Rebuilding Poseidon’s Sidearm

War creates chaos, unleashing unpredictable and unintended consequences. The U.S. shipping industry found itself ensnared by such an upheaval when World War I broke out. 

At the time, most of the country’s imports and exports were moved using foreign vessels. When European ships were suddenly diverted en masse in response to the war, American goods were left stranded on the docks. 

There weren’t enough ships to move the stuff and the price of goods suddenly spiked, over 10x more in some cases. Then, the Navy realized it didn’t have enough ships to transport troops to Europe as the U.S. was compelled into active military involvement. 

The government and the military scrambled to increase the fleet size through a combination of mass emergency construction and requisitioning (i.e., seizing by force) private vessels, both foreign and domestic. 

Between 1914 and 1920, U.S. Merchant Marine capacity expanded from 2 million gross tons to 12 million. Despite expanding at such a dizzying rate, the military still required the help of Allied merchant vessels to transport over half of its military personnel. 

In the aftermath of the war, policy makers analyzed it for lessons. They decided that America should never again allow itself to be caught in a situation where it was dependent on so much foreign naval capacity in times of crisis. 

This would require fostering a robust pool of American sailors, trained and ready to assist in times of national emergency. It would also require developing a mighty domestic shipbuilding industry. 

Congress, in its infinite wisdom, chose to reinforce protections for the domestic ship building industry against foreign competition in order to achieve those goals.

Thus the Jones Act (named after its primary sponsor, Senator Wesley Jones) was born and passed in 1920 as an “earnest effort to lay the foundation of a policy that will build up and maintain adequate American merchant marine in competition with the shipping of the world.”

If the weaponized ships of the U.S. Navy represented Poseidon’s deadly trident, the Merchant Marine, both the commercial fleet and its sailor crews, represented an invaluable sidearm. The Jones Act was meant to strengthen that sidearm to make sure America’s naval capacity was never vulnerable to crisis.

The Jones Act

The law sought to force cargo shippers in the U.S. to use American ships and American sailors to move their goods between American ports, leveraging commercial demand to augment and sustain domestic ship building and ship operating capacity (particularly relating to sea-faring vessels). 

That would ensure that the domestic logistics system could remain functional during times of crisis and the domestic fleet, personnel, and building/repair capacity could be diverted to supplement a war effort as needed. 

The feature that the law is most associated with is the requirement that any ship carrying cargo between two U.S. ports must be built in the U.S., crewed by Americans, fly the U.S. flag, and be majority-owned by Americans.

However, a century after its passing, the condition of the American commercial fleet seems anything but robust and mighty. Of the roughly 40,000 merchant vessels sailing the oceans for international trade, only about 200 are American and most of those are well past their useful life. 

The U.S. still depends on foreign ships for most of its imports and exports, just like it did pre-WWI. The number of active merchant mariners may fall well short of what the U.S. would require in a conflict. 

Finally, the capacity for building large sea-faring vessels has dwindled: nearly 60 shipyards have closed since the 1920s, while only 15 remain active today.

Meanwhile, the competition has caught up. China’s naval fleet has surpassed the U.S. in size and its shipbuilding capacity is miles ahead of the U.S. 

The domestic cargo shippers who were supposed to be buying ships and their services have moved their freight to truck and rail instead. There is still an active water-based freight infrastructure, but it has focused on using tugboats and barges which are smaller in size, require smaller crews, and are (understandably) cheaper. 

The shipbuilding industry has shifted to building these types of vessels instead of the larger and more expensive sea-faring vessels that the framers of the Jones Act had envisioned. 

Criticism of the Jones Act has been growing in recent years with critics pointing out the anemic state of the U.S. fleet as a sign the Jones Act has failed to achieve its mandate. 

The Jones Act fails to achieve its vision because it  inadvertently promotes inefficiency. Its protectionism has allowed domestic ship building and ship operating sectors to avoid making the investments necessary to compete with foreign peers. 

Other logistics providers (subject to less stringent restrictions) have become more competitive over time and have taken more market share.

In the words of the Competitive Enterprise Institute– the Jones Act is protecting the domestic shipbuilding industry to death.

