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Op-Ed: The Jones Act…Again

Author Jose Joaquín Villamil is the founder of Estudios Técnicos Inc.

In a recent issue of News Is My Business (NIMB) an Op-Ed piece summarized a new study on the impact of the cabotage law on Puerto Rico. It is better than all previous ones, according to the co-author of the study, who modestly attributes this to the fact that they interviewed importers and not because he and his team are geniuses.

The study is to be welcomed and the authors and the sponsoring entities
congratulated for it includes much useful information. It makes it possible to
discuss the Jones Act based on numbers and not simply emotional or political
preferences, that have characterized the discussion for decades.

It would have helped had the study mentioned how many importers were
interviewed, who chose them and from what sectors. To say that those
interviewed imported 40,000 trailers seems like a large number, but it is a
small proportion of total cargo movement. Without this information scaling up
to the universe of cargo movement cannot be done.

Thus, mentioning that a survey was made is, from a research perspective,
useless. If the authors of the study had used P.I.E.R.S. data, by far the most
detailed information on maritime cargo, their results would have been enriched
and they would have had a more precise idea of how to design a sample of
importers to be interviewed that reflected market realities.

There may be a number of reasons for wanting to eliminate the cabotage
law, but its negative impact on Puerto Rico’s economy is not one. A reasonable
approximation to the costs of the Jones Act must be based on an understanding
of the cost structure of ships operating under the Act. The reason for that is
simple.

The Jones Act relates to just two components of the cost of shipping a trailer
from the U.S. mainland to Puerto Rico: the crew on board and the ship’s depreciation.
The cost of the crew is determined by collective bargaining (and, of course,
U.S. labor laws), not the Act, and the depreciation of the ship is slightly higher
for a Jones Act carrier because the ship is built in the United States and is
costlier.

In fact, these two costs are about 20 percent of the total cost if that
much, with crew costs being the largest share by far.

Should the Jones Act be repealed, or Puerto Rico excluded from it, non-domestic
ships serving the mainland-Puerto Rico route would incur in fuel costs, the
cost of equipment, stevedoring, wharfage fees, inland transportation costs,
warehousing costs, insurance and overhead.

And, of course, these ships would have to pay their crews and depreciate
their ships. Since they would be serving the domestic or coastwise market, most
likely they would be subject to U.S. labor laws and other regulations (as
pointed out by the U.S. Maritime Administration).

The above is relevant because if the total billings of the Jones Act
carriers is in the neighborhood of $700 million (although last year it may have
increased somewhat) then the cost attributable to the Act would be 20 percent of
that figure less whatever a non-domestic ship would pay in salaries and its
depreciation allowance.

As the GAO, in its 2013 report on the Jones Act indicated, because there
are many other factors besides the Jones Act that affect freight rates, “it is
difficult to isolate the extent to which freight rates between the U.S. and
Puerto Rico are affected by the Jones Act.”

It is reasonable to assume that Puerto Rico’s imports will continue to
be predominantly from the mainland and thus the key research question must be
how the repeal of the Act or exempting Puerto Rico from it will impact that
trade and the cost of transporting cargo in that route. This is why knowing the
cost structure of Jones Act and non-Jones Act carriers is essential.

As the GAO, in its 2013 report on the Jones Act indicated, because there are many other factors besides the Jones Act that affect freight rates, “it is difficult to isolate the extent to which freight rates between the U.S. and Puerto Rico are affected by the Jones Act.”

Analysis requires ‘systemic’
approach
In Estudios Técnicos Inc. we follow
the principle that analyzing complex systems such as the maritime cargo system,
with its myriad ramifications and spillovers, requires a systemic, not a
segmented approach that focuses on one or two components of a particular system.

In this case, for instance, one cannot evaluate the Jones Act impact by
merely considering the southbound (inbound) component because this component is
closely related with the northbound (outbound) segment (I assume no exporters
were interviewed).

The latter is characterized by the fact that ships leave the Island
practically empty and rates are accordingly below northbound rates. Oversimplifying
the complex nature of the maritime cargo system will lead to wrong conclusions
and wrong solutions. There is a wonderful quote to that effect by H.L. Mencken:
“For every complex problem there is an answer that is clear, simple, and wrong.”

In addition to the need to integrate the analysis of southbound and
northbound components, there are a number of other issues related to the Jones
Act that are relevant for reaching a conclusion on its impact.  One is the dedicated service that provides
importers and exporters with certainty on arrival schedules.

