Puerto Rico, the Jones Act, and a New Focus on Economic Protectionism

By: Elizabeth Whiting

Earlier this week, President Trump’s administration temporarily waived the Jones Act for a period of ten days, allowing Puerto Rico to receive aid and supplies from non-U.S.-flagged vessels in the wake of Hurricane Maria. [1] The waiver decision was made by acting head of Homeland Security Elaine Duke, following a determination by Department of Defense Secretary Jim Mattis that such a waiver would be in the interest of national security. [2] The decision, along with the hesitation by the Trump administration that preceded it, has ultimately come to spark a national dialogue on the long-term efficacy of the Jones Act with respect to its promotion of outdated protectionism, its financial prioritization of a subset of the domestic shipping industry, and its subordination of Puerto Rican trade to the arguably senseless economic burden created by that protectionism.

The Merchant Marine Act of 1920 was signed into law by President Woodrow Wilson two years following the end of World War I and was intended to serve the development of U.S. naval power by safeguarding the American maritime industry from foreign, particularly German, competition. [3] Section 27 of the Merchant Marine Act, popularly referred to as the Jones Act and codified as 46 U.S.C. § 55102, makes up part of the nation’s “coastwise” laws regulating domestic trade between ports in the United States. [4] Among the Jones Act’s more controversial provisions is the mandate that all passengers or merchandise transported by water between U.S. ports be carried by vessels owned by U.S. citizens and registered under the U.S. flag with a coastwise endorsement, which in turn requires that the vessels be built in the United States. [5] Because the Jones Act requires U.S. flag registry, U.S. manning laws also apply, which means the vessels must be operated by predominantly U.S. citizen crews. [6]

Requests for temporary waiver of the Act’s application are reviewed by the Department of Homeland Security on a case-by-case basis. [7] Waivers of the Jones Act are granted if warranted by national defense under 46 U.S.C. §501. [8] Generally, waivers have only been granted in cases of national emergencies or upon the request of the Secretary of Defense. For example, waivers were temporarily issued in the immediate aftermath of Hurricane Katrina in 2005, Hurricane Sandy in 2012, and more recently, for Hurricane Harvey and Hurricane Irma in Texas and Florida, respectively. [9]

The Trump administration’s delayed waiver of the Act for Puerto Rico in the wake of Hurricane Maria is emblematic of a long history of Jones Act-related afflictions plaguing Puerto Rico. Because foreign-flagged ships cannot carry cargo between the U.S. mainland and certain noncontiguous parts of the U.S., including Puerto Rico, shipping goods to Puerto Rico can be significantly more expensive [10] than shipping goods to ports in the contiguous U.S., other Caribbean nations, [11] or even the U.S. Virgin Islands. [12] Significantly, while Puerto Rico is subject to the Act in its entirety, the U.S. Virgin Islands, a U.S. territory acquired from Denmark just three years prior to the Jones Act, has been exempt from the Act since 1936 and remains so pending any presidential proclamation to the contrary. [13] Guam, along with sparsely populated Midway Island and Wake Island, is partially exempt from the Act with respect to the U.S.-built ship requirement, and therefore, some kinds of foreign-built ships may trade freely with Guam and those islands. [14] As per 46 U.S.C § 55101(b), the coastwise laws do not apply to either American Samoa, nor the Northern Mariana Islands. [15]

The Act’s protectionism creates costs critical for the fragile island economy of Puerto Rico, which declared bankruptcy in May and has been trying since to restructure more than $70 billion in debt. [16] For example, rates to ship freight to Puerto Rico may be more costly because there is little competition among freighters. A 2013 Government Accountability Office (G.A.O.) report indicated that only four carriers–Crowley Puerto Rico Services, Inc., Horizon Lines, Inc., Sea Star Line, LLC, and Trailer Bridge Inc.–have operated under the Jones Act to serve the Puerto Rican market, which is highly reliant on trade from the U.S. mainland. [17] According to the 2013 report, those four carriers used just seventeen vessels to carry out the totality of shipping services between the U.S. and Puerto Rico. [18] In 2014, one of the carriers, Horizon Lines, terminated its Puerto Rico shipping operations, leaving the three major remaining carriers to cover the trade lane between the U.S. mainland and San Juan. [19]

The increasingly limited number of carriers between the mainland and Puerto Rico has created an environment in which price-fixing has flourished. In 2014, two of the four Jones Act carriers, Sea Star Line and Horizon Lines, agreed to pay a combined $3.4 million to settle claims filed in a federal lawsuit under the qui tam provisions of the False Claims Act. [20] Specifically, the claims alleged that the two companies had fixed prices of contracts for water freight transportation between the mainland United States and Puerto Rico. [21] The two companies had previously pleaded guilty, in related criminal proceedings, to anti-competitive conduct in violation of the Sherman Act. [22] In November 2011, Sea Star Line LLC pleaded guilty and agreed to pay a $14.2 million criminal fine for its role in the price-fixing conspiracy for freighter transportation between the continental United States and Puerto Rico. [23] In April 2011, Horizon Lines LLC was sentenced to a payment of a $15 million criminal fine, and five former shipping executives from both Sea Star and Horizon were sentenced to pay a total of approximately $85,000 in criminal fines and serve a combined eleven years in prison. [24] The U.S. Department of Justice has noted that, between 2002 and 2008, shipping companies transporting goods from the U.S. mainland to Puerto Rico engaged in one of the largest domestic price-fixing conspiracies in history. [25]

