Jones Act Ready for Retirement

 

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National defense needs have long been such an all-purpose excuse for protectionism that they may be the best illustration of Samuel Johnson’s aphorism that “Patriotism is the last refuge of a scoundrel.”

The products that have ridden defense coat-tails to special treatment make up a long, and long-standing, list. For example, in the U.S., they have included sugar, peanuts, candles, thumbtacks, gloves, umbrellas and many more common goods. One my particular favorites is mohair. After WWII, when our soldiers wore wool uniforms, assertions that we might be unable to supply enough mohair in future conflicts triggered subsidies beginning in 1954. Apparently we wouldn’t be able to fight effectively if uniforms weren’t itchy enough. Soon after, the military switched to synthetic fibers, displacing wool from the strategic materials list in 1960. But mohair production subsidies continued for thirty-five more years. And even when they were ended in 1995, lobbying brought the subsidies back a few years later.

While many such protectionism gambits are obvious jokes just waiting for economists to tell, there is one that would seem to merit special consideration. That is trying to build up a country’s fleet and its military capabilities by eliminating other countries’ ability to ship goods between domestic ports. One reason for giving that policy, imposed by the Merchant Marine Act of 1920, commonly called the Jones Act, more careful consideration, is that it has a pedigree of over three-and-a-half centuries. Perhaps more important is that its English predecessor had the endorsement of Adam Smith, usually known as a free trader, not a protectionist.

The Jones Act traces back to England’s 1660 navigation law “for the increase of shipping … wherein … the wealth, safety and strength of this kingdom is so much concerned.” It required that all shipping between British ports had to go in British-built ships with British owners. Parliament also required a three-quarters British crew. Those rules were a cornerstone of Britain’s mercantilist system whose burdens, along with those imposed by other restrictions, added impetus to the American Revolution.

Despite the policy’s role leading America toward independence, the U.S. Congress’ inaugural session enacted similar restrictions on coastal shipping even before adoption of the Bill of Rights. The restrictions are now codified by the Jones Act. Its rationale and terms — restricting trade between American ports to vessels built, owned and three-quarters manned by Americans — echo Britain’s navigation acts.

In Wealth of Nations, Adam Smith endorsed the British navigation acts, an endorsement that has been deployed since as inoculation against criticism of the Jones Act from backers of free trade and its strictly voluntary arrangements. Smith’s rationale for the exception was that “the defense of Great Britain depends very much upon the number of its sailors and shipping.” Consequently, “The act of navigation, therefore, very properly endeavors to give the sailors and shipping of Great Britain the monopoly of the trade of their own country.” Smith made it clear that it would restrict trade and the wealth it would create, but “As defense, however, is of much more importance than opulence, the act of navigation is, perhaps, the wisest of all the commercial regulations of England.”

Unfortunately, Smith’s high praise does not apply to the Jones Act. The circumstance that justified it does not apply to America now. And despite incredibly high costs, it does not add to American shipping, sailors or capabilities.

If the relevant choice was an all or nothing one between defense and opulence, there is no doubt that defense, when threatened by aggression, is more important than opulence. But it is a marginal choice, not an all-or-nothing choice. Given one’s current level of threats, readiness and consumption possibilities, added shipping restrictions could improve military readiness, but only by taking away from the goods and services citizens can exchange for their productive efforts in peaceful trade. The issue is how much value is added to readiness and how costly is it to achieve?

Smith’s endorsement of a policy to bolster naval defense is sensible only when that defense would be inadequate without such restrictions. If there were already sufficient defensive capability for the threats faced, the marginal value of expansion would be small. Smith argued that in England’s case, the threat faced from the Dutch (“the great carriers of Europe”), Britain’s main naval rival, justified more military strength. In fact, he noted that the navigation acts aimed to undermine the sea-power of the Dutch at least as much as to stimulate British sea-power. As Smith put it, “though England and Holland were not actually at war, the most violent animosity subsisted between the two nations.” In consequence, what justified the policy was warlike “diminution of the naval power of Holland, the only naval power which could endanger the security of England.”

In other words, Smith did not endorse the restrictions of the navigation acts as generally justified, but only justified by a serious, specific war threat. One might have made a case that America’s founding echoed such a situation, given its early weakness. But similar circumstances have not applied during most American’s lifetimes. They did not characterize America in the aftermath of WWII. They have not characterized America as the world’s dominant strongest naval superpower; particularly after Eisenhower’s warning that the military-industrial complex could be dictating far more defense production than can be justified. Yet, even without a plausible case for inadequate naval power, Jones Act restrictions have been retained.

One might consider burgeoning Chinese military sea-power to be a current analog. But restricting America’s coastal trade to American ships does not appreciably restrict Chinese sea-power, military or otherwise, given the tidal wave of goods their ships carry to America and other destinations around the world. Further, concern about potential naval military threats as a rationale for the Jones Act is inconsistent with the sharp drawdown taking place in the Navy fleet.

Beyond the question of a sufficient military threat, for the Jones Act to make any sense, it must produce benefits, increasing the number of American ships, sailors and construction capabilities. But it does not.

From 43 percent of global shipping in 1950, the Department of Transportation found in 2009 that “U.S.-flag ships carry only about 1.5 percent of the foreign trade of the United States.” The wider U.S. flag fleet lost half its tonnage capacity between 1975 and 2007.

Vessels meeting Jones Act requirements fell to 90 in 2014 from 193 in 2000. 110 tankers have become 43. Almost five times as many American ships now fly other flags to escape Jones Act burdens, even though it makes them ineligible for domestic shipping.

Even if the Jones Act had a positive effect on American shipping, it could do little for military production potential, as only one shipyard that builds the Navy’s primary vessels also builds commercial shipping vessels.

The Jones Act must also provide services that would be hard to acquire during hostilities and emergencies. But it does not.

The Department of Defense has stated that “Unfortunately, very few commercial ships with high military utility have been constructed in U.S. shipyards in the past 20 years. Consequently … nearly all of the [charter] offers are for foreign-built ships.” Similarly, in the aftermath of both Hurricanes Katrina and Sandy, Jones Act restrictions were suspended because they hindered emergency response capabilities.

Despite no evidence that the Jones Act provides any expansion in shipping or defense capabilities, the only reason Adam Smith found justified such restrictions, its costs are substantial.

Ships meeting Jones Act restrictions may cost triple or quadruple those built in Korean or Japanese yards. Crewing expenses can be a similar multiple. Maintenance and repair costs are also far greater. One illustration of the result is that foreign-flagged tankers can transport oil for one-third the cost of American-flagged tankers.

The Jones Act doesn’t add to America’s naval or defense capabilities, rendering Adam Smith’s endorsement void. It has been accompanied by plummeting numbers of American-flagged ships and the trade they carry. It hinders rather than helps in mounting emergency operations. The military services it is supposedly makes possible are already provided more efficiently by foreign ships. And the costs are very high. It is time to end its nothing-for-something trade that only impoverishes us.

Gary M. Galles is a professor of economics at Pepperdine University.