Grabow: Examining the Jones Act’s harm to U.S. ports

By Colin Grabow |

Earlier this week Wall Street Journal columnist Mary O’Grady penned an excellent piece detailing the myriad ways in which U.S. maritime protectionism interferes and distorts trade. Some of the examples presented may be familiar, such as the imperilment of Alaska’s summer cruise season. But the column also delves into effects of the law that are often overlooked, such as its impact on ports:

The Jones Act is particularly costly to Puerto Rico because it keeps the island from capitalizing on its comparative advantage as a transit point for cargo. Colin Grabow, who heads the Cato Institute’s Project on Jones Act Reform, puts it this way: “Absent the Jones Act we would see large ships drop their cargo in San Juan or Ponce for placement on smaller ships to various ports in the region, including the U.S.—basically a hub‐ and‐ spoke model. But no one will ever use Puerto Rico as such a transshipment hub so long as shipping between PR and the world’s largest economy is subject to the Jones Act.”

This merits further explanation. For those unfamiliar, transshipment is the transfer of cargo from one vessel to another before it is brought to its final destination. The massive container ship Ever Given that recently blocked the Suez Canal, for example, was bound for the port of Rotterdam where much of the ship’s containers would be unloaded for placement onto smaller vessels for destinations around Europe.

But such transshipment of containers for destinations elsewhere in this country does not happen because any goods moved between U.S. ports—including those originating from abroad—must use expensive and uncompetitive Jones Act shipping. As the Congressional Research Service notes, “Transshipment of international containerized cargo by feeder ships is prevalent abroad, but the practice does not exist in the United States.” Instead, containers are not moved by water to their final U.S. destination but rather by rail and trucks (with their attendant environmental costs).

This lack of transshipment extends to Puerto Rico. While neighboring Jamaica and the Dominican Republic have emerged as major transshipment hubs where large ships arriving from Europe and Asia (via the expanded Panama Canal) can have their cargo loaded onto to smaller vessels for transport to destinations throughout the Caribbean, Puerto Rico isn’t even a part of the transshipment conversation.

The Jones Act figures prominently here. Why use the island as a shipping hub when other ports in the region not beholden to the law offer far less expensive options for transport to the world’s largest consumer market? The end result is a missed economic opportunity for Puerto Rico.

That the law greatly reduces Puerto Rico’s attractiveness for transshipment isn’t controversial. To wit:

• A 2012 report from the Federal Reserve Bank of New York states that most experts agree the Jones Act “diminishes the viability of the Island as a major regional trans‐ shipment port.”

• The Inter‐ American Development Bank flatly states that the port of San Juan is not part of a transshipment cluster “since it is a Jones Act port.”

• A 2000 report authored for Puerto Rico’s government about the island’s feasibility as a transshipment point conceded that “transshipment between foreign and U.S. destinations via a Puerto Rican transshipment port would usually not be attractive as cabotage [i.e. Jones Act] shipping rates are on average higher.”

A 2014 article in American Shipper also cited the Jones Act, along with high labor costs, as key reasons why the Puerto de Las Américas in Ponce is not terribly attractive for transshipment purposes. As a visit by the Cato Institute’s multimedia team shows, to call the port underutilized is putting it mildly:

A common perception of the Jones Act and other forms of maritime protectionism is that their costs manifest themselves in higher transportation costs that are then passed along to consumers. But that’s just a starting point. These laws also mean the forced diversion of tourist dollars to Canada. Higher taxpayer expenditures for dredging. The inability to transport liquefied natural gas by ship to Puerto Rico and New England. Reduced opportunities for Puerto Rico’s port. In ways large and small the Jones Act and similar laws exact their tolls. Often overlooked, but always there and chipping away at the country’s economic vitality.

Colin Grabow is a policy analyst at the Cato Institute’s Herbert A. Stiefel Center for Trade Policy Studies where his research focuses on domestic forms of trade protectionism such as the Jones Act and the U.S. sugar program.

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