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The Jones Act in Historical Context.

June 2019

Protectionism in the United States' coastwise shipping industry is commonly attributed to the Merchant Marine Act of 1920, also known as the Jones Act. (1) The Jones Act authorizes the exclusion of all foreign vessels from participating in the movement of goods between two ports within the United States and its territories, often referred to as coastwise or domestic trade. (2) However, the widely held belief that the Jones Act introduced protectionism to the coastwise trade is incorrect. Protectionism for coastwise trade has existed in various forms since 1789 (Johnson et al. i922;McGeorge 1990). (3) The stated purpose of the Jones Act is to encourage a national merchant marine service capable of fulfilling the dual goals of meeting the commercial needs of the United States and being available to serve as an effective naval reserve. Assessing whether the Jones Act has accomplished either of these goals is not the purpose of this report. Rather, our intent is to illuminate how the wide range of policy prescriptions incorporated in the Jones Act fit into the broader historical context of US shipping policy.

We examine, in a historical context, all major aspects of the Jones Act rather than just the provisions affecting coastwise trade. Regulations affecting coastwise trade are limited to just one section of the Merchant Marine Act, Section 27. The Jones Act includes a plethora of regulations designed to empower the United States Shipping Board (USSB) with tools to promote the shipping and shipbuilding interests of the US government and domestic firms in both foreign and coastwise shipping. (4) The legislation therefore substantially increased state involvement in all aspects of the shipping and shipbuilding industries.

The Merchant Marine Act of 1920 provided a wide range of policy tools intended to encourage the buildup of a US merchant marine service and domestic shipbuilding industry. These included various types of subsidies, flag requirements, employment mandates, and other regulations. First, we provide a brief history of how broader historical changes affected all aspects of US shipping involved in both domestic and foreign trade. Then we examine the changing role of the USSB, which was established in 1916, and the programs it was authorized to use to affect US shipping and shipbuilding during and after the end of World War I. Finally, we discuss how the Jones Act changed the policy environment in both the foreign and coastwise trades.

The Evolution of the US Shipping Industry Before 1920

Before the Merchant Marine Act of 1920, three major factors had influenced all aspects of American shipping and shipbuilding policy: a series of technical changes that led to the introduction of metal and steam-powered ships, high US labor and flagging costs, and the rapid increase in demand for shipping necessitated by US involvement in World War I. The first two factors hurt the structure and global competitiveness of the US shipping industry. The third resulted in a rapid government-led expansion of shipping capacity between 1916 and 1920. In the aftermath of World War I, this combination of events led Congress to conclude there was an urgent need for government involvement to encourage the expansion of the US merchant fleet and domestic shipbuilding capacity. (5)

Technical innovations in the second half of the 19th century eroded America's global competitiveness in shipbuilding. Before the Civil War, the United States enjoyed a comparative advantage in shipbuilding largely because of the large supply of timber available for constructing masts and hulls. The introduction of new steamships made primarily of metal (iron and later steel) shifted comparative and competitive advantages to foreign companies (Johnson et al. 1922; USSB 1922b). A1922 USSB report argued that Britain's advantage in iron led to its early 20th-century dominance over the United States in shipbuilding. The USSB study also reported that in 1903, the cost of US-made steel plates was 62 percent higher than similar steel plates made in England (USSB 1922b). Table 1 shows that comparative tonnages changed for five of the largest shipping nations from 1870 to 1914.

Table 1 illustrates how near parity between the United States and the United Kingdom in wooden sailing ship tonnage gave way to the dominance of foreign-built steam tonnage between 1870 and 1914. In 1870, the United States and United Kingdom had comparable merchant marine services, both in terms of absolute size and the proportion of steam tonnage. However, between 1870 and 1914 the United Kingdom built over five times as many tons of steamships as the United States did. The US was unable to keep pace because of higher steel prices and labor costs, which made US-built ships more expensive than foreign vessels (Johnson et al. 1922; USSB 1922b). (6)

In addition to higher building costs, as shown in Table 2, US vessel operators also faced higher wages for labor and ship provisions, leading to higher operating costs for US-flagged vessels. (7) Estimates of the total difference in operating costs between US and British ships range between 38 percent and 92 percent for a 1,000 ton, fully rigged vessel (Hutchins 1954).

The data in Table 2 show that even before the Merchant Marine Act was passed in 1920, US shipping companies faced significantly higher operating costs than their overseas competitors. Comparisons of commodity prices and wages show both were higher in the United States than in many other countries, especially England (US Senate 1911).

