Jones Act

A U.S. federal law aimed at revitalizing the US shipping industry after World War I

What is the Jones Act?

The Jones Act is a U.S. federal law aimed at revitalizing the U.S. shipping industry after World War I. It regulates maritime commerce in the country and is still in effect today. It is also called Section 27 of the Merchant Marine Act of 1920.

 

Jones Act

 

Summary

  • The Jones Act aimed at revitalizing the U.S. shipping industry after World War I.
  • The underlying goals of the Jones Act are to encourage the development of a national fleet, support national defense, strengthen the American maritime industry, and fuel economic growth.
  • It can be temporarily waived in the interest of national defense if there is a national emergency or upon the request of the Secretary of Defense.

 

Explaining the Jones Act

According to the Transportation Institute, the Jones Act requires that goods shipped at the U.S. port will be transported on ships that are:

  1. Owned by U.S. companies, of which are controlled by U.S. citizens (>75% US ownership);
  2. Crewed by the majority of U.S. citizens;
  3. Built (or rebuilt) in the U.S.; and
  4. Registered in the U.S.

 

The Jones Act also acts as an employee-friendly law, providing seamen the right to seek compensation from crewmates in the event of injury caused by negligence.

Ultimately, the Jones Act is seen as protectionist legislation aimed at helping the U.S. build and maintain a sizable American merchant marine. Such protectionist legislation is not unique to the country.

In a survey conducted by the Maritime Administration (an agency of the Department of Transportation), 47 nations passed laws that restrict foreign access to domestic trade.

 

Underlying Goals of the Jones Act

The underlying goals of the Jones Act are to:

 

1. Encourage the development of a national fleet and support national defense

During a war or national emergency, American ships can provide capacity and manpower to support U.S. military operations.

The construction of American ships requires the establishment of infrastructure (equipment, systems, repair yards, etc.), all of which can be allocated to the U.S. military during times of need.

Prior to the Jones Act, during World War I, the U.S. government struggled to build ships to support the war effort. It resulted in the loss of hundreds of millions of dollars in hastily building ships to meet demand.

 

2. Strengthen the American maritime industry and fuel economic growth

The Jones Act helps the U.S. maintain a strong maritime industry and fuels innovation in shipbuilding and waterborne transportation.

According to the American Maritime Partnership, the Jones Act supports 650,000 American jobs and generates $150 billion in economic benefits annually.

 

Practical Example

Question: A container ship made in China plans to sail from China to the U.S. to provide support to Puerto Ricans who were affected by Hurricane Maria. The ship plans to arrive in New York, pick up bulk cargo, and transport it to Puerto Rico.

Under the Jones Act, can the container ship do the above?

Answer: Given that the container ship is made in China, it would not be able to pick up bulk cargo in New York and transport it to Puerto Rico.

 

Criticism of the Jones Act

With increasing globalization, critics have called to end the Jones Act. According to the Mercatus Center that published the Economic Analysis of the Jones Act, “benefits to national security has decreased, and costs to consumers have increased. Further, these costs are unevenly distributed – they have been borne disproportionately by the noncontiguous regions of Hawaii, Alaska, Puerto Rico, and Guam.”

Ultimately, it is believed that shelving the maritime legislation will decrease shipping costs and pass cost savings on to American consumers.

According to numerous studies that discuss the economic costs associated with the Jones Act:

  • Transport costs for a ship subject to the Jones Act are twice as high versus a ship that is not subject to the Jones Act,
  • Due to the requirements of an American crew, operating costs for a ship subject to the Jones Act are more than 2.7 times higher, and
  • The average price of a ship built in the US is two to four times higher than the average price of a ship built outside of the country.

Puerto Rico stands out as a heavy loser from the Jones Act, as shipping goods from and to the US mainland is significantly more expensive than other states.

Based on data from economic consulting firm John Dunham and Associates, the average shipping cost differential between a US carrier and a foreign carrier for bulk cargo and containerized freight is 62% and 57%, respectively. The lost economic activity for Puerto Rico, according to the same report, is US$1.2 billion.

Furthermore, the Jones Act drives up the cost of living for those in Puerto Rico significantly. Ultimately, it is seen as an inhibitor of economic growth for Puerto Rico.

 

Can the Jones Act be Waived?

The Jones Act can be temporarily waived in the interest of national defense if there is a national emergency or upon the request of the Secretary of Defense.

In practice, it’s been temporarily waived during natural disasters. When Hurricane Maria devastated Puerto Rico in 2017, U.S. President Trump authorized the Jones Act to be waived.

 

More Resources

CFI is the official provider of the global Commercial Banking & Credit Analyst (CBCA)™ certification program, designed to help anyone become a world-class financial analyst. To keep advancing your career, the additional resources below will be useful:

  • Delivered Ex Ship (DES)
  • Valued Marine Policy
  • Voyage Policy
  • Freight Expense

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