The Jones Act is an Obstacle to Recovery and Economic Growth in Puerto
from Hurricane Maria, and it is an obstacle to long-term economic growth.
By Thomas Grennes
The Jones Act of 1920 requires, among other things, the use of American-built ships to transport goods from one US port to another. By prohibiting Americans from using lower cost foreign-flag ships in coastal trade, shipping costs are higher, and the added cost has been shifted on to consumers. These additional costs have significant current relevance to the storm-damaged island of Puerto Rico.
ADVERSE EFFECTS ON PUERTO RICO
Although additional transportation costs have been spread rather widely over millions of American consumers, the non-contiguous regions of Puerto Rico, Hawaii and Alaska have been hurt more than the mainland. Economic harm to Puerto Rico from the Jones Act has been reported in a series of studies since 2012 by the Federal Reserve Bank of New York and in the work of Anne Krueger, the former chief economist of the World Bank. Puerto Rican consumers and other end users of goods shipped from the mainland by water have been disproportionate victims of the Jones Act.
In addition to forcing the use of higher cost ships, the Jones Act reduces competition and makes it easier for the smaller number of Jones Act-eligible ships to conspire to raise their mark-ups above cost. For example, in 2013, four companies using Jones Act-compliant ships were convicted of price fixing on the Florida to Puerto Rico route, and six executives were sent to prison. Depriving Puerto Ricans from hiring foreign-flag ships also reduces their ability to influence the schedules and types of ships serving the island.
AN OBSTACLE TO DISASTER RECOVERY
Puerto Rico had severe economic problems before Hurricane Maria, including a major debt problem and a grossly inefficient government-owned electrical power company (PREPA). However, the Jones Act made a bad situation worse. By excluding the use of foreign-flag ships, the Act continues to be an obstacle to recovery. The Trump administration first hesitated, but it eventually issued a ten-day exemption from the Jones Act, after a request from the Puerto Rican governor. However, the exemption was too brief to allow meaningful participation by foreign ships. For example, a CNN affiliate reported that the owners of a Norwegian flag ship that was in New Orleans at the time of the Hurricane offered to send needed supplies to Puerto Rico, but the exemption expired before they could complete the transactions. Later, officials from Greenpeace discovered that they were not allowed to use their Dutch-flag ship to transport supplies from New York City to San Juan.
CONSUMER AND VOTER IGNORANCE
If the Jones Act is so harmful, why do consumer/voters not rise up and repeal it? Because the large total costs are spread widely across millions of consumers, the cost per consumer is small. The average consumer has only a weak incentive to spend time acquiring information about how the act affects him and to lobby against the adverse effects of the Act. As a result, the few benefit at the expense of the many. In some cases, consumers are not the only ignorant parties. Natalie Jaresko is the Executive Director of the Financial Oversight and Management Board that must approve tax and spending decisions by Puerto Rico. Recently Ms. Jaresko, in a testimony before a House Committee admitted to Congressman Luis Gutierrez of Illinois that she was not aware of the Jones Act and its effect on Puerto Rico.
REFORM OF THE JONES ACT
The tragic effects of Hurricane Maria were made worse by the Jones Act restrictions on transportation. The Federal government can take advantage of this opportunity to remove a barrier to recovery and to longer-term economic growth in Puerto Rico. Permanently exempting Puerto Rico from the Jones Act would be a useful beginning, and many informed observers are now advocating an exemption. A broader reform would extend the permanent exemption (or at least the American-build requirement) to the non-contiguous regions of Puerto Rico, Hawaii, and Alaska. The Jones Act and earlier protectionist laws were inspired by the ancient British Navigation Acts. However, the British were wise enough to repeal the Navigation Acts in 1848. How long will it take the Americans to repeal their own version of the Navigation Acts?