Higher building and operating costs made flying the American flag relatively expensive since typically foreign-built ships were not allowed on the US registry and crews had to consist of mostly American sailors. (8) Overall, operating a line service under the US registry meant that the price of the vessel, the costs of provisions, and wages for the crew were all higher. As the 19th century drew to a close and at the beginning of the 20th century, US merchant marine companies were increasingly concerned about these higher shipping costs in the context of the domestic market for transportation services. Rail transportation services were rapidly expanding, had become the primary domestic alternative to shipping goods by water, and were becoming less expensive, while transportation by water remained relatively costly (Johnson et al. 1922).

World War I had an unprecedented impact on the US shipping industry because of the resulting rapid and dramatic increase in the demand for both ships and shipping services. Anticipating war, Congress passed the Shipping Act of 1916, which established the USSB. The 1916 act authorized the USSB to requisition ships for operation, expand the infrastructure for building ships, and contract with domestic firms to build new vessels. The result was an unprecedented buildup in the US-flagged fleet, as shown in Figure 1.

By the end of 1919, because of the wartime expansion of shipping capacity, the United States merchant marine industry had been transformed. The exigencies of war caused a domestic shipping shortage that was met only through government action. During and directly after World War I, the USSB built or acquired vast numbers of ships, greatly expanding the total supply of vessels eligible to be flagged in the United States. (9) However, after World War I, US shipping companies continued to face the same problems of high building and operating costs that had plagued their operations before the country's entrance into the war. These factors framed the debate in Congress that led to the passage of the Jones Act in 1920.

The USSB and the Jones Act

Most of the Jones Act provisions addressed the USSB's powers and functions. In his speech to the Academy of Political Science in 1921, Sen. Wesley Jones (R-WA) outlined the USSB's central role in building up the US merchant fleet "as the primary end to be attained in the disposition of our ships, in making rules and regulations and in the administration of the shipping laws" (Jones 1921). While the act did not create the USSB, it amended the powers and duties of the board to fit the postwar setting. The 1920 act expanded the board's authority over the regulation of the US shipping industry, the administration of subsidy programs, maritime insurance programs, mortgage programs, the sale of vessels acquired by the US government, and the operation and development of line services.

As discussed above, the Shipping Act of 1916 created the USSB to develop a merchant marine and regulate shipping commerce. Most importantly, the USSB needed to prepare the country for potentially entering World War I by building a merchant marine that was also militarily useful. To achieve this objective, Congress authorized the USSB to acquire, build, and requisition ships and to regulate shipping conferences. The 1916 Shipping Act also gave US shipping firms an antitrust waiver, which allowed them to form cartels called conferences to set quantities and prices. In exchange, the conferences were required to post their shipping rates with the USSB and to be subject to rate regulation. (10) The USSB was also directed to form a corporation, in which the US government would be a majority stockholder, to construct and acquire vessels for service.

The Emergency Fleet Corporation (EFC) was the main instrument the USSB used to fill contracts for modern merchant ships to meet domestic and military demands. By the end of 1918, the EFC had signed 1,460 steel ship contracts and requisitioned around 87 percent of all shipyard ways for vessel production. (11) However, by the end the war, work on around only 5 percent of the steel ship contracts negotiated by the EFC had been started or completed (USSB 1918).

These contracts came at a high price. On average, these ships were built at $200 per deadweight ton. Similar classes of vessels could be purchased in England for as low as $75 per deadweight ton (Gibson and Donovan 2000). One of the primary purposes of the Jones Act was to give the USSB the tools to direct these vessels to serve the national interest in peacetime through sales to private firms or direct operation by the board.

The Jones Act outlined a plan to convert the massive government-sponsored buildup of vessels into a sufficient and modern postwar merchant marine fleet. To accomplish this objective, the law allowed for the completion of any outstanding contracts for vessel construction and most outstanding contracts for port and shipyard construction or renovation projects, even though hostilities had ended in 1918 (Day 1920). (12) The legislation also directed the EFC and the USSB to sell vessels and facilities they had acquired as government property to US citizens who would maintain specific line services or to operate those services directly until they could be sold to citizens. (13) The legislation further directed the USSB to set prices for these sales as it saw fit. For lines the USSB operated directly, the price charged to shippers could not be below the board's cost of operating the line.

