THE JONES ACT: TOO BIG TO SINK? Coleman1

The Jones Act: Too Big to Sink?

California State University Maritime Academy

Shane Coleman

THE JONES ACT: TOO BIG TO SINK? Coleman2

Abstract

The American shipping industry operates under the regulation of the Jones Act, found in

the Merchant Marine Act of 1920. This thesis asserts that the 97 year old legislation has outlived

its intended purposes. In 1920, the United States created the Jones Act in order to regulate

maritime commerce while creating a platform to build a Merchant Marine Fleet to aid during

times of war or national emergencies. The current state of the U.S. Jones Act fleet is

deteriorating before the nation’s eyes. The government continues to aid the dying American

shipping industry through an excess amount of government subsidies. The American shipping

industry has fallen so far behind, the subsidies are no longer enough to support the failed

interests of the United States. The repercussions of having a disastrous maritime cabotage

industry now have begun costing the consumers of the United States. The current state of the

Jones Act in today’s maritime industry can no longer support the original claims: protecting

national security, economy, safety, environmental, and global context.

THE JONES ACT: TOO BIG TO SINK? Coleman3

Introduction to the Jones Act

As new policies promote restrictions within the United States, the Jones Act is one

domestic policy that’s against the best interest for federal production. Federal production is

restricted by the presence of the Merchant Marine Act of 1920, most commonly known as the

Jones Act. Regardless of the efficiency of the 97-year-old piece of legislation, government

officials have not yet gathered the number of votes to annul the Jones Act. Free trade has

dwindled since its creation in 1920. Under Woodrow Wilson when the law entered into force, the

hopes were to maintain a healthy United States shipping fleet. These hopes were for the United

States to be a leading nation in the international shipping industry, while also supporting military

needs abroad. The government’s intervention of free trade regulations on the United States has

created a protectionist cabotaged market. Limiting competition has risen prices in markets

throughout the United States. The regulations found in the Jones Act have had repercussions on

the maritime industry. These ramifications have shown to be affecting companies, states,

consumers, the economy, ship building, national security, and emergency responses.

The federal statute was created in order to promote the growth of the United States

Merchant Marine. Besides promoting growth, it created regulation that applied to maritime

commerce. Primarily, Section 27 controls domestic waters, and sets regulation on operation. The

Jones Act is a cabotage on the maritime industry. Therefore, it enforces that no foreign vessel

can call two consecutive United States ports. Additionally, the United States requires all ships to

be made in the U.S. if it will be flying the American flag. The owner of the vessel must be an

American citizen. Any vessel that is American flagged must be crewed by a minimum of 75%

American citizens. “Violations of the Jones Act restrictions can have serious consequences, THE JONES ACT: TOO BIG TO SINK? Coleman4

including civil and criminal penalties and forfeiture of the offending vessel(s),” (Hengen, 2013,

p. 3). These laws found within the Jones Act came following the First World War. The hopes

were to build up a merchant fleet to a large enough size to supply the United States Military at

times of war. In the world today, roughly 75% of the world’s gross tonnage moves by sea. Due

to the weakened state of the Jones Act Fleet, the United States is responsible for handling only

around 1% of the global market on commercial vessels.

Acting as the centerpiece for the U.S. maritime industry, this thesis argues that the Jones

Act has outlived its purpose. Article 27, otherwise known as the Jones Act, is no longer

positively accomplishing the framework in which it was intended to do. Within the United

States, the Jones Act is responsible for roughly half a million of jobs. Unfortunately, the Jones

Act has put the United States in a vulnerable position. The U.S. shipping industry is no longer a

thriving industry. It is costing the United States hundreds of millions of dollars each year, in

order to keep the market alive. The U.S. shipping fleet has shrunk severely, and domestic ports

are filled with foreign flagged vessels. In comparison to foreign countries, the United States is

falling far behind in not only technology, but also in production. The shipping industry is built on

strict regulations in compliance to the Jones Act, which not only spikes production cost, but also

operational cost. The costs in keeping the Jones Act has not been favorable. The promised

benefits are not being met. The Jones Act has driven prices up, and has forced the U.S. industry

to shrink. It has created a sheltered job market surrounding the maritime industry. Without the

subsidization and protection from the government, the U.S. maritime industry would be more

depleted than it has already become.

Opposing Views THE JONES ACT: TOO BIG TO SINK? Coleman5

The majority of the individuals who are informed and support the Jones Act are often

connected to the Maritime Industry. There are a few arguments that are made in favor of the

Jones Act that are commonly made. First, the Jones Act has been supported by the majority of

presidents, including Ronald Reagan, who stated that he would not want to jeopardize such a

long standing piece of legislation. The large support of the Jones Act from past presidents is only

one of many arguments in favor of the Act. The other two main viewpoints that come up often

are that the Jones Act is imperative to the United States military and national security.

Throughout the existence of the Department of Defense (D.O.D), they have continuously

supported the Jones Act. Within the U.S. Military, the largest supporter of the Jones Act is the

Navy which wants a strong commercial fleet in order to have a capable military sea lift command

fleet ready on a moment’s notice. Vice Chairman of the Joint Chiefs of Staff, General Paul

Selva, has said,” I can stand before any group as a military leader and say without the

contribution that the Jones Act brings to the support of our industry there is a direct threat to

national defense, and I will not be bashful about saying it and I will not be silent” (Selva, 2016,

Para 3).

Department of Defense

However, the D.O.D’s main focus is on security interest, not on federal production.

Keeping the United States borders and homeland secure is one of the many reasons the Jones Act

was created. Upholding the Jones Act promises costs the government millions each year. Senator

John McCain states, “According to a 2002 U.S. International Trade Commission economic

study, repealing the Jones Act would lower shipping costs by about 22 percent. The Commission

also found that repealing the Jones Act would have an annual positive welfare effect of $656 THE JONES ACT: TOO BIG TO SINK? Coleman6

million on the overall U.S. economy. Since these decade-old studies are the most recent statistics

available, imagine the impact that Jones Act repeal would have today: far more than a $656

million annual positive welfare impact – likely closer to $1 billion, truly stimulating our

economy in the midst of an anemic economic recovery” (McCain, 2015, Para 6). Arguments for

the Jones Act are just as valid as the arguments that oppose the Jones Act. The argument being

made in this thesis is to expose the claims that defend the Jones Act which state that it’s in the

best interest for the United States federal production.

The Department of Defense makes up the majority of orders that U.S. shipbuilding yards

fill. Commercial shipbuilding makes up only 21.7% of the U.S. shipbuilding industry (MARAD,

2015). For security purposes, the United States will continue making their vessels in the United

States. The D.O.D, has a record of leasing foreign vessels, in order to fulfil missions that needed

an increase of sealift capabilities (O’Rourke, 2010). Studies have shown that the Department of

Defense has often renewed the leases on the vessels upon expiration. If the Department of

Defense is renewing foreign vessels for another five year lease, they must be saving money.

There are cases which O’Rourke highlights where the D.O.D has leased foreign vessels for

increased sealift capabilities edging close to 10 years. The military sealift command fleet has

consistently been shrinking in size. The United States shipyards don’t have the same capabilities

to produce the same number of ships per year compared to foreign vessels. One of the primary

reasons the Jones Act was introduced was in order to maintain a healthy Military Sealift Fleet.

The government has been able to outsource their shipbuilding capabilities for themselves. The

D.O.D has begun leasing these foreign built vessels in order to maintain a proper size fleet while

doing it in the most cost effective manner. It is quicker and cheaper to receive a vessel from a THE JONES ACT: TOO BIG TO SINK? Coleman7

foreign shipyard. The American ship yard industry is experiencing push back from the Jones Act.

“As for national defense, the Jones Act is - at best - simply irrelevant and at worst an actual

impediment to national security. It doesn't protect shipyards. Roughly 60 shipyards have gone

out of business in the last decade alone. It doesn't provide a shipbuilding base. Newport News,

which yells the loudest about keeping it, hasn't built a self-propelled blue-water Jones Act vessel

in 30 years. The industry as a whole has built only eight deep-water vessels of all types in the last

10 years because the yards that build ''Jones Act vessels'' - mainly barges - don't build large,

complex Navy ships, and vice versa” (Quartel, 1996, p 6). Elimination of competition and a

shrinking commercial fleet size has not encouraged automatization. Existing labor unions and

upfront capitol makes investment into competitive automation into the United States difficult

underneath the current state of the Jones Act maritime industry.

