05 August 2014

The Jones Act and the Energy Price Hawaii Pays for Protectionism

By Grassroot Institute @ 7:12 PM :: 617 Views :: EnergyJones ActCost of Living

by Gaetano Venezia, Grassroot Institute

The US is involved in two secretive trade negotiations: the Trans-Pacific Partnership (TPP) and the Transatlantic Trade and Investment Partnership (TTIP). Both aim to provide new market access, expand existing markets, and provide regulatory transparency and consistency among European and Asia-Pacific markets.

Unfortunately, multiple sources close to the negotiations say the US flatly refuses to include Jones Act reform in either round of talks.
Ironically, the Jones Act, more formally known as the Merchant Marine Act of 1920, harms the US far more than any other country.

The Jones Act requires that ships carrying cargo between US ports be 1) built in the US, 2) crewed largely by American citizens 3) owned largely by Americans, and 4) be registered US vessels. With up to 90% of US goods transported by sea at some point in their production cycle,1 the Jones Act keeps prices artificially high for consumers, especially in the non-contiguous states and territories. The Jones Act costs US consumers and businesses “at least $2.8 billion [$4.37 billion in 2014 inflation-adjusted dollars] annually and its removal would lower domestic shipping prices by 26%,” according to a 1995 report from the U.S. International Trade Commission.2 More recent research by Justin Lewis of Tulane University has shown that “a full repeal of the Jones Act would yield economic benefits of up to $682 million per year” with domestic coastal shipping “approximately 61% cheaper.”3

Hawaii suffers disproportionately from these costs and missed opportunities thanks to the state’s dependence on imported products and limited competition among ocean carriers. Hawaii's cost of living is estimated to be anywhere from 16% to 85% higher than the rest of the US.4 One big factor in this disparity is energy prices which reverberate through every sector of the economy. A recent Heritage Foundation article found that, “electricity prices in Hawaii are nearly double those in the state with the next highest prices because Hawaii generates 75 percent of its electricity from petroleum and must rely on Jones Act vessels for all domestic oil shipments.” 5

Conversion of Hawaii’s electric generation to liquid natural gas (LNG), a much cheaper and cleaner alternative, is limited because no US shipbuilder has the capacity to build LNG bulk-transport ships. Instead, HECO and Hawai'i Gas import LNG in 40-foot containers—a much more expensive proposition. Eliminating the US-build requirement would allow purchase or lease of a foreign-built bulk LNG carrier for Hawaii, speeding LNG conversion and sharply lowering Hawaii’s cost of electricity and natural gas.
Jones Act restrictions don't only impose high costs, they can shut businesses down completely.  In 2013, Sunoco oil refineries in the Northeast weren’t able to order shipments of US oil due to the high cost and limited availability of Jones Act tankers. Expensive oil from abroad rendered them unprofitable and forced closure of the refineries.6 Ironically, the Sunoco refinery in Marcus Hook, PA is being converted to a natural gas export terminal. Without Jones Act bulk LNG carriers to serve US ports, foreign consumers and businesses will benefit from the cheap American natural gas.7

Perhaps foreign competition could make American shipbuilders and ocean carriers cheaper and more efficient as it has done for the automobile industry. Ever since foreign cars entered the US market, American automakers have been challenged to create more efficient and better quality vehicles. Despite this ongoing challenge, the auto industry remains the largest American employer in manufacturing and a main economic driver.8 By meeting this challenge, American automobile companies have also become internationally competitive. In 2013 GM sold more cars in China than in the US, 3.2 million as compared to 2.8 million.9

Because of these great detriments of Jones Act protectionism, domestic and foreign trading partners have challenged US support for a policy that runs counter to its commitment to free trade.10 But the TTIP and TPP will not be the turning point for Jones Act reform unless the Obama administration changes its stance.

Regardless, it’s clear from the economic data and examples of open trade that protectionist policies like the Jones Act have extremely high domestic costs. Hawaii, Alaska, Puerto Rico, and the US energy industry would be prime beneficiaries of a Jones Act modification.

Gaetano Venezia is a research intern at the Grassroot Institute of Hawai‘i pursuing a degree in philosophy at the University of New Orleans.

2 Data from US International Trade Commission(5-4). Quote from Malia Blom Hill
4 16%—U.S. Commerce Department’s Bureau of Economic Analysis, 85%—Economic Research Institute. See Huffington Post