Local shipbuilder’s woes show absurdity of Jones Act

Do you love old buildings? The details and craftsmanship from years past can be impressive, but conditions vary widely. Buildings that are well-maintained and updated can stand for centuries, but some are so old and creaky that they’re beyond saving.

Laws are like that too. A law’s foundation can last a long time, if legislators take care to update it as circumstances change. If not, many become irrelevant or, worse, counterproductive.

Counterproductive is a good way to describe the Jones Act, the 1920 federal law that hyper-regulates so much about our maritime industries. It’s a protectionist law, and like so many protectionist efforts, the downsides grow ever more absurd with time.

To whit: The situation a local shipbuilder, which was trying to comply with the Jones Act, and its local customer find themselves in. I could hardly believe what I read in the Seattle Times:

The largest, most modern American-made trawler built in nearly three decades may be barred from fishing in U.S. waters, with financial repercussions to its local builder and buyer “so draconian that neither company may survive.”

That’s the scenario painted by the law firm that Anacortes shipyard Dakota Creek Industries has hired to seek a rare waiver from a century-old law called the Jones Act, which they acknowledge wasn’t properly followed when the shipyard began building the state-of-the art, $75 million vessel America’s Finest.

The shipyard’s mistake — using too much foreign steel that was modified before coming into the U.S. — could mean the advanced ship must be sold abroad at a big loss.

The situation puts 500 jobs at risk. And what was the great offense committed by Dakota Creek Industries, the Anacortes shipbuilder? 10% of the ship is allowed to be made of foreign components, but for the most part those components can’t be worked on by foreign workers.

If more than 1.5% of the ship by weight is “touched” by a foreign worker, it can’t be U.S.- flagged and can’t fish in American waters. “A foreign worker drilling a single hole, or making a single bend on a 2-ton steel plate will automatically disqualify the entire weight of that plate,” an attorney for Dakota Creek explained. Some of the new ship’s hull parts were cut and bent in the Netherlands, putting the ship over the 1.5% threshold.

Why is the foreign content measured by weight and not, say, value? You’ll have to ask a 1920 congressman. Why is 1.5% set as the threshold? Well, why not 1.5%? This is a protectionist law, questionable and arbitrary go with the territory.

Imagine if Boeing had to build airplanes this way, or if PACCAR had to build Peterbilts like this. More than 1.5% of a truck’s weight is “foreign”? It can’t drive on our roads. What silliness. Our other manufacturers don’t face these incredibly constraining rules.

If Dakota Creek does not receive a Jones Act exemption, the trawler will have to be sold abroad at a huge loss. That would sink the shipbuilder and its customer and cost in-state jobs.

While this local example highlights one problem with the Jones Act, the law’s absurdities are more extensive. Consider a few:

1. The Jones Act forbids a foreign-flagged ship from visiting two U.S. ports in a row. This hurts places like Hawaii, Alaska, and U.S. island territories by making shipping much more expensive (except the U.S. Virgin Islands – they were carved out) and depresses trade between the states.
2. That “two ports” rule is why Seattle-Alaska cruises always include a Canadian stop. No major cruise ships are American-flagged, so they have to hit a foreign port between Seattle and Alaska, with little purpose beyond being Jones Act-compliant.
3. Shipping oil from Houston to an East Coast American city is much more expensive than sending that oil to Canada or even across the Atlantic.

One purpose of the Jones Act is to protect American shipbuilding, but even that goal is not being achieved. Thomas Grennes, author of “An Economic Analysis of the Jones Act,” notes:

But if the Jones Act was designed to preserve a large ship-building industry and American-flag fleet, and thus bolster our national security, it has been a clear failure. There has been a large and continuous decline in American ship-building. Today there are only six domestic shipyards that produce ocean-going vessels, and only one of them produces both merchant and military ships. The American-flag fleet has shrunk from 16 percent of the world fleet in 1960 to less than one percent today. More than 95 percent of large merchant ships are now produced in South Korea, Japan and China. In 2000 there were 193 Jones Act-eligible ocean-going ships, but by 2014, only 90 remained.

The law gives what amounts to a protected monopoly to U.S.-flagged ships, with predictable results: higher costs, a lack of innovation, and stagnation in the industry.

Protectionist laws often seem like a good idea. Whether it’s high protective tariffs, rent control, foreign content rules, or other market-distorting laws, with time they twist the rationality of the market into pretzels. They often don’t accomplish their goals, or if they do, it’s at such a high cost as to be a net-negative on the economy. The Jones Act fits that bill.

So how do these laws survive? The same reason questionable tax breaks or subsidies do. The costs are spread out while the benefits are concentrated. Those paying the costs are unaware, or organizing opposition isn’t worth it. Those benefiting will fight tooth-and-nail to preserve the status quo.

In that sense, it’s rational. But from the perspective of economy and efficiency, it’s not rational at all.

-Rob McKenna

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Rob McKenna
Rob served two terms as Washington’s Attorney General, from 2005 to 2013. He successfully argued three cases before the U.S. Supreme Court and negotiated three of the largest consumer financial protection settlements in national history, all involving mortgage lending and servicing. He is a recognized leader in the development of consumer protections on the internet, in data protection and privacy regulation.