Act has greatly increased the cost of water transport. Less obviously, the law has effectively squandered what should be a key U.S. economic advantage – the relative ease of water transport in and around a very large country – by rendering an otherwise efficient transport mode uncompetitive. Although the law’s costs fall particularly hard on the shipping-dependent residents of the noncontiguous states and territories like Hawaii, Alaska and Puerto Rico, the impact is felt virtually everywhere in a country where efficient waterborne transport is artificially displaced by rail and truck. ¶ But beyond its economic toll, the law has also proven to be a poisoned chalice for the industry it is meant to support. Limited to a captive domestic market in a global industry that relies on specialization and scale to achieve maximum efficiency, U.S. shipyards produce small numbers of vessels at prices vastly higher than those constructed overseas. These capital costs, in turn, play a significant role in the coastal shipping industry’s dwindling size and relegation to largely those trades where alternative forms of transport are not available.

Origins of The Fall

Although the Jones Act was passed in 1920, similar protectionist laws have existed in the United States since the country’s founding. Indeed, one of the first acts of Congress permitted foreign ships to operate in coastwise (domestic) trade but imposed high tariffs on them to encourage the use of U.S. vessels. In 1817 Congress took matters even further by prohibiting foreign vessels from transporting goods within the U.S.

The efficiency of a once renowned industry declined to the point that, by the late 1860s, U.S.-built ships cost significantly more than those constructed in Canada and Great Britain.

Such restrictions, however, were imposed in a very different context. Unlike today, early 18th-century U.S. shipping and shipbuilding were renowned for their efficiency, so much so that according to maritime experts these early restrictions “cost the nation nothing” as there was “generally no advantage in securing vessels from abroad.” That, however, was not to last.

As the era of wooden sailing ships gave way to iron vessels powered by steam, protected U.S. shipbuilders saw their competitiveness steadily erode. The efficiency of a once renowned industry declined to the point that, by the late 1860s, U.S.-built ships cost significantly more than those constructed in Canada and Great Britain. Vessels purchased from domestic shipyards became steadily less attractive, and American shippers began looking for hacks.

One method was the use of trans-shipment. In 1891 one shipper transported 250 kegs of nails from New York to California via Belgium, thus dividing the trip into two trips where foreign vessels could be employed. Yes, this much longer voyage, complete with an extra stop, still made more financial sense than using a U.S.-flagged vessel on a direct route.

Even at this early date, the self-defeating nature of U.S. maritime protectionism was already apparent. Writing in 1886, the economist Henry George observed that the “increased cost of building and running vessels [under U.S. navigation laws] has, especially as to steamers, operated to stunt the growth of our coasting trade.” Testifying before the U.S. Merchant Marine Commission 18 years later, shipbuilder I.E. Thaler declared that American shipyards “have been killed and a most desirable business almost obliterated by an excess of well-meant but ill-advised patriotism.”

Such observations, however, caught no one’s fancy in Congress. The problem, as law-makers saw it (with the help of a few lobbyists), was attempts to evade U.S. laws rather than the laws themselves.

Nevertheless, shippers persisted in their attempts to avoid the use of U.S. ships. One successful workaround was sending goods to foreign ports by land and then transporting them to a U.S. port via international shipping. One such waypost was Vancouver, Canada. By utilizing the port, goods going to and from Alaska could utilize more competitive foreign-flagged ships rather than the U.S. vessels that would have to be used if transporting the goods via West Coast ports.

This stopgap aroused the ire of Seattle shipping interests. On February 20, 1920, William Clark of the Pacific Steamship Company proposed legislation at a Senate hearing to block the Canadian competition. The language advanced by Clark bears an uncanny similarity to what Congress eventually adopted later that year – the law better known today as the Jones Act, after its chief sponsor Senator Wesley Jones of Washington State.

Grabow Colin Protectionism Merchant Marine Act 2
Jonathan Saruk/Getty Images
Wheels Within Wheels

The deterioration in the competitiveness of U.S. shipping and shipbuilding since the Jones Act’s passage has been dispiriting. While a 1922 government report found that a U.S.- built ship cost some 20 percent more than one constructed in Great Britain – the world’s dominant shipbuilding country at the time – large cargo ships constructed in U.S. shipyards today cost at least 300 percent more than the competitive world price.