Not only has this undermined the nation’s shipbuilding capacity, the growth of trucking and rail relative to ships has huge economic consequences that directly impact all of our lives and finances. 

Transporting goods by water is significantly cheaper than transporting them by land; shifting a greater percentage of our shipping to the water could lower the costs of almost everything that we buy. 

Ships also emit less greenhouse gas per ton of cargo. Not to mention traffic – more trucks on the road means more congestion during your daily commutes. And it also means faster wear and tear on our roads - more potholes, more frequent trips to the auto repair shop.

Shifting more cargo onto ships could reduce congestion on the streets that we drive and reduce the amount of money spent annually on fixing worn out roads, releasing those funds to be spent elsewhere.

Why not just repeal the Act?

Today we have a functional domestic logistics system that is relatively immune to foreign control. However, we probably don’t have enough American deep-sea vessels to sustain our import/export flows if foreign vessels disappear (just like during WWI). Moreover, the domestic logistics system is geared towards rail and truck, placing an extra burden on our whole economy. 

Of course, we cannot sacrifice national security at the altar of economic growth; that would be putting the cart before the horse. 

If we are to realize the dream of the Jones Act - a vibrant and robust domestic industry for building and operating large, sea-faring commercial ships - the fundamental question concerning policy makers is: how to reduce the cost of building and operating ships in America without becoming dependent on foreign-controlled entities in a way that would undermine our national security interests?

Some of the Jones Act’s staunchest critics argue that the law is totally outdated and needs to simply be repealed. The simplicity of this proposal makes it attractive. Repeal the restrictions, force domestic shipbuilders and operators to compete with foreign firms. Those who cannot adapt will die, others will survive, and thrive as customers flock to them for their lower prices. 

The Organisation for Economic Cooperation and Development (OECD) released a paper in 2019 claiming that simply removing these restrictions could add $100s of billions to economic output over time.

However, such proposals may be overestimating our commercial shipbuilders ability to adjust their cost structures fast enough to effectively compete. 

The Philly Shipyard, for example, a commercial shipbuilder of large vessels based out of Philadelphia, posted a net loss of $14 million in its most recent quarter despite having an active order book worth nearly $1.9 billion. 

There is no guarantee that exposure to foreign competition won’t simply deliver a death blow to builders of large sea-faring vessels. 

Foreign ship operators can move cargo at a fraction of the cost of U.S. operators. If they are allowed to move goods between U.S. ports, they may start to steal significant market share from truck and rail operators. 

Over time, this could recreate the problem from WWI that inspired the Jones Act in the first place. Moreover, U.S. regulators would have less oversight and influence over what goes into foreign-built ships and how they are made. 

So we are confronted with a pendulum-like problem. 

Protecting our domestic shipbuilding and operating sector from foreign competition secures the logistics system from foreign influence, but it effectively kills our ability to efficiently build large, sea-faring ships and makes the overall logistics system more expensive than it needs to be. 

Remove those protections, and the pendulum swings the other way, unleashing significant economic growth but potentially rendering our domestic logistics system more vulnerable to foreign influence and foreign interests. 

Essential and valuable

To solve this dilemma, we need a more granular understanding of our national priorities. 

• Ensuring the domestic logistics system remains functional in war time – ESSENTIAL
• Ensuring we have a sufficiently robust naval fleet, along with ability to build and repair military vessels during crises – ESSENTIAL
• Ensuring we have sufficient skilled and prepared naval personnel for conflict time – ESSENTIAL
• Having the option to tap into the commercial fleet, commercial shipbuilding and repair infrastructure, and the merchant marine labor pool to augment naval capacity during conflicts – HIGHLY VALUABLE, BUT SUPPLEMENTAL
• Having the most efficient domestic logistics system possible to support maximum economic prosperity – HIGHLY VALUABLE, BUT MUST BE BALANCED AGAINST OTHER CONCERNS LIKE ENVIRONMENT AND NATIONAL SECURITY

We should not depend on the vagaries of the free market to secure our essential national interests. If our essential infrastructure is lacking, it is the responsibility of the government and military to address that shortcoming. 

