Letters

MCTF Letter To Congressman Ed Case (D-HI) On His Legislation To Repeal The Jones Act

September 29, 2003

The Honorable Ed Case
U.S. House of Representatives
Washington, DC 20515

Dear Congressman Case:

As stated in its July 28 news release, the Maritime Cabotage Task Force (MCTF) strongly opposes your efforts to repeal the Jones Act under the rationale of creating an open market for non-contiguous shipping. In fact, such a market exists today under the Jones Act. Entry into those trades requires only that entrants are willing to abide by the same U.S. laws and regulations as apply to every other service provider in the trade. This fundamental requirement ensures that no entrant gains a competitive advantage over other participants by virtue of economic benefits - such as freedom from U.S. taxation - that are not available to all participants.

The mission of MCTF is to provide Jones Act education and, if necessary, to lobby Congress for Jones Act support. The Task Force is the largest coalition in the history of the U.S. maritime industry with a membership that includes over 400 American-flag shipping companies, labor unions, shipbuilders, pro-defense organizations, and representatives of every other mode of transportation. While MCTF obviously opposes your effort to repeal the Jones Act, your July 24th introductory statement and accompanying press release make several assertions that we feel deserve comment.

Current Support For The Jones Act Is Broad And Bipartisan

The Jones Act is not “just an anachronism”, as you suggest. In fact, it enjoys, and has enjoyed, the overwhelming support of those who have studied it most closely. Every modern President has supported it, regardless of party. This includes Presidents Carter, Reagan, Bush Sr., Clinton, and George W. Bush. Congress has been equally supportive. In 1997, H. Con Res. 65, in support of the Jones Act, had 243 co-sponsors, a clear, bipartisan majority of the 435 Members of the House. In contrast, earlier Jones Act repeal bills introduced between 1995 and 2000 received virtually no support in the House or Senate and made no progress whatsoever through the legislative process. In addition, as more fully described below, the Defense Departments of various administrations have consistently endorsed the Act for national security reasons.

Shipping Rates For The Hawaii Trades Have Actually Declined In Real Terms

You state that “cargo prices have gone in only one direction - up, and fast - and it is indisputable that there is no downward market pressure.” Yet a 1997 U.S. Department of Transportation (DOT) report to Congress on the non-contiguous trades determined that shipping rates in the Hawaii trade had declined in real terms. Following an extensive, in-depth review of the Hawaii trades, DOT determined that “after adjusting for inflation, westbound shipping rates in 1995 were less than 70 percent of their 1985 level and eastbound rates were just over 60 percent of their 1985 level.” The Department found this decline to be consistent with the trend in the deregulated U.S. international maritime trades, such as the Transatlantic and Transpacific markets. It was also consistent with rate trends in the deregulated domestic truck and railroad industries.

Competition In Non-Contiguous Trades Is Open And Vigorous

The aforesaid DOT report further documented the openness of competition in each of the non-contiguous trades, resulting in substantial “downward market pressure” on rates. While container and, to an extent, roll-on/roll-off services, in each trade tend to be concentrated in a relatively small number of large operators due to the high capital investment cost of establishing regular liner services, substantial opportunity exists for new Jones Act entrants. For example, in Hawaii, since 1980 ten carriers have initiated liner service from the mainland and four have exited those trades. Moreover, Pasha Hawaii Transport is poised to enter the roll-on/roll-off trade to Hawaii in 2004 employing a new U.S.-built vessel.

The Jones Act Results In Stable, Efficient Service For Hawaii

You characterize service by American vessels to Hawaii as a “stranglehold” on the State. Yet the Jones Act ensures that in its trade with the mainland, Hawaii is served by carriers that have a commitment to the community and that serve the interests of Hawaii consumers and shippers.

As an island State, Hawaii will always be dependent on ocean carriers for imports and exports internationally and to and from the U.S. mainland. The question is whether the U.S. domestic portion of those services is to be provided by United States-flag vessels and U.S. crews operating under the Jones Act in dedicated service both eastbound and westbound, which you characterize as a “stranglehold” on the State, or by foreign carriers for which Hawaii may be no more than a way-stop in their international shipping routes. Put differently, are the interests of Hawaii consumers and shippers better served by dedicated carriers whose primary purpose is to serve Hawaii, or by international carriers whose primary interest is in the transpacific trades?

