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Introduction:

Back in 2017, Hurricane Maria ravaged the commonwealth of Puerto Rico. The island experienced debilitating fallout from this natural disaster Effects ranging from flooding, vast power outages, destruction to infrastructure, and disrupted communication and supply lines. Puerto Rico is estimated to have lost approximately $43 billion as a result of Maria. This is only insulting to injury for a nation that was previously suffering from economic woes. Despite the unfortunate consequences of hurricane Maria’s carnage it did resurrect interest in the Jones Act. Many experts speculated that this protectionist measure profoundly hampered recovery efforts for the island. Mainly through drastically inflating shipping rates. This proves to be disastrous in times of an emergency, especially considering the commonwealth’s economic woes.

The late senator John McCain from the landlocked state of Arizona proposed legislation to repeal the Jones Act. McCain even directly suggested that Puerto Rico should receive the permanent exemption. Addressing the inadequacy of President Trump’s 10 -day exemption to assist with the recovery efforts from Hurricane Maria. The late senator was met with little support. However, he was able to obtain the advocacy of the bill’s co-sponsor Utah senator Mike Lee. The lack of fanfare for repealing the Jones Act should not be surprising. Considering the lobbying-power of the vast array of invested interests fighting any efforts to eliminate the law. Such groups include “shipbuilders, ship owners, and labor unions representing seafarers”. All organizations that have a lot to gain from keeping competitively priced foreign operators out of the U.S. market.

Imposing the additional costs of the Jones Act on the commonwealth of Puerto Rico is at best tone-deaf. Puerto Rico’s economy is in shambles and has been for some time. The island was in an 11-year recession before Maria. Their economic hardship is only exacerbated by the higher shipping costs due to the Jones Act. Also magnified by the fact that using waterborne vessels is the only means to transport goods from the mainland to Puerto Rico. Holding the noncontiguous U.S. territory captive to U.S. vessel operators. By geographical exclusion ruling out the use of cheaper modes of transportation such as rail and trucking. For the reasons for the impact on an already ailing economy, the higher prices imposed on Puerto Rico, and a lack of better transit alternatives Puerto Rico should be exempt from the Jones Act. A piece of legislation that only benefits a small group of invested interests and the costs are borne by the majority of Americans. However, what is the Jones Act? After all, it is an obscure law that seldom comes up in typical public discourse.

What Is The Jones Act?

The Jones Act is section 27 of the Merchant Marine Act of 1920. This clause implements what is known as cabotage laws. Laws that govern the transportation of goods between two domestic ports. For example, goods sailing on a vessel departing Boston and bound for Miami would be subject to the Jones Act. The bill was signed into effect on June 5th, 1920. The bill’s vociferous proponent Senator Wesley Jones (R-WA) promoted Section 27 as a national security measure. Due to the utilization of foreign-flagged ships for sealift in World War I. Presenting a grave national security concern. Some find the notion of this being a national security matter to be dubious. Rather it was an attempt to pander to his constituency by protecting the railroads from the competition of foreign-flagged ships. However, the law also aimed to give a boost to the domestic shipbuilding industry. An industry that enjoyed a comparative advantage due to North America’s dense woodlands. Until the later half of the 19th century when steel displaced lumber as the primary building material for watercraft. Relinquishing the U.S. domination of the shipbuilding market.

The United States has had cabotage laws in one form or another since the nation’s infancy. One of the earliest examples dating back to 1789. The Jones Act as a more stringent version of previous laws. Boosting a domestic flagging requirement, requiring the crew to be made primarily of U.S. citizens, domestically owned, and to be the U.S. built. There are a few stipulations concerning the U.S. built and domestic ownership requirements. Foreign cooperation can own a Jones Act vessel providing 75 % of their stock is owned by U.S. citizens. The U.S. build requirement does allow for minor components of the ship to be foreign-made parts. For the vessel to remain Jones Act compliance major upgrades to the ship cannot be done abroad, even if it is required for a repair. These requirements have resulted in higher U.S. port-to-port shipping rates and ultimately passing down higher costs to the consumer.

Insult to Injury For An Ailing Economy

The Jones Act has contributed to Puerto Rico’s economic turmoil. Not just from the standpoint of hastening relief efforts from every sizable hurricane. It is merely another obstacle for an economy that is already bleeding out. The origins of the island’s extensive recession date back to 2006. When section 936 of the Internal Revenue Code was fully repealed. Many of the pharmaceutical companies with operations in Puerto Rico moves abroad. Amounted to significant losses in the island’s GDP. This was a significant blow to the commonwealth’s economy. Outside of the loss of jobs the loss of tax revenue left Puerto Rico with few options but borrow large amounts of money to compensate for lost revenue. Naturally, this policy came with profound consequences. Puerto Rico struggled to attract investors. Brokers at the banks were encouraged to sell off debt in the form of bonds. The bonds started to crash in 2013. Puerto Rico filed for bankruptcy in May of 2017, at the time owing creditors $70 billion.