The military should ensure that the U.S. has a sufficiently powerful naval fleet to handle any likely conflict scenario. Congress should provide it with the budget necessary to contract out the work as needed. Finally, the U.S. Navy should also be responsible for ensuring there are sufficient, trained naval personnel to respond to any conflict situation. 

We should never be dependent on commercial shipping routes to keep our war-time sailors’ skills sharp. The navy should bear the whole responsibility for ensuring sufficient naval personnel are trained and prepared at all times.

It is also the job of our government and national security apparatus to ensure the domestic logistics system is resilient to crises. If a repeal of the Jones Act would make that system more vulnerable to foreign shocks, we should think twice before pulling the trigger.

And while we shouldn’t be dependent on the commercial sector for securing our essential needs, it is worth thinking about how to best support it because the potential benefits are immense. If it were possible to somehow reduce the cost of building and operating large ships in America, without repealing the Jones Act, we might be able to enjoy some of those benefits.

Policy proposal

Foreign shipbuilders are able to build ships at a fraction of the cost of their American counterparts. 

The technology and know-how for building ships more efficiently is there. We just need to find a way to push American shipbuilders to make the necessary changes to realize some of those benefits.

The government can use its considerable buying power to catalyze aggressive efficiency seeking in the private large vessel shipbuilding sector. The government and military can simulate the pressure of foreign competition without actually taking market share away from the domestic sector.

To realize this possibility, I propose a systematic buying process that sets aggressive efficiency targets, rewarding commercial builders for achieving them and punishing non-achievement. 

The government can create a programmatic government buyer of non-essential large, sea-faring vessels. These vessels could include navy training ships, LNG tankers, large container ships, etc. These ships would not be essential for securing national interests, but they would be nice-to-haves.

Different branches of the government, like the military, Department of Commerce, and Department of Energy can allocate funds to this buyer to procure vessels. The buyer could purchase the ships outright or provide financial support to a private buyer. However, the money would come with specific and strict conditions. 

This new government entity would study and consult foreign shipbuilders to set a reasonable ceiling for cost. 

Commercial builders would have to submit bids below the ceiling in order to be considered for the contract. If the builder can deliver the vessel at or under cost without experiencing significant financial loss, it will receive substantial tax credits, or another kind of financial benefit that better incentivizes the desired behavior. 

If it overruns the costs in its contract, it will be punished in some way. For example, relatively minor cost overruns might result in exclusion from bidding on the next contract. Major cost overruns may involve cancellation and refunding payments.

The government can assist the commercial builder in making the necessary changes and investments to become more efficient. 

If this program can catalyze greater cost efficiency in the domestic sector, it could spur organic commercial demand for large vessels, kicking off the cycle of benefits envisioned in the Jones Act (without needing to repeal the act).

Spurring organic demand is the ultimate goal, which is why a sunset clause should be embedded in the charter of the new government entity. 

It should have a fixed timeframe, no more than 10 years, in which to demonstrate its ability to generate significant and sustainable productivity improvements in the commercial shipbuilding sector. 

After 10 years, Congress will have the opportunity to review its performance and determine if its services are still needed. 

U.S. shipbuilders have become inefficient and fragile, in part because the government, like an overprotective parent extinguishing environmental threats, has “protected the industry to death.” 

But you can’t allow an industry to atrophy for a century, only to throw it abruptly into shark-infested waters. The industry must be trained and nurtured back to strength. The government must shift from a helicopter parent to a nurturing, yet strict disciplinarian to help catalyze the appropriate transformation.

Opinions expressed are solely the author’s own and do not reflect the views of their employer.

Corrections:

5/9/2024: Article had previously attributed a quote to the American Enterprise Institute rather than the Competitive Enterprise Institute. This was corrected.

5/9/2024: Article previously referred to Huntington-Ingalls as a large commercial shipbuilder. While it may have sold commercial vessels in the past, today it specializes in building vessels for the Navy which are not subject to Jones Act restrictions. 

5/9/2024: Some wording towards the beginning of the article implied that U.S. protectionist maritime cabotage policies began with the Jones Act. This was altered to emphasize that the Jones Act “reinforced” a protectionist stance that already existed. 

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