Dr. Daniel Goure, a national security expert, analyzed the effects on homeland security if the

Jones Act was repealed. “Although the Jones Act was not written with today’s threats to

homeland security in mind, its provisions provide an important base on which to build the

systems, processes, and procedures needed to secure America. The provisions in the Jones Act

regarding vessel ownership and manning simplify efforts to ensure that rogue regimes and

international terrorists cannot strike at this country via its ports and waterways. One could

readily assert that were there no Jones Act, Congress would have to invent one . . . . Without the

Jones Act, the Department of Homeland Security would be confronted by the difficult and very

costly task of monitoring, regulating, and overseeing all foreign-controlled, foreign-crewed

vessels in internal U.S. waters” (Beason, 2015, p. 42).

Competitive Nature THE JONES ACT: TOO BIG TO SINK? Coleman8

It is no surprise to any seafarer or worker in the Maritime Industry that America has lost

its competitive advantage. Shipping in the United States is nothing short of strict and expensive.

Government intervention is minimizing growth for its own industry. Harsh shipping policy for

American shippers must be complied with, or fines will be given. Due to the government

intervention in the maritime industry, it’s not in the best interest for business owners to operate

in the US that operate under the Jones Act. A large expense that comes with operating under

Jones Act regulation is the confined nature of supporting American industry. Supporting

domestic production is great, as long as the American industry can maintain a competitive edge

with operations and prices with foreign industry. The domestic shipping industry in the United

States has struggled to grow and maintain a competitive edge due to government intervention.

The strict nature of U.S. maritime guidelines has driven costs up, and the size of American

shipping industry down. Business could not survive under such stringent guidelines, while losing

their competitive edge over foreign competition. The problem with the regulation in the maritime

industry is that it’s hard to accomplish anything promptly. The government has become more

worried about policy and regulation, rather than operation and growth. The United States

continuously constricts its federal growth with austere regulation, such as the Jones Act. The

reality is that operation and growth should be reflected by a healthy amount of regulation. It’s

important to find the middle ground with regulation, and production. A proper balance between

the two will promote a prosperous industry. A fair balance of regulation and production benefits

not only the American people, but the production within the United States. Shipping companies

are having to expend excess amounts of money in order to comply with the Jones Act. THE JONES ACT: TOO BIG TO SINK? Coleman9

Companies operating under the Jones Act are being restricted by the government, while foreign

competition is able to gain competitive advantages.

In the decade following the end of World War II, the United States was reaching its peak

production underneath the Jones Act. Roughly ten years after the end of the war in 1955, the

number of United States commercial vessels that were American built, totaled just under 1,100.

With the number of vessels so high that were flying the stars and stripes, it was nearly impossible

to enter a foreign port without seeing the American flag. From that point on in history, the

number of eligible Jones Act fleet ships has been on a consistent decline. Since the peak of the

Jones Act fleet, the U.S. international trade fleet has shrunk nearly 95% (Kreep, 2015). The

Department of Transportation has clear records of the number Jones Act eligible vessels. In

2000, the number of vessels was 193, and fell to a mere 90 vessels in 2014. The following year

in 2015, the number of Jones Act vessel fell another 3 vessels, to total 87. In 2016, a total of

seven new vessels added to the overall number of U.S. flagged Jones Act vessels. Tankers made

up the largest portion of the Jones Act fleet with a total of 51 vessels. The remainder number of

vessels in 2016 were; 23 containerships, 9 RO/RO, 8 General Cargo, and 3 Dry Bulk Carriers.

Totaling a total 94 vessels as of December 1, 2016 (MARAD, 2016).

American Politics

Up to 2017, very few politicians and citizens have voiced an opinion about Article 27. A

common problem within the shipping industry is that it is often forgotten about. People are often

uninformed that the roughly 80% of all commercial goods are transported internationally via

ship. The industry is hidden behind the technology that individuals order products off online. The

majority of the products that are purchased in America aren’t made domestically. These products THE JONES ACT: TOO BIG TO SINK? Coleman10

are being shipped abroad in bulk via the shipping industry. There are very few people in the

United States that are aware of a piece of legislation such as the Jones Act. Politicians, on the

other hand, are a little more aware, and often vote on the Jones Act. John McCain (R-AZ), has

consistently tried to repeal Article 27 of the Merchant Marine Act of 1920. McCain lives in

Arizona, a non-Jones Act state. The Senator has no Jones Act jobs in his state. However, his state

is affected by higher prices due to the Jones Act. McCain has been the most consistent United

States Senator in any state fighting against the Jones Act. John McCain has spent many hours

informing the public as much as he can. Politicians who represent states with waterborne trade

may not necessarily agree with the Jones Act; however, there are jobs that can be lost as a result

of repealing Article 27. It is hard to gain votes as an elected official when jobs are being lost

within their respected state. Hence, the main goal of an elected official is to be elected again.

Senator McCain speaks often on the Senate floor with an amendment to repeal the Jones

Act. He has stated that the Jones Act has outlived its purpose in which it was intended for. As a

strong believer in free trade, McCain maintains his stance on open markets to insure a free flow

of commerce. McCain stated on the Senate floor, “U.S. consumers are free to buy a foreign-built

car. U.S. trucking companies are free to buy a foreign-built truck. U.S. railroads are free to buy a

foreign-built locomotive. U.S. airlines are free to buy a foreign-built airplane. Why can’t U.S.

maritime commercial interests more affordably ship goods on foreign-made vessels? Why do

U.S. consumers, particularly those in Hawaii, Alaska, and Puerto Rico, need to pay for ships that

are five times more expensive?” (McCain, 2015, Para 18). McCain stands for the American

consumers with his amendment to repeal the Jones Act. Puerto Rico has begun to push back

against the Jones Act, having political figures speaking out against it. The Jones Act was THE JONES ACT: TOO BIG TO SINK? Coleman11

originally introduced to Puerto Rico as a form of American forward presence and economic

provisions (Fors, 1975).

The entirety of the Merchant Marine Act of 1920 has not reached the necessary number

of votes to be repealed. In the past, the tactics to repeal the Jones act have not been successful

because the strategy was to repeal the entire Jones Act. However, recent proposals to repeal the

Jones Act have become more refined and simpler. Instead of repealing the entire Act, McCain

has begun focusing on small reforms. In 2016, the Senator set his main focus on the energy

sector. This approach allows for more of a precise fight against small aspects of Article 27,

instead of fighting against the entire Act. By focusing on small aspects of the Jones Act to repeal

it becomes more relevant for the average citizen to see the effects of the Act. Currently McCain

is in the process of proposing a bill that would eliminate the requirement of American built ships

for tankers that partake in coastal trade. “There is no doubt that these inflated costs are

eventually passed on to shipping customers. In the energy sector, for example, the price for

moving crude oil from the Gulf Coast to the Northeastern United States on Jones Act tankers is

$5 to $6 dollars per barrel, while moving it to eastern Canada on foreign-flag tankers is $2. That

can mean an additional $1 million per tanker in shipping costs for oil producers. This increased

cost is why, according the Congressional Research Service, more than twice as much Gulf Coast

crude oil was shipped by water to Canada as was shipped to Northeastern U.S. refineries over the

last year – all in an effort to avoid paying Jones Act vessels shipping rates,” said McCain to the

Senate (McCain, 2015, Para 11).

Subsidization is Not the Answer THE JONES ACT: TOO BIG TO SINK? Coleman12

The United States government subsidizes the maritime industry in order to offset the cost

of operation under the flag of the United States. The maritime industry in the U.S. is no longer

composed of predominantly American companies. The industry is filled with foreign subsidiaries

maritime companies. There are two major issues that the United States is faced with. Tax payer

money is being allocated to fund a dying industry. The industry is being subsidized, however the

U.S. maritime industry cannot properly compete with foreign competition in which is beneficial

for American citizens. For that reason, subsidization is not the answer to save the Jones Act

influenced industry, because American interest in the domestic maritime affairs is shrinking.

