rates have been substantially higher than its New York to Puerto Rico rates. Apparently there is more competitive pressure on containerized freight rates in the Puerto Rican than in the transatlantic trade, despite the fact that foreign flag operators are excluded from the New York to Puerto Rico trade by the provisions of the Jones Act.

The success of U.S. flag operators with containerized shipping in the foreign trades has, of course, been beneficial to the U.S. balance-of-payments as well as to U.S. shipyards, workers and seamen.

IV. THE COASTAL LAWS AND LIVING COSTS IN THE NON-CONTIGUOUS AREAS

Reserving the non-contiguous trades to U.S. flag vessels should mean higher freight rates on goods imported to these territories from the continental U.S. It should also mean higher transportation charges on the goods they ship to the U.S. and lower revenues earned by the producers of such goods who must meet prices prevailing on the highly competitive mainland "48" market. The cost-ofliving and the cost of production in these areas is thus raised by the amount of the excess shipping costs involved in the use of U.S. flag vessels. Expansion of production in the non-contiguous areas may be inhibited by the added cost of transportation to the continental market.

While the probable direction of the economic effect of the Jones Act in the long run on the economies of the non-contiguous areas is indisputable, the magnitudes actually involved hardly appear significant.

Puerto Rico

A U.S.-Puerto Rico Commission appointed by the President of the United States and the Governor of the Commonwealth of Puerto Rico found that for the fiscal year 1964, full exemption from the U.S. coastal shipping laws would have reduced import prices by 1.35 percent and the cost of private consumption expenditures by 0.67 percent. Export prices received by Puerto Rico would have increased by 1.00 percent.

A recent Federal Maritime Commission staff study concluded that repeal of the coastwise laws would bring foreign flag container service into the U.S.-Puerto Rican trade but would not reduce rates substantially in the long-run. In the shortrun, it admitted the possibility of overtonnaging of the trade, followed by a temporary rate war that would either eliminate most U.S. carriers or lead to a ratemaking conference. The Commission staff estimated the cost advantage of foreign flag container ships at about 18 to 20 percent. The U.S.-Puerto Rico Commission estimates quoted in the preceding paragraph were based on the assumption that a saving of one-third in total freight charges would follow the admission of foreign flag ships to the U.S.-Puerto Rico trade.

The Federal Maritime Commission staff emphasizes the minor impact of ocean freight on living costs in Puerto Rico. For a list of foodstuffs most important to the families of Puerto Rican wage earners, ocean freight rates in 1967 would have accounted for only 6.3 percent of the retail price, while the retail mark-up would have accounted for 36.5 percent of the total retail cost. Since half of Puerto Rico's food is domestically produced, total ocean freight can account for only three percent of the total retail cost of foodstuffs.

For 24 primary foods, retail prices rose 16 percent between 1958 and 1967, while ocean freight rates actually declined by two percent. The rising cost of food in Puerto Rico thus appears to be entirely attributable to the rising cost of locally-produced food, the inefficiency of the local food distribution system and the rising wholesale cost of food on the mainland. Even granting the debatable assumption of the U.S.-Puerto Rican Commission concerning a possible reduction of one-third in ocean freight rates as a result of suspending the cabotage laws, the retail price of food would be reduced by as much as one percent only if the distribution system passed the full amount on to the consumer.

Ocean freight on other consumer goods is a much smaller percentage of the retail price than is the case for food, which is relatively low in value per pound or per cubic foot. Moreover, ocean freight charges do not directly affect the cost of services purchased by consumers. Thus, the 0.67 percent estimate of savings on total personal consumption expenditures derived from the earlier Status Commission study seems to be on the high side, when compared with the possible one percent reduction in the costs of foodstuffs to Puerto Rican wage earners derived from the FMC staff study for 1967.

Alaska

The data available for Alaska and Hawaii are not as definitive. However, a rough comparable analysis suggests that savings on personal consumption expenditures in Alaska might have been reduced by 1% percent in 1965, while similar savings to Hawaiian consumers would have been less than one percent. The preceding estimates for Alaska and Hawaii were prepared as part of the present study and require some explanation. Domestic ocean borne imports to Alaska are reported annually by commodity and tonnage. In 1967, the Federal Maritime Commission published an Alaska Trade Study, furnishing data on freight rates per 100 pounds charged by the various services. Applying these rates to imports on dry bulk carriers suggest total charges in 1965 of about $35$40 million for ocean borne transportation. Maritime Commission and I.C.C. data on shipping revenues in the Alaska trades suggest a similar figure. The tonnage of imported petroleum products carried by tanker is more than twice that imported by dry cargo vessels, but freight costs probably did not exceed $5 million. Subtracting estimated freight costs on capital goods and goods for government use carried on commercial vessels, the total cost of ocean freight entering into the cost-of-living of Alaska consumers probably ranged between $30 and $35 million. This figure is to be compared with personal consumption expenditures in 1965 estimated at about $730 million on the basis of reported personal income of some $900 million.