All vessels sold by the USSB were eligible for either foreign or coastwise trade but could not be transferred to foreign ownership. These sales were exempt from sales tax as long as the purchasing firm set aside the funds equivalent to the sales tax to order a new US-built ship within 10 years' time. By 1929, several new shipping lines had purchased vessels from the board. However, even in 1934, 78 percent of all subsidized ships in operation were of vintages that predated passage of the Jones Act, indicating that many firms had not met their obligations under the sales tax deferment program to purchase new ships (Hutchins 1954). (14) As a result, newer foreign-built vessels were outclassing older US vessels that remained in service.

In addition, subsidies were available for ship construction through government loans and other tax deferment programs. (15) These programs were financed through a fund the USSB was authorized to establish from the revenues the board obtained through ship sales. Shipping line operators in the United States had also relied heavily on loans, which resulted in high levels of government-held debt for the industry (Hutchins 1954). Subsequently, the Merchant Marine Act of 1936 reorganized these subsidy programs to enable domestic companies to purchase US-built vessels at world prices by paying the difference between the cost incurred by the shipbuilder and the world price as a subsidy to the builder (Morse i960). (16)

The Jones Act also made important changes to maritime mortgages and maritime labor laws. The inclusion of detailed provisions clarifying regulations for maritime mortgages was important for establishing a common method of financing the large capital expenditures required for new vessel purchases. In addition to mortgage regulations, the Jones Act extended the employment regulations that applied to US rail workers through the Interstate Commerce Act to seamen. These protections included stipulating how and when seamen were due their wages and giving them the right to claim injury against their ship's master. These provisions, along with increased citizenship requirements for crews in both the foreign and coastwise trade, also contributed to higher operating costs for US-flagged vessels.

The Jones Act and Foreign Trade

Congress has regulated coastwise and foreign trade in various ways since as early as 1789. Since 1817, coastwise trade between two US ports has almost exclusively been restricted to US-built ships, with few exceptions. However, trade between US and foreign ports has involved many more shifts in policy, largely because the US fleet has had to compete for that trade with foreign vessels (USSB 1922b). The major policy areas relevant to foreign trade are requirements on vessel eligibility, building subsidies, operating subsidies, and tonnage duties. The Jones Act introduced changes in all these areas. (17)

In 1789, Congress introduced a discriminatory port tonnage duty, which charged lower rates for domestically owned and built ships, a higher rate for domestically owned but foreign-built ships, and a much higher rate for foreign ships. These taxes were collected every time a ship entered a port, but a cap was placed on how much total tonnage tax a US ship would pay in a given year. Starting with Britain in 1815, the US negotiated with other countries to lower these tonnage duties for foreign vessels if the other nation lowered its in turn. In 1828, Congress authorized the president to determine which countries had sufficiently reciprocated by equalizing duties and to make ships carrying goods from their country of registry eligible to pay tonnage as if they were US ships (Johnson et al. 1922). The Jones Act ended the practice of reciprocity and restricted the development of any future arrangements that might impede the United States' ability to levy discriminating duties on imports or tonnages on foreign ships. (18)

Even before the Jones Act, with few exceptions, vessels flagged as US ships competing in the foreign trade had to be US owned, US built, and US crewed. (19) In addition, vessels that received government-building subsidies were eligible to participate in foreign trade but could compete in the coastwise trade for only a limited number of months. (20) These subsidies originally took the form of removing import duties on building materials (Johnson et al. 1922).

The most extensive exceptions to these registry requirements were made under the "free ship movement," which was authorized in 1912 as part of the Panama Canal Act. This provision admitted American-owned but foreign-built ships to the US registry so long as those ships were no more than five years old (Day 1920; USSB 1922b). The policy was driven by the expectation that "state of the art" ships would be needed in the event of a foreign conflict. When the US did enter World War I, the USSB continued to add foreign vessels to the US registry to meet domestic shipping shortages. (21) The Jones Act ended this practice in 1920.

During the war, the EFC directly contracted with domestic shipbuilding firms to purchase vessels. These ships were admitted into the US registry and sold after the war. The Jones Act not only stipulated that ships sold by the USSB and EFC would be eligible for both foreign and coastwise trades but also created new subsidy programs to encourage shipbuilding in the United States.