In 2022, for example, the containership George III was delivered by a U.S. shipyard for over $225 million. In comparison, a pair of similarly sized containerships were ordered from a South Korean shipyard the previous year for $41 million each. Small U.S.-built tankers, meanwhile, are estimated to now cost over $200 million compared to an overseas price of approximately $50 million.

More specialized vessels do feature construction costs that are relatively smaller, but even larger in absolute terms. A vessel for hauling and installing wind turbines in coastal waters that is currently under construction in a U.S. shipyard has a price tag of $625 million, while the same type of vessel – indeed, the same model – has been ordered from a South Korean shipyard for $330 million. In 2019, the Wall Street Journal estimated the price of a U.S.-built liquefied natural gas tanker to be $520 million more than an equivalent one built in Asia.

In addition to these capital costs, U.S.- flagged ships also labor under operating costs that appear to be increasing at a rapid clip. While a 2011 government study reported such costs to exceed those of their internationally flagged counterparts by approximately $4.9 million annually, a 2018 Government Accountability Office report found that difference to have increased to more than $6.2 million.

A lack of competition within the attenuated Jones Act fleet also exerts upward pressure on prices. This is particularly true of service for Alaska, Hawaii, Guam and Puerto Rico, where each market is home to just two shipping companies. And, no surprise, sometimes this lack of competition leads to collusion. In 2008 four shipping executives pled guilty to price-fixing in the Puerto Rico trade.

In the offshore wind sector, critical to the transition to net-zero carbon, the high cost of U.S. shipbuilding and inefficiencies resulting from Jones Act restrictions have contributed to the nascent industry’s struggles.

The inability of Jones Act shipping to compete for international cargo also leads to their inefficient utilization. Jones Act container-ships, for example, cannot compete for cargo from nearby Caribbean ports after discharging goods in Puerto Rico, meaning they return to the U.S. mainland less than half full. Tankers are subject to a similar dynamic, resulting in longer backhaul voyages where the vessels sail empty.

Inevitably, the cumulative impact of such factors is costly shipping – very costly. A 2012 Federal Reserve Bank of New York study found that it was roughly twice as expensive to ship a 20-foot container to Puerto Rico – where the Jones Act applies – than to nearby Jamaica or the Dominican Republic, where it does not. A 2014 Congressional Research Service report, meanwhile, noted that the cost of shipping oil from the Gulf Coast to refineries in the Northeast was two to three times higher than shipping the oil to Canada.

These bloated costs serve as a de facto tax on domestic commerce, introducing myriad distortions at the expense of other American producers. One such distortion is the importation of products that would otherwise be made domestically. A 2013 GAO study, for example, noted Puerto Rican farmers and ranchers purchase animal feed and fertilizer from distant foreign sources to escape Jones Act prices. Likewise, lumber companies in the Pacific Northwest have complained for decades that the Jones Act gives a competitive edge to Canadian competitors in the U.S. market. A 1989 U.S. International Trade Commission report, meanwhile, identified the Jones Act as a key factor behind Eastern U.S. steel firms’ struggle to compete against imports in the Western United States.

These distortions are particularly pronounced in energy. For example, East Coast refineries purchase most of their crude oil from foreign countries such as Nigeria and Saudi Arabia, while the Gulf Coast exports similar grades of crude as far as China and Singapore.

At its most extreme, however, the Jones Act doesn’t simply undercut the purchase of U.S. products but makes it outright impossible. While the United States is the world’s top exporter of liquefied natural gas, both New England and Puerto Rico must rely on imported LNG as there are literally no Jones Act-compliant tankers capable of transporting the fuel. From November 2022 through October 2023, Puerto Rico’s premier source of LNG was Nigeria, which is over 2,500 nautical miles further from Puerto Rico than U.S. export terminals along the Gulf Coast.

The bill adds up. In 2019 the head of the beleaguered Puerto Rico Electric Power Authority testified that Puerto Rico stood to lose “hundreds of millions of dollars in savings” from its inability to access U.S. LNG – an amount later clarified at $300 million per year.

Similarly, the United States is a leading exporter of liquefied propane gas. But Hawaii, New Hampshire and Puerto Rico must obtain LPG from as far away as West Africa owing to the nonexistence of Jones Act-compliant vessels to transport it.

The Jones Act’s role as a trade barrier is another oft-overlooked cost. U.S. trade partners often express their desire for access to the domestic shipping market, but U.S. officials invariably refuse to cede ground during trade negotiations.

