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You will also note that while the volume of foreign trade carried by U.S. flag vessels has declined by 25 percent since 1950 and overall domestic trade by 10 percent, tonnage moved in the non-contiguous trades has almost doubled. Dr. Kaplan demonstrates that tankers account for virtually all of the net growth in the non-contiguous trades, increasing from 98,000 tons in 1950 to 679,000 tons in 1968, and he concludes that non-contiguous traffic promises to grow vigorously.
You will further note the assertion that additional transportation charges attributable to the Jones Act, contrary to popular belief, approximate only 0.67 percent, 1 percent and 12 percent of consumer costs in Puerto Rico, Hawaii and Alaska respectively. Both the high cost of living in Alaska and Hawaii relative to the mainland 48 states, and the rapidly rising cost of living in Puerto Rico, are primarily attributable to factors other than the Jones Act.
Throughout Dr. Kaplan's report, the substantial prospects for new shipbuilding by U.S. shipyards in the context of the Jones Act are outlined. These prospects equate to opportunities for expansion of shipping services in all domestic trades, and, in turn, to significant economic benefits so long as the spirit and integrity of the Jones Act are maintained.
As discussions relating to the Jones Act develop in the future, we hope that the enclosed document will be a source of helpful continuing reference to you. Cordially,
EDWIN M. HOOD, President.
ECONOMIC SIGNIFICANCE OF THE JONES ACT, PREPARED FOR THE SHIPBUILDERS COUNCIL OF AMERICA, WASHINGTON, D.C.
Mr. EDWIN M. HOOD,
President, Shipbuilders Council of America,
WASHINGTON, D.C., July 27, 1970.
DEAR MR. HOOD: In pursuance of your letter of April 15, 1970, I submit this report on the economic significance of the Jones Act. Within the limits of available time and materials I have attempted to assess and quantify the various costs and benefits accruing from the U.S. coastal laws. I have also projected the situation that may be expected to prevail over the 1970 decade, if the Act is or is not permitted to remain operative for the non-contiguous trades.
In the course of preparing the numerous estimates required for this study, I have used what I consider the more conservative assumptions. The results are offered as ranges or reasonable approximations of both current and future costs and benefits. However, the statistical records on which they are based contain important gaps and deficiencies, which limit the reliability of the quantifications. Nevertheless, I believe that they validly portray the rough orders of magnitude involved.
In preparing the study, I have benefitted from the guidance and assistance of a considerable number of people, both in and out of government service. U.S. Maritime Administration and Federal Maritime Commission officials have provided special tabulations of unpublished data from their files. In addition, of ficers of Booz-Allen Applied Research, Inc., and of Economic Associates, Inc., made important contributions on special topics.
JACOB J. KAPLAN, Consultant.
1. The domestic trades have been reserved to U.S. ships built in U.S. yards since the early days of the republic. Since World War II, they have accounted for a large and growing proportion of all deep sea traffic carried in U.S. flag ships. In the coastwise and intercoastal trades, the tonnage of tanker traffic has been stable but dry cargo traffic has fallen drastically. In the non-contiguous trades, dry cargo traffic has increased and tanker traffic has risen spectacularly. Meanwhile, foreign trade cargoes carried by U.S. flag ships have declined by more than 50 percent.
2. The Jones Act provides important public benefits to the United States, particularly in the case of the non-contiguous trades. The significance and magnitude of these benefits may be expected to increase substantially over the next decade. They take the form of important balance of payments savings, a larger ocean-going U.S. flag fleet, an expanded merchant ship construction capability, the availability of more experienced merchant seamen and shipyard workers and a larger tax base.
3. The non-contiguous trades now carry almost as many tons of dry cargo per year as U.S. flag foreign trade vessels, employ almost a fifth as much deadweight tonnage, and earn at least a fifth as much gross revenue. The domestic trades as a whole employ 30 percent of the active U.S. sea-going merchant fleet and 40 percent of its D.W.T., while providing 12,000 seafaring jobs (3,300 in the noncontiguous trades alone).
4. The non-contiguous fleet currently includes 18 ships built in U.S. yards since 1950 at a cost of $150 million and another 25 ships converted in U.S. yards at a cost of $100 million. By 1980, the mere replacement of vessels now in the noncontiguous trades will require another $320 million of new construction in U.S. yards. Adding expected growth of current traffic raises this total to $500 million. The additional requirements of Alaskan North Slope oil should mean $700 million to $2.5 billion more.
5. Suspension of the Jones Act in the non-contiguous trades could cost the U.S. balance of payments a minimum of $140 million a year by 1980, in shipping revenues less port charges. At least $500 million more would be lost through payments for construction in foreign yards. Interest charges on foreign financing of such construction would increase the bill significantly. Accepting more optimistic estimates of Alaskan North Slope production as well as the possible use of the Northwest Passage routes for transporting crude oil to the East Coast would raise these estimates drastically.
6. The Jones Act confers additional benefits in the form of U.S. tax revenues. Moreover, it provided the testing ground for containerized shipping-a development that has benefited the non-contiguous areas as well as the competitiveness of the U.S. foreign trade fleet.