The Jones Act created two broad types of subsidies: one for shipbuilding and the other for ship operating. Shipbuilding incentives included the tax deferment program for war profits and EFC vessel sales (discussed above). They also involved the creation of a construction loan fund that would subsidize up to two-thirds of the cost of building new vessels until 1925. Finally, the Jones Act authorized a third tax deferment program intended to encourage new vessel builds by allowing owners to sell ships built before 1914 without sales tax so long as they used the savings to build a new ship before 1930. The impact of these short-term building subsidies was modest. Between 1922 and 1928, not one oceangoing vessel was built in a US yard, as shipping line operators failed to fulfill their obligations to use sales tax savings to order new ships (Gibson and Donovan 2000; Hutchins 1954). (22)

The US had also provided operating subsidies for US vessels engaged in foreign trade as many as 75 years before the Jones Act was passed. The most notable subsidies were for carrying US mail. Mail subsidies had been offered with limited success since 1845, (23) but in 1891 the program was changed from a preferred rate to a contract system. Under the new system the postmaster general could contract with US-owned and -built steamships deemed to be militarily useful under criteria to be laid out by the secretary of the Navy (Johnson et al. 1922). (24) In 1920, the Jones Act restricted mail carriage to US ships and offered a direct operating subsidy instead of relying on contracts. (25) The Jones Act also provided subsidized support for US shipping lines by offering preferred rail rates for imports and exports of goods carried on US ships.

The USSB also set up line services to establish markets for services between specific ports and then sold them to operators. The broad goal of these subsidy programs was to compensate US operators for providing services while keeping the cost to shippers as close to competitive market rates as possible.

The Jones Act and Coastwise Trade

The Jones Act is not the original source of US coastwise trade restrictions, although that is the policy context in which today it is most often referenced. Coastwise trade was first restricted to US-registered ships in 1817. To be eligible for coastwise trade, ships had to be US owned, US crewed, and US built. (26) This mandate was tested in the late 1880s, when a shipper took 250 kegs of nails on a foreign vessel from the United States to a foreign port in Europe and then returned to the US with the same cargo of nails also on a foreign vessel to avoid US cabotage restrictions. The Ninth Circuit Court ruled in United States v. 250 Kegs of Nails that taking the cargo from the US to Europe and back did break a "continuous voyage" between US ports and was therefore permitted.

Congress quickly responded in 1893 by introducing additional and revised language to address what constitutes coastwise trade in an amendment to the controlling statute (Gruendel 1980; McGeorge 1990). (27) Almost all the language defining coastwise trade policy included in Section 27 of the Jones Act was lifted from the language included in the legislation Congress authorized in 1893. The one major change incorporated in the Jones Act was an extension of these provisions to US territories such as Puerto Rico. (28)

The Jones Act also made a modest change to clarify US ownership and crew requirements in both the foreign and coastwise trades. (29) Although these modest changes in coastwise trade restrictions have proved to be among the most permanent of the provisions included in the Jones Act, especially for the territories to which the law extended those provisions, for the most part, the Jones Act simply represented a continuation of US coastwise policies already in place. (30)

Almost a Century Later: Takeaways to Inform Current Debate

Today, the USSB, the EFC, and the vast majority of subsidies and other programs established or reauthorized by the Jones Act of 1920 have been disestablished or replaced. The Merchant Marine Act of 1936 significantly reorganized the construction subsidies, operating subsidies, and tax deferment programs. The differential subsidies for construction introduced by the 1936 legislation, which replaced tax deferment programs created by the Jones Act, were discontinued by the Reagan administration in 1981 (Blume 2011; Klein 2015). Differential operating subsidies, also authorized in 1936, were discontinued by the second Bush administration in 2004 (Blume 2011). (31) These programs benefited ships participating in foreign trade. However, their removal has been criticized by supporters of the Jones Act as a major cause of US maritime decline after World War II (Klein 2015, 2017).

Since 1920, there have been no policy changes to the coastwise trade restrictions outlined in the Jones Act. However, there has been an interesting clarification about the scope of those laws through the definition of the term "merchandise." Since 1938, the US Customs and Border Protection (CBP) has held that foreign processing of a good breaks the continuity of the voyage. In a way that to some extent echoes the issues associated with the 250 Kegs of Nails case, according to the CBP, a shipper could take a product from a US port to a foreign port and then ship it back to the US, but only if the product was altered in some way at the foreign port.