There are environmental consequences as well. A dearth of coastal shipping – in large part due to the Jones Act’s high costs – has increased demand for alternative forms of transportation. That means higher prices for trucking and rail, increased congestion, more highway maintenance and – particularly in the case of trucking – more pollution. Indeed, a 2020 Cato Institute analysis calculated that the value of potential environmental gains of repealing the Jones Act would range as high as $8.2 billion as newer vessels displaced older Jones Act-compliant tonnage and freight is shifted away from more polluting modes.

The Jones Act’s role as a trade barrier is another oft-overlooked cost. U.S. trade partners often express their desire for access to the domestic shipping market, but U.S. officials invariably refuse to cede ground during trade negotiations. In retaliation, U.S. trading partners refuse to open sectors of their economy desired by U.S. exporters.

An example of this was seen during talks that eventually produced the U.S.-Korea Free Trade Agreement in 2007. U.S. officials sought to open the South Korean rice market. South Korea – one of the world’s leading shipbuilding countries – responded by demanding the Americans grant concessions on the Jones Act. The U.S. delegation refused, and the mutually beneficial deal was deep-sixed.

Other costs stemming from the Jones Act also bear mentioning. In the offshore wind sector, viewed by many in Congress and the White House as critical to the transition to net-zero carbon, both the high cost of U.S. shipbuilding and inefficiencies resulting from Jones Act restrictions have contributed to the nascent industry’s struggles. Then there’s the issue of dredging, critical to the efficient operation of U.S. ports and waterways. It, too, suffers from strictures imposed by the Jones Act and a related maritime law.

Accounting for all the wheels spinning within wheels would be no small feat, but analysts have tried.

A 1988 GAO report found that the Jones Act’s U.S.-build requirement alone imposed costs of $163 million per year (approximately $418 million in 2023 dollars) just on Alaska – an amount equal to 2 percent of the state’s personal income. A private 2020 study found that the Jones Act imposes $1.2 billion in costs to Hawaii, while a 2019 study found costs to Puerto Rico of $1.1 billion. A 2023 working paper estimated that eliminating the Jones Act’s application to the transport of fuel from the Gulf Coast to the East Coast would increase “consumer surplus” – the net benefit from the market transaction – by $769 million annually.

Combined with environmental and other costs, these studies suggest an aggregate toll in the many billions of dollars. That would comport with a 2019 study from the OECD that found that the Jones Act’s repeal would increase U.S. GDP by $19 billion to $64 billion (no misprint).

Comprising a fleet of 257 large oceangoing cargo ships as recently as 1980, the number of these vessels that comply with the Jones Act has since declined to 93. Of these, only 74 are deemed militarily useful.
The Jones Act and National Security

When confronted with such estimates, Jones Act supporters typically contend that the extra costs are more than offset by the law’s contributions to national security. In theory, these benefits take the form of ships ready (and legally obliged) to provide sealift for the U.S. military, along with mariners who can crew sealift vessels and shipyards that can both build and repair ships for the military. Sounds good, but the argument doesn’t stand up to scrutiny.

If the Jones Act was meant to provide a large fleet of merchant ships and mariners, then it has come up short. Very short. Comprising a fleet of 257 large oceangoing cargo ships as recently as 1980, the number of these vessels that comply with the Jones Act has since declined to 93. Of these, only 74 are deemed militarily useful.

But even these numbers overstate Jones Act ships’ defense contribution since they are rarely called upon. During Operation Iraqi Freedom, for example, just 6.3 percent of deployment cargo was transported by U.S.- flagged merchant ships – only a subset of which were from the Jones Act fleet. During Operations Desert Shield and Desert Storm in 1990-91, just one Jones Act-compliant ship was pulled from commercial trade to transport cargo from the United States to Saudi Arabia.

U.S. officials have implicitly conceded the peripheral role of these ships in meeting U.S. sealift needs. In 2021 congressional testimony, for example, the head of the U.S. Transportation Command expressed great reluctance to call upon Jones Act ships in times of conflict, citing the economic disruptions that would result from withdrawing the fleet from commercial service. Similarly, that same year a U.S. Maritime Administration report warned that Jones Act tankers – which comprise the majority of Jones Act oceangoing ships – would be “largely unavailable to [the Department of Defense] without major disruption to domestic transport needs.”