Ever since the U.S. government began heavily subsidizing the maritime industry, maritime

companies began failing more frequently. “Yet even with these subsidies and guarantees, the

dozen or more U.S. companies -- including such once well-known names as American Export

Lines, Grace Lines and Pacific Far East Lines -- failed, one after another, in the face of

competition from more efficient carriers as more and more countries entered the international

shipping market” (Bank, 2009, Para 3). The presence of labor unions limit growth in the

maritime industry. Union demands, along with the high cost of operation doomed the growth of

American interest shipping with the high financial burdens. Labor Unions were originally

created in order to insure safe work places and proper wages. However, present day Unions are

starting to take advantage of the system. The longshoremen and woman have the power to shut

down the ports. It has not been uncommon to see the certain labor unions strike while

negotiating. “The International Longshoreman and Warehouse Union (ILWU) has been involved

in a “work slow-down” to shake-down employers for higher wages. But with 29 West Coast

ports handling 43.5% of U.S. containerized cargo shipments and the movement of 12.5% of THE JONES ACT: TOO BIG TO SINK? Coleman13

America’s GDP, a looming strike could cost billions of dollars per day and severely hurt the U.S.

economy” (Street, 2015). Labor Unions are already a cause for high operational cost because of

their manual labor. While foreign nations have been able to invest money in port automation

technology in order to maintain a competitive advantage; the United States has not had the

opportunity to fully transform their ports.

Very few liner vessels are left that are flying the flag of the United States. The number of

remaining blue ocean commercial vessels are shrinking. Commercial vessels that are registered

under the U.S. automatically qualify for subsidization. Although, United States flagged vessels

are required to be crewed by over 75 percent American, doesn’t necessarily mean it’s not owned

by foreign company that subsides in the United States. Foreign subsidiaries based in America are

forced to use American labor on their vessels, however that doesn’t automatically mean the

company is using the subsidies to support American interests. A liner that is receiving

subsidization through tax payer money is Maersk Alabama. Maersk Alabama was a commercial

liner that was flagged by the United States, but it was actually owned by Danish interests.

The U.S. is using tax payer money to further foreign interest in a Jones Act maritime

industry. Regardless of the current subsidizations, the Jones Act has failed in protecting the

United States merchant marine capabilities. The U.S. tax payers aren’t even seeing the benefits

of the subsidizations being paid out to the remaining Jones Act vessels. The original purpose of

the creation of the Jones Act was in order to build merchant marine capabilities to protect the

United States interest overseas. The Jones Act Fleet has shrunken from over 1,000 vessels to

under hundred. The last remaining vessels are outdated compared to foreign fleets. The U.S.

government is leasing out foreign vessels in order to fulfil domestic interest overseas. This is all THE JONES ACT: TOO BIG TO SINK? Coleman14

possible through the Department of Defense waiving the Jones Act for their personal agenda. As

of 2013 the U.S. government was paying $186 million dollars a year in order to subsidize the

remaining Jones Act Fleet of 60 vessels (Bowman, 2013). The International Propeller Club of the

United States sent a letter to Congress in order to maintain the same subsidization for the

industry. The argument coming from the Propeller Club was to fund the Jones Act vessels in

order to have them available during times of war and or during national emergencies. At the time

of negotiations in 2013, the US Jones Act vessels were each receiving a little over $3 million

each year. However, ex Director of the State Department office of Maritime Affairs, Richard

Bank, said, “Foreign operators could easily renege on their promise to provide those vessels to

the U.S. government for emergency purposes. Denmark, for example, might forbid any ships

operated by Danish companies to operate in a war zone, regardless of whether they were part of a

U.S. subsidiary. Or Singapore could bar the U.S. from deploying any of its ships in a military

action against China” (Bowman, 2013, Para 8). A piece of legislation such as the Jones Act gives

foreign countries the advantage over the United States interest.

Aging Fleet

The Cabotage Act of 1920 has begun shrinking American shipping growth. The

American Jones Act fleet has become one of the smallest of the top developed nations. The

United States is one of the richest nations in the world; however, the age of the Jones Act fleet is

substantially older than even developing nations. The Jones Act requiring vessels to be

constructed, owned, and crewed American has become quite expensive. The long term result of

the Jones Act is that ship owners can’t afford to continuously keep a young fleet. Ship building

costs in the United States largely exceed the cost of building ships abroad. In the U.S. it cost four THE JONES ACT: TOO BIG TO SINK? Coleman15

times as much to construct commercial vessels as it does to have them constructed overseas.

Drewry Maritime Research reported the Jones Act shipping company Matson purchased U.S.

built vessels that were four times more expensive than vessels of the same size being built

overseas in Asia (Drewry, 2013). With shipping companies paying higher prices to operate under

an American flag, the economic consequences have been placed on the consumers. It is not

economically feasible to maintain a youthful shipping fleet when paying four times as much as

competitors.

(MARAD, 2003, P. 7-8)

Shipyards have been closing their doors due to the shrinking shipping fleet. Federal

funding supported production capabilities within the shipyard. The U.S. Transportation Secretary

Anthony Fox stated in an interview, “Investments in our shipyards and American workers is

critical to ensuring America’s economic growth and global competitiveness. These grants

support and strengthen both local communities and our national economy.” (D.O.T, 2016). U.S.

shipyards have the top skilled workers in the world. The biggest cost factors in shipyards are

labor and facilities. To open a new shipyard in the U.S. requires a lot of upfront capital. The size

of the United States Navy helped the remaining shipyards to continue doing business with the THE JONES ACT: TOO BIG TO SINK? Coleman16

number of vessels ordered. The large defense budget has allowed the number of vessels for the

United States military to continue to increase. The Jones Act insures the US military a

shipbuilding industry that will remain open to construct their vessels. The vessels being created

are being built in American shipyards under the Jones Act are being built more slowly, and at a

more expensive price. The number of shipyards capable of producing large commercial vessels

are disappearing. Two of the largest remaining shipyards in the U.S. are in San Diego, and

Philadelphia. There are not enough capable shipyards left in the United States to produce and

replace the vessels that are being scrapped from the Jones Act fleet. There are no regulations in

the U.S. that states how old a vessel can sail until it has to be retired. As long as vessels are

passing state run inspections, the flagged state will continue to allow the vessel to sail until its

next inspection.

Government intervention has pushed the American shipping community to absorb high

costs of production and operation. Shipyards in America have some of the highest environmental

and safety standards of any other nation in the world. American policy makers have begun

placing more stringent policy on top of the shipping industry, resulting in even higher

operational costs. The cost of operations are shutting the doors of shipyards. There are only three

capable shipyards left in the United States that can produce a mid-sized tanker; 400+ feet. A

MARAD survey that carriers responded to rated Maintenance & Repair cost to be the second

highest cost burden behind crew cost (MARAD, 2011). With the U.S. Maritime shippers already

having to adhere to Jones Act Policy; when it comes to M&R there is 50 percent ad valorem duty

that U.S. ships are charged when nonemergency repairs are made in foreign ports (MARAD,

2011). This leaves U.S. flagged ships in financial burden. Depending on which part of the world THE JONES ACT: TOO BIG TO SINK? Coleman17

the vessel is in, cheaper parts and labor may with a 50% duty charge may out way the cost in a

domestic port. When dealing with a domestic shipyard to receive maintenance; the vessel has

several factors that need to be weighed out. Since the number of remaining American shipyards

that are capable of taking in over a 400 foot vessel are limited; scheduling and availability can

become an issue. Owners have many unpleasant factors that the Jones Act has imposed on them.

Their vessels are the most expensive vessels to operate on the sea due to the regulation of the

Jones Act. A large amount of policy makes it tough on shippers to buy new vessels and scrap old

vessels at the end of their career. It leads to companies holding onto older vessels until they are

no longer operational. “On the container shipping side, Horizon Lines Inc., one of the largest

container shipping companies operating under the Jones Act, has a fleet of 20 vessels. Within its

fleet, the 13 Jones Act-qualified vessels it owns range in age from 30 years to 44 years. Another

leading operator, Matson Navigation Co. Inc., a subsidiary of Alexander & Baldwin Inc. (both

not rated), has in its fleet 17 owned ships, of which seven are more than 30 years old and an

additional five are between 20 and 30 years old” (Afonja, 2012, p. 3). Replacing vessels in a

fleet takes a lot of capital, particularly when the new vessels need to follow more stringent

environmental and safety standards.

