Storm of Protectionism
Steven Malanga
The City Journal, January 20. 2013
It’s time to repeal the Jones Act.
New York–area
residents facing gasoline shortages in Hurricane Sandy’s aftermath must
have wondered about the federal government’s announcement that it would
suspend the Jones Act to ease long lines at the pump. Most of them had
probably never heard of one of the most onerous pieces of protectionist
legislation of the twentieth century. Still in force nearly 100 years
after its passage, it exacts a significant toll on the economy.
Officially known as the Merchant Marine Act of 1920, the Jones Act requires that all goods and people moving by water from one American port to another travel on American-built, American-owned, American-manned ships. The act’s original proponents argued that it was essential to national security, since it helped preserve a maritime fleet that could support the country’s armed forces and supply the nation during wars. Over time, American shipping interests and powerful maritime unions also became fierce defenders of the act, believing that it protected American jobs. Their defense has largely succeeded. Only in emergencies like Hurricanes Katrina and Sandy does the federal government occasionally suspend the Jones Act to get goods flowing more quickly and cheaply. Those brief pauses reveal how much better the market would work without the act.
Like most protectionist legislation, the act costs more than it generates in economic activity. In a 1996 article in the Canadian Journal of Economics, four researchers (including two economists at the U.S. International Trade Commission) wrote that the act allowed “domestic shippers to charge rates substantially above comparable world prices,” reducing shipping by water in the United States and increasing the annual cost of goods by about $6 billion (in today’s dollars). Older studies, they recalled, estimated the cost as high as $10 billion (again, in today’s dollars). The act might save 15,000 jobs in the American shipping industry, but at a price that reduced national income by hundreds of thousands of dollars per job saved. The only trade restrictions worse for the American economy, the authors concluded, were limitations on textile and garment imports. Those “multi-fiber agreements,” in effect at the time of the economists’ study, have since expired.
The Jones Act has also long outlived its national-security rationale. In a 1991 article in Regulation, Rob Quartel, a commissioner at the Federal Maritime Commission, described how U.S. armed forces in the Gulf War moved massive amounts of matériel and personnel using their own ships and those controlled by NATO allies. Only six of the 59 ships that the military employed were Jones Act–subsidized vessels. As Quartel noted, the country’s merchant-marine fleet has continued to shrink, largely because the Jones Act has made American shippers globally uncompetitive. With a monopoly at home, why get better?
Growing evidence of the act’s cost and ineffectiveness has led to calls to rescind it. In 2003, Hawaii congressman Ed Case introduced legislation to free his state from the Jones Act, saying that it so limited competition among shippers serving the state that it had produced a “crippling drag on an already-challenged economy and the very quality of life in Hawaii.” The protectionist legislation, Case argued, “is just an anachronism: most of the world’s shipping is by way of an international merchant marine functioning in an open, competitive market. And those few U.S. flag cargo lines that remain have maneuvered the Jones Act to develop virtual monopolies over domestic cargo shipping.” Similarly, in 2010, Arizona senator John McCain introduced legislation to repeal the act, observing that it “hinders free trade and favors labor unions over consumers.”
These efforts have failed, mostly because of the power of maritime unions and shipping interests, which would rather preserve their hold on a narrow but uncompetitive slice of the marketplace than compete more forcefully around the world. Over the years, both Democratic and Republican presidential administrations have pledged their allegiance to the act in return for the support of the shipping cartel that benefits from it. The losers are American consumers and businesses. It shouldn’t take acts of God like Sandy to show us that the Jones Act should go.
Officially known as the Merchant Marine Act of 1920, the Jones Act requires that all goods and people moving by water from one American port to another travel on American-built, American-owned, American-manned ships. The act’s original proponents argued that it was essential to national security, since it helped preserve a maritime fleet that could support the country’s armed forces and supply the nation during wars. Over time, American shipping interests and powerful maritime unions also became fierce defenders of the act, believing that it protected American jobs. Their defense has largely succeeded. Only in emergencies like Hurricanes Katrina and Sandy does the federal government occasionally suspend the Jones Act to get goods flowing more quickly and cheaply. Those brief pauses reveal how much better the market would work without the act.
Like most protectionist legislation, the act costs more than it generates in economic activity. In a 1996 article in the Canadian Journal of Economics, four researchers (including two economists at the U.S. International Trade Commission) wrote that the act allowed “domestic shippers to charge rates substantially above comparable world prices,” reducing shipping by water in the United States and increasing the annual cost of goods by about $6 billion (in today’s dollars). Older studies, they recalled, estimated the cost as high as $10 billion (again, in today’s dollars). The act might save 15,000 jobs in the American shipping industry, but at a price that reduced national income by hundreds of thousands of dollars per job saved. The only trade restrictions worse for the American economy, the authors concluded, were limitations on textile and garment imports. Those “multi-fiber agreements,” in effect at the time of the economists’ study, have since expired.
The Jones Act has also long outlived its national-security rationale. In a 1991 article in Regulation, Rob Quartel, a commissioner at the Federal Maritime Commission, described how U.S. armed forces in the Gulf War moved massive amounts of matériel and personnel using their own ships and those controlled by NATO allies. Only six of the 59 ships that the military employed were Jones Act–subsidized vessels. As Quartel noted, the country’s merchant-marine fleet has continued to shrink, largely because the Jones Act has made American shippers globally uncompetitive. With a monopoly at home, why get better?
Growing evidence of the act’s cost and ineffectiveness has led to calls to rescind it. In 2003, Hawaii congressman Ed Case introduced legislation to free his state from the Jones Act, saying that it so limited competition among shippers serving the state that it had produced a “crippling drag on an already-challenged economy and the very quality of life in Hawaii.” The protectionist legislation, Case argued, “is just an anachronism: most of the world’s shipping is by way of an international merchant marine functioning in an open, competitive market. And those few U.S. flag cargo lines that remain have maneuvered the Jones Act to develop virtual monopolies over domestic cargo shipping.” Similarly, in 2010, Arizona senator John McCain introduced legislation to repeal the act, observing that it “hinders free trade and favors labor unions over consumers.”
These efforts have failed, mostly because of the power of maritime unions and shipping interests, which would rather preserve their hold on a narrow but uncompetitive slice of the marketplace than compete more forcefully around the world. Over the years, both Democratic and Republican presidential administrations have pledged their allegiance to the act in return for the support of the shipping cartel that benefits from it. The losers are American consumers and businesses. It shouldn’t take acts of God like Sandy to show us that the Jones Act should go.
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