The Jones Act’s contributions to domestic shipbuilding are similarly desultory. From 2000 to 2023, U.S. shipyards collectively built an average of fewer than three oceangoing cargo ships per year – and just three are currently slated for delivery for the remainder of this decade. In contrast, Hyundai Heavy Industries’ Ulsan, South Korea, shipyard alone was scheduled to deliver 47 ships in 2023. In terms of gross tonnage delivered, U.S. ship- building over the past decade has trailed not only leading shipbuilders such as China and South Korea, but also every region of Europe.

This anemic production is predictable, given the underlying economics. The high prices charged by U.S. shipyards mean they are restricted to building for the industry’s captive U.S. market. That relatively small market, in turn, is rendered even smaller by Jones Act shipping’s lack of competitiveness, which consigns it to trade where there is no competition from alternative transportation modes.

In effect, the Jones Act’s prevention of fleet modernization drives demand for repair services to a country widely considered to be the United States’ leading geopolitical rival, China.

Even on these routes, however, there is only tepid demand for new vessels due to sky-high replacement costs. The inevitable result is an aging fleet. While internationally flagged ships have typical life spans of 25-30 years – and are often scrapped even earlier to make way for more efficient ships – the last 18 Jones Act ships removed from the fleet had an average age of 43 years. In 2019 ships from the international fleet had an average age of 12.7 years, compared to 20 years for Jones Act ships.

The damage inflicted by the U.S.-build requirement to national security, therefore, is at least two-fold. First, saddling Jones Act shipping with such high capital costs cripples its competitiveness and encourages the fleet’s contraction. Second, by discouraging fleet modernization, the build requirement degrades the Jones Act fleet’s military utility. “Degrade” is an understatement. Commercial ships operating as part of the Maritime Security Program to provide sealift must be no more than 15 years of age, while vessels participating in the Tanker Security Program cannot be older than 10.

The use of aging ships has at least one other perverse effect. To reduce the cost of the more frequent repair and maintenance required of these vessels, Jones Act shipping firms – particularly those operating in the Pacific – utilize state-owned Chinese shipyards. In effect, the Jones Act’s prevention of fleet modernization drives demand for repair services to a country widely considered to be the United States’ leading geopolitical rival.

Meanwhile, practical considerations undermine U.S. shipyards’ ability to offer meaningful contributions in a military crisis. Although Jones Act-compliant ships are nominally “U.S. built,” U.S. shipyards’ extensive reliance on an international supply chain – including from China – calls into question their ability to obtain needed components to construct new vessels in wartime. Furthermore, the few ships built by U.S. shipyards take significantly longer to deliver than those constructed abroad. The last 10 Jones Act-compliant containerships, for example, required an average of 35 months to construct.

Such timelines mean that, in a future conflict, there is a very real chance that any merchant ships ordered from U.S. shipyards would be delivered long after the guns had gone quiet. Indeed, this exact scenario has played itself out before. A crash shipbuilding program launched during World War I resulted in the construction of over 2,000 vessels, but few were delivered before the cessation of hostilities.

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Chris Goodney/Bloomberg via Getty Images

To the extent that the Jones Act generates any significant national security benefits, it is found in the Jones Act fleet’s employment of mariners who could crew U.S. sealift vessels in times of conflict. A 2017 government report found that some 3,400 mariners with the necessary credentials to crew U.S. sealift ships were from the Jones Act fleet. Not surprisingly, they don’t come cheap. Even assuming that the Jones Act imposes costs of just $2 billion annually, that translates to some $600,000 per mariner.

Other considerations also undermine the case for the Jones Act as a means of meeting U.S. national security needs. To the extent that the act succeeds in providing ships and mariners, it does so not only inefficiently but inequitably. Of the dry-cargo ships in the Jones Act fleet, all but one are employed serving the noncontiguous states and territories, as are 11 tankers used to transport crude oil from Alaska to West Coast refineries. This effectively means that while Alaska, Guam, Hawaii and Puerto Rico – a territory with little political voice in Washington and that struggles with a poverty rate of over 40 percent – comprise less than 2 percent of the U.S. population, they shoulder over half the burden of supporting the Jones Act’s oceangoing cargo ship fleet.

Finally, the Jones Act fails as a matter of simple arithmetic. According to the Transportation Institute, a group funded by U.S. maritime interests that is inclined to view the Jones Act through rose-colored glasses, the federal government would have to spend just $800 million annually to maintain the ships and mariners generated by the Jones Act. Since the act costs a whole lot more in terms of higher shipping rates, such numbers argue in favor of scrapping the law and instead meeting national security requirements through targeted direct expenditures on a standby fleet.

