Puerto Rico, the Jones Act and National Security

As federal policy makers examine possible solutions to Puerto Rico’s entrenched fiscal challenges, attention has turned to the Jones Act, a little-known federal shipping law that requires all goods transported by water between U.S. ports be carried by ships built in the United States, owned and registered in the United States, and crewed by U.S. citizens.

Also known as the Merchant Marine Act of 1920, the Jones Act was designed at least in part to protect the U.S. shipbuilding industry from foreign competition, on the theory that shipbuilding is an essential part of U.S. security. It was deemed important to the government to have a strong shipping industry and experienced seamen in case future wars needed the capacity to build and staff ships quickly in response to defense needs.

The “Krueger Report,” a study commissioned by Puerto Rico Governor Garcia Padilla and authored by former officials of the International Monetary Fund (IMF) and World Bank, recommends exempting Puerto Rico from the Jones Act.  The Governor’s recently released plan to strengthen the territory’s public finances and restore economic growth similarly contains a proposal to “[a]sk Congress to repeal Jones Act’s application to the commonwealth in order to reduce maritime transport costs to the island.”

Yet opposition to the proposal to carve out Puerto Rico from the Jones Act is growing.

The Navy League recently sent a letter to the House Armed Forces committee arguing that the Jones Act continues to be important for national defense. “Any weakening of the Jones Act would weaken national and economic security,” they stated. Quoting Air Force General Paul J. Selva, the Navy League explained that “without the contribution that the Jones Act brings to the support of our industry, there is a direct threat to national security.”

The Navy League letter also cited a 2013 study by the Government Accountability office that recognized, “the military strategy of the United States relies on the use of commercial U.S.-flag ships and crews and the availability of a shipyard industrial base to support national defense needs.”

The American Maritime Partnership (AMP) wrote its own letter to the Armed Services Committee, also quoting the GAO’s findings on the impact of the Jones Act on national security. “According to DOD officials,” wrote GAO, “to the extent that Jones Act markets [like Puerto Rico] are unable to sustain a viable reserve fleet, DOD would have to incur substantial additional costs to maintain and recapitalize a reserve fleet of its own.”

The letter also referenced section 3503 of the National Defense Authorization Act of 2015, which includes the “unquestioned” national security benefits of the domestic maritime industry and offered strong support for the Jones Act.

The AMP letter also referenced claims that the Jones Act increases the cost of goods in Puerto Rico and refuted them as “unsubstantiated and contrary to the findings” of the 2013 study.  The letter explains that ” the GAO found that there were far too many factors impacting the cost of transportation in Puerto Rico to identify a specific cost attributable to the Jones Act, if any,”  and notes further that “[t]he agency said it is even more complicated —’difficult, if not impossible’ — to quantify any purported cost of the Jones Act on the price of consumer goods on the island.”

The American Maritime Partnership  cited GAO in its prediction that if the Jones Act were ever repealed for Puerto Rico, the shipping rates for foreign shipping companies operating between the U.S. mainland and the Commonwealth could well increase because those foreign shipping companies would suddenly be subject to American tax, employment, immigration, and other U.S. laws.

The group also noted that two thirds of the ships bringing freight to Puerto Rico are foreign ships from foreign ports.

The American Maritime Partnership ended its letter with a caution that including an exemption in any legislative package intending to help Puerto Rico in the current fiscal crisis would only decrease the odds of passage of such a package as “Congress understands the important benefits of the Jones Act and historically has been opposed to legislation that would outsource American jobs and undermine national, economic, and homeland security.”

Read the Navy League letter.
Read the American Maritime Partnership Letter.

5 Comments

Luis Arroyo

The whole Jones act charade is nothing more than PDP separatist tactics to remove Puerto Rico piecemeal from the us Flag.

The PDP is now run by clandestine independence advocates calling that status “sovereignty ” and calling for a “Sovereign commonweath ” that’s really independence in Free Association. Governor Padilla and San Juan Mayor Carmen Yulin are “sovereignty” proponents.

Luis Arroyo

Padilla originally supported “ELA Soberano “(Sovereign Commonwealth ) in the months leading to the 2012 status vote. But as news spread in social media of its true Independence nature, candidate Padilla sought personal damage control by turning the status vote into a circus no confidence vote by calling for a “blank status,ballet & a “punishment ” vote against GOP Governor Fortuño.

