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The Jones Act: a New Face or New Fate

Sep 29, 2017

On September 20th Hurricane Maria slammed into Puerto Rico with Category 5 winds, knocking out power and devastating much of the island’s roads and infrastructure. Two weeks earlier, Hurricane Irma passing just north of the island also created significant damage. These storms dealt Puerto Rico a devastating blow. Fuel Oil and Natural Gas reserves were hardest hit, making it extremely difficult to restore power and electricity. As food, water and medical supplies become depleted, Puerto Rico faces a resupply problem. How to get the ports and infrastructure up and running so that relief can reach the people?

FEMA Begins Relief Operations

After assessing the catastrophic damage, on September 23rd FEMA issued a public statement on their relief efforts. They indicated that the island’s ports were reopened to receive aid which was on its way. We need to keep in mind that Puerto Rico is three days sailing time from the main land. Much of the resupply of hard commodities could be performed by commercial Jones Act vessels. The media unfortunately misunderstood the nature of commercial activity into the Island not realizing the containerized cargo was not the problem. The critical issue would be the resupply of fuel oil and natural gas. In the aftermath of Irma, Customs and Border Protection allowed foreign tankers to load and transport refined petroleum to areas within coastwise commerce. This constituted a suspension of the Jones Act which prohibits the movement of such cargo by foreign vessels.

Cabatoge and the American Fleet

Cabatoge is defined as the transportation of cargo between two points within a country’s coastal or territorial waters. As applied to the Merchant Marine Act of 1920 authored by Wesley Jones, it sets forth the requirement that all such commerce be performed by vessels built in the U.S. and crewed by American citizens and or permanent residents. While the definition of Cabatoge has expanded to include all forms of transport, as applied to the Jones Act, it relates to the movement of goods by sea.

Putting Product where needed

Suspending the Jones Act allows for the swift movement of petroleum from states where supplies are plentiful to areas most affected by the hurricane. As of 2016 there are only 53 U.S. flag Petroleum-Chemical tankers left in America, and none of these are LNG ships. On September 8th DHS issued an initial waiver for transportation between New York, Pennsylvania, Texas, and Louisiana to South Carolina, Georgia, Florida, and Puerto Rico. This was revised on the 12th to add the additional states of New Jersey, Delaware, Maryland, New Mexico, Mississippi, Alabama, and Arkansas to Florida, Georgia, South Carolina, North Carolina, Virginia, West Virginia, and Puerto Rico. Foreign flag tankers were responding, filling the gap for petrochemical and LNG carriage and providing needed tonnage to resupply affected areas.

President Trump responds to the current need

On September 22nd, the suspension of U.S. Flag requirements ended, loading and discharge of petrochemical cargo had to be performed by that date. This is where the situation gets a little sticky. Hurricane Maria pummeled Puerto Rico with Category 4- 5 winds up to 150 mph. So now what do we do? Extend the Jones Act suspension again, enact a new one? Yesterday President Trump suspended the Act stating that a request for such action had been received by Gov. Ricardo A. Rossello. While the suspension applies to all commercial cargos moving from the United States to Puerto Rico, hard commodities have been moving by Jones Act Vessels. Also as the American Maritime Partnership points out, trade to and from the island is routinely carried by both U.S. and foreign flag vessels depending on the origin of the cargo. The critical issue is in the movement of petrochemicals. So, is it time to take another look at whether the current Jones Act meets our needs?

In support of the Act

In spite of the need to suspend U.S. Flag service from time to time, some would argue that the Jones Act still serves a useful purpose. In May, the CBP decided to maintain Jones Act exemptions for the off-shore drilling industry. The Offshore Marine Services Association (OMSA) argued these exemptions put hundreds of jobs in the hands of foreign workers. OMSA has been trying to control the offshore drilling and supply industry for over 8 years. The ruling they said affected not only supply boat crews but American shipyards which build and service supply boats. The Shipbuilders Council of America (SCA) felt the decision was CBP’s way of passing the issue down the road, a deferral that “only hurts the more than 400,000 men and women of the US shipyard industry.”

Ocean Carriers serving Puerto Rico, Hawaii and American possessions see the Jones Act as essential to stability within the U.S. maritime trade. Management at Matson Navigation stated that it is… “The single most important piece of legislation to Matson.” Hawaiian legislators from Daniel Inouye to Mazie Hirono have long cited the training and recruitment of American merchant seaman, service stability and national security as the reasons for maintaining the Jones Act.

Cost of Doing Business

Alaska, Puerto Rico and Hawaii sustain much higher transportation costs for fuel and consumer goods. Hawaii is a perfect example of why the Jones Act should be reviewed. In Manhattan consumers pay one fourth the cost for electricity as their counterparts in Honolulu. Energy costs run almost $50.00 per month higher in Anchorage as well because of the cost of transportation.

According to MARAD, the cost of operating a U.S. Flag vessel is 2.7 times higher than for an equivalent foreign flag vessel. U.S medium range tankers are three times more expensive to build in the U.S than on the world market. Within the United States it is less costly for oil and natural gas producers in Texas to export product than to sell it to consumers in the Northeast. Inter-coastal tankers built in America cost about three times as much as they would on the world market making the cost prohibitive. The Texas comptroller’s office indicates that because of the limited number of U.S. built tankers moving product, it is cheaper to import oil from Nigeria to the Northeast $1.45 to $1.70 per ton than to move it from the Gulf $5.00 to $6.00 per ton.

Argument for Repeal

Former Senator Inouye once said, “…we are reminded that a strong merchant marine fleet is vital to the security of this nation and a critical supply link for our troops fighting overseas…” While he was talking about American built vessels, the statement could also apply to foreign ships reflagged under the DOD’s Maritime Security Program. A continued strengthening of MSP can supply the logistic needs of the Military and the DOT in times of national emergency. With crew requirements being met by U.S. officers and seamen it isn’t necessary for our auxiliary fleet to be built in the United States.

In 2016 Senator John McCain proposed an amendment to the Energy Modernization Bill which would remove the requirement for oil and gas tankers to be built in the United States. Recently the senator introduced the “Open America’s Waters Act of 2017”. Senator McCain has been a strong advocate for repealing the Jones Act claiming that burdensome regulations stifle the economy and hinder free trade. He believes the purchase of foreign built vessels by American carriers would allow U.S. business interests to be more competitive in the global market. S 1561 as written currently applies only to tankers and LNG carriers but cargo vessels while not specifically mentioned could be included under a broader interpretation of the act.

So, where do we go?

There is little argument for American Flag Vessels to be manned by U.S. trained merchant seamen. It’s required under the Jones Act and by MARAD for reflagged ships in America’s auxiliary fleet. Building requirements could be reviewed and the percentage of foreign components revised to allow greater flexibility. Currently under the act a qualified “U.S. ship” must be completely assembled in the States and all of its major components manufactured here. No more than 1.5% of its steel hull casting can be of foreign origin. What if we relaxed these rules? If we agree that major construction should be performed at U.S. shipyards, then perhaps a larger percentage of components could be of foreign origin. CBP exemptions in offshore drilling point to a broader interpretation of building requirements. A need to supply that industry’s demand led to relaxation of the rules. Does the recent suspension of domestic fuel carriage make a similar case? Are we supporting the Jones Act for tradition’s sake? Or are certain parts of the act simply out of date?

Author Photo
Matt Guasco
INF Marketing and Logistics, Inc.
President

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