The Impacts of the Jones Act on Hawaiian Economy

The impacts of the Jones Act on Hawaiian economy

History and background

The Merchant Marine Act of 1920 is a United States Federal statue that regulates maritime commerce in U.S. waters and between U.S. ports. Section 27, better known as the Jones Act, deals with cabotage (i.e., coastal shipping) and requires that all goods transported by water between U.S. ports be carried in 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. The purpose of the law is to support the U.S. maritime industry (Wikipedia).

Same law applies to a lot of other countries. For example the European Union has an open trade agreement with their member countries, but have restrictions when it comes to foreign import from countries and states outside Europe. Some other countries have some modifications of this law, that could be that they maybe aloud foreign vessel, but they have to be crewed by locals. While it is common practice for countries to restrict foreign participation in cabotage, few countries require domestically built vessels to be used. Only three countries -- Brazil, Indonesia and Peru -- have maritime laws that are as extensive and restrictive as those of the Jones Act. Brazil, which wishes to play a major maritime role in South America, is easing its laws. Later on in this paper we are going to have a look on how Singapore's economic model would adapt in Hawaii and the possible effect it might have.

Criticism

Critics note that the legislation results in costs for moving cargoes between U.S. ports that are far higher than if such restrictions did not apply. Critics in Hawaii also believe the law has created a monopoly that has rewarded Alexander & Baldwin's Matson Navigation Co. and, to a lesser degree, Horizon Lines -- the two carriers that dominate the market -- at the expense of consumers.

Non-economic matters of the Jones Act

Before we look at the economic impacts of the Jones Act on the Hawaiian economy we are going to briefly discuss some of the other majors issues that arise when discussing the Jones Act.

National Defense

The Jones Act states; 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 (Sec. 1. Purpose and policy of United States (46 App. U.S.C. 861 (2002)).

It is stated that if the U.S. is at war, they are in need of U.S. vessels. To have foreign vessels travel U.S. harbors is a risk. The cost of having a reserve fleet would in fact be cheaper. Also during the time of not war, the need to control U.S. ports if still there. It covers the importance of protecting the U.S. on a vital area. Actually, the use of foreign ships and crew during the gulf war led to a statement from the Department of Defense that there is no need to rely on U.S. vessels in foreseeable wars.

Operating Costs

U.S. vessels have different operating costs than foreign vessels. As shown in the following table, it is the crew costs that make out the largest difference in total costs (table 1). There

are many reasons why this may be; one of them is the demand that U.S. laws have regarding significantly more crew per vessel.

U.S. Flagged Foreign Flagged

Crew $12 705 $2 940

Fuel $4 410 $3 045

Maintance & Repair $2 310 $1 470

Insurence $13 335 $13 335

Other $1 500 $1 400

TOTAL $34 260 $22 190

Table 1. (The Economic Effects, 2007)

The thing to remember when reading these charts and amounts, is that using a foreign vessel would probably not cut costs as drastically as some claims state. The vessels would probably have to pay the same taxes and abide by the same laws as the U.S. vessels. There are additional complications with both the immigration laws and the labor laws as well. It is highly possible that the foreign vessels have crew that work considerably longer hours and under different accommodations. By having U.S. flagged vessel abiding to U.S. law will also give the U.S. the ability to limit trash dumping and limit oil spills.

We also have to consider the fact that foreign vessels may not have the same commitment to deliver when market conditions change. We are never guaranteed that foreign vessels will continue to ship to Hawaii under different circumstances. They might just as well abandon the market when it is no longer profitable. Matson newly signed a shipping deal with China, competing in many foreign markets. This indicates that under the same circumstances, local competitors would lower prices somewhat, if not to the degree that the table above states. In Hawaii, many cattle ranches use airfreight to ship their cattle instead of using U.S. flagged ships.

Job protection

In 2006, an estimated 73,787 jobs were directly attributable to the Jones Act fleet and provided U.S. citizens with employment. These jobs include the crewing of vessels, the building, maintenance, and repair of those vessels, and the shore-side management and support of trade. Another 425,889 jobs arise from indirect and induced employment. The indirect impact measures the economic activity in other U.S. industries that sell goods and services to Jones Act businesses. The induced impact measures the economic effect of goods and services purchased out of payrolls arising from the direct and indirect impacts of the Jones Act fleet. The combination of these effects comprises the overall contribution of the Jones Act fleet to the U.S. economy (Transportation Institute). As shown in table 1, the wages that are paid to crew on U.S. vessels are considerably higher than on foreign vessels. This is mainly because of U.S. labor laws and unions. Some argue that companies use the Jones Act to increase the wages of their employees, or otherwise excessively profit from reduced competition.

U.S. shipbuilding

Some also mention that the shipbuilding industry would suffer from repealing the Jones Act. The Jones Act does not protect U.S. interests. In fact, U.S. shipbuilding industry is dying.