Hawaii’s situation in this regard is particularly tenuous due to the imbalance in its liner trades. A foreign, transpacific carrier may be interested in providing low cost westbound services to Hawaii because of the relatively larger amounts of cargo moving to Hawaii in that direction (which is essentially a backhaul for such carriers given the general U.S. trade imbalance with Asia). But the same would not hold true for eastbound shipments from Hawaii to the mainland. Foreign carriers in the eastbound transpacific trades would be less willing to incur the added delay of diverting vessels to Hawaii on a regular basis for the relatively small amounts of cargo moving from Hawaii to the mainland, causing increased delays (and costs) for their primary customers in Asia. As a result, Hawaii’s exporters to the mainland would become captive to such carriers at whatever rates they might demand. In contrast, Jones Act carriers serving Hawaii in direct service to and from the U.S. West Coast must provide regular eastbound service for Hawaii’s exports.

Claims That The Jones Act Costs Hawaii Cannot Be Supported

Claims of 40 percent or greater savings to shippers and consumers from repeal of the Jones Act may have great political appeal, but they simply cannot be supported. Over the last decade, persons or groups opposed to the Jones Act have commissioned various studies seeking to make the argument that foreign vessels would result in significant cost savings. None has successfully made that case.

The unsuccessful efforts of the U.S. International Trade Commission (USITC) to attribute an imputed cost to the Jones Act as a barrier to the import of transportation services illustrate this point. In 1991, in the first of a series of studies on the economic impact of non-tariff restraints on the import of goods and services, the USITC estimated that the Jones Act “cost” the U.S. economy between $3.6 and $9.8 billion annually. We presume this $9.8 billion estimate is the basis of claims that the Jones Act costs Hawaii $600 million per year or that it costs every Hawaiian citizen $1000 per year, although the actual basis for those statements has never been revealed. In 1993 and 1995 the International Trade Commission revised their Jones Act cost estimates downward to $3.1 billion and $2.8 billion, respectively.

Following the 1995 Update, Senator John McCain (R-AZ) asked the General Accounting Office (GAO) to verify the USITC findings. The GAO concluded that the USITC had not fully considered the costs of compliance with U.S. laws, particularly in the areas of tax, labor, and employee protection. In subsequent reviews, as the Commission gave more consideration to these factors, the estimated costs of the Jones Act have come down accordingly. When the Commission next revised its estimate in 1999 the imputed cost had fallen to $1.3 billion. By 2002, the number had fallen further to $656 million for the U.S. economy as a whole.

Even if you accept the USITC’s most recent estimates as accurate, which the Task Force does not,[1] the imputed impact on Hawaii is far less that the numbers cited in the press by Jones Act opponents. The 2002 USITC study assumes that 70 percent of the tonnage moving in domestic trade is liquid petroleum (primarily Alaskan oil) at a U.S.-flag cost for self-propelled tankers that is 52% higher than the foreign cost, and that the remaining 30 percent is dry cargo moving in self-propelled U.S.-flag container ships at costs that are 13 percent higher than those of foreign flag vessels. Using the USITC’s methodology, the imputed annual cost of the Jones Act on Hawaii trade with the mainland for all products, East and West bound, would be no more than $6.7 million (of the $656 million total) or $5.52 per person in Hawaii, which is less than the price of the average movie ticket. Although you state that the Jones Act is “a crippling drag on an already-challenged economy and the very quality of life in Hawaii,” the USITC’s figures equate to less than 2/100ths of a percent of Hawaii’s Gross State Product (0.017%). That is certainly a small price to pay for safe and reliable, dedicated ocean transportation to and from the mainland.

The Jones Act Is Widely Acknowledged As Important To National Security

The Jones Act is widely recognized as an important component of U.S. national security, an issue ignored by your legislative efforts. Indeed, one of the faults the Task Force finds with the USITC’s approach to the Jones Act is that its analyses look at only the cost side of the equation while ignoring offsetting benefits such as its contribution to national security.