While ocean freight charges may thus account for 42 to 5 percent of personal expenditures, savings from the relaxation of coastal shipping laws would be unlikely to reduce such charges by much more than 12 percent.

High freight rates to Alaska are attributable in part to the small market and to inadequate facilities in the Southwest and Northwest regions of the State. Freight rates to these points are substantially higher than those to Anchorage and Juneau and are probably not much affected by the Jones Act, since foreign carriers are least likely to enter this trade. Only modest savings on rates would result should carriers to such outlying areas find it advantageous to invest in new foreign-built vessels. Service to Juneau and the Cook Inlet ports might sustain larger rate reductions were service to be provided with foreign-built vessels, though the size of the market may not be adequate to warrant rapid replacement. A percentage rate reduction on imported dry cargo of one-third for Alaska as a whole thus appears to be the maximum benefit that should reasonably be expected from relaxation of the Jones Act as it applies to Alaska.2

Moreover, the importation of petroleum products by tanker is a significant factor. Should the market warrant the erection of a refinery in Alaska, freight charges on petroleum products would be saved. The cost of petroleum products on the Alaska market, of course, depends on supply and demand factors as much as on the cost at the port of delivered products. The high rates of growth in demand for such products in Alaska puts a strain on the expansion of distribution facilities, limits the intensity of competition and raises questions about the extent to which savings in the cost of ocean transport would be translated into reduced product prices to the consumer.

The Federal Maritime Commission study reports ocean transportation charges to Juneau and Nome with respect to a number of consumer items, related to the prevailing retail prices for such items. It calculates such charges at 15-18 percent of food items carried to Juneau. For cement, the percentage was 48 percent for Nome and 36 percent for Juneau, while for lumber and asphalt the percentages were 31 and 22 percent respectively. For finished manufactured goods, however, the freight cost amounted to less than five percent of the retail price in Nome, while it amounted to only two percent of the shelf price in Juneau of such highly valued commodities as washing machines. Lighterage costs explain much of the difference, adding about 25 percent to the ocean freight charge to Nome.

1 The U.S.-Puerto Rico Commission study estimated that only 69 percent of ocean freight charges on imports affected personal consumption expenditures. This estimate assumes the percentage for Alaska may range in the order of 80 percent.

2 Note that the Federal Maritime Commission staff challenges the assumption of a reduction of one-third in freight charges as a result of the relaxation of the coastal shipping laws in the case of Puerto Rico. Puerto Rico would benefit from competition from foreign carriers who should find it advantageous to seek cargoes at low rates while proceeding on their normal trade routes. Alaska is an unlikely candidate for such service, so that a one-third reduction in the cost of Alaskan imports as a result of exemption from the cabotage laws may be much too large.

These percentages are consistent with the 41⁄2 to 5 percent overall estimate for ocean freight as a percentage of total personal consumption expenditures. Such expenditures include the cost of Alaskan products as well as the cost of services. Food, clothing, housing and household operation account for % of personal consumption expenditures in the United States and probably less in Alaska where services are so expensive. It is the food items and the construction materials brought from the West Coast that are most affected by transportation costs, Such items as the labor cost component of housing, clothing and furniture, local transportation, medical and personal care, recreation and education account for most of personal expenditures. The cost of transporting cargoes has only a very small direct percentage effect on these costs.

It remains to explain the other factors that must account for the high cost of living in Alaska. Thus, food costs in Juneau and Anchorage were reported to be 33 percent above the U.S. average in mid-1965, but transportation costs can account for only to 1⁄2 of this difference. The average merchant's mark-up in Alaska is 60 percent of the landed price which includes transportation costs.

The answer lies in remoteness, climate, and failure to attract population to keep pace with a rapid increase in demand for labor. Much of Alaska's economy is based on a large Federal government establishment which accounts for almost two-fifths of all wage and salary payments in the State. The national average is about eight percent. Moreover, state and local government accounts for another 14 percent (national average 11 percent). Half of the revenues of state and local government in Alaska is derived from the Federal government (national average 17 percent). The high proportion of income earned from government personnel disbursements means that the recipients maintain a high level of demand for goods and services, while the rest of the population cannot provide a sufficient labor force to meet the demand.

