GAO reports on impacts of Jones Act on Puerto Rico trade

MARCH 21, 2013 — The GAO has issued a report that should rekindle the debate over the benefits, or otherwise, of the Jones Act. Entitled “Puerto Rico: Characteristics of the Island’s Maritime Trade and Potential Effects of Modifying the Jones Act,” the study says that Jones Act requirements have resulted in a discrete shipping market between Puerto Rico and the United States. Most of the cargo shipped between the United States and Puerto Rico is carried by four Jones Act carriers that provide dedicated, scheduled weekly service using containerships and container barges. Although some vessels are operating beyond their expected useful service life, many have been reconstructed or refurbished.

Jones Act dry and liquid bulkcargo vessels also operate in the market, although some shippers report that qualified bulk-cargo vessels may not always be available to meet their needs.

Cargo moving between Puerto Rico and foreign destinations is carried by numerous foreign-flag vessels, often with greater capacity, and typically as part of longer global trade routes.

Freight rates are determined by a number of factors, including the supply of vessels and consumer demand in the market, as well as costs that carriers face to operate, some of which (e.g., crew costs) are affected by Jones Act requirements.

The average freight rates of the four major Jones Act carriers in this market were lower in 2010 than they were in 2006, which was the onset of the recent recession in Puerto Rico that has contributed to decreases in demand. Foreign-flag carriers serving Puerto Rico from foreign ports operate under different rules, regulations, and supply and demand conditions and generally have lower costs to operate than Jones Act carriers have. Shippers doing business in Puerto Rico that GAO contacted reported that the freight rates are often–although not always–lower for foreign carriers going to and from Puerto Rico and foreign locations than the rates shippers pay to ship similar cargo to and from the United States, despite longer distances.

However, says GAO, “data were not available to allow us to validate the examples given or verify the extent to which this difference occurred. According to these shippers, lower rates, as well as the limited availability of qualified vessels in some cases, can lead companies to source products from foreign countries rather than the United States.”

The effects of modifying the application of the Jones Act for Puerto Rico are highly uncertain, says GAO, and various trade-offs could materialize depending on how the Act is modified. Under a full exemption from the Act, the rules and requirements that would apply to all carriers would need to be determined. While proponents of this change expect increased competition and greater availability of vessels to suit shippers’ needs, it is also possible that the reliability and other beneficial aspects of the current service could be affected. Furthermore, because of cost advantages, unrestricted competition from foreign-flag vessels could result in the disappearance of most U.S.-flag vessels in this trade, having a negative impact on the U.S. merchant marine and the shipyard industrial base that the Act was meant to protect.

Instead of a full exemption, some stakeholders advocate an exemption from the U.S.-build requirement for vessels. According to proponents of this change, the availability of lower-cost, foreign-built vessels could encourage existing carriers to recapitalize their aging fleets (although one existing carrier has recently ordered two new U.S.-built vessels for this trade), and could encourage new carriers to enter the market. However, as with a full exemption, this partial exemption could also reduce or eliminate existing and future shipbuilding orders for vessels to be used in the Puerto Rico trade, having a negative impact on the shipyard industrial base the Act was meant to support.

The GAO reports main conclusions are:

The Jones Act was enacted nearly a century ago to help promote a viable maritime and shipbuilding industry that would, among other things, provide transportation for the nation’s maritime commerce and be available to serve the nation in times of war and national emergency. The possible effects of the Act on Puerto Rico as well as U.S. businesses are manyfold. The Act may result in higher freight rates—particularly for certain goods—than would be the case if service by foreign carriers were allowed. Nevertheless, at the same time, the law has helped to ensure reliable, regular service between the United States and Puerto Rico— service that is important to the Puerto Rican economy. Because of freight rate differentials or the lack of availability of Jones Act vessels for certain products, the Act may cause businesses in Puerto Rico to import goods from foreign locations when the same goods are readily available from U.S. providers. However, it is not possible to measure the extent to which rates in this trade are higher than they otherwise would be because the extent to which rules and regulations that would apply to international carriers’ vessels that may serve this trade are not known, and so many factors influence freight rates and product prices that the independent effect and associated economic costs of the Jones Act cannot be determined. Finally, the original goal of the Act remains important to military preparedness and to the shipbuilding and maritime industries, but understanding the full extent and distribution of the costs that underlie these benefits is elusive. This circumstance results in a question as to whether the status quo presents the most cost effective way to achieve the goals expressed in the Jones Act. Ultimately, addressing these issues would require policymakers to balance complex policy trade-offs with the recognition that precise, verifiable estimates of the effects of the Act, or its modification, are not available.

AMP VIEW

The American Maritime Partnership says that the GAO study shows that the U.S. domestic container shipping fleet has provided regular, reliable service while offering significant rate reductions.

“GAO disproved charges that the Jones Act raises prices for consumers in Puerto Rico,” AMP said in a statement shortly after the release of the repor. “GAO specifically said, ‘[S]o many factors influence freight rates and product prices that the independent effect and associated economic costs of the Jones Act cannot be determined.'”

“As such, GAO’s report confirmed that previous estimates of the so-called ‘cost’ of the Jones Act are not verifiable and cannot be proven.  The GAO report demonstrates that many of the most pointed criticisms of the Jones Act came from individuals or groups that did not offer data to back up their concerns.  In many cases GAO cited allegations against the American fleet despite admitting that the claims could not be validated or verified.”

AMP said the GAO study is important because it is the rare Jones Act study that is detailed, comprehensive, and prepared by an independent government agency.  AMP thanked Puerto Rico Delegate Pedro R. Pierluisi, who requested the study and released it today.

“In fact, container shipping rates in Puerto Rico for American companies dropped as much as 17 percent between 2006 and 2010, according to the study,” said AMP, noting that the vast majority of cargo to and from Puerto Rico moves by container. “GAO said there is no guarantee that shipping rates would go down further if the Jones Act was changed.”

Most satisfying, AMP said, was the finding that the American domestic fleet had provided reliable service in Puerto Rico.

“The GAO found that American domestic shipping companies have provided regular and reliable service that has been extremely beneficial to the economy in Puerto Rico and that changes to the Jones Act could result in a reduction in service to the Commonwealth,” AMP said.  “GAO said ‘it is possible that the reliability and other beneficial aspects of the current service could be affected’ if the law is changed.”

AMP also said the GAO report highlighted the national security benefits of the Jones Act.

“In fact, the study quoted the Defense Department and the U.S. Maritime Administration as saying the contributions of American commercial shipyards is more important than ever as the number of new military vessels being constructed is reduced by federal budget cuts,” AMP said. “American ship construction for Puerto Rico is important for national security because it ‘help[s shipbuilders] sustain their operations, as well as help them to retain a skilled workforce and supplier base. Absent new orders, that workforce could be put at risk,'” GAO said.

AMP was not entirely happy with everything in the study, its main criticisms were reserved for the GAO’s analysis of LNG and other bulk cargos in Puerto Rico.

“In contrast to its analysis of the container shipping market, GAO’s review of the LNG and other bulk shipping markets is anecdotal, incomplete, misleading, and one-sided,” AMP said.  “In fact, there are already fully compliant American vessels available to transport LNG to Puerto Rico and, of course, others can be built in plenty of time. In addition there are special provisions of law that allow Puerto Rico to move LNG into the Commonwealth on foreign vessels from the U.S., and of course, LNG can be imported into Puerto Rico from overseas any time.  If there is sufficient demand for LNG or other bulk cargoes, the American maritime industry will meet that demand, just as it has provided regular, reliable and cost-effective service for decades in other Puerto Rico shipping trades where a demand exists.”

Read the entire GAO report HERE