As noted above, the Jones Act has been supported by all modern Commanders in Chief, from President Carter to President George W. Bush. Similarly, the Jones Act has been supported by the U.S. military’s top transportation officials. For example, the former heads of the Defense Department’s U.S. Transportation Command, General Walter Kross, USA and General Charles T. Robertson, USAF, each characterized the Jones Act as “a proven performer that supports both our nation's military security and economic soundness.”

During Operation Iraqi Freedom, U.S.-flag domestic operators, shipyards, and American seafarers from Jones Act ships provided vital support to military operations. This support included use by the Defense Department of a Jones Act roll-on/roll-off vessel from the Alaska trade to transport military equipment to the Persian Gulf, as well as the efforts of hundreds of American civilian seafarers to crew the 40 ships activated from the U.S. Government’s Ready Reserve Fleet to aid in the sealift effort. As acknowledged by the present USTRANSCOM Commander, General John W. Handy, USAF, “[w]e simply cannot, as a nation, fight the fight without the partnership of the commercial maritime industry. ... Our nation’s organic sealift capability ... would literally be useless without the support of the commercial maritime industry.”

The U.S.-Build Requirement Of The Jones Act Is Also Vital To U.S. National Security Policy

The U.S. build requirement of the Jones Act, which your proposed legislation would eliminate, is as much a question of national security policy as it is of maritime policy. A 2001 national assessment of the U.S. shipbuilding and repair industry by the Department of Commerce concludes “[i]t is essential that the capability and infrastructure needed to build ... ships is resident in the United States because it provides added assurance that they can be built, repaired, and maintained during times of conflict.”

The U.S. shipyards that build large, oceangoing vessels for the non-contiguous Jones Act trades are key parts of the national shipbuilding industrial base upon which the U.S. Navy relies for construction of major combatant vessels. Hundreds of other smaller shipyards contribute both to the construction of smaller naval vessels and repair of all but the very largest Navy ships. All of these yards depend on commercial building for the Jones Act in combination with their Navy work to stay in business. At the same time, the commercial work done by these yards helps reduce the cost to the Navy of repairs or construction in those yards by lowering the overhead cost to the taxpayer.

Thus, the U.S. Navy’s comment on Congressman Nick Smith’s 1997 bill to repeal the Jones Act was that it was “inconsistent with the President’s National Security Sealift Policy”. The Navy further commented that the bill “... adversely impacts ...(a) the numbers of vessels in the commercial U.S.-flag merchant marine available to support defense deployment and essential economic requirements; ...(b) the numbers of U.S. citizen mariners available to crew strategic sealift ships owned and operated by the Military Sealift Command and Maritime Administration; and ...(c) the maritime industrial base of shipyard and repair facilities...“.

Application Of U.S. Laws

You state that under your legislation, any foreign carrier operating in Jones Act trade “must comply with the same labor, environmental, tax, documentation, U.S. locus and other laws as are applicable to non-U.S. flag ships and shippers transiting U.S. waters today.” The problem is, however, that, except for certain environmental laws, the U.S. laws cited do not apply to foreign ships operating in U.S. waters, or even when in U.S. ports, because these foreign vessels operate under the laws of the country whose flag they fly. While your bill would, for example, require U.S. citizen crews for a foreign-qualified freight vessel, those crewmembers would not be protected under the minimum wage provisions of the Fair Labor Practices Act inasmuch as those standards apply only to seamen employed on “an American vessel.“

Any attempt to apply U.S. law temporarily to a foreign vessel while it carried cargo in domestic trade would be cumbersome, at best, and unenforceable, as a practical matter. Assume, for example, that a ship on a one-month West Coast - Hawaii - Far East - West Coast round voyage would spend one week in domestic commerce transiting from the U.S. West Coast to Hawaii and the remaining three weeks in international commerce. Would the National Labor Relations Act give the crew the right to organize for one week, but not for the next three?

Taxes are even more troubling. Even if nominally subject to U.S. taxes for U.S. source revenues earned in domestic trade, foreign vessels on a mixed domestic/foreign voyage could avoid paying U.S. corporate income taxes by manipulating the allocation of costs into the domestic portion of the round voyage. This would ensure there is no “profit” from the domestic operation. The foreign vessel, therefore, likely would never pay U.S. corporate income taxes.

