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COLUMN-Long live the Jones Act? Kemp

John Kemp
Tuesday, 14 Jan 2014 | 9:57 AM ET

LONDON, Jan 14 (Reuters) - The Philadelphia-registered schooner "Amity" was seized off the island of St Kitts on May 2, 1785 and accused of contravening the British navigation laws, which required trade with Britain's Caribbean possessions to be carried in British-owned and crewed ships.

The captain who seized her was Horatio Nelson, the young commander of the Royal Navy frigate "Boreas". It was the first in a string of seizures of American vessels by Nelson that antagonised local merchants.

But following the American Revolution, Nelson and British politicians were determined to exclude American-owned vessels from the Caribbean and build up trade between the islands, Canada and the home countries.

"Amity" together with her cargo was impounded, sent for trial and eventually confiscated ("Nelson: a dream of glory" 2004).

Nelson, who went on to become the most famous admiral in the Royal Navy, was an enthusiastic supporter of the navigation law parliament had enacted in 1660 "for the increase of shipping and encouragement of the navigation of this nation wherein ... the wealth, safety and strength of this kingdom is so much concerned."

Under its terms, "no goods or commodities whatsoever shall be imported into or exported out of any lands, islands, plantations, or territories to his Majesty belonging or in his possession ... but in such ships or vessels as do truly and without fraud belong only to the people of England or Ireland, dominion of Wales or town of Berwick upon Tweed, or are of the built of and belonging to any the said lands."

Parliament additionally decreed that "the proprietors and right owners thereof, and whereof the master and three fourths of the mariners (must be) English."

The restrictions, intended to build up Britain's shipping industry and weaken the Netherlands, her principal trading rival, had been a contributing factor to the growing disaffection of her North American colonies.

The navigation laws were a cornerstone of the mercantilist system that dominated commerce between the mid-17th and mid-19th centuries, though they were only ever fitfully enforced with limited success.

There was plenty of evasion and there were limits to how far Canada and the home islands could replace the United States as a trading partner.

Nonetheless, the navigation laws have lived on in some surprising places.

In its very first session, in September 1789, the U.S. Congress enacted restrictions limiting coastal trading in the infant United States to American ships. The navigation restrictions actually predate the Bill of Rights.

Similar restrictions were renewed throughout the 19th century.

Even today, a version of the navigation laws is still in force across the United States, a relic of mercantilism and a political case study of the ability of concentrated interests in the maritime and shipbuilding industries as well as seafarers' unions and parts of the armed forces to maintain protectionism.

MERCHANT MARINE ACT

The restrictions were most recently and comprehensively restated in the Merchant Marine Act of 1920, more commonly known as the Jones Act, after its sponsor Republican Senator Wesley Jones of Washington.

Echoing Britain's Navigation Act passed 260 years earlier, Congress declared: "It is necessary for the national defense and the development of the domestic and foreign commerce of the United States that the United States have a merchant marine."

Lawmakers determined the U.S. merchant marine should be "sufficient to carry the waterbourne domestic commerce and a substantial part of the waterbourne export and import foreign commerce of the United States" and be "capable of serving as a naval and military auxiliary in time of war or national emergency."

It should be "owned operated as vessels of the United States by citizens of the United States ... and manned with a trained and efficient citizen personnel ... supplemented by efficient facilities for building and repairing vessels."

Together with subsequent laws, the Jones Act restricts "coastwise trade" between ports in the United States and with its outlying islands like Puerto Rico to U.S.-owned and built vessels, with a U.S. captain and officers, and a crew that consists of at least 75 percent U.S. citizens.

THE WEALTH OF NATIONS

Navigation laws have had some surprising defenders. Economist Adam Smith endorsed the navigation acts in his celebrated "Inquiry into the Nature and Causes of the Wealth of Nations" as one of the limited exceptions to the principle of free trade.

"The defence of Great Britain depends very much upon the number of its sailors and shipping," Smith wrote in 1776. "The act of navigation, therefore, very properly endeavours to give the sailors and shipping of Great Britain the monopoly of the trade of their own country."