Older vessels tend to be at a cost disadvantage compared to newer vessels, due to higher

maintenance and repair costs, which can lead to a ship having to dry dock. When a vessel is in

dry dock, money is being spent, not made. Engines on old vessels tend to not have high

performance in fuel efficiency. Loss of time at sea, and fuel inefficiency are costing shipping

companies millions each year. To tack onto the burden of Maintenance & Repairs (M&R) costs,

Jones Act vessels face more cost when abroad. Vessels often unavoidably face mechanical or THE JONES ACT: TOO BIG TO SINK? Coleman18

machinery issues while underway or overseas. If the vessels happens to purchase or use a foreign

service while outside of the U.S., a tax has to be paid when the vessel returns back to the United

States. Upon arrival back into the United States, the services and parts that were used in the

foreign country have to be reported to the United States Customs. Receiving M&R abroad may

be cheap up front; however, the owner of the vessel has to pay a 50% tariff to the United States

government. Although companies absorb the high cost of the Jones Act up front, the consumers

are the ones truly paying.

Break Down of Cost

Underneath the Department of Transportation, MARAD put out a report comparing U.S.

and foreign flag operating costs. MARAD computes operating cost by adding together the

following; Crew, Store, M&R, insurance, and overhead. Daily operational costs aboard a U.S.

flagged vessel was roughly $20,053, compared to $7,454 aboard a foreign vessel. Daily

operational costs vary, dependent on the vessel. Containerships had the narrowest gap between

U.S. and foreign vessel operational cost; $21,194 to $9,583. Increasing to 3 times the daily

operational cost were the Bulk Carriers, $17,656 to $5,807. The class of vessel with the highest

average daily operational cost gap was the “RO/RO” (Roll On/Roll Off), $19,200 to $ 5,915

(MARAD, 2011). The operation cost for foreign vessels are contingent on the respected flag of

the vessel.

Operating cost breakdown for U.S. flagged vessels versus foreign flagged vessels brings

light to the cost structure. The crew cost is the first thing that stands out for both daily

operational cost. The average United States Jones Act vessel in 2010 had crew expenses total

68% of overall operating cost. Maintenance & Repairs (M&R) was the next largest expense at THE JONES ACT: TOO BIG TO SINK? Coleman19

15%. The remaining 17% in operating cost were split very evenly amongst, insurance, stores,

and overhead. Combined percentages for crew cost and M&R aboard a foreign flagged vessels

totaled lower than solely crew cost on a U.S. flagged vessel. The crew cost on foreign flagged

average of 35% of total operational cost. Following closely behind crew cost, M&R reached an

average of 32% of 2010 operational cost. The remaining percentage of operation cost such as

insurance, stores, and overhead roughly doubled compared to the breakdown of U.S. flagged

(MARAD, 2011).

American legislation requiring American crewed vessels does not allow shipping carriers

to shop around for cheaper labor in foreign markets. Shipping companies are transporting large

quantities of cargo and operating expensive equipment. Although companies are looking for

cheap labor, it is contingent on whether predetermined skills are met. Due to the citizen

requirements presented by Article 21, crew sizes are smaller and costs are higher aboard U.S.

vessels. Crew cost per day on an American owned vessel averaged five times higher than the

cost imposed on crewing a foreign vessel. The study conducted looked at the following ship

classifications; container, RO/RO, and Bulk Carrier. The price gap in paying crew cost aboard

the containerships was the largest differential out of the vessel classifications. The United States

shipping carrier paid an average of $14,872 compared to $2,698 per day. The remaining ship

classifications pay gap was very similar, slightly behind the pay of the containerships. The

overall daily cost average for crew regardless of the ship classification was; U.S. $13,655 versus

$2,590 foreign flagged. The competitive advantage of crewing foreign is massive. Foreign

seafarers work for pennies on the dollar compared to an American (MARAD, 2011).

Shift in Dominance THE JONES ACT: TOO BIG TO SINK? Coleman20

Shipyard capabilities have shifted in America, away from building large Commercial

Ocean going vessels. Only a few ship yards left in the U.S. are capable to cater to companies to

produce large vessels. The main customers that the large shipyards cater to often is the United

States military, and large shipping liners. Due to the lack of shipyards to produce large ships of

scale, the books are often filled to capacity a decade out. With the United States no longer having

a major stake in world market for ocean going vessels, there has a been a shift to Asia. Countries

such as China, Japan, and South Korea have all groomed their ship building capabilities in a way

that now dominates the world. These three nations are currently building ships faster and cheaper

than any other nations. Cheap labor and little regulation has allowed these countries to overtake

the market. The three countries represent a combined share of 80% of the world’s ship building

market for ocean going vessels. “Labor skill requirements, material specifications and work rules

are rigorous. U.S. yards and ships are thus safer than many foreign shipyards, but also more

costly. For example, in 1990, a ship built in the U.S. by Matson Navigation with a capacity of

about 1,900 TEUs, cost approximately $140 million to build. In 2007, the Emma Maersk, one of

the largest containerships in the world with a capacity of close to 12,000 TEUS, was built in

Denmark for just $5 million more,” reported IHS Global Insight (IHS, 2009). Building

commercial vessels for a fraction of the price abroad would allow for growth of the U.S.

shipping companies that are financially being strangled by the government ridden Jones Act. The

number of jobs in U.S. ship yards have continued to decline over the years. THE JONES ACT: TOO BIG TO SINK? Coleman21

Throughout the United

States, the amount of maritime

work available has been on a

steady downfall. Since the

1980’s, the number of jobs

represented for payroll

employment within the U.S.

shipbuilding and repairing

industry has decreased. In 2003, the total of number of jobs in which (MARAD, 2003, P. 9)

the Maritime Administration reported on for the private sector was 45,000 (MARAD, 2003). The

industry has been confined by too much regulation, putting shipyard markets in a tough place to

grow. Repairing and shipbuilding support not only jobs within the yards, but create and support

additional jobs.

In ship building there are several terms used by the U.S. Maritime Administration. There

are four common terms and definitions that MARAD uses while classifying shipyards.

“Active Shipbuilding Yards: The Active Shipbuilding Yards is comprised of those privately

owned U.S. shipyards/facilities, that are open with at least one building position capable of

accommodating a vessel 122 meters (400 feet) and over in length, and are currently engaged in

the construction of naval ships and/or major oceangoing merchant vessels 122 meters (400 feet)

and over in length.

“Shipyards With Build Positions: With Building Positions are those privately owned

shipyards/facilities that are open with at least one building position capable of accommodating a THE JONES ACT: TOO BIG TO SINK? Coleman22

vessel 122 meters and over in length, and that have not constructed a naval ship or major

oceangoing merchant vessel in the past two years. The shipyards may not be capable of ship

construction without significant capital investments. These shipyards could, however, be used in

module ship construction.

Repair With Drydocking: Repair (with drydocking) facilities are those shipyards that have

graving docks, floating drydocks or marine rails capable of handling naval ships and/or major

oceangoing merchant vessels 122 meters and over in length. These shipyards may also be

capable of constructing vessels less than 122 meters in length.

Topside Repair: Topside repair facilities are those shipyards that have sufficient berth/pier

space, including dolphins, to accommodate a naval ship or major oceangoing merchant vessel

ships of 122 meters and over in length. These shipyards may also be capable of constructing

and/or drydocking vessels less than 122 meters in length” (MARAD, 2003, P. 11).

The most up to date report that MARAD has published is up to October 2003. The

following years 2004-2016 are all pending on the government’s website. During 2003 the

number of active shipbuilding yards throughout the U.S. maritime industry, totaled 9. The

number of remaining ship repair yards out number the few remaining active shipbuilding yards.

The number of repair yards totaled 94 during October 2003 when MARAD published their data.

The number of remaining shipyards with building positions that hadn’t built a vessel in over 2

year’s totaled 15 shipyards. Only 9 out of the 15 remaining shipyards in the U.S. had built a

vessel(s) over 400+ feet in the two year period leading up to October 2003 (MARAD, 2003). The

number of ships that remain flagged under the U.S. flag continue to shrink. The less amount of

ships being built have resulted in thousands of lost jobs in the shipyards. Just between 1982 and THE JONES ACT: TOO BIG TO SINK? Coleman23

2003 the number of production workers in the U.S. private shipyards declined by over 67,400

(MARAD, 2003). Each U.S. coast, including the Great Lakes all recorded a loss in jobs between

1982 and 2003.

