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To promote competition, deregulate

Jul 28,2021 - Last updated at Jul 28,2021

WASHINGTON, DC — US President Joe Biden recently issued an executive order calling on regulators to “further competition” in the shipping and rail industries, among others, because high and rising freight costs and delivery delays constitute a drag on economic activity by preventing businesses from obtaining timely inputs. But regulatory interventions won’t ameliorate that problem; deregulation will.

For over a century, US maritime transport has been regulated under the Merchant Marine Act of 1920 (the “Jones Act”) and the Foreign Dredge Act of 1906, both of which greatly restrict competition and raise costs. The Jones Act requires all shipping between domestic ports to be on vessels that are American-built (made with a majority of American-made parts), American-owned, American-operated, and manned by a crew that is at least 75 per cent American.

The Case Against the Jones Act, a collection of essays edited by Colin Grabow and Inu Manak, details the many problems with this rule. For starters, the law both ignores and contributes to the fact that coastal cargo ships built in the United States cost six to eight times more than similar vessels built elsewhere. Moreover, labor costs are substantially higher for US ships, both because wages are relatively higher in the US and because the legally required size of coastal ship crews has remained unchanged, even as automation has enabled foreign shipping companies to reduce crew size and lower their costs. Restrictions on US dredging further exacerbate the problem.

The paradox of this protectionist rule is that it has led to a sustained decline in US shipbuilding, an increase in land-based transportation, unnecessary highway congestion, greater environmental damage, and an aging, smaller fleet that employs far fewer people than it once did.

Citing high and rising costs, Biden’s executive order aims to enhance US competitiveness and economic growth, improve occupational conditions for American workers, reduce environmental damage, safeguard national security, strengthen US infrastructure, and increase the number of “good” jobs.

It is rare to find a policy instrument that can achieve so much for so little. But that is exactly what repealing America’s damaging shipping regulations would do. Hawaii, Alaska, and Puerto Rico, in particular, would benefit immensely, because maritime shipping between them and the US mainland costs significantly more than it would without the Jones Act, which has even resulted in cattle being transported by air from Hawaii.

The benefits of repeal would be far-reaching, starting with the effect on competitiveness and growth. High shipping costs raise the prices of imports used in manufacturing, which in turn raises the prices charged to consumers, making US businesses less competitive in foreign countries where other producers bear no such costs. An inefficient and costly transportation sector reduces the entire economy’s overall growth rate.

By unnecessarily increasing the cost of ships, the Jones Act deters US shipping companies from buying new vessels. Not surprisingly, at least half the US coastal shipping fleet is more than 30 years old, even though the ships’ economic life expectancy is about 20 years. It is estimated that there are only 99 active Jones Act ships, supporting 3,380 jobs at most. With deregulation, the industry could add more ships and thus more jobs. And the newer ships would be better for the environment and less accident-prone, providing a healthier workplace for more crew.

The environmental benefits would not end there. Freight carried by ship causes greenhouse-gas emissions that are 70 per cent lower per tonne-mile than freight carried by rail, and over 80 per cent lower than freight carried by trucks. By allowing for much more freight to be shipped by water (at significantly reduced cost), repealing the Jones Act would relieve traffic congestion and delays on major US trucking routes. This also would further Biden’s infrastructure goals, by freeing up resources that otherwise would go to maintain the country’s over-burdened highways.

Since the Jones Act was enacted, the number of shipyards and ships built in the US has diminished greatly, except in the case of barges and related small vessels. As former US Maritime Commissioner Rob Quartel concludes in his contribution to The Case Against the Jones Act, the law’s restrictions “have led to the demise of American ships and shipbuilding and the subsequent loss of military support capacity, to the detriment of our national security”.

He also notes that the Jones Act has been suspended “for national emergencies…on the grounds that it was an impediment to national security.” More broadly, the national-security argument for requiring ships to employ American citizens makes little sense: foreign-flagged and foreign-manned ships enter US ports from overseas every day, and the airline industry may employ anyone who is authorised to work in the US.

In sum, the Jones Act has not served any of the purposes that its defenders cite. It has been detrimental to workers, the environment, and the overall economy, while benefitting only a very small group of people.

Fortunately, the law could easily be phased out over time, with offsets for any reduction in wages to seamen already in the industry. During the phase-out period, waivers could allow shipping to Hawaii, Puerto Rico and Alaska. These could also be granted in cases where Jones-eligible shipping is not available, or where the costs or delays of using it are unreasonably burdensome.

Not all regulation is bad, and not all regulation is good. There is no question about how to categorise the Jones Act. If the Biden administration is serious about promoting competition and economic growth, it should look at regulations that do far more harm than good.

 

Anne O. Krueger, a former World Bank chief economist and former first deputy managing director of the International Monetary Fund, is senior research professor of International Economics at the Johns Hopkins University School of Advanced International Studies and senior fellow at the Centre for International Development at Stanford University. Copyright: Project Syndicate, 2021. www.project-syndicate.org

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