Interviews with importers on the dedicated service component were
carried out and the result was that it represented a major advantage, one that
would otherwise not be available to local importers. This was corroborated by very
recent conversations.

The study mentioned in NIMB lacked a clear understanding of the
structure of the international maritime cargo industry and how it operates.
This led to oversimplifying assertions related to, for example, shipping from
California to Puerto Rico, the advantages of “port hopping” and suggesting that
eliminating the Jones Act would lead to a proliferation of ports offering
service to Puerto Rico.

The California statement reminded me of when a local politician said
that in the absence of the Jones Act carriers, if we needed to ship 100 trailers
somewhere, one would simply call one of the international lines to come and
pick them up. The international maritime cargo system doesn’t work that way.

Cost comparisons can also be very volatile. Thus, what may be true at
one point in time may not be at another. For example, the cost of shipping to
the DR from the U.S. or even the price of staples. Evidence from earlier
studies showed shipping costs to the Dominican Republic were not lower than to
Puerto Rico, for example.

Although the study mentions that prices for a basket of goods are higher
in Puerto Rico than in the States, a previous study reflected different
results. It would have helped the reader to include the basket of goods in the
previous study. It’s interesting that one of the co-authors of the Chamber of
Marketing, Industry and Food Distribution (MIDA) report not so long ago defended
the position that rice in Florida and New Jersey had higher prices than in
Puerto Rico.

In that case the client needed that result for reasons related to an
arbitration related to price setting. Notwithstanding the usefulness of such
comparisons, without an assessment of the cost structure of Jones Act and
non-Jones Act carriers, it’s impossible to gauge the impact of the Act and the welfare
effect of eliminating the Act or excluding Puerto Rico from it.

Not including this information in an assessment of the Jones Act is an
instance where the phrase attributed to Alexander Pope is appropriate: “A
little knowledge is a dangerous thing.”

As I indicated, the fact that we have a new study is a positive
development. What I have suggested on a number of occasions, most recently to
the former president of the Economics Association, is that all parties
interested in analyzing the Jones Act get together and agree on the basic
assumptions underlying their assessment.

This could lead to results that would make it easier to reach a
consensus on a subject that has been discussed for decades with no final
determination.

I, and others, have also suggested that we shift emphasis to securing an
exemption from the air cabotage restrictions that are in place, with only
Alaska being exempted. This could open the door for Puerto Rico to become a
major air cargo transshipment port for which it has significant competitive
advantages.

As a matter of full disclosure, Estudios Técnicos Inc. completed two studies for the Maritime Alliance that includes Jones Act carriers as well as others.

Author Details
This story was written by our staff based on a press release.

Comments (3)

  1. Richard R. Tryon II

    Assume that the current shipping from FL to PR is cost competitive because of speed, experience, volume, and co-operative relations. If all is true, then the Jones Act is irrelevant and can be turned off just to save additionally by removing some handling costs.

    Of course, CA fruits and veggies moved to FL at over $7,500 shipping via trucks is still a handicap to current payers of total shipping expense. But, free of Jones Act, PR buyers could import same CA produce from Central and S.A. and other Caribbean Islands.

    Of course, sugarcane land held by the Land Authority is still available in small parcels, especially for individual farmers. Joined in a co-op, these farmers could share lots of costs, and avoid duplications of other expense.

    PR citizens would let this combination lower cost of living; but, some key players would lose a share of the greater expense. I wonder which party would be hurt more by the change? Probably both. So, what would change anything?

  2. “Editor’s Note: As a matter of full disclosure, Estudios Técnicos Inc. completed two studies for the Maritime Alliance that includes Jones Act carriers as well as others.”

    O sea, esta columna es el perfecto ejemplo del pájaro tirándole a las escopetas.

    Si las líneas marítimas del Jones Act son tan buenas, pues si abren el mercado a la competencia, se comeran su competencia nueva como niños crudos. Eso no lo quieren hacer porque realmente tienen un guiso gigante con nosotros.

    Y hablando de datos, ¿por qué estas compañías no comparten sus estados financieros con nosotros? Van a decir que es información confidencial y revelarla divulgaría “secretos” a su (poca) competencia. Si papo! Lo que no quieren es que nos enteremos del billonaje que se llevan al bolsillo.

  3. José J. Villamil

    Although the disclosure appears as an Editor’s Note, it is very much part of the original submitted to NIMB. We always make such disclosures about potential conflicts of interest.

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