The Jones Act only exacerbates Puerto Rico’s current economic turmoil. It is estimated that the island loses $537 million annually due to the Jones Act. The artificially inflated shipping rates make imports from the mainland more expensive and exports less profitable. It has also been projected that the economies of Alaska, Hawaii, and Puerto Rico stand to gain $5 billion to $15 billion if the law is fully repealed. The already dreadful economic conditions coupled with the Jones Act restrictions limiting commerce “…has resulted in a massive outmigration to the contiguous US states“. This only works to further reduce economic productivity and tax revenue. Being tantamount to the death knell for the island’s economy.

Costs of the Jones Act on Puerto Rico

The higher costs of the shipping rates for the mainland to Puerto Rico shipments are invariably are passed down the supply chain to the consumer. A Jones Act compliant vessel has an annual operating cost totaling $6 million making it 2.7 times more expensive than foreign operators. The higher cost of operating a U.S. flagged ship is reflected in the shipping rates. Shipping a container from New York to Puerto Rico is estimated to cost $3,063.00. In contrast, shipping the same container from New York to Jamaica comes in at only $1,607.00. As a result of the higher costs, where possible Puerto Ricans will purchase goods from foreign countries. The farmers of Puerto Rico import livestock feed from foreign sources to cope with the high shipping rates. The island opts to import jet fuel from Venezuela rather than the Gulf Coast. The irony being the Jones Act intended to protect American Jobs! The higher prices have forced the residents of the commonwealth to seek cheaper alternatives.

The higher shipping rates is a slap in the face to a dedicated trading partner. Considering the mainland Unites States makes up 90 % of their exports and over 55% of their imports. These costs are also being imposed on a constituency that is drastically less affluent than their mainland counterparts. The per capita income of Puerto Rican residents is averaged to be a third of what mainland residents make. The Jones Act not only is a hidden tax to the citizens of the commonwealth it is also a regressive tax. It disproportionately impacts the citizens of an economically disadvantaged region.

Puerto Rico Held Captive

The reality of being a noncontiguous territory of the United States is that is impossible to avoid using Jones Act carriers. Utilizing alternatives such as rail and truck to transport goods from the continental U.S. is out of the question. For one very simple reason, there are no adjoining landmasses that would make either option feasible. Limited by geographical restrictions the residents of Puerto Rico are limited to two alternatives. Either air freight or purchase goods from a foreign supplier. Even though air freight rates have come down from soaring heights since April, it has never been cheap to ship via aircraft. Certain items may be better suited for water-borne transit. Such as dry-bulk commodities. If it is a resource that cannot be purchased from a foreign supplier Puerto Rico will have to be confronted with the higher shipping costs imposed by the Jones Act.

Conclusion

The Jones Act impedes the continental United States and its noncontiguous territories. Particularly for the bankrupt commonwealth of Puerto Rico, it is a malignancy. Placing exorbitant costs on a region grappling with the consequences of an economic collapse. Not only has the Jones Act stunted Puerto Rico’s potential for economic growth it continues to suffocate the island. This policy continues to fail in Puerto Rico. Making it nearly impossible for the commonwealth to achieve economic stability.

Beyond the Jones Act demonstrating the deep-rooted fallacies of protectionist policies, it is more than just bad economics. The Jones Act is also a moral failure. The residents who average make a third less than a resident on the mainland have to cope with unnecessary cost distortions. The compliance parameters of the Jones Act artificially inflates the cost of shipping. Which is reflected in the cost of consumer goods. Making it a circuitous form of regressive taxation. Few would argue that it is just to force undue costs on the poor. Especially when those costs benefit only a small group of individuals.

5 thoughts on “Why Puerto Rico Should Be Exempt From The Jones Act

  1. Excellent post (again!). This topic is not only dear to my heart (as I lived on the Island of Puerto Rico from 1993 to 2009 — and my wife is Jamaican) but also because of a supreme irony regarding the Jones Act. Yes, this law is protectionist and counter-productive, but in my view, it pales in comparison to all the protectionist laws and regulations that the Puerto Rico Government itself has enacted over the years!!!! Congress should repeal this lame law, but at the same time, PR should get its anti-free-market act together as well.

    Liked by 1 person

    1. I choose to feature PR due to their difficult economic circumstances. I am certainly not surprised that the commonwealth has also shot itself in the foot with bad policies.

      I don’t know if my interpretation is correct. Based upon my limited research on the economy of PR, it seems as if the island was made into a Mecca for crony-capitalism. Then once the tax advantages were phased out over a 10- year period then shit hit the fan.

      Granted, I probably should do more research on the state of the Puerto Rican economy before making any definitive claims.

      I may have another essay or two to dedicate to the Jones Act.

      Liked by 1 person

      1. That is exactly right! I practiced corporate law in Puerto Rico before entering the Legal Academy, and I saw both things — local protectionism as well as crony tax deals — up close and personal! It’s the main reason why I went into teaching, as I did not want to live off such a corrupt and bullshit system …

        Liked by 1 person

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