This practice was subject to a legal challenge in 1978 by the US shipping industry in American Maritime Association v. Blumenthal. Amerada Hess planned to take oil from Alaska to St. Croix in the Virgin Islands (a port not covered by the Jones Act) on a vessel not eligible for coastwise trade, process the oil at a refinery in St. Croix, and then take the oil back to the Atlantic Coast also on vessels not eligible for coastwise trade. The District of Columbia Court held that the oil was sufficiently "physically altered" and therefore did not constitute a coastwise shipment of goods (McGeorge 1990). (32)

Today, the Maritime Administration (MARAD) and the Federal Maritime Commission have replaced the USSB. MARAD oversees many of the building and operating subsidies currently available to US shipbuilders and operators. For the most part, shipbuilding subsidy programs take the form of guaranteed loans for vessels or port construction, tax deferment programs, and a construction reserve fund. MARAD also oversees two operating subsidy programs: the Maritime Security Program and cargo preference requirements for shipments of goods (including defense shipments) on the government's behalf and for international food aid shipments (Mercier 2019; MARAD 2018). The Federal Maritime Commission regulates commerce, a role carried out by the USSB in the 1920s and early 1930s, mostly through posting conference rate schedules and regulating common carriers (Morse 1960). (33)

In 2018, the Department of Defense's military sealift command consisted of just 113 militarily useful commercial vessels. These included 99 privately owned vessels, which were enrolled in the Voluntary Intermodal Sealift Agreement (VISA). Just 32 of those 99 VISA ships are Jones Act--eligible vessels that compete in the domestic trade (GAO 2018). Most of the ships in the VISA program are involved in foreign trade, and 60 of those ships receive direct operating subsidies through the Maritime Security Program that amounted to $5 million per ship in 2018. (34) These vessels are also eligible to carry government shipments of food, Export-Import Bank cargo, or military cargo, under cargo preference mandates that provide higher rates to US shippers than would be charged in the competitive global market for international shipments (Mercier 2019).

What remains of the Jones Act consists largely of the restrictions on trade between domestic ports that were recodified in Section 27 of the act, and for which the legislation is now most widely known. (35) A broader understanding of the Jones Act in its current and historical context should help ensure that debates concerning maritime policy focus on its contemporary impacts on the US economy, the environment, and the nation's military readiness. In that context, as Grennes (2017) and others (e.g., Grabow et al. 2018) discuss, the Jones Act represents a fascinating case study of the efficacy or otherwise of government regulations and subsidy programs and the extent to which arguments about the national interest can serve to obfuscate patterns of rent-seeking by special interest groups that are often the primary reason for their existence.


We thank Azad Azani and Danielle Barden Jack for their excellent research assistance and James Coleman, Colin Grabow, Tom Grennes, August Hutchinson, Daniel Ikenson, Stephanie Mercier, and Stan Veuger for their helpful comments. All errors are our own.

About the Authors

Philip G. Hoxie is a research assistant at the American Enterprise Institute.

Vincent H. Smith is the director of the Agricultural Policy Studies and a visiting scholar at the American Enterprise Institute and an economics professor at Montana State University.

A1. Relevant Maritime Policy Changes and Events

Year   Event

1789   Tariff of 1789 passed by first Congress
1817   First discriminating tonnage duties on foreign ships enacted
1828   Congress passes reciprocity policy in foreign trade
1893   Congress amends the "continuous voyage" language to prohibit the
       United States v. 250 Kegs of Nails precedent
1912   Panama Canal Act allows "free ships" in foreign trade
1916   Shipping Act establishes the United States Shipping Board
1917   US enters World War I
1918   World War I ends
1920   Jones Act is passed
1928   Merchant Marine Act increases construction loan fund
1936   Merchant Marine Act passes, reorganizing subsidy programs and
       creating the construction differential subsidy and operating
       differential subsidy
1978   American Maritime Association v. Blumenthal confirms "physical
       alteration test"
1981   Reagan administration ends construction differential subsidy
1984   Shipping Act alters regulation of US conferences
2004   Bush administration ends operating differential subsidies

Source: Day (1920): Gruendel (1980): Hutchins (1954); Johnson et al.
(1922); and Morse (1960).


American Shipper. 2007. "Presidential Candidates Offer Support for Jones Act."

Blume, Kenneth J. 2011. Historical Dictionary of the U.S. Maritime Industry. Lanham, MD: Scarecrow Press.

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Frittelli, John F. 2003. "The Jones Act: An Overview." Congressional Research Service.

Gibson, Andrew, and Arthur Donovan. 2000. The Abandoned Ocean: A History of United States Maritime Policy. Columbia, SC: University of South Carolina Press.