Stuck With It?

The Jones Act remains in place because it is defended by a well-organized, well-funded lobby. And while the act’s costs exceed the benefits flowing to shippers, mariners and shipyards by an order of magnitude, the losers are too dispersed to be able to mount effective opposition. As a result, legislators brave enough to advocate repeal mostly earn their applause from think-tank nerds like me. By contrast, those who favor the status quo garner campaign donations, endorsements – even seats on the board of Jones Act companies, once they go to pasture.

The stance of politicians in noncontiguous states and territories that lose the most from the Jones Act offers eye-opening examples of this dynamic. Opposition to the act in Alaska is such that in 1984 voters passed a referendum that made lobbying for the Jones Act’s repeal one of the governor’s official duties. Yet today all three members of the state’s congressional delegation support the law! In Hawaii, Ed Case is the only member of the state’s congressional delegation who favors reforming the law. Meanwhile, Puerto Rico’s lone (non-voting) member of Congress was given an award by maritime interest groups in 2022 for her staunch support of the Jones Act.

It’s not for nothing that the late Senator John McCain, an ardent foe of the law, called the maritime lobby “as powerful as anybody or any organization I have run up against in my political career.”

Pro-Jones advocacy is lent a further helping hand by the U.S. government. On the act’s 100th anniversary, for example, the Maritime Administration, which nominally works for all Americans, called for its preservation. MARAD’s absurd claim that the law supports 650,000 jobs is particularly revealing: the number comes not from U.S. government sources but from a maritime industry-funded study that has never been made publicly available.

Members of Congress provide further institutional support by stifling voices of dissent. A 1995 U.S. International Trade Commission (USITC) finding that the Jones Act costs the U.S. economy $2.8 billion annually, for example, prompted a congressional directive requiring the GAO to scrutinize the USITC’s methodology.

In the wake of this investigation, the USITC lowered its estimates of the Jones Act’s costs in reports it issued in 1999 and 2002, and has subsequently decided discretion in the form of silence is the better part of valor.

In 2018, meanwhile, Representative Duncan Hunter, chair at the time of the House committee responsible for maritime transportation, sent a sharply worded letter to Puerto Rican officials in response to a report issued by the island’s government calling for the territory to be exempted from the Jones Act. (For what it’s worth, Hunter went to prison two years later for stealing campaign funds.) A year later, senior members of Congress called for a Congressional Research Service report to be pulled from circulation due to treatment of the Jones Act that they deemed overly harsh.

What Might Be Done?

Repealing the 104-year-old Jones Act is among the toughest political nuts to crack. It’s not for nothing that the late Senator John McCain, an ardent foe of the law, called the maritime lobby “as powerful as anybody or any organization I have run up against in my political career.” But didn’t people despair in the 1970s before an almost miraculous confluence of factors made it possible to sweep away regulations that were strangling the markets for airline travel, trucking and freight rail?

So never say never, but let’s not hold our collective breath. In the meantime, there are numerous options for more modest reforms that perhaps stand a chance.

One politically astute initiative would be to discard the Jones Act’s restriction against the use of vessels constructed outside the United States. This would have the “virtue” of preserving the interests of shippers and maritime labor, throwing only the tiny remnant of a domestic shipbuilding industry under the bus.

Another plausible step forward would be the establishment of a waiver system based on economic considerations.

Currently, Jones Act exceptions can only be obtained for situations deemed in the “interest of national defense” – a high bar to clear. Allowing Americans to utilize vessels from the international fleet when no Jones Act-compliant vessel is available – think LNG carriers – seems like common sense. By the same token, granting Jones Act exemptions just for shipping to the noncontiguous states and territories would be another worthy incremental reform – and one that might salve the consciences of friends of organized labor who nonetheless wish Puerto Ricans who are living in poverty well.

When the United States first imposed restrictions on foreign shipping, it was a country renowned for its shipping and shipbuilding prowess. The costs of these restrictive policies were small and arguably a reasonable sacrifice in the name of meeting U.S. defense needs. Today, the restrictions disrupt domestic supply chains, add to highway and rail congestion, contribute to pollution and strain relations with U.S. trading partners who retaliate against American exporters – all without doing a lick to enhance national security.

The case for dumping the Jones Act into the ashcan of history is a no-brainer. That’s probably not in the cards anytime soon. But maybe, just maybe, we can whittle away some of its costs.