The United States has had an industrial policy aimed at promoting the domestic shipbuilding industry since the passage of the Merchant Marine Act of 1920, commonly known as the Jones Act. Whatever the arguments for passing this bill a century ago, it has proven disastrous for the U.S. maritime industry over time and continues to impose significant costs on other parts of the U.S. economy. Colin Grabow makes the argument in „Steroid Protectionism: The Jones Act Scandal.'' (Milken Institute Review, Q2 2024, pages 44-53).
The Jones Act „requires that vessels engaged in domestic transportation be registered and constructed in the United States, crewed, and at least 75 percent owned by U.S. nationals.“ It goes back to an 1817 law that „prohibited the carriage of goods within the United States by foreign vessels.“
The political problem in 1920 was that U.S. shipbuilding and shipping costs were protected from foreign competition and were no longer cost competitive. In terms of production costs, transportation by U.S.-owned companies was also not cost-competitive. Grabow cites the example of a 19th-century company that shipped goods from New York to Belgium to California. It was cheaper to pay for two „overseas“ trips with a non-US company than to pay a US shipping company to go directly from New York. To California.
The gap in U.S. shipbuilding costs continues to widen.Current estimates suggest that „a large cargo ship built in a U.S. shipyard today will cost at least 300 percent Higher than competitive world price. Regarding operating costs, Grabow said: 2018 Report from the Government Accountability Board “According to U.S. Maritime Administration (MARAD) officials, the additional cost of operating a U.S.-flagged vessel compared to a foreign-flagged vessel has increased from approximately $4.8 million annually in 2009 and 2010 to approximately $620 million annually. from $10,000 to $6.5 million,” making it difficult for such vessels to remain economically viable. ”
The results of America's attempts at pro-shipbuilding and pro-American shipping industry policies have been disastrous. Here we will introduce some of them.
1) The U.S. shipbuilding industry no longer needed to respond to international competition and became powerless in the world market. This is a table prepared by the Congressional Research Service regarding large ocean-going ships under construction (“U.S. Commercial Shipbuilding in a Global Context” November 15, 2023).
CRS reports:
During World War I and World War II, the United States built thousands of cargo ships. These were sold after the war to merchant ships, including foreign buyers, but were soon replaced by more efficient ships built in foreign shipyards. In the 1970s, U.S. shipyards built about 5% of the world's tonnage, which equated to 15 to 25 new ships per year. In the 1980s, this was reduced to about five ships per year. This is the current U.S. shipbuilding rate. …The domestic construction requirements of the Jones Act likely underpin the entire construction of U.S. commercial ships. Although none of the U.S.-flagged international trade fleet is built domestically, shipbuilders may be able to take advantage of both the loan guarantees and tax protection programs mentioned above. For decades, large U.S.-built ships have not been purchased overseas because they can cost more than four times the world price.
In fact, the U.S. military relies on Chinese-made ships to support its warships. “Three of the 10 commercial oil tankers selected to transport fuel to the Department of Defense as part of the newly established Tanker Security Fleet are Chinese-made. Seven of the 12 recently built ships in the fleet are Chinese-built.
2) High Jones Act shipping costs in the US naturally result in higher costs for places like Hawaii, Alaska, and Puerto Rico. A strange result occurs. Grabow provides many examples. Puerto Rico obtains liquefied natural gas from Nigeria because there are no Jones Act-compliant U.S. vessels to transport natural gas within the United States. U.S. timber producers must use expensive Jones Act ships to ship their products to U.S. destinations, whereas Canadian timber producers have access to cheaper international shipping companies. They complain that it is disadvantageous to Canadian companies.
3) One might think that a natural transportation advantage for the United States would be to take advantage of maritime transportation via oceans on both sides. But higher U.S. transportation costs under the Jones Act mean more trucks and freight trains, which means more traffic congestion, highway repairs, and more pollution.
4) Various special uses of ships are more expensive. For example, if you want offshore wind to be a significant part of the future of U.S. power generation, you should know that building in Jones Act-compliant vessels will be significantly more expensive. Even basic tasks such as dredging U.S. ports and rivers were difficult because the Jones Act (along with other laws at the time) closed off suppliers of high-quality, low-cost dredgers manufactured in other countries. It is time consuming and expensive.
Supporters of industrial policy tend to dismiss examples like the Jones Act by saying, „Sure, that's a stupid way to do industrial policy, but my plan is a smart way to do it.'' „Yes, the Jones Act is a problem, but the way to solve it is to significantly increase government subsidies to expand U.S. shipbuilding.“ This is a classic example of special interest law that benefits one group but imposes significant diversification costs. The problems with the Jones Act have been well known for decades, and nothing has changed. Any proposal for industrial policy faces similar political and economic dynamics.
The challenge for proponents of industrial policy, then, is not simply to pick a few attractive industries and hand out government favors like Halloween candy, but how to measure the success or failure of these subsidies. It seems to me that the point is to specify in advance what you are going to do. There will likely be a set of targets that must be met over time, or the subsidy will be terminated. For example, in South Korea, which is often cited as an example of successful industrial policy, government subsidies for specific industries were often conditional on the industry increasing export sales at prevailing prices in the international market. When industrial policy goes awry, as in the case of the Jones Act, the costs are widespread across a variety of related industries.