Grabow, Colin, Inu Manak, and Daniel J. Ikenson. 2018. "The Jones Act: A Burden America Can No Longer Bear." Cato Institute.

Grennes, Thomas. 2017. "An Economic Analysis of the Jones Act." Mercatus Center at George Mason University.

Gruendel, Robert W. 1980. "The Weakening Grip of United States Cabotage Law." Fordham International Law Journal 4, no. 2391-408.

Harley, C. K. 1973. "On the Persistence of Old Techniques: The Case of North American Wooden Shipbuilding." Journal of Economic History-33, no. 2 (June):372-98.

--. 1988. "Ocean Freight Rates and Productivity, 1740-1913: The Primacy of Mechanical Invention Reaffirmed." Journal of Economic History 48, no. 4 (December): 851-76.

Heritage and Education Center. 2019. "World Fleet Statistics." Lloyd's Register Foundation.

Hutchins, John G. B. 1954. "The American Shipping Industry Since 1914." Business History Review 28, no. 2 (June): 105-27.

Johnson, Emory Richard, Thurman William Van Metre, Grover Gerhardt Huebner, and David Scott Hanchett. 1922. History of Domestic and Foreign Commerce of the United States. Washington, DC: Carnegie Institution of Washington.

Jones, Wesley L. 1921. "The Merchant Marine Act of 1920." Proceedings of the Academy of Political Science in the City of New York 9, no. 2 (February): 89-98.

Klein, Aaron. 2015. "Decline in U.S. Shipbuilding Industry: A Cautionary Tale of Foreign Subsidies Destroying U.S. Jobs." Eno Center for Transportation.

--. 2017. "What Everyone Got Wrong About the Jones Act, Hurricane Relief, and Puerto Rico." Brookings Institution. October 25.

McGeorge, Robert L. 1990. "United States Coastwise Trading Restrictions: A Comparison of Recent Customs Service Rulings with the Legislative Purpose of the Jones Act and the Demands of a Global Economy." Northwestern Journal of International Law and Business 11, no. 1 (Spring): 62-86.

Mercier, Stephanie. 2019. "Rent-Seeking Behavior in US International Food Aid Programs." AEI Economic Perspectives. January 31.

Mokyr, Joel. 1990. The Lever of Riches: Technological Creativity and Economic Progress. New York: Oxford University Press.

Morse, Clarence G. 1960. "A Study of American Merchant Marine Legislation." Law and Contemporary Problems, no. 25 (Winter): 57.

National Bureau of Economic Research. "Merchant Vessels Built and Documented, Tonnage for United States." Federal Reserve Bank of St. Louis.

UN Conference on Trade and Development. 2018. "Transport and Trade Facilitation: Rethinking Maritime Cabotage." January 1.

US Department of Transportation, US Maritime Administration. 2018. "A Short History of the Maritime Administration."

US Government Accountability Office. 2018. Maritime Seeurity: DOT Needs to Expeditiously Finalize the Required National Maritime Strategy for Sustaining U.S. -Flag Fleet.

USSB (United States Shipping Board). 1918. Second Annual Report of the United States Shipping Board. Washington, DC: Government Printing Office.

--. 1922a. Sixth Annual Report of the United States Shipping Board. Washington, DC : Government Printing Office.

--. 1922b. Report on the History of Shipping Discriminations and on Various Forms of Government Aid to Shipping. Washington, DC: Government Printing Office.

US Senate, Select Committee on Wages and Commodities. 1911. Investigation Relative to Wages and Prices of Commodities. Washington, DC: US Government Printing Office.

Yglesias, Matthew. 2017. "The Jones Act, the Obseure 1920 Shipping Regulation Strangling Puerto Rico, Explained." Vox.

Arthur C. Brooks, President; Michael R. Strain, Director of Economic Policy Studies; Stan Veuger, Editor, AEI Economic Perspectives

AFI Economic Perspectives is a publication of the American Enterprise Institute (AEI), a nonpartisan, not-for-profit, 501(c)(3) educational organization. The views expressed in AEI publications arc those of the authors. AEI does not take institutional positions on any issues.

By Philip G. Hoxie and Vincent H.Smith

Critics and supporters of the Jones Act frequently overlook how the 1920 law fits into the history of US maritime policy. Since 1789, Congress has restricted access to coastwise trade--the movement of goods between US ports--to US merchant marine and shipbuilding companies, with preferred duties on US ships, shipbuilding and operating subsidies, and bans on foreign competition. We examine how Congress designed the Jones Act to address the circumstances of the shipping industry in 1920 and where the act fits into the history of US shipping and shipbuilding policy.

