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Why is the Jones Act so important all of a sudden?

Why is the Jones Act Important All of a Sudden?

Photo courtesy of E21 Manhattan Institute

By Melvin Torres, Director of Western Hemisphere Trade

During the recent hurricanes that affected Houston, Florida and Puerto Rico, the Merchant Marine Act of 1920 – better known as the Jones Act – has been in all news and social media. Many are wondering what makes the Jones Act important as the President of the United States waived the Jones Act for Houston and Florida temporarily when Hurricane Harvey impacted both, and for Puerto Rico on September 28, 2017. This was eight days after hurricane Maria destroyed the island’s infrastructure and stirred a humanitarian crisis from the devastation. These crises make the Jones Act important to understand now that it has a direct impact on the well-being of people in these disaster areas.

What makes the Jones Act important?

Many of us that have traveled to Puerto Rico ask why everything is much more expensive in there than in the US mainland? The answer may lay on the fact that when a cargo ship leaves its destination, let’s say China, it passes approximately 10 miles from Puerto Rico, lands in Jacksonville, Florida, unloads its containers for Puerto Rico, the containers wait for a U.S.-flag ship, constructed in the United States, owned by U.S. citizens, and crewed by U.S. citizens and U.S. permanent residents.

Then it is loaded into the vessel and sails back to Puerto Rico, unloads the containers in Puerto Rico and waits for the USDA and US Customs to approve a truck to move it out of the port. This process as per the US the Federal Reserve Bank of New York [4] and the World Economic Forum[5], increases costs for the goods at the point of sale by at least twice the cost in the US mainland.

Why do we know so little about the Jones Act and why did the President lift it for 10 days in Puerto Rico? In short, the law was created in 1920 after World War I to bolster the US maritime shipping business after German U-Boats had sunken thousands of vessels.

The Jones Act regulates maritime commerce between U.S. ports. Within the Jones Act, there is Section 27 which regulates how cabotage (defined as coastal trade) is used, requiring that all goods regardless of type that are shipped by water between U.S. ports have to be carried on U.S.-flag ships, constructed in the United States, owned by U.S. citizens, and crewed by U.S. citizens and U.S. permanent residents.

How many US vessels that qualify for shipping to Puerto Rico are in existence? Table 1 in this link, published by the United States Department of Transportation, shows the existing stock of privately owned ships sailing under the U.S. flag.*

These shipping companies are mainly four US companies that ship all goods to Puerto Rico. The law also applies to Hawaii, Alaska and Guam. Three American territories are exempt from the Jones Act. The law has very little effect on the state of Arkansas as most goods are trucked in and out of the state, eliminating the use of maritime vessels when it is more expensive to ship through the Arkansas Rivers.

What is the impact of the Jones Act on Puerto Rico’s Economy?

The economic impacts of the law, direct and indirect, also make the Jones Act important to understand.

The average gross salary in Puerto Rico is $28,720, compared to Mississippi, the poorest state in the nation which has an annual average salary of $38,300. The median average household income is less than half of that of the poorest state in the nation. The unemployment rate in Puerto Rico is over 10%, compared to the US National average unemployment rate of 4.2%.

One of the arguments per a study by the Government Accountability Office on the Jones Act restrictions, is that the law prevents the development of Puerto Rico’s electric power infrastructure as it constrains the island to oil power, since most American tankers are unable to handle liquefied natural gas.

In addition, the Federal Reserve Bank of New York [4] and the World Economic Forum [5] found that the Jones Act hurts the Puerto Rico economy. It is estimated that goods cost twice to four times as much in Puerto Rico compared to the mainland. The Jones Act adds $.15 cents to each gallon of oil shipped to Puerto Rico. Also, Puerto Rico’s state-run power authority pays 30 percent more than it needs to for liquefied natural gas.

For an example of what happens to shipping costs when the Jones Act is lifted, look at the time when the US Virgin Islands were exempted. It is a U.S. territory nearby and similar to Puerto Rico and the cost of shipping goods there dropped to half of the amount of shipping costs to Puerto Rico.

One way that this law has an effect on Puerto Ricans is how businesses utilize air conditioning as a result of the high cost of shipping oil for the energy grid. All establishments wait for their doors to open to the public turning the air conditioning systems on and once it closes, the system is turned back off. Employees work without air conditioner before and after their establishment is open to the public.

A 2012 report by two University of Puerto Rico economists found that the Jones Act had a $17 billion impact as a loss to Puerto Rico’s economy from 1990 through 2010. As far as Puerto Rico, Hawaii, Alaska and Guam as a whole are concerned, another study by the International Trade Administration and the General Accounting Office estimated the Jones Act’s impacted the economy of the three by $2.8 billion to $9.8 billion per year. Some reports go to the extent of stating that if the Jones Act had not been implemented in the past years, Puerto Rico’s debt would most likely not exist. Certainly you can see why so many consider the Jones Act important to discuss.

For now. A repeal of the Jones Act in Puerto Rico has the support of the Heritage Foundation, the Cato Institute, the Manhattan Institute and two US Senators: Senator John McCain of Arizona and Representative Gary Palmer of Alabama, have submitted bills to repeal or suspend the law.

The US shipping and ship building industry are against lifting the Jones Act for Puerto Rico citing national security reasons and that using US vessels maintains a constant availability of ships for Puerto Rico. They argue these reasons make the Jones Act important to preserve.

The U.S. International Trade Commission has estimated that reform or repeal of the Jones Act could yield an annual economic gain of between $5 and $15 billion to the US economy.

Melvin Torres is the Director of Western Hemisphere Trade for the World Trade Center Arkansas and a native of Puerto Rico. The mission of the World Trade Center Arkansas is to grow trade and increase Arkansas exports by connecting Arkansas businesses to the world through international trade services. For more information and valuable updates, please follow the Center on Facebook and Twitter, or subscribe to the World Trade Center Arkansas newsletter.

*U.S. Department of Transportation, Maritime Administration. Table published by Grassroot Institute of Hawaii, Apr 9, 2017.