National Security

The United States of America prides itself with a high standard of national security. The

U.S. military relies on the domestic shipyards to produce and repair its warships and commercial

vessels. The Jones Act was created in order to have sealift capabilities to support military and

national interest overseas. The creation of the Jones Act boosted economic growth for the federal

government. In order to scale domestic naval capabilities quickly, the Jones Act created a market

that protected the industry from outsourcing jobs. It not only boosted the economy but it grew

American naval capabilities into a leading nation on the global scale. At the time of the creation,

America was home to the top industrial skilled workers. The US was producing ships in record

numbers on home soil. Sealift and military capabilities grew quickly in comparison to foreign

nations. The Jones Act supported homeland security by only allowing American flagged vessels

operating the internal water ways. It allowed for a system that did not allow for foreign

competition to take over domestic maritime interests. The common argument for the Jones Act is

that without secured internal waterways, a nation cannot successfully have secured borders.

The United States is no longer a leader in the shipping industry. The argument for the

United States having the top skilled workers and leading class shipyards is not the case anymore.

Foreign competition has been able to grow because foreign industries are not constricted by

legislation such as the Jones Act. Sealift capabilities for military efforts are dwindling. The

federal government can no longer sustain its own sealift capabilities without the leasing and THE JONES ACT: TOO BIG TO SINK? Coleman24

contracting foreign vessels. The Jones Act has begun to suffocate the successful industry in

which it built. The Jones Act was a genius piece of legislation to increase United States maritime

interest in a short period of time. Once the industry peaked, however, the same number of ships

didn’t need to be produced. The expensive nature of the Jones Act didn’t encourage

advancement in the industry due to the cabotage laws in place. The United States military will

always be a customer to the U.S. shipyards, but the commercial industry will begin investing in

foreign markets in order to seek better profit margins. The Cabotage laws found in the United

States only allow for fair competition within the internal water ways. With the federal

government relying on foreign vessels for sealift capabilities, more non-Jones Act vessels are

infiltrating the market. This has begun to further damage the sole intentions of the Jones Act.

The maritime industry has shrunk significantly in the number of blue water ocean going

vessels. In times of war or increased national security, there are not enough qualified vessels to

serve the sealift capabilities. The President of the United States is able to pardon the Jones Act

for situational purposes. A pardon allows for an exemption of the Jones Act requirements.

During times of war or natural disasters, the United States may need to seek outside help due to

the shrinking state of the Jones Act fleet. The process in pardoning the Jones Act isn’t an easy

task. It is not uncommon to see the Jones Act waived or suspended in order to protect the

national interest of the United States. The majority of sealift capabilities are being sailed on

foreign vessels due to the government capability of waiving the Jones Act for their operations.

The United States military is always ordering new vessels in order to maintain its size and

dominance. The Military Sealift Command is not capable alone of supplying large government

operations. The government created the Jones Act in order to rely on ocean going commercial THE JONES ACT: TOO BIG TO SINK? Coleman25

vessels to aid sealift command efforts. The United States is a nation with national interest spread

throughout all the regions in the world. It takes large sealift command efforts in order to supply

and aid all of American interests.

Waiving the Jones Act is a controversial topic within American politics. If the Jones Act

is waived, American jobs are being substituted by foreign shippers. The United States ocean fleet

has become so depleted that it can’t support national defense without foreign aid. There are

several different processes in which Jones Act Waivers are possible to obtain. The first and

quickest way the Jones Act is able to become waived is by the Secretary of Defense. Waivers are

automatically granted through the Secretary of Defense. The second most common Jones Act

waiver, is requested by the Secretary of Department of Homeland Security (DHS). A request by

DHS is done on discretionary terms. The DHS’s waiver has to further be inspected by the

Maritime Administration. The only time that the Maritime Administration grants the DHS Jones

Act waiver is when there are no available American flagged vessels. Lastly, the remaining way

to obtain a Jones Act waiver is to apply for a discretionary waiver. Vessels apply for this waiver

process directly through the United States Customs & Border Control. The request is then

expedited straight to the Department of Defense, Secretary of Homeland Security, and the

Maritime Administration. Depending on the surrounding factors in which the waiver is being

applied for, additional agencies will receive the waiver request as well. For example, if there is a

natural disaster in the Gulf of Mexico that disrupts trade of oil; the Department of Energy would

receive the waiver request as well. Discretionary waivers are looked over very closely. There is a

lot of consulting through cross agency cooperation, in order to establish if the United States THE JONES ACT: TOO BIG TO SINK? Coleman26

should grant a waiver. National Security is a high standard in determining the discretionary

waiver process.

State Emergencies

During times of national emergencies, there are plenty of cases which display the

ineffectiveness of the Jones Act. National Emergencies can never be planned. In February 2014,

New Jersey experienced heavy snow in the storms they were receiving. The state officials for

New Jersey ran out of all their road salt in order to keep the roads safe for the citizens. In order to

continue to keep the roads clean, NJ officials ordered 40,000 tons of road salt from Maine to

have it shipped down via dry bulk vessel. However, the nearest vessel capable of handling the

load of road salt to complete the job was an empty foreign flagged vessel. Unfortunately, due to

the Jones Act, it was not an option to use the foreign vessel unless a waiver was approved. State

officials applied for the Jones Act waiver in order to use the foreign flagged vessel to ship the

road salt during their state emergency. A waiver was unlikely due to a U.S. flagged vessel down

the east coast from New Jersey. The state officials had to wait several days in order to hear back

if the shipment of road salt would be on its way. The last remaining option in order to receive the

road salt in a reasonable time to help the roads, was to use barges.

Several trips via barge had to be made due to the overall tonnage of the road salt that was

being shipped. Shipping over 40,000 tons of road salt had to be taken by barges. A total of four

barges had to be sailed down the coast with the entire load of salt. The barges available were not

able to accommodate the tonnage of salt. Instead of shipping it all on one vessel, it cost the state

of New Jersey hundreds of thousands of dollars. Due to the Jones Act, it cost New Jersey

$700,000 to improvise with barges in order to aid its state. The four trips of salt on barges cost THE JONES ACT: TOO BIG TO SINK? Coleman27

approximately $1.2 million. If the salt were able to make it on one dry bulk vessel, it would have

cost roughly $500,000 (Frassinelli, 2014). Waiting days during the waiver process put lives at

danger in New Jersey. New Jersey tried expediting the shipment of road salt due to the depleted

salt stock after the large amount of storms they had experienced. This shows how economic

growth is being exhausted through the presence of the Jones Act. It has proven to be inefficient

during times of peace but also in times of emergency.

Both state and country functionality has been negatively affected by the Jones Act. The

farmers in the United States, for example, are failing to compete with foreign competition

domestically. Foreign farmers are able to take advantage of cheap shipping on a non-U.S.

flagged vessel. Operation and shipping cost on a non-U.S. flagged vessel is low enough in order

to still beat competition in the United States. The United States is home to the world’s largest salt

producer. However, due to the current state of the Jones Act, foreign competition has the

advantage. The depleted state of the U.S. flagged vessels, discourages competitive rates with

foreign competition. A comparison of transportation of salt via ship will illuminate negative

qualities that Jones Act reflects. New Orleans is a state that produces an abundance of salt.

Logistically, it is not feasible to ship rock salt 1,600 nautical miles from New Orleans to

Baltimore. Since two consecutive ports are being called, it requires for shipment aboard a Jones

Act qualified vessel. Shipping rock salt 4,500 nautical miles from Chile to Baltimore is more

economically feasible (Wilson, 2015). The ship leaving Chile has to travel nearly three times as

far as the American vessel, and also pay the fee for crossing the Panama Canal. The Jones Act in

place does not favor domestic business operations that require state-wide maritime shipping. The THE JONES ACT: TOO BIG TO SINK? Coleman28

regulation in place has created an insufficient market in order to have an edge on foreign

competition.