(1) The Merchant Marine Act of 1920 is often referred to as the Jones Act because of its lead sponsor and advocate, Sen. Wesley Jones (R-WA) (American Shipper 2007).

(2) The Merchant Marine Act of 1920 expanded the coverage of US cabotage laws to include island possessions. Later amendments exempted the Virgin Islands and American Samoa, but Hawaii, Alaska, and Puerto Rico are still subject to US coastwise restrictions.

(3) Cabotage laws are not unique to the United States. For more information, see United Nations Conference on Trade and Development (2017).

(4) The USSB was dissolved in 1936, and its successor was then reorganized as the Maritime Administration and Federal Maritime Commission by President Harry Truman in 1950 (Morse i960).

(5) Day (1920) also argues that changes in foreign duties further contributed to Congress' perceived need to pass the Jones Act.

(6) As Mokyr (1990) points out, steamships did not evolve from one single new invention but rather from a combination of smaller inventions. This partially contributed to their slower adoption over sailing vessels. However, the benefits from steamships, and especially metal steamships, were derived from the fact that their efficiency rose as their size increased. The benefits from expanded cargo capacity and increased speed rose more rapidly than construction costs and crew wages. For a discussion on why the steamship resulted in greater economies of scale and productivity in shipping, see Mokyr (1990) and Harley (1988). For an assessment of why US wooden shipbuilding persisted into the late 19th and early 20th centuries, see Harley (1973).

(7) Commodities are important to consider because ships needed not only men but also stores of food and water for their voyages.

(8) The exact specifications for admission to the American registry concerning ownership, crew composition, and shipbuilding vary slightly over time and vary by the type of trade the ship was operating in. These variations are discussed in more detail below.

(9) The Jones Act specifies that all vessels, foreign or domestic, acquired and sold by the USSB are eligible to enter the US registry.

(10) Section 14 also detailed the rales of competition these conferences needed to follow. This section was expanded by Section 20 of the Jones Act to increase the USSB's enforcement powers.

(11) A shipyard can have several "ways," which refer to structures surrounding dry-docked ships used to facilitate construction. The number of ways is often used to measure a yard's production capacity, with only one ship capable of being built in one way at a time.

(12) Wooden ship construction was mostly halted after the war's end, but steel ship and port projects continued at the discretion of the USSB (Day 1920).

(13) The sale of property the USSB and EFC acquired was permitted to foreigners only if a sale to a US citizen was not possible, as long as the USSB approved the sale in a vote.

(14) Although these programs were voluntary, Hutchins (1954) reports that firms participated in the deferment program and missed their obligations rather than simply opting out of the programs.

(15) These programs are discussed later in the section "The Jones Act and Foreign Trade."

(16) This program was referred to as the "construction differential subsidy," and it is discussed below in the section "Almost a Century Later: Takeaways to Inform Current Debate."

(17) The Jones Act actually changed very little in coastwise trade, which we discuss in the following section.

(18) Although the Jones Act specifically ends the practice of reciprocity in trade agreements, the practice was already declining by the early 20th century. For a more detailed discussion, sec Johnson et al. (1922).

(19) Between 1789 and 1817, foreign ships making calls at US ports faced tonnage duties almost 10 times as high as duties for US ships, all but excluding them from the trade (Johnson et al. 1922).

(20) Originally, such vessels could participate in the coastwise trade for only two months in any given year, but in 1912 the Panama Canal Act lifted this restriction (Johnson et al. 1922).

(21) The USSB had acquired ships from China, France, Japan, the Netherlands, and other neutral countries before the end of 1918 (USSB 1918).

(22) ()To be clear, these obligations to acquire new vessels were made under a slightly different provision to the two tax-deferment programs described above. However, the limited scope of new vessel construction between 1920, 1928, and 1934 indicates that all the shipbuilding subsidy programs offered under the Jones Act were ineffective.

(23) The program was abandoned in 1858, and the postmaster general was instructed to secure carriage while giving preference to US ships. Revised versions of the operating subsidies for mail shipments were briefly reinstated before 1891. For a more complete discussion of 19th-century mail operation subsidies, see Johnson et al. (1922).

(24) For a detailed discussion of current operating subsidies for US shipping firms, see Mercier (2019).

