The Jones Act: How This Protectionism Harms Puerto Rico and the Rest of the U.S.

It has been about a month since Hurricane Maria hit Puerto Rico, and the Puerto Rican community remains devastated by the damage caused. Only a small portion of people have water and electricity again. It will probably take months for the island to recover from this tragedy. One of the responses from President Trump is to temporarily waive the Merchant Marine Act of 1920, which is better known as the Jones Act. You are probably wondering what a shipping act that is nearly a century old has to do with Puerto Rico in 2017.

The Jones Act is a law that regulates maritime commerce between U.S. ports in U.S. waters. The Act states that all goods carried between U.S. ports must be done so on U.S. flag-ships constructed in the U.S., owned by U.S. citizens, and manned by U.S. citizens or permanent residents. The law was created shortly after the end of WWI as a national defense measure against the potential of [German] U-boats attacking, specifically to have a solid supply of marine vessels. Essentially, if the United States found itself in a national state of emergency or under attack, it could better secure its shipments and navy, thereby better securing U.S. commerce.

I want to get less into whether the Jones Act should have been law in the first place, and focus more on whether Congress should repeal the Jones Act. Based on the blog entry I wrote earlier this year about Trump's "Buy American," you can already take an educated guess as to how I feel about the Jones Act. We can bypass the irony that Trump is very pro-"Buy American" and yet temporarily rescinded an Act that is about as "Buy American" as it can get, but let's take a look at the Jones Act specifically in further detail.

Economic Costs
One of the major criticisms of the Jones Act is that it makes shipping goods from U.S. port to U.S. port more expensive. This should be no surprise since this is a predictable economic outcome. Why? When foreign-owned or foreign-operated shipping vessels cannot transport between ports in the United States, the competition in this market is subject to less competition. Here is some research to back up the economic theory that the Jones Act causes economic harm:

• The Congressional Research Service (CRS) released a 2014 reporting finding how the Jones Act made it about three times more expensive to ship petroleum between U.S. ports (CRS, p. 9). 
• In 2012, the New York Federal Reserve Bank found that shipping a 24-foot container from the mainland to Puerto Rico cost $3,063. It cost $1,503 to ship that same container to the Dominican Republic, which is further away from the mainland than Puerto Rico. The major culprit as to why it costs twice as much to ship goods to Puerto Rico? The Jones Act.
• In her paper on Puerto Rico, World Bank Chief Economist Anne Kruger points out how the Jones Act creates a particularly negative effect for Puerto Rico and that by repealing it, the Jones Act could help the Puerto Rican economy be on the mend. 
• In 2012, two professors from University of Puerto Rico estimated that the Jones Act cost the Puerto Rican economy $17 billion from 1990 to 2010 (Valentin-Mari and Alameda-Lozada, 2012; [see infographic below]).
• The World Economic Forum calculated that the Jones Act costs the United States economy $200 million a year in shipping costs. 
• The Right-leaning Manhattan Institute estimated in 2015 that the Jones Act increased gas prices in the U.S. by 15¢. Fifteen cents might not seem a lot, but think of how often gasoline is used, both by individuals driving vehicles and business transporting goods. That fifteen cents a gallon adds up very quickly. 
• As another example of cost, that same Manhattan Institute report estimated that because foreign ships cannot ship liquefied natural gas, Puerto Ricans pay an extra 30 percent for electricity. 
• One recent study from the Grassroot Institute (Kashian et al., 2017) estimated that the Jones Act creates $163 million of domestic activity for shipping jobs while costing $3 billion in economic costs. Since places like Hawaii, Alaska, and Puerto Rico are disproportionately dependent on shipping, they would benefit from the repeal of the Jones Act. 
• Drewry, an independent maritime consulting firm, found that Jones-compliant ships cost about four times as much to construct as foreign ships (also see CRS report here). It should be no surprise that the U.S. went from being 16.9 percent of the world's fleet in 1960 to 0.4 percent in 2014 (Grennes, 2017).

National Security Argument
I can hear proponents of the Jones Act arguing that the economic costs could be worth the national security benefits. Let's examine that for a bit. Even if we accept the assertion that the "national security" argument was valid back in 1920, it has much less validity now. Why? Air transport for shipping purposes didn't exist back then. We have made advancements in railroads, trucks, and pipelines. As an additional side note, the Cato Institute argues how the Jones Act endangers seamen, which would be another facet as to how the Jones Act actually diminishes national security.

You know the Jones Act has to be bad when the neoconservative Heritage Foundation, a think-tank that often is in favor of national security arguments, does not even accept the Jones Act's national security premise (Loris et al., 2014). As the Heritage Foundation brings up, 1,072 ships were Jones-eligible. By 2014, that number decreased to 90 ships. There are very few Jones-Eligible ships that are used for military operations. As a matter of fact, the Department of Defense for Military Sealift Command (MSC) vessels is typically to use lease foreign vessels with military capacity (CRS, 2010, p. 3). In its 2017 report on the Jones Act (Grennes, 2017), the Mercatus Center scrutinizes the national security argument, as well as illustrates economic costs.

As an aside point, the fact that Presidents often waive the Jones Act, much like we see with Hurricane Maria, illustrates how the Jones Act threatens national security in disaster response. In short, the national security argument is nothing more than a smokescreen.

Conclusion
I don't think Trump temporarily rescinding the Jones Act will do much because a) it is to only last for 10 days, and b) Puerto Rico gets most of its oil from outside the U.S. due to the adverse effects of the Jones Act. But I will say this: the research on the Jones Act over the past 25 years consistently tells us that the Jones Act incurs considerable economic costs and contributes to increasing energy costs. What's more is that the national security justification has outlived its usefulness. The Jones Act is another example of why protectionism is harmful: because it protects and benefits a small group of well-connected producers while harming everyone else. The reason customers don't complain about something like the Jones Act is because like with other forms of protectionism, it is difficult for the consumer to see the costs. When I point out how shipping costs are increased because of the Jones Act, this is not just about numbers. Especially when looking at a place as greatly affected as Puerto Rico, we are talking about the ability of people to afford cost of living. The Jones Act makes it that much harder for people to have a livelihood, which affects people in more ways than one.

The Jones Act should not just be waived, but repealed. Aside from the aforementioned reasons, repealing the Jones Act would lower the costs of coastal shipping by 67 percent (Lewis, 2013). Do I think that repealing the Jones Act will solve all of Puerto Rico's woes? No. As I have mentioned before (see here and here), Puerto Rico contends with multiple issues, ranging from economic barriers to harmful tax code exemptions to debt issues. I hope that this blog entry can help shatter the illusion that the Jones Act is of benefit to the American people.