Alaska, Hawaii, & Puerto Rico

Places such as Hawaii, Alaska, Puerto Rico, and even Guam all are not benefiting from

the Jones Act. These states and countries are disconnected from the continental United States

making it inefficient to send an American flagged ship to these locations. Foreign flagged ships

pass these locations on a regular basis, but are limited by the Jones Act in order to call port

before stopping at another U.S. port. All four locations experience extremely high prices and

taxes due to their unique locations. These nations have collectively been trying to push against

the Jones Act due to the limitations it has placed on its citizens. The cost of living is higher than

it should be due to the inefficient ways they have adapted to, due to the Jones Act. Not enabling

ships from Asia to stop and exchange goods in Hawaii before stopping on the West Coast of the

United States, has driven up prices at intolerable rates. It has become financially straining for

individuals, families, and businesses due to the higher cost being on average 49% more

expensive than the lower 48. The price difference to ship from Los Angeles to Shanghai,

compared to Los Angeles to Honolulu is dramatically different. It isn’t fair to financially punish

these secluded regions. These indigenous people are often not wealthy enough to move out of

these states, leaving them to bear the cost of the Jones Acts. The cost to ship a 40 foot equivalent

unit from L.A. to Shanghai only cost $790; but from L.A. to Honolulu is a whopping $8,700 to

ship the same container (Bussewitz, 2014). These states and provinces could be prospering

better, if the freight rates weren’t so extreme under the Jones Act. (Coleman, 2015) THE JONES ACT: TOO BIG TO SINK? Coleman29

Although Hawaii is a tourist trap that raises prices to increase profit margins, the Jones

Act has strained effect on the life on the island chain. Likewise, the Jones Act ridden state of

Hawaii has lasting effects that reach the lower 48 as well. This past January 2017, California and

Hawaii Sugar Company (C&H Sugar) announced the closing of the sugar plantation on Maui. By

shutting down the 145 year old plantation on Hawaii, the C&H sugar factory in Crocket, Ca will

no longer be receiving Hawaiian grown sugar from the American Flagged Vessel, Moko Pahu.

Due to the required nature of having to ship on American Flagged Vessels between two

consecutive U.S. ports had its lasting effect on the company. The long term accumulation of high

American labor cost and lower sugar prices coming from foreign competition, put a U.S. mill out

of business. The C&H refinery is now in the position to import sugar from foreign nations.

Foreign nations are able to ship their sugar to Crocket, Ca on a foreign bulk carrier at a far more

competitive rate, unlike the Moko Pahu. The legislation in the Jones Act slowly made the

plantation in Maui, HI inferior to foreign competition. As the MARAD reports earlier stated,

operational cost on a U.S. vessel far exceed those on a foreign ship. With the remaining ocean

going cargo vessels shrinking, there is less competition. In places such as Hawaii, there is

already a far less amount of ocean going maritime competition established on the islands. Less

competition tends to be the cause of higher prices. Unfortunately since the plantation become

unable to sustain its competitiveness, over 650 jobs are being lost on the island (MarEx, 2017).

The repurposing the 36 year old integrated tug barge Moku Pahu is still uncertain, but it may

lead to laying off of it 15 crew members. This further hinders the Jones Act pro national security

claim. Instead of having the Moku Pahu transporting the sugar into the San Francisco Bay, a new THE JONES ACT: TOO BIG TO SINK? Coleman30

foreign vessel will be entering through the Golden Gate. In this case, the Jones Act is not acting

favorably for either the state of Hawaii or the U.S. economy.

Unfortunately due to the geographic location of the Hawaiian Islands, the state is huge

disadvantage. “Hawaii is at least 80 percent reliant on imported food. We’re hundreds of miles

away from major shipping routes. Relying on foreign shippers that can easily decide a stop in

Hawaii is not profitable, or who would charge us big fees to veer off their major routes, doesn’t

guarantee that our hotels and shops have the food and goods they need to support our economy

and communities,” stated U.S. Rep. Mazie Hirono (Yuen, 2012). It is time the U.S. congress

pardons the Hawaiian Islands from the Jones Act due to their unique situation.

Alaska is in a similar situation as Hawaii, even though they are not an island state. Alaska

is so far disconnected from the lower 48 that it likewise imports a majority of its goods via ship.

Cost of goods in Alaska run on the higher end compared to the lower 48. Freight rates are more

expensive on a U.S. flagged vessel which get put off onto the consumers. The states cost of

living and cost of goods would see a dramatic decrease if the United States government allowed

a state such as Alaska to be pardoned from the Jones Act. Allowing foreign vessels to visit back

to back consecutive ports. Alaska is likewise in a unique situation where they don’t have

alternative means of transportation for mass volumes of goods other than via ship. Things that

are great for Alaska is the use and creations of more pipelines. Instead of relying on a tanker and

paying for high operational cost on a U.S. flagged vessel; it cuts out the middle man. Pipelines

are the best option in a Jones Act maritime industry. It’s not only saving on time and money, but

it’s eliminating the risk of a disastrous oil spill out at sea. The United States Governmental

Accountability Office conducted a study that found the Jones Act Requirements in place THE JONES ACT: TOO BIG TO SINK? Coleman31

increased the overall annual transportations cost by $163 million in Alaska (GAO, 1988). This

study was published in 1988 which means that the number of remaining U.S. competition has

decreased, most likely leading to higher differential in today’s era.

Puerto Rico’s maritime legislation is regulated by the Jones Act. Some argue that Puerto

Rico should be pardoned from the Jones Act like Guam. While others argue that repealing the

Jones Act would be detrimental for Puerto Rico’s country in several ways. The major arguments

for the why the Jones Act is beneficial to Puerto Rico are similar to the arguments for its

existence in the United States. The claims are that it’s beneficial to the economy, homeland

security. The chairman of American Maritime Partnership stated, “The Jones Act is not a cause

for the island's financial woes. While other industries have fled the island, the domestic maritime

industry has made significant capital investments to service the economy and support thousands

of family-wage jobs for Puerto Ricans. Weakening the Jones Act would harm, not help, the

Puerto Rican people and the Commonwealth's economy. In fact, a vote against the Jones Act is a

vote to outsource American jobs, undermine national security and degrade homeland security”

(AMP, 2016, para 4). In Puerto Rico, there is a push from the public to get pardoned from the

legislation. Many natives to Puerto Rico claim the Jones Act undermines their economy. The

Jones Act may not be the sole contributor to the Puerto Rican economy. Many claim pardoning

the Jones Act regulation would lift the restrictions in Puerto Rico that would allow growth in

other markets.

Purpose of Interviews

The Jones Act is a blanket Cabotage Act that effects different industries in different

ways. In order to see the true effects that the Jones Act has; reaching out to professionals in THE JONES ACT: TOO BIG TO SINK? Coleman32

different maritime career fields would allow for a collection of well-versed responses from

different points of views. A collection of three interviews were done in order to get respected

perspectives from a mariner, and shipyard workers. When choosing a mariner to interview, a

foreigner was picked in order to avoid a biased opinion. Since the two remaining sets of

interview questions were conducted with American maritime workers who may have a slight

bias.

Pete Bethune Interview

The first interview was conducted with New Zealander, Pete Bethune. Mr. Bethune is the

founder of the conservation company, Earthrace. He has an in-depth background in the global

maritime industry. During a tour of the California Maritime Academy campus, Mr. Bethune said

agreed to be interviewed on the topic of the Jones Act. Pete admitted to knowing a generous

amount of the Merchant Marine Act of 1920. By traveling and touring through the worlds ports,

including many within the United States, he had gained enough information on the cabotage law

in order to have an opinion on the topic. With Pete Bethune’s very busy travel schedule around the

world, email was the best way to reach him. Mr. Bethune was five questions over email that

allowed him to expand his knowledge on the topic. As a well-established foreigner with a broad

maritime background. It was a privilege to be able to get answers back from Mr. Bethune during

his busy schedule. Pete is an individual that has an opinion respected by many, but has a fair share

of critics due to his bold approach to conservation. Although Pete has different views from this

author on the effects of the Jones Acts, his input was greatly respected.

Question 1: With your maritime background, do you have any basic knowledge of the U.S. cabotage law known as the Jones Act? If so what are your opinions on the success or failures of it? THE JONES ACT: TOO BIG TO SINK? Coleman33

Response: “The Merchant Marine Act of 1920 (the Jones Act) was introduced and among other things, stipulates that vessels operating between two or more US ports, must be among other things, US registered and crewed. My view is this is a morally correct thing to do. Economically it can be seen to reduce competitiveness of US transportation, but this is when you compare with say India, Indonesia, Pakistan, China etc. when you compare to western countries like Australia, NZ, UK, Germany, the US is actually relatively competitive already. These countries all have similar laws, and so if the US was to repeal the merchant marine act 1920, it would increase your shipping competitiveness against those countries, but in many ways this is a race to see who can get away with the lowest wages. Is that really what the US wants? I have boarded many low wage boats in targeting illegal fishing. The crew are virtual slaves. They are paid around 40 cents to $1 a day. Safety is appalling. Living conditions appalling. Environmental discharge is rampant. The boats are disasters waiting to happen, and many do happen. Wealthy countries like the US have an obligation to ensure they are not party to such things. Should you allow these vessels in, you will have more environmental issues from illegal discharge, you will have the crew trying to abandon ship in port and seek refugee status. You are effectively allowing a form of slave labor in the US. Make no mistake, US waters are your responsibility. It could be argued internal shipping costs will reduce, so the US will be fractionally more competitive, but the US should not be racing to a low wage economy” (P. Bethune, Personal Communication, March 2, 2017).