Thus, only one out of eight employees in the Alaskan non-agricultural labor force is engaged in service and miscellaneous occupations, compared to a national average of one out of seven, while wholesale and retail trade accounts for 15 percent of Alaskan employees, but 21 percent of employees in the country as a whole. The supply of labor in the service and distribution industries is relatively tight in Alaska. Wage rates are understandably high, with average hourly earnings in manufacturing industries more than 40 percent higher in 1968 than in the United States as a whole. Per capita income is the third highest in the nation, exceeded only by Connecticut and New York. The number of employees has risen at a remarkable rate-by almost 40 percent between 1960 and 1968, while employment in the country as a whole rose 26 percent. Yet the increase has been insufficient. While high wage rates have attracted labor from the mainland 48 states, remoteness and climate continue to diminish the attractiveness of high wages.

Thus, while transportation costs do increase the cost of goods in Alaska above that in the mainland 48 states, it is the pressure of demand for services and an insufficiency of labor that accounts for most of the disparity in the Alaska costof-living. The additional cost of transportation, stemming from the exclusion of foreign-built and foreign-owned ships may add somewhat to Alaska costs, but its percentage role is small. Relieving Alaska of the requirements of the Jones Act could be offset by minor increases in the size of the federal establishment, in federal contributions to the expenditures of State and local governments or in the rate at which the Alaska labor force expands.

The relatively minor role of transportation costs is illustrated by the trend of food prices in Nome and Anchorage between 1959 and 1965. The cost of a market basket is estimated by the Department of Agriculture to have declined by 7.5 percent over that period. Yet freight rates charged by Alaska Steam increased by 7.5 percent on the average.

Hawaii

Similar analysis leads to the conclusion that the coastal laws explain less than one percent of Hawaii's high living costs. Yet the average cost of a moderate urban living standard for a four-person family was 20 percent higher in Honolulu in 1967 than the average for all urban centers in the United States.

With personal consumption expenditures at about $1,650 million in 1965, the cost of transporting goods to Hawaii from the mainland by sea may be estimated at about $50 million from I.C.C. and Maritime Commission data on shipping revenues. Using the Puerto Rican figure of about 70 percent for consumption imports gives an estimate of some $35 million as the burden of ocean freight

from the mainland 48 states on personal consumption, or some 2.1 percent. Assuming a reduction of between a third and a half in shipping costs as a result of suspension of the coastal shipping laws in its favor would reduce personal consumption costs by 0.7 to 1.05 percent.

Much the same explanation as for Alaska accounts for the high cost of living in Hawaii-rapidly rising income, a tight labor supply relative to demand and inadequate competition in the distribution industries serving Hawaian consumers. Like Alaska, more than half of personal income in Hawaii stems from income disbursements to persons by federal, state and local governments. While average hourly earnings in manufacturing are below the national average, they rose by 23 percent between 1965 and 1968 together with a 16 percent rise in non-agricultural employment. For the nation as a whole, such employment only increased 12 percent and average hourly earnings rose 16 percent.

V. THE COST OF GASOLINE IN THE NON CONTIGUOUS AREAS

The relatively minor impact of the Jones Act-and the predominant role of other factors-on the cost of consumer products in the non-contiguous areas can be illustrated by examining gasoline prices.

Gasoline prices are 2-4 cents per gallon higher in Hawaii than on the West Coast of the United States, Yet. the total cost of shipping products from the West Coast to Hawaii on U.S. built and operated flag ships is less than one cent per gallon. Assuming that suspension of the Jones Act permitted a one-third reduction in cost and that the savings were passed on to consumers, gasoline prices in Hawaii could be reduced by one-third of a cent. The disparity between mainland and Hawaiian gasoline prices must, therefore, be explained by other factors. The availability of refining and distribution facilities, the operations of the U.S. Mandatory Oil Import Program and the competitiveness of the market seem to offer adequate explanation.

Gasoline prices in Puerto Rico are about the same as on the East Coast. Unlike Hawaii, Puerto Rico has a separate import quota, based on its estimated internal requirements plus limited product shipments to the mainland.' Crude is imported from Venezuela and the Netherlands Antilles, refined in Puerto Rico and the excess above internal requirements is shipped to the mainland in U.S. flag vessels. Because Venezuelan crude is much less expensive than domestic crude, Puerto Rican products are highly competitive on the U.S. market. Under a development program designed to create employment in Puerto Rico, part of the products shipped to the U.S. are over and above the import quota for Districts I-IV (the entire United States mainland east of the Rockies). The Puerto Rican refineries are thus able to supply the domestic market very profitably, using low cost imported crudes and exporting about half of their output to the mainland in U.S. flag ships.

Alaska has its own burgeoning crude oil production but no refinery, so that its crude is shipped to the West Coast, where it is refined. Petroleum products are shipped to Alaska from the West Coast.

Hawaii has a refinery which imports low-cost crude from the Persian Gulf and Indonesia and produces enough product to meet about half of its present requirements. The landed price of foreign crude is no higher in Hawaii than on the West Coast. The rest of Hawaiian demand is met by shipments of petroleum products, with gasoline coming mainly from foreign sources, but also from the West Coast.

