Jones Act: A Great Protectionist Success
Thanks to the continuing efforts of Colin Grabow of the Cato Institute’s Center for Trade Policy Studies, we know of a great success in American protectionism: the 1920 Jones Act. This law, which replaced similar previous measures, protects US shipyards and ship owners from foreign competition: only US-flagged, US-built, and mostly US-crewed and US-owned vessels may transport cargo between two points in the United States. This legislation has succeeded so well that there is no foreign competition in domestic maritime shipping and no domestic ship is able to do the job at internationally competitive prices. In some cases, there is no Jones Act compliant ship and thus no ship at all legally available to carry something between two American coastal points.
Following the increase in (natural) gas prices due to the Russian government cutting supplies to Europe, we find a good example of the detrimental Jones Act in a recent letter that the governors of the six New England states wrote to the federal Department of Energy:
We appreciate that the Biden Administration has been working with European allies to expand fuel exports to Europe. A similar effort should be made for New England. The Jones Act, which restricts the types of ships that may transport products between US ports, effectively precludes all US exported LNG from being delivered into New England. The insecurity of global natural gas markets in 2022 exacerbates the long-standing ramifications of the restriction and undermines reliability. We request that the Biden Administration work with the New England states to alleviate the unique fuel challenges that the region faces, including beginning to explore the conditions under which it might be appropriate to suspend the Jones Act for the delivery of LNG for a portion or all of the winter of 2022-2023.
In one of his frequent and useful posts on the Jones Act, Grabow recently shared the governors’ letter and commented:
Although geographically part of the U.S. mainland, in terms of energy New England is almost an island. Lacking pipeline connections to refining centers outside the region, it also has insufficient pipeline capacity to transport natural gas—New England’s dominant fuel for electricity production—from other parts of the United States during wintertime spikes in demand. Instead, the region must turn to marine deliveries of liquefied natural gas (LNG) to meet its needs. That means imports. While the United States is one of the world’s top exporters of LNG, there are no ships to transport it to New England.
More accurately, there are no ships to transport it that comply with the Jones Act.
Of the world’s nearly 600 LNG tankers, none are U.S.-flagged, U.S.-built and mostly U.S.-crewed and owned. … And such a vessel isn’t likely to appear anytime soon, if ever. With U.S.-built LNG tankers estimated to cost over $500 million more than those from foreign shipyards—although no one knows for sure, since no such vessel has been constructed in this country since before 1980—the economic case for building and operating one is non‐existent.
(Colin tells me that he has since discovered that the last two of these ships were built in 1980, so the “before” in the last sentence should be deleted.)
Not surprisingly, for more than a century, the small and non-competitive US maritime shipping industry has been fighting against any attempt to cancel its protectionist privileges. It is a textbook example of the inefficiency of protectionism and of the rent-seeking that government power encourages. If the government is powerful enough to give you corporate welfare, including indirectly by banning your competitors, and you are politically powerful enough to get the privilege, why wouldn’t you? From the point of view of the small number of people protected against competition and the large number of consumers harmed, the Jones Act is a great protectionist success, although this is mostly true for the first capitalists who obtained the privilege. Since then, the value of the privilege must have been competed away, up to a normal return on capital, by other inefficient domestic rent-seekers.
It is estimated that, in 2018, 3,380 mariners (or 1/48,000th of the US nonfarm employment of more than 163 million) worked on Jones Act oceangoing ships. Even if we accept the unrealistic estimates of the Transportation Institute, a defender of the Jones Act, which puts the number of jobs at 94,470, this would still correspond to only one job for every 1,700 employed persons in the US. They have a much wilder estimate that includes “indirect” and “induced jobs” which, if we added such ghost jobs over all industries, would give us several times more employed people than there are in the labor force. (The Transportation Institute’s report, which it apparently doesn’t want to go public, has been reproduced on the website of the Grassroot Institute of Hawaii, which opposes the Jones Act.) Anyway, were the Jones Act repealed, workers in protected jobs could of course find employment in other industries, as nearly all workers do. Similarly, investors would find an equivalent rate of return on their capital in other industries, although the current shareholders protected by the Jones Act would lose what they have invested.
In 1872, Rep. Samuel Cox (D-NY), speaking in the House about what their horse trading on tariffs amounted to, declared (quoted from Ida M. Tarbell, The Tariff in Our Times [The Macmillan Company, 1906], and partially quoted in Doug Irwin, Clashing over Commerce [University of Chicago Press, 2017]):
Let us be to each other instruments of reciprocal rapine. Michigan steals on copper; Maine on lumber; Pennsylvania on iron; North Carolina on peanuts; Massachusetts on cotton goods; Connecticut on hair pins; New Jersey on spool thread; Louisiana on sugar, and so on. Why not let the gentleman from Maryland steal coal from them? True, but a comparative few get the benefit, and it comes out of the body of the people; true, it tends to high prices, but does not stealing encourage industry? Let us as moralists, if not as politicians, rewrite the eighth commandment: Thou shalt steal; because stealing is right when common.
He can add: Washington State steals from New England and many other states. Senator Wesley Jones (R-WA), who gave his name to the Jones Act, aimed at protecting Seattle shipping companies. Today, the ongoing fruit of the theft is a continuing deadweight loss, a pure economic loss that benefits nobody because resources are not allocated in conformity with consumers’ preferences and real economic costs.