7. The additional transportation charges attributable to the Jones Act approximate 0.67 percent, 1 percent and 12 percent of personal consumption expenditures in Puerto Rico, Hawaii and Alaska respectively. Both the high cost of living in Alaska and Hawaii relative to the mainland 48 states, and the rapidly rising cost of living in Puerto Rico, are primarily attributable to other factors. 8. Gasoline prices in Hawaii are 2-4 cents per gallon above the West Coast price. The Jones Act accounts for only % of one cent. The high price of gasoline in Hawaii and Alaska is attributable primarily to the inadequacy of refining and distribution facilities, the U.S. Mandatory Oil Import Quota Program and insufficient competitiveness in meeting rapidly rising demand.
9. Conservative estimates of Alaska North Slope oil production could produce U.S. flag shipping revenues of $140-$500 million per year, at rates a third less than those now prevailing. The economies would result primarily from using larger and more automated ships and partly from series production. Potential savings from foreign construction and operation would probably accrue to the producing and refining companies and tanker operators rather than to U.S. consumers of petroleum products.
1. HISTORICAL BACKGROUND
The Jones Act (Section 27 of the Merchant Marine Act of 1920) excludes foreign built or foreign operated ships from the U.S. domestic trades. Similar restrictions have been operative since the early days of the republic. A law passed in 1792 required that only ships constructed in the U.S. and owned by U.S. citizens could be registered under the American flag. Laws passed in 1808 and 1817 excluded foreign flag ships from the domestic trades.
At the time such legislation was common to most maritime nations. At present, only six nations permit foreign flag vessels in their coastal traffic. The so-called cabotage laws seek to minimize dependence on foreign carriers in time of emergency, as well as to protect the maritime industries. By excluding foreigners from competition for domestic maritime business, at least a minimum capability for meeting sea transport needs in time of crises can be assured.
Such protection may have been unnecessary in the United States prior to the Civil War since its shipbuilders and owners easily met foreign competition in the era of the sailing vessels. However, with the advent of iron and steam to the maritime trades, U.S. operators and shipbuilders found themselves competing under the disadvantage of higher raw material costs as well as high wage rates. In consequence they lost out steadily in the foreign trades. While in 1855 U.S. vessels carried 75 percent of the value of U.S. water-borne foreign trade, the proportion fell to 35 percent in 1870 and to 10 percent in 1900.
Nevertheless, a U.S. maritime capability was maintained between the Civil War and World War I largely as a result of the new very effective cabotage laws. Because coastwise and internal maritime traffic enjoyed substantial growth, a significant U.S. merchant marine was available at the outbreak of World War I and a sizeable shipbuilding industry existed, at least for the period.' Documented vessels in the U.S. merchant marine totaled some 7.9 million tons in 1914, of which 6.8 were engaged in coastwise and internal trade. Between 1900 and 1911, an average of 282 thousand tons a year of steam and motor ves sels were built in the United States, principally for the domestic trades.
The first World War created heavy immediate demands for additional shipping. In order to assure adequate capacity for carrying U.S. foreign trade, foreign built ships were admitted to U.S. registry provided they were U.S.-owned. U.S. shipbuilding boomed after U.S. entry in the war in 1917. The boom continued for a few years thereafter as foreign fleets sought to replace their wartime losses.
After the war 970 thousand tons of foreign built vessels were permitted to remain in the U.S. coastal trades for the duration of their operational life (equal to 13 percent of the carrying capacity of the pre-war U.S. flag fleet). Though the newly enacted Jones Act forbade further entry of foreign built ships into such trades, the carryover of vessels built and acquired during World War I weighed heavily on the U.S. shipbuilding industry. Despite the protection of the Act, the building of new merchant ships fell to 242 thousand tons in 1923; it failed to attain even this volume again until the outbreak of World War II. Nevertheless, domestic operators were able to handle a steady growth in intercoastal and foreign trade traffic over the inter-war period (set back, of course, between 1929 and 1935 during the depth of the Great Depression), despite such low levels of new construction in U.S. shipyards.
Again in World War II, foreign ships had to be admitted to the U.S. coastal trades and a major shipbuilding program had to be mounted in U.S. yards. Again the post-war U.S. flag fleet was too large for peacetime needs, vessels were laid up, and new ship-building for the U.S. merchant fleet fell to token proportions.
During the 1960 decade, less than 300 thousand tons a year of merchant shipping were built in U.S. yards for the U.S. fleet. Once again, U.S. flag operators were handicapped by high costs in competing for cargoes, despite a rapidly expanding market for international shipping services. Notwithstanding operating subsidies and sporadic effort to expand shipbuilding via construction subsidies, the U.S. flag share of U.S. foreign trade tonnage dropped steadily from 39 percent in 1950 to 6.4 percent in 1968. Even this small share could not have been maintained without subsidies for break bulk cargoes in the liner trade, government-sponsored cargoes, and a competitive advantage based on the inauguration of containerized cargo service by U.S. operators. The active U.S. fleet has also been sustained by a high level of Defense Department demand for U.S. flag shipping services. Difficulties in competing for foreign trade cargoes have thus again underlined the importance of the domestic trades and the cabotage laws in maintaining an active U.S. merchant fleet.
II. THE IMPORTANCE OF THE NON-CONTIGUOUS TRADES
A steep decline in the volume of foreign trade cargoes carried by U.S. flag vessels since 1950 has been accompanied by a fairly stable volume of domestic deep sea cargo. Hence the domestic trades are again contributing a rising share of the traffic carried on U.S. flag ships. (See Table 1.)