Notwithstanding the foregoing, the Jones Act subjects those who trade with the island economy to increased practical costs associated with meeting the law’s requirements. There are costs, for example, related to the Act’s insistence on American-built vessels and crews made up of predominantly U.S. citizens. As per the 2013 U.S. G.A.O. report, U.S. manning requirements are associated with higher costs, as is the building of vessels in U.S. shipyards. [26] The Act’s admitted protection of American jobs [27] comes with a cost that may translate into increased prices of consumer goods in Puerto Rico. According to a 2015 report by former IMF economists, the price of imports from the U.S. mainland was at least double that of neighboring islands, such as the U.S. Virgin Islands, which is not subject to the Act. [28] Structurally, the Act may even limit the development of Puerto Rico’s infrastructure and impact its continued dependency on fuel oil for its electric grid. Most U.S. tankers are unable to transport liquefied natural gas, making it “prohibitively expensive” [29] to transport LNG to domestic ports and, especially, to ports in noncontiguous Puerto Rico, Hawaii, and Alaska.

Studies have demonstrated these higher costs: A 2012 New York Federal Reserve study found that shipping a container from the U.S. East Coast to Puerto Rico cost $3,063 relative to the $1,504 cost of shipping a container from the U.S. East Coast on a foreign ship to the neighboring Dominican Republic. [30] A 2010 University of Puerto Rico study found that Puerto Rico loses $537 million annually as a result of Jones Act shipping restrictions. [31] However, the wide-ranging 2013 report completed by the non-partisan Government Accountability Office, attempting to narrow down the effects of the Jones Act on Puerto Rican goods and shipping, ultimately determined that estimating the true additional cost of shipping under the Jones Act would be too uncertain a calculation given the number of changing factors that determined freight rates. [32]

Protecting domestic shipping interests and jobs but inhibiting the exercise of free market principles, the Jones Act has divided the U.S. political establishment. Arizona Republican Senator John McCain, long known as a fierce critic of the Act, has argued for years that the Act should be permanently repealed. [33] The Act has received bipartisan support in the past–former presidents George W. Bush and Barack Obama both pledged support for the Act as vital to national security. [34] Meanwhile, the political clout of the U.S. shipping industry likely remains influential: Trump said on September 27th that “[w]e have a lot of shippers and a lot of people who work with the shippers who don’t want the Jones Act lifted.” [35] For example, the number of U.S. jobs protected by Jones Act domestic shipping routes is estimated at 1,400. [36] For its part, the American Maritime Association, a powerful lobby group for the U.S. shipping industry, argues that American domestic carriers are key to private sector investment in Puerto Rico and that the carriers invest much needed capital into vessels, equipment, and infrastructure, as well as provide private sector employment to Puerto Ricans on those vessels. [37]

While eliminating the Jones Act in its entirety or repealing its U.S.-build requirement may well result in losses of profits and jobs in the subset of the domestic shipping industry that serves the U.S.-Puerto Rico trade, the fact remains that the Jones Act commits Puerto Rico to an undue economic burden in times that the island is facing increasingly acute financial distress, along with the difficulties related to post-disaster governance and disaster recovery. This burden will likely become more harsh as the island’s focus turns to importing the supplies necessary to re-build Puerto Rico’s infrastructure. The new spotlight placed on the seemingly obsolete Jones Act by the public clamor for its waiver evinced following Hurricane Maria currently affords the United States favorable political conditions for re-evaluating the relative worth of pursuing protectionism in the context of Puerto Rico’s historic reliance on a monopolistic shipping regime vulnerable to price-fixing, the artificially high costs passed on by the regulation to Puerto Rican consumers, and the increasingly tenuous financial circumstances faced by the bankrupt and disaster-stricken U.S. territory as a whole.

[1] Niraj Chokshi, Trump Waives Jones Act for Puerto Rico, Easing Hurricane Aid Shipments, N.Y. Times (Sept. 28, 2017), https://www.nytimes.com/2017/09/28/us/jones-act-waived.html.

[2] Id.

 [3] Memorandum Opinion for the Assistant to the President for Domestic Affairs and Policy, D.O.J. (Jan. 30, 1980), https://www.justice.gov/file/22446/download (citing 42 Op. Att’y Gen. 189, 196 (1963)).

[4] Id.

[5] U.S. Gov’t Accountability Off., Characteristics of the Island’s Maritime Trade and Potential Effects of Modifying the Jones Act (Mar. 2013), http://www.gao.gov/assets/660/653046.pdf.

[6] 46 U.S.C. § 55102(b)(1) (2012).

[7] Industry Profile–The Jones Act, Transportation Institute (2016), https://transportationinstitute.org/jones-act/.

[8] 46 U.S.C. § 501 (2012).