Pete Bethune claims his response is the morally correct thing to do. However, economic

prosperity doesn’t always succeed through a moral roadmap. Bethune explains how the United

States is on a level playing field with the Western Nations. One of the major disadvantages the

United States is experiencing is a lack of competitiveness, foreign wages and operational cost

undercut the industry. The United States can never match foreign wages due to its minimum

wage laws set in place. A major hurdle that the United States faces in order to become more

competitive on the global market is the government involvement in business. Pete made the

argument that the U.S. has the obligation to keep the Jones Act in order maintain the integrity of

the current maritime industry. However, others argue that current integrity of the U.S. maritime

industry is not doing very well as it is; it’s a dying industry for America. The environmental

issues and illegal discharge argument is already being managed by the states. The United States

has always been visited by foreign flagged vessels crewed by foreigners. By the United States

eliminating regulation, it allows industry the chance to more easily lower operational cost. THE JONES ACT: TOO BIG TO SINK? Coleman34

Lowering operational cost is different than leading to a low wage economy. The more

competition in a given industry allows for competitive wages.

Question 2: As a foreigner to the United States, does it make it appeasing to start up a business that falls under the jurisdiction of the Jones Act? Response: It is no different to starting a marine company in any other western country. If you operate a commercial ship in NZ, Australia, Germany, UK, etc., your ship must be registered in that country, and must be crewed by nationals. This is the same in most western countries. There are a few exceptions on fishing vessels. But these are being phased out” (P. Bethune, Personal Communication, March 2, 2017).

Pete Bethune claims that the U.S. is in a similar situation as other western nations. That

may be correct; however, why would the United States be comfortable with shrinking market

size? Others argue that the United States needs to be able to innovate while other Western

Nations are failing alongside the United States. The UK, Germany, and Denmark all each

represent 1% of the worlds registered tonnage alongside America. Large developed nations have

higher cost of living which transforms into higher wages. With having to crew American vessels

with 75 percent Americans, it doesn’t give the ship owners the opportunity to cut down on

operational cost by hiring more foreigners for more competitive wages. Outsourcing jobs to

foreigners in the U.S. shipping industry could lower cost in upstream markets, further creating

more jobs. In a capitalist market, industries that lose relativity will become irrelevant if they

don’t continuously maintain a competitive edge.

Question 3: Do you see any limitations that the Jones Act creates for marine science and conservation capabilities? Response: Not really. Marine science and conservation are largely funded by western countries, and that the ships required for such activities are locally registered and crewed is OK. You can bypass the act anyways by working as a private vessel. We did this on Earthrace when we toured the US. We were a private ship and could have foreign crew” (P. Bethune, Personal Communication, March 2, 2017).

A good argument was put forth by Bethune in addressing the Jones Acts effects on

marine science and conservation capabilities. Western nations are more prevalent in funding the THE JONES ACT: TOO BIG TO SINK? Coleman35

marine exploration because developed countries tend to be more invested in protecting and

learning about the environment. Additionally, the western nations that are leading the world

marine exploration tend to be more advanced in technology due to the state of their developed

countries. Currently, the United States has very limited Artic capabilities with an aging ice

breaker. Allowing foreign nations such as Russia to gain on artic exploration missions. The

United States has constrained its ability to grow a large modern oceanographic fleet due to the

overbearing building cost, compared to foreign markets. American scientist that are funded by

grants by the government in order to research aboard oceanographic vessels, and or reaching

places such as Antarctica have faced difficulties. These include finding available oceanographic

research vessels to join for the subject specific research.

Question 4: From a foreigner perspective, have you seen the United States shipping capabilities begin to deteriorate with the Jones Act in place? Response: The US has less global trade from shipping now. But when you compete against companies paying wages of $1 / hr this is expected. The US no longer makes clothing, it imports it from China and India. That is OK. You do not need to dominate all industries. The US should be happy that it remains the biggest economy by far, and dominates many industries. You don't need to dominate global shipping as well, when it has become a race to lower wages” (P. Bethune, Personal Communication, March 2, 2017).

Pete has noticed that the United States has shrunken in global trading on American ships.

He states that it’s difficult to compete against nations that are paying their workers and seafarers

pennies on the dollar compared to American workers, which is why the United States has

outsourced its textile industry needs to Asia. If the Jones Act was eliminated, the U.S. companies

would be outsourced to foreign markets in order to benefit the consumers with lower prices.

Others argue that the U.S. doesn’t need to dominate the global shipping market, but that the

United States needs to first begin becoming competitive outside its borders. Some believe it’s

the morally right thing to hire citizens within your own borders. However, others make the THE JONES ACT: TOO BIG TO SINK? Coleman36

arguments that it’s economically smarter and more viable to outsource jobs to benefit the

consumers of the receiving country.

Question 5: In your opinion does the Jones Act limit companies in the U.S. the ability to be competitive with international companies/internationally flagged vessels? Response: “Yes it does limit competitiveness. But if you want to take this to its extreme, take away the minimum wage, bring in millions of people from India, Bangladesh etc. and the US could also become competitive in clothing, shoes, textiles and many other things. That in turn would bring wages down in many sectors. I don’t see it as a good thing though. Already the US lags behind most western countries in terms of minimum wage. Plus the US has among the highest disparity in wealth. Low wage people in the US really struggle. Low wage people in most western countries fare much better. Does the US want to become like China?” (P. Bethune, Personal Communication, March 2, 2017)

Mr. Bethune & states that the Jones Act limits the United States competitiveness against

foreign competition. The United States isn’t the only western nation that subsidizes their

industries. The question is if it’s economically beneficial in the long term for a country to

continuously subsidize a cabotaged market? Many argue that in fact it delays advancements

within the industry due to the lack of competitive markets. Pete finds it important for the United

States to maintain the Jones Act because it may put a larger presence of wealth disparity its

nation.

NASSCO Interviews

In order to get perspective on the Jones Act from all aspects of the industry, reaching out

to General Dynamic NASCCO provides a good look into the ship building industry. Interview

questions from two different General Dynamic’s workers provided insight from the Supply

Chain Professional of Material Control, and the Director of Planning. Asking aggressive

questions to this Pro Jones Act Company gave interesting responses. The Supply Chain

Professional for Material Control is a recent California Maritime Academy Graduate; Natalie

Laconsay. Natalie answered the interview questions, but forwarded them up the chain of THE JONES ACT: TOO BIG TO SINK? Coleman37

command in order for a more seasoned professional take on the Jones Act questions at hand. Bill

Gove, Director of Planning at General Dynamics NASSCO, gave similar answers as Natalie

Laconsay, but with slight differences of opinion on a couple topics.

Question 1: Do you believe NASSCO would be able to compete internationally without the Jones Act in place? Explain. Gove’s Response: “NASSCO will be able to compete internationally if: a. They dramatically upgrade and modernize their facilities. They will need more water front property so the Navy will have to give up part of their naval base. They need more land space so the adjoining neighborhood will need to secede some property to NASSCO…at fair market value, of course. b. The USA will have to un-cuff the regulations that make an uneven playing field with other countries. These would mostly be environmental regulations. c. Some people think protectionist’s laws harm America and competition; they are wrong. As a government if you want to give an industry a shot in the arm and up their customer base you aid them by making laws that benefit their industry internationally. For example many countries have laws that say all exported goods must be delivered in their flag ship or any imported goods must be delivered in their flagship. The best protectionist law I’ve seen used is the corporate welfare laws (most countries use this a lot). It called subsidies. The government pours money into companies so they can sell their goods at a discount and when they have attained their market share the government stops the subsidy and the company then competes on its own” (B. Gove, Personal Communication, March 7, 2017). Laconsay’s Response: “Although I believe NASSCO would be able to complete internationally without the Jones Act, building American commercial ships is one of the major contributors to our recent contracts. NASSCO built 8 commercial American Petroleum Tankers in the past few years which will be carrying cargo between U.S. ports. By being built in U.S. shipyard it further protects hundreds of thousands of American jobs and almost $100 billion in annual economic impact as a result of the domestic American maritime industry. The tankers will be used to transport products—such as petroleum—that help fuel America’s businesses and homes. Coming up, we have contracts to build two MATSON CON/RO (container/roll on-roll-off) vessels under the Jones Act which will further protect the jobs of many Americans, merchant mariners -- some of which include our fellow classmates graduating in the industry at Cal Maritime” (N. Laconsay, Personal Communication, March 7, 2017).