"The act of navigation is not favourable to foreign commerce, or to the growth of that opulence which can arise from it," he acknowledged. "As defence, however, is of much more importance than opulence, the act of navigation is, perhaps, the wisest of all the commercial regulations of England."

CRITICS AND SUPPORTERS

Mercantilism is no longer fashionable. Not many economists would employ Smith's argument to defend the modern Jones Act.

Its restrictions have been criticised by shippers and politicians in outlying islands like Puerto Rico and Hawaii for pushing up the cost of freight to and from the mainland United States, contributing to the high cost of living on the islands and holding back their economic development.

The Jones Act has also prompted quiet complaints from oil companies and traders struggling to find enough eligible ships and barges to transport crude oil and products between refineries on the Gulf Coast and the North East United States.

But the defence argument remains enormously popular with politicians, vessel owners, shipbuilders and the military.

"A U.S.-flagged fleet is in the national interest," according to the American Maritime Partnership, a lobbying organisation which defends the restrictions. The Partnership also likens a domestic shipbuilding and repair industry to a "national asset" akin to aerospace, computing and electronics.

The Jones Act continues to be embraced by the U.S. Navy. "At the heart of Military Sealift Command is the United States Merchant Marine - that force of American citizen sailors that crew the U.S. cargo ships that carry the goods and services of America's waterbourne trade," Sealift Command wrote in its Strategic Plan for 2013-18.

Every president since Ronald Reagan has endorsed the Jones Act, either in office or on the campaign trail. "America needs a strong and vibrant U.S.-flag merchant marine," Barack Obama declared during his first campaign. "That is why you can count on me to support the Jones Act."

In addition, Congress continues to appropriate nearly $200 million per year to support various maritime security programmes designed to protect the U.S.-flagged fleet; the appropriations are popular with members of both major parties.

SHRINKING U.S. FLAG FLEET

In a rational world, the Jones Act would long ago have been consigned to the history books. The principal criticism is that the restrictions raise costs without actually being very effective.

The number of Jones Act-eligible vessels has fallen from 193 in 2000 to just 92 in 2013, according to the U.S. Maritime Administration (MARAD).

Within this total, Jones Act tankers are down from 110 to 43, with deadweight tonnage down by more than half from 6.3 million tonnes to 3.1 million tonnes, according to MARAD.

There has been an even more sharp decline in the wider U.S. flag fleet, which includes ocean-going vessels engaged in international trade. The ocean-going U.S. flag fleet had shrunk from 857 ships (17.7 million deadweight tonnes) in 1975 to around 200 by December 2007 (8.6 million deadweight tonnes).

"At present, U.S.-flag ships carry only about 1.5 percent of the foreign trade of the United States," consultants from IHS Global Insight wrote in a 2009 report for the U.S. Department of Transportation.

"The overall conclusion is that the current body of policies is only supportive of domestic maritime trades. Policy is not supportive of U.S. participation in international trades," IHS wrote.

"The U.S.-flag fleet has been in decline relative to the fleets of other maritime nations. Building ships in the U.S. and operating U.S.-flag ships is more costly than building or operating ships in other nations," IHS added.

"Current programs support shipbuilding for the domestic Jones Act fleet but not the wider U.S.-flag foreign trade fleet," IHS explained. "U.S. shipyards face higher costs than foreign yards and as a result have a very small share of the ocean vessel market."

The consultants concluded: "The domestic vessel market is protected from foreign competition through the cabotage regime and aided by financing programs that are largely inadequate for U.S.-flag foreign trades vessels."

Some new Jones Act vessels, including tankers, are on order. In December 2013, Kinder Morgan Partners a leading pipeline and energy storage company, announced it was buying two companies that own five Jones Act-eligible tankers and have four more on order.

Nonetheless, it is questionable whether the Jones Act really contributes significantly to maritime security in the modern world. If Congress is worried about maintaining an adequate merchant marine and auxiliary sealift capacity, there are far cheaper and less distorting ways to do it out of general taxation and subsidies.