Because its imports count against the District V import quota, the Hawaiian producer has no particular incentive to import crude, refine it there, and ship any excess above the needs of the local market to the mainland, as occurs in Puerto Rico. To date, the petroleum industry has preferred to import directly to the mainland and ship products to Hawaii.

Unlike Puerto Rico, Hawaii thus gets no particular benefit from the use of lowcost imported petroleum in its market. Prices are set on the basis of the cost of products in District V as a whole, for which the percentage of imported crude is relatively low. Even so, product prices in Hawaii are still higher than on the West Coast because of its rapidly expanding economy, high rate of growth in demand for petroleum products, and relatively modest expansion in distribution facilities. The State of Hawaii is now suing the company that dominates its market under the federal anti-trust laws.

1 In 1969, about 69 000 barrels per day of product shipments were authorized from Puerto Rico, of which 38,000 were outside the quota for Districts I to IV.

The recent Cabinet Task Force on Oil Import Controls estimated the cost of the mandatory import quota system to consumers at $18 million for the people of Alaska and Hawaii. The estimate is based on the differential between world and domestic prices in District V as a whole (the U.S. west of the Rockies, plus Alaska and Hawaii), a basis which understates the cost of Hawaiian consumers. This sum is probably twice the total current cost of transporting petroleum products to Alaska and Hawaii in U.S. flag ships. It is many times the possible savings that might accrue if these states were permitted to import petroleum products in foreign flag ships and if the savings therefrom were passed on to the con

sumers.

VI. SIGNIFICANCE OF THE JONES ACT FOR NORTH SLOPE OIL

The principal economic interest in the Jones Act does not lie in the possible reduction of transportation costs for moving the present trade between the noncontiguous areas of the United States and the mainland. Nor does it lie in the normal growth of such traffic, even if it were accelerated by reduced transportation charges. Impending large scale shipments of crude petroleum from the North Slope of Alaska is about to produce a major source of additional deep sea traffic which, under existing legislation must be carried in U.S. flag ships, built in U.S. shipyards.

The Cabinet Task Force estimated the flow at between 2 and 3 million barrels per day in 1980, the range depending on whether wellhead prices for crude in the continental U.S. remain at the present level of $3.30 per barrel or fall to $2, the price that could be expected to prevail if import controls were soon eliminated. The lower price and the consequently lower production in the mainland states would mean heavier demand and exploitation of North Slope oil. With wellhead costs on the North Slope estimated at 18 to 36 cents per barrel, profitable development of the fields seems to be assured irrespective of conceivable fluctuations in transport charges. The Task Force report emphasizes the conservative character of its estimate of North Slope supplies.

At current rates, even the lower estimate would involve between $700 thousand and $2 million per day in shipping revenues, or $250 to $700 million per year.1 Assuming a drastic decline in tanker rates as a result of the introduction of larger and more automated ships, the lower estimate of production and construction of the Valdez pipeline, gross shipping charges of some $140 million per year would be incurred, about equal to half the total revenues earned in 1967 by dry cargo vessels plying the non-contiguous trades. If half the production was sent to the East Coast via the Northwest Passage, almost half a billion dollars a year of gross shipping revenues would result.

Assuming that foreign flag operations would enable this traffic to be carried at a third less, savings of $50 to $150 million a year would result. The benefits of such savings would almost certainly accrue to the petroleum companies that exploit the North Slope fields and to the tanker operators who may receive charters for such oil movements. As the Cabinet Task Force rightly explains: "The price in the United States must ultimately cover the highest-cost oil that is needed and used to supply the demand, not merely the lowest-cost segment of the supply." Thus the price paid by U.S. consumers is unlikely to be affected significantly by low production costs on the North Slope. Nor is it apt to reflect savings through a reduction in transportation charges.

A series of ships of various types suitable for U.S. trades was recently designed and costed in connection with studies commissioned by the United States Maritime Administration. Booz-Allen Applied Research, Inc., a participant in these studies, has prepared rough estimates of the requirements and costs of moving 2 million barrels per day of North Slope oil to the West Coast from the projected Valdez pipeline. It estimates that about 27 vessels, each of 125,000 D.W.T. would be required, at a construction cost of $26.4 million per vessel assuming the vessels are built in sizable series. The single ship construction price is estimated at $31.3 million.

U.S. shipyards could thus expect between $700 and $850 million dollars worth of new ship construction contracts, involving over 3.4 million D. W. T. of tanker construction, to meet the requirements of moving the conservatively estimated flow of North Slope oil in 1980. These tankers could charge 20-22 cents per barrel on average movements to the West Coast (a third less than current rates) and

1 The lower rate would carry the crude via pipeline to Valdez, Alaska and thence by ship to California. The higher rate is estimated for carriage via the Northwest Passage to New York.