(25) Gibson and Donovan (2000) have an interesting discussion of how the failed mail-subsidy program introduced in the Merchant Marine Act of 1928 influenced the subsidy designs of the differential subsidies introduced in the Merchant Marine Act of 1936.

(26) Technically, non-US crewed ships were not banned, but Section 5 of the March 1,1817, act stipulated that crews that could not prove to be at least 75 percent US citizens had to pay a dramatically higher tonnage tax.

(27) A few legal questions still arise as to what constitutes a continuous voyage under the Jones Act. Issues involving the nature of the products being shipped arc currently addressed using the standard of "meaningful change to the product" to determine if the Jones Act applies. See McGeorge (1990) for a more in-depth discussion of current rulings.

(28) The US Virgin Islands were not included in this expansion.

(29) All US-flagged vessels need to be US crewed, US built, and US owned. However, the Jones Act stipulates that foreign trade ships only need to meet a 50 percent ownership requirement, whereas coastwise ships need to meet a 75 percent ownership requirement.

(30) Many critics of the Jones Act have highlighted the laws' relevance to territories such as Puerto Rico that are negatively affected by US coastwise trade restrictions (Yglesias 2017).

(31) Gibson and Donovan (2000) have an in-depth discussion of the titles of the Merchant Marine Act of 1936 in which they outline the Operating Differential Subsidy, the Construction Differential Subsidy, the Capital Reserve Fund, the Title XI program, and the excess profit recapture scheme encompassed in this bill.

(32) Interestingly, the CBP has been relatively inconsistent after Blumenthal in applying the "physical alteration test" in its own quasi-judicial proceedings. It has held that processing Alaskan crab legs by shelling them in Canada does not create a "new and different product," subjecting the goods to coastwise laws, but that refilling oil in St. Croix does. For a more complete discussion, see McGeorge (1990).

(33) The largest program authorized by the 1936 act that is still used is the Title XI ship financing program. Many subsidy programs were removed in the 1980s and 1990s as well. Those changes arc not discussed here.

(34) The Maritime Security Program is an updated version of the operating subsidy authorized by the 1936 Merchant Marine Act.

(35) These restrictions, ironically, were largely insignificant to Sen. Jones. So much so that he did not even mention Section 27 in his speech about the new law to the Academy of Political Science in 1921 (Jones 1921).
Table 1. Total Sailing and Steamship Tonnages by National Registry for
Selected Years

Panel A: Sailing Tonnages
Country          1870         1900         1913-14      Change:

United States     3,171,432    1,295,305    1,026,544   -68%
United Kingdom    4,506,318    1,727,687      422,293   -91%
France              920,826      298,369      407,854   -56%
Germany             900,361      490,114      339,015   -62%
Norway            1,008,800      876,129      587,097   -42%
Total            10,507,737    4,687,604    2,782,803   -74%

Panel B: Steam Tonnages
Country          1870         1900         1913-14      Change:

United States    1,075,095     1,454,966    4,302,294      300%
United Kingdom   1,111,375    11,513,759   18,273,944    1,544%
France             151,415     1,052,193    1,793,310    1,084%
Germany             81,994     2,159,919    4,743,046    5,685%
Norway              13,715       764,683    1,870,793   13,540%
Total            2,433,594    16,945,520   30,983,387    1,173%

Note: These data show total tonnages for the national registries of
France, Germany, Norway, the United Kingdom, and the Unitec States in
1870,1900, and 1913-14. The final column shows percentage changes in
Source: Heritage and Education Center (2019).

Table 2. Monthly Cost of Manning and Operating a Fully Rigged Ship by
National Registry, 1870-1949

Flag             C-3 Class Cargo Liner     Liberty Tramp
                 1870-1900       1949      1949

United States    $1,100-$1,250   $21,004   $15,321
United Kingdom     $650-$800      $6,730    $5,312
Germany            $600-$750
France             $850-$1,000
Norway                            $6,454    $5,207
Netherlands                       $7,676    $6,482
Italy                             $5,450    $4,509
Greece                            $8,357    $6,897

Note: These data show comparative monthly costs of operation for
similar vessels across countries. All figures are in nominal US dollars
and have not been inflation adjusted. Values for 1870-1900 are given as
a range.
Source: Hutchins (1954).
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Author:Hoxie, Philip G.; Smith, Vincent H.
Publication:AEI Paper & Studies
Geographic Code:4EUUK
Date:Jun 1, 2019
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