According to Gove, new facilities would be necessary in order to have modern innovative

equipment. One thing that foreign ships yards such as ones in India and Bangladesh have an

advantage over American yards, are a lack of government imposed environmental regulations.

It’s true that the United States is being beat by foreign competition through foreign governments THE JONES ACT: TOO BIG TO SINK? Coleman38

flooding the markets with subsidies. Some argue that’s one of the main causes of the decline of

the U.S. maritime industry. Laconsay on the other hand, said NASSCO would be able to

compete internationally without the Jones Act. The question asked if the ship building company

would be competitive without the Jones Act. Many argue that American shipping companies

would be foolish if they continued to build American for five times the price instead of going to

South Korea to get designs and equipment for a fraction of the price. Although Laconsay

believes supporting an industry with domestic workers is positive thing, the long term economic

repercussions for the consumers can become substantially worse.

Question 2: U.S. built Jones Act Vessels cost on average 5 times more than foreign commercial vessels, how is NASSCO working to lower that margin? Gove’s Response: “NASSCO is working at lowering costs to build ships through its strongest asset, the NASSCO culture. The culture at NASSCO is to perform better: a. better design b. lower costs in engineering, material and labor. c. raise productivity NASSCO also has a plan to upgrade their facilities overtime, but no truly dramatic cost reduction will occur unless NASSCO is able to upgrade to a world class facility. That means NASSCO’s waterfront and land holding must increase at least five fold” (B. Gove, Personal Communication, March 7, 2017). Laconsay’s Response: “NASSCO has many ways of lowering our margin. One way we strive to do that is innovation in all aspects of the company, minimizing complexity, and finding ways to simplify design in engineering, planning, and supply chain. Our culture insists we use acumen to identify root causes, not symptoms, so with each ship, we implement change and our statistics improve. This idea is implanting in the way we do business from the moment we begin at the company. By using experience, knowledge, and diversity within the company, we make wise decisions from the beginning planning stages of a contract. Another way we lower the margin is by working with DSEC, a subsidiary of Daewoo Shipbuilding & Marine Engineering (DSME) of Busan, South Korea. They not only designed the commercial vessels these past years, but we work with them to receive material as well. We planned 8 ships ahead, so we are able to plan, ocean ship material lowering costs” (N. Laconsay, Personal Communication, March 7, 2017).

Lowering cost and rising productivity is a very common business model. Improvements

to facilities is difficult because up front capital to start projects and buy new equipment is pricey.

It’s difficult to compete with developing nations that are paying low wages, but that may not THE JONES ACT: TOO BIG TO SINK? Coleman39

provide a reason why American shipyards are not automated. Jobs may be lost in the ship yards.

However, new jobs in the economy are created in the technology industry building machines for

shipyards. President Donald Trump has voiced his opinion in wanting to build a larger navy for

the United States. With a limited number of active shipbuilding yards capable to produce large

enough naval ship would be limited. The president’s plan on growing the navy would keep the

capable shipyards fill with ship orders for years. Some argue that during that period in which the

ship yards are filled with orders, would be a good time to repeal the Jones Act.

Question 3: U.S. shipbuilding companies are fed business through the Jones Act, do you have an opinion on why the number of remaining Jones Act ships are shrinking? Gove’s Response: “Congress, through the pressures of other industries, have weakened the Jones Act, basically the last meaningful protectionist’s law aiding our shipbuilding industry. This weakening of the Jones Act is against our national interests. This Act helps keep our “vital” shipbuilding industry intact…at a very small level but still it helps. The world is dangerous and I would hate to think we cannot protect ourselves and have to purchase war and maritime services from some other dominant country…like China or Iran or North Korea, or even worse the weaklings in Western Europe. These purchases would be in the form of cash gifts for protection. Think of the neighborhood mafia” (B. Gove, Personal Communication, March 7, 2017). Laconsay’s Response: “An opinion on why the number of remaining Jones Act ships are shrinking is because there is an economic view that the Jones Act creates expensive barriers to trade. There is a view that it creates a higher cost of shipping goods between U.S. ports leading to a number of situations that harm the country” (N. Laconsay, Personal Communication, March 7, 2017).

There is strong argument that the weakening of our Jones Act favors the U.S. national

interest. If the number of remaining Jones Act vessels continue to shrink and it results in less

profits for the shipyards, the National Security argument that Gove makes has become irrelevant.

The United States not only has the largest Navy in the world but has institutions in place in order

to protect the homeland. The Department of Homeland Security has the Coast Guard to protect

the U.S. waterways. If the United States had no remaining capable shipyard to maintain a Navy,

that means the government has continued to create regulation, further restricting the flexibility THE JONES ACT: TOO BIG TO SINK? Coleman40

business. However, if the United States truly needed vessels for its navy, our allies South Korea

have cheaper shipyards that produce ships quickly.

Policy Recommendations

There are many complex parts to the Jones Act. If there was any time to manage a full

repeal of the Jones Act, it would be during the growth of the United States Navy. With the

United States government’s intentions to continuously build more naval vessels, it would fill the

shipbuilding books for many years to come. The upfront capitol from orders would allow for

reallocation of money into automatization and equipment in order to limit the cost disadvantages

to foreign competition. Instead of being able match foreign wages, the United States shipping

companies should begin to reallocate subsidy funding and invest in automatization to lower cost

in other sectors. Some would argue that without the Jones Act there would be no U.S. maritime

industry. That may be true since the Jones Act has protected the industry through a cabotage, in

which some say has not encouraged continuous innovations to stay competitive. Back in 1920,

the United States was in a different situation as it is today. Countries evolve through changes in

policy and economics. In order to ensure the Jones Act is beneficial for the best interest of the

United States; it could be an intelligent idea to reevaluate the policy every few years. This would

ensure the policy remains relevant to national interests. The Jones Act serves the purpose of the

backbone of the U.S. maritime industry that also has global effects. A repeal of the Jones Act has

the possibility to benefit our industry but more importantly the consumers who are receiving

goods from the downstream of the ports.

Conclusion THE JONES ACT: TOO BIG TO SINK? Coleman41

The Jones Act has influenced the United States maritime industry since 1920. The policy

has been under scrutiny since the day it entered legislation. It has had effects on not only the

economy, but also national security. The United States no longer holds a major stake in global

ship tonnage. The majority of American commerce is imported on foreign flagged vessels. There

are several points of views on the policy that argue different recommendations. In general the

United States flag fleet continues to dwindle mainly for cost reasons. Bunker is a large part of a

ships operating costs, and while the barrel is relatively at a much lower pricing compared to

historical figures, the overall cost of fuel easily weighs down the profitability of smaller Twenty-

Foot Equivalent Units (TEU) vessels; 2,000-4,000 TEU. Mainly since they are unable to get the

economies of scale that larger vessels such as, Triple E class at 18,000 TEU can achieve. Labor

costs to operate vessels along with US certification requirements have also added additional cost

to the picture. The American shipping industry continues to shrink, many argue the Jones Act

has something to do with it. Jones Act critics and supporters both have gathered intensive

economic, and security data to strengthen their arguments. It’s imperative to remember both

sides of the argument frame cases and statistics to their benefit. The true “cost” of the Jones Act

are difficult to 100% certainly pin point. That’s where social and political science allows for

analysis on the topic. Is the Jones Act too big to sink? The policy may not be going anywhere in

Americas demanding political system. Although the Jones Act may not go away though a

repealing process, the U.S. maritime industry may be gone before that ever happens.

THE JONES ACT: TOO BIG TO SINK? Coleman42

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