A fundamental objective of the Jones Act is to ensure that all ships carrying U.S. domestic cargo operate under the same comprehensive regulatory and statutory regime of the United States. This simple, fundamental principle applies to any company that does business in the United States, regardless of industry. Your legislation would allow foreign ships to do business in the United States’ domestic economy, and yet not be fully subject to the same laws that apply to other companies operating here, most of which are owned by American citizens. This not only would treat foreign vessels more favorably than we treat our own American companies, it also would be a drastic departure from established and logically sound national policy.

International Shipping Is A Poor Model For U.S. Domestic Shipping

You assert that most of the world’s shipping is by way of an “international merchant marine functioning in an open, competitive market,” implying that would be a desirable model for the U.S. domestic trades. That market, however, is “a domain increasingly beyond government control, vast and wild, where laws of nations mean little... .” (See William Langewiesche, Anarchy at Sea, Atlantic Monthly, September 2003) Many of the vessels involved are registered in “flag of convenience” states such as Liberia, Panama, or Malta, with little or no incentive to police the activities of enrolled ships or shipowners. These vessels are untaxed, largely unregulated, and employ Third World crews at subsistence wages.

The virtual disappearance of the U.S. flag from international commerce is a direct consequence of U.S. maritime policies. The United States requires American flag ships to operate under the same laws as all other U.S.-based corporations, notwithstanding the fact that they compete internationally with vessels that are economically advantaged by tax or regulatory regimes. As a result, U.S.-flag shipping today maintains only a limited presence in international shipping (sustained in part by the Maritime Security Program and cargo preference laws), while 97 percent of U.S. international commercial trade moves on foreign-flag ships.

It has long been a basic tenet of U.S. maritime policy that subsidized vessels, whether U.S. or foreign flag, should not be allowed to compete in domestic trades against unsubsidized U.S.-flag Jones Act vessels. To move away from that policy in favor of “open markets in non-contiguous shipping” would subject Hawaii to the same dependence on foreign-flag shipping as we now have in U.S. international trades. That is, the U.S.-flag fleet in the domestic offshore trades would disappear unless provided with the same economic advantages as the foreign-flag ships with which it would be asked to compete.

Conclusion

The MCTF and its member companies are committed to working with American shippers to transport their products to domestic markets or to U.S. ports for export. Since our inception, we have found that engaging in a constructive dialogue is the most productive way to address shipper requirements. We look forward to an open exchange on this matter with you and your office.

Sincerely,
Rolf Marshall
Counsel

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[1] The MCTF disputes the USITC methodology in three respects: (1) the USITC welfare cost does not consider offsetting economic benefits of the Jones Act, such as in the area of national defense; (2) the cost differentials used assume that a FF ship could operate in domestic commerce at the same cost level as it does in international trade (i.e., ignores the application of U.S. laws issue); and (3) the USITC assumes that all coastwise cargoes are transported by self-propelled vessels, whereas almost half that trade is by non-self-propelled vessels (which the USITC considers competitive with foreign vessels when used in inland trades). The GAO in 1998 agreed with the MCTF on the first and second points (the third was beyond the scope of its inquiry), identifying the USITC’s failure to consider offsetting benefits as a deficiency in its overall approach and characterizing its findings as “unverifiable” because of its inability to address the application of laws issue. --

The Maritime Cabotage Task Force was founded in 1995 to promote the U.S.-flag fleet engaged in domestic waterborne commerce. With more than 350 members, MCTF is the largest coalition ever assembled to represent the domestic segment of the U.S. merchant marine. Nationwide, there are more than 35,000 vessels engaged in Jones Act commerce and they annually move more than 1 billion tons of cargo and 100 million passengers. The Jones Act fleet generates nearly 125,000 jobs, 80,000 of which are aboard vessels and represents a $26 billion private sector investment in vessels and infrastructure. The Act has been broadly supported by every Congress and Administration since its passage in 1920 and is considered a key element in the nation's national defense capabilities.

For more information, contact: Glen Nekvasil, Director of Media Relations (1-888-400-9429)/info@mctf.com

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