The Jones Act Needs to Go

December 7, 2020 Topic: Politics Region: Americas Blog Brand: The Reboot Tags: Jones ActShipsShipbuildingFree MarketProtectionism

The Jones Act Needs to Go

The Jones Act’s requirement forcing the domestic construction of ships serves as a considerable deterrent to the purchase of new vessels while utterly failing to foster a vigorous commercial shipbuilding industry.

Perhaps the Jones Act’s most damaging provision is its requirement that vessels engaged in domestic commerce be constructed in U.S. shipyards. By forcing Americans to buy ships that cost four to five times as much as those built abroad, the restriction exerts downward pressure on the size of the U.S. fleet. Compounding matters, the requirement has proved ruinous to the U.S. commercial shipbuilding industry, which has become almost wholly dependent on a captive domestic market whose size continues to dwindle.

To appreciate the market’s decline, consider that in 1996 the chairman of the Shipbuilders Council of America lamented in testimony before Congress that U.S. shipyards—effectively shut out of the international market given their sky‐​high prices—were “fighting over a lousy five or six Jones Act ships that might be built every year.” Last year, meanwhile, a Congressional Research Service report noted that annual production of such vessels had slipped to a mere two or three. And now a new government study suggests that production is likely to decline even further.

Last month the Government Accountability Office (GAO) released a report examining the effects of Congress’s December 2015 decision to repeal the ban on exports of U.S. oil. Among its findings was a decreased demand for U.S.-built Jones Act tanker ships. Freed from the export ban, U.S. producers have increasingly opted to sell their crude on the international market rather than to U.S. refiners—a domestic shipment requiring expensive transport on Jones Act vessels. Those refiners, meanwhile, replaced the domestic oil they had previously purchased with imported crude able to take advantage of much cheaper international shipping.

As the GAO report notes, crude exports from the Gulf Coast increased by over 200 percent from 2016 to 2017, Jones Act shipments from the Gulf Coast to the East Coast declined by 57 percent in 2016, and oil imports bound for the East Coast that same year increased by 35 percent. This increased use of cheap international shipping and reduced demand for Jones Act vessels has significant implications for U.S. shipbuilding:

Four of the seven shipping industry stakeholders we interviewed said that the decline in demand for the use of Jones Act tankers and barges to transport crude oil has primarily affected the shipbuilding sector…One industry representative we interviewed explained that approximately 80 percent of the Jones Act fleet was built between 2007 and 2016, and since such vessels have a lifespan of approximately 30 years, it is unlikely that there will be a need to build new tankers in this decade given the decrease in demand.

Tankers account for nearly 60 percent—57 of 97—oceangoing ships in the Jones Act fleet. If the appetite for such vessels has been sated for the foreseeable future—and there is every indication it has, with no tankers delivered since 2017 and none currently under construction—that places a severe dent in demand for new Jones Act ships. Among non‐​tanker Jones Act ships, there are currently three such vessels scheduled for delivery through 2021. But after that, the order book for Jones Act ships is empty. Even when orders eventually are placed, it will take several years for the ships to be delivered (two of the three Jones Act ships still awaiting delivery were ordered in August 2017, for example, while the third was ordered in August 2016).

In other words, it is a virtual certainty that there will be entire years in this decade in which zero Jones Act ships are delivered. And for those years ships are delivered, their numbers are sure to prove anemic given the lack of need for new tankers.

The shipbuilding industry may have once complained about a “lousy” five or six Jones Act ships constructed per year, but such times will likely be regarded—if they aren’t already—as the good old days. The Jones Act’s requirement forcing the domestic construction of ships serves as a considerable deterrent to the purchase of new vessels while utterly failing to foster a vigorous commercial shipbuilding industry. This is costly protectionism in service of nothing.

This article first appeared on Cato at Liberty, a publication of the Cato Institute.

Image: Reuters.