Leibowitz on Trade: Jones Act Waiver Tests Presidential Authority

After Hurricane Ian devastated Florida and the Carolinas last week, it is easy to forget that Hurricane Fiona hit Puerto Rico a week earlier, knocking out electricity for virtually the entire island. A BP tanker set sail for Puerto Rico with a vital cargo of diesel fuel and was allowed to dock in Puerto Rico to help get the power turned back on. But it was allowed only because of the waiver by Secretary Mayorkas.

Predictably, US merchant marine interests challenged the waiver as illegal. They wrote a letter pointing out that Congress considerably strengthened the requirements for granting a waiver in 2021. But the Biden administration, faced with a major disaster, and the presence of a shipload of diesel fuel for Puerto Rico’s electric generators, took advantage of the opportunity to help the island.

The issue regarding the waiver was whether the secretary determined that American-registered ships were not able to carry the fuel to Puerto Rico. Based on the arguments as I understand them, the administration had good reason to conclude that the cargo was already on the BP tanker and therefore could not be carried by domestic shipping. It will be tough to argue that the waiver was illegal.

Jones Act waivers have often been granted. But this is the first waiver since Congress toughened the requirements for them. Whatever the merits of the waiver, what is the Jones Act there for, and does it help more people than it hurts? These questions have been debated for a century, since the Jones Act (originally called the Merchant Marine Act of 1920) was enacted in the aftermath of the First World War.

During World War I, the US faced an acute shortage of merchant vessels because the belligerent nations took their merchant vessels out of commercial service to aid in the war effort. The US undertook a major effort to increase its merchant fleet during WWI. When the US entered the war in 1917, those efforts increased.

The end of the war in late 1918 saw a massive oversupply of merchant ships. The Jones Act in 1920 was created to carve out a protected US market for domestic shipping. Any ship carrying goods or people between two ports within the United States must be built and maintained in a US shipyard and at least 90% of the crew of each ship must be a US citizen or permanent resident.

As a result, shipping costs between two US ports are vastly higher than the costs between a foreign port and a US port. The US Maritime Administration estimates that the cost of operating a US-flag vessel is nearly three times higher than comparable foreign-flag vessel. This translates into noncompetitive terms of trade. For example, the cost of shipping steel from the Midwest to the West Coast is roughly three times higher than shipping it from China to the US, even though the distance from China is three times greater. As a result, West Coast steel processing operations must rely almost totally on imported semifinished steel.

The impact of this obvious effort at protection of the domestic shipbuilding industry and its workers is profound on the rest of the US economy. Because of the political clout of the merchant marine industry, an objective analysis of the pros and cons has proven to be impossible. Whenever the wisdom of the Jones Act has been questioned, either inside or outside government, the US industry paints a depressing picture of the US without the Jones Act. There is little attention given to proposals to moderate the Jones Act’s restrictions rather than eliminate them altogether.

Rather, Jones Act waivers seem to be the order of the day. In the last 10 years, many Jones Act waivers have been granted by the Department of Homeland Security to move oil in and out of the Strategic Petroleum Reserve, or to respond to natural disasters such as Hurricane Fiona. Again, predictably, the domestic merchant marine interests argued that the waiver last week was illegal. We’ll see if the merchant marine interests challenge the waiver in court, but it seems very doubtful.

As the world’s largest economy, one would expect the US merchant fleet to be among the world’s largest. But it isn’t. At 9.9 million gross tons, the US fleet ranks 22^nd in the world, and accounts for less than 1% of merchant tonnage. It therefore appears that the fundamental goal of the Jones Act, to secure a significant place in the international market for US merchant shipping, has failed.

Maybe we should consider another approach to help preserve American merchant shipping—unless we are satisfied to pay more for domestic goods and still be No. 22 in the world in merchant shipping.

Lewis Leibowitz

The Law Office of Lewis E. Leibowitz
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