Rep. Palmer Introduces Jones Act Exemption for Puerto Rico Despite Uncertainty over Need for Change - Puerto Rico Report

[…] The effects that the Jones Act has on Puerto Rico’s economy are not very clear, GAO reports. The Government Accountability Office was referenced in letter by the American Maritime Partnership stating that “there were far too many factors impacting the cost of transportation in Puerto Rico to identify a specific cost attributable to the Jones Act, if any.” The letter also quoted the GAO report stating that “it is even more complicated —’difficult, if not impossible’ — to quantify any purported cost of the Jones Act on the price of consumer goods on the island.” A more detailed look of the effects that the Jones Act has on Puerto Rico can be viewed here. […]

frankroman

All I want to pay is sale tax No Arbitrios ! I pay the shipping by U.S. Flag No Problem ! But my sale tax for my car should be by the black book value use in the mainland not in P.R. Please dont rape us anymore with those arbitrios ! let us be American in P.R. Thanks !

Dennis Freytes

Shipping goods on US flagged vessels is expensive. In 2011, the Maritime Administration (MARAD) reported that it costs over 2.7 times more to transport cargoes on US flagged ships than on foreign ones. MARAD also reported that labor costs were five times higher on US vessels and government reports have documented that construction costs for US flagged vessels are more than double those for vessels constructed in other countries. Data from US food aid shows that carrying goods on US flagged vessels increases shipping costs by as much as $50-$60 per ton.

Shipping costs between US ports and Puerto Rico are substantially affected. For example, a recent quote for shipping a 20-foot container from Jacksonville, Florida to San Juan was $3,390, or about $3 per nautical mile. The quote for shipping a similar 20-foot container from Veracruz, Mexico to San Juan, a longer journey, was only $1,350, or $0.77 per nautical mile.

The Jones Act mandate to use US flagged vessels has had well-documented adverse impacts on Puerto Rico. It is now likely to substantially reduce the amount of on-the-ground resources that can be provided by the $900 million SNAP and reconstruction package in the disaster aid legislation being considered by Congress. Evidence from analyses of other US cargo preference programs indicates that between $100 and $200 million (between 10% and 20% of the total aid amount) is likely to be diverted for excess shipping costs to companies owning US flagged ships.

Most of those Jones Act costs will adversely affect the poorest families in Puerto Rico, where over 50% of the island’s population rely on food stamps. Around 85% of the island’s food is shipped from America and other countries. 71% of it comes from the United States, and 60% of all food consumed in Puerto Rico is shipped from the US under the provisions of the Jones Act. The Act also applies to shipments and imports of the machinery and equipment needed to repair the territory’s electrical grids, roads, houses, schools, offices and factories.

Today, the Jones Act delivers “hidden” subsidies to US maritime companies, at the expense of others, by guaranteeing much higher shipping rates on domestic routes between US ports. Supporters of the Act (and other systems) that benefit US mercantile marine companies argue that these programs are necessary to ensure that the US merchant marine can provide military sealift services in times of war. They also state that these actions strengthen the US shipbuilding industry so that it remains capable of delivering submarines, warships and other vessels needed for the nation’s defense.

In fact, even with the protective shield of the Jones Act (and the other forms of direct and indirect subsidies) the US merchant marine has not provided the sealift capacity needed to support operations or contribute to military shipbuilding. Only one commercially owned ship used in the Desert Storm and Desert Shield campaigns during the 1990-1991 Gulf War came from the Jones Act fleet. Foreign flagged ships carried more cargo for the operations than all the US commercial ships used by the military in those campaigns.

Moreover, the Jones Act generates only a small share of business for the companies that build US combat ships. A recent AEI study reported that, since 2000, building ships that are part of the current Jones Act fleet only accounted for 5% of all orders placed with shipyards that build government and military vessels. Furthermore, large military vessels are built in specialized yards that are almost entirely dependent on government contracts for their economic survival.

The Jones Act provides very little in the way of military support, but imposes substantial costs on the US economy. The legislation is also likely to sharply reduce the benefits of congressional disaster aid funds for Puerto Rico. So do the national defense benefits that stem from the Jones Act outweigh its costs? The evidence indicates that the answer is no!

Vincent H. Smith is Director of Agricultural Policy Studies at the American Enterprise Institute and Professor of Economics at Montana State University. Philip Hoxie is a research assistant at AEI.

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