[9] Lee et al., Harvey’s Impact on U.S. Fuel Supply Chains Triggers Jones Act Waiver Request, Holland & Knight (Aug. 31, 2017), https://www.hklaw.com/publications/harveys-impact-on-us-fuel-supply-chains-may-trigger-jones-act-waiver-request-08-31-2017/.

[10] Henry Grabar, We’ll Know if Congress is Serious About Helping Puerto Rico if it Axes This Obscure Shipping Law, Slate (Sept. 25, 2017), https://slate.com/business/2017/09/congress-should-waive-the-jones-act-to-help-puerto-rico.html.

[11] Report on the Competitiveness of Puerto Rico’s Economy, N.Y. Fed. Res. 13 (Apr. 29, 2017), https://www.newyorkfed.org/medialibrary/media/regional/PuertoRico/report.pdf.

[12] Rory Carroll, The U.S. Shipping Industry is Putting a Multimillion Dollar Squeeze on Puerto Rico, Reuters, http://www.businessinsider.com/r-us-shippers-push-back-in-battle-over-puerto-rico-import-costs-2015-7.

[13] U.S. Gov’t Accountability Off., supra note 5, at 6, n. 6.

[14] Id. at 2.

[15] Id. at 6, n. 6.

[16] Brian Resnick and Eliza Barclay, What Every American Needs to Know About Puerto Rico’s Hurricane Disaster, Vox Media (Oct. 3, 2017), https://www.vox.com/science-and-health/2017/9/26/16365994/hurricane-maria-2017-puerto-rico-san-juan-humanitarian-disaster-electricty-fuel-flights-facts.

[17] U.S. Gov’t Accountability Off., supra note 13, at 6.

[18] Id.

[19] Mark Szakonyi, How Will Horizon’s Exit Affect the Puerto Rico Trade?, Journal of Commerce Group, (Nov. 14, 2014), https://www.joc.com/maritime-news/how-will-horizon’s-exit-affect-puerto-rico-trade_20141114.html.

[20] D.O.J. Off. of Pub. Aff., Two Ocean Shipping Companies to Pay $3.4 Million to Settle Claims of Price Fixing Government Cargo Transportation Contracts, D.O.J., (Mar. 7, 2014), https://www.justice.gov/opa/pr/two-ocean-shipping-companies-pay-34-million-settle-claims-price-fixing-government-cargo.

[21] Id.

[22] Id.

[23] D.O.J. Off. of Pub. Aff., Florida-Based Sea Star Line LLC Agrees to Plead Guilty and Is Indicted for Price Fixing on Coastal Freight Services Between the Continental United States and Puerto Rico, D.O.J., (Nov. 17, 2011), https://www.justice.gov/opa/pr/florida-based-sea-star-line-llc-agrees-plead-guilty-and-its-former-president-indicted-price.

[24] Id.

[25] Steven Melendez, Coca-Cola, Others Sue Over Puerto Rico Shipper Price-Fixing, Law360 (Apr. 13, 2012), https://www.law360.com/articles/330178/coca-cola-others-sue-over-puerto-rico-shipper-price-fixing.

[26] U.S. Gov’t Accountability Off., supra note 17, at 15, 27.

[27] Id. at 24.

[28] Anne Kruger et al., Puerto Rico–A Way Forward, Government Development Bank for Puerto Rico 8 (June 29, 2015), http://www.bgfpr.com/documents/puertoricoawayforward.pdf.

[29] Mark Perry, Meet the Jones Act, American Enterprise Institute (June 22, 2017), http://www.aei.org/publication/meet-the-jones-act/.

[30] Report on the Competitiveness of Puerto Rico’s Economy, supra note 10, at 13.

[31] Chris Isidore, The Jones Act Has Been Hurting Puerto Rico for Decades, CNN (Sept. 28, 2017), http://money.cnn.com/2017/09/28/news/economy/jones-act-puerto-rico/index.html.

[32] Id.

[33] David Krapf, McCain Introduces Jones Act Legislation, WorkBoat (July 2017), https://www.workboat.com/news/coastal-inland-waterways/mccain-introduces-jones-act-repeal-legislation.

[34] Robert Hopkins and Michael Brook, The Jones Act Under Trump, Journal on Commerce Group (May 9, 2017), https://www.joc.com/regulation-policy/transportation-regulations/us-transportation-regulations/impact-new-political-climate-jones-act-unclear_20170509.html; see also Elizabeth Chuck, What is the Jones Act? Opponents to 1920 Law Argue It’s Worsening Puerto Rico’s Crisis, NBC News (Sept. 28, 2017), https://www.nbcnews.com/storyline/puerto-rico-crisis/what-jones-act-opponents-1920-law-argue-it-s-worsening-n805101.

[35] Jennifer Bendery, Trump: ‘A Lot of Shippers Don’t Want Me to Waive the Jones Act to Help Puerto Rico,’ Huffington Post (Sept. 27, 2017), http://www.huffingtonpost.com/entry/trump-puerto-rico-jones-act-maria_us_59cc281ee4b05063fe0ef7ec.

[36] U.S. Gov’t Accountability Off., supra note 25, at 24.

[37] Isidore, supra note 28.

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