There are hot-button issues — the rail project, GMOs and pesticides, and others — that inspire intense pitched political battles in Hawaii.
And then there is a federal issue that has helped to define the islands’ critical supply link to the mainland: the Merchant Marine Act of 1920.
More commonly referred to as the Jones Act, it is a remarkably enduring piece of federal legislation that has had an enormous impact on the American shipping industry, and on Hawaii.
Comparing an arcane 95-year-old maritime law to deeply divisive contemporary issues might seem a bit strange. But the 11-page Jones Act has long been the source of a deep philosophical divide across which opposing political forces talk at — rather than to — each other.
On one side, well-funded lobbying interests have proved adept at fending off change in a multi-billion-dollar industry thanks partly to their support from a wide array of politicians, including Hawaii’s political delegation in Washington, D.C.
Their opponents consist of an insurgency of activists and politicians, sometimes funded by other business interests — including the shale oil industry that would benefit from lower shipping costs — working to roil the status quo.
The fight over the Jones Act includes many components, such as national security, reliable freight delivery and oil tankers. But at a time when much of the nation’s middle class — especially in Hawaii — is struggling, the most persuasive arguments may well revolve around jobs and the ultimate cost of it.
Advocates, like U.S. Sen. Mazie Hirono, have argued that the Jones Act protects huge numbers of well-paying American jobs, including here in Hawaii. Opponents lambaste the law for being a primary driver of higher costs in America’s most expensive state. Both sides merit great scrutiny, given that no credible, objective study has put a price tag on the Jones Act or decisively conveyed how many jobs it preserves.
The absence of definitive research on the impact of the law allows debate over it to become ungrounded, suggested Carl Bonham, a member of the Hawaii Council on Revenues and the executive director at the University of Hawaii Economic Research Organization. “When people look at the Jones Act, they make all kinds of wild assumptions,” he said.
For years, some local supporters of the Jones Act used a 2003 report to claim the maritime regulation costs Hawaii just $7.5 million, which is less than $6 per person per year. Advocates of a Jones Act exemption for Hawaii claim that the law is responsible for 6 percent to 60 percent of higher-than-mainland-average prices in the islands.
The breadth of that range, which was on display at an April 13 discussion of Jones Act reforms at the State Capitol, highlights the unreliability of the data cited.
Civil Beat did determine that the cost of shipping adds somewhere more than zero and less than 7.5 percent to the cost of goods in the islands. Given that there are real costs to moving freight across the ocean — including the cost of vessels, maintenance, rent, fuel and salaries — the direct cost of the Jones Act is likely on the lower end of that range, according to several local economists.
The continuing impact of the law, and the ongoing fight over it, are testimony to the way decisions made at a given moment in history can have incalculable repercussions generations later.
The Merchant Marine Act was put into place just after World War I. Since then, America has weathered the Great Depression, World War II and a plethora of other wars. Over the years, globalization has transformed commercial trade. And the United States came to include two states — Alaska and then Hawaii — that are disconnected from the mainland and particularly reliant on freight deliveries. Through it all, the Merchant Marine Act of 1920 has endured.
The Jones Act mandates that any cargo shipped between domestic ports be on U.S.-built and U.S.-owned vessels where at least 75 percent of the crews are American. The legislation was enacted to bolster American shipbuilding, protect the jobs of merchant mariners and guarantee that federal authorities could requisition a Merchant Marine fleet in case of an emergency.
One effect of the Jones Act is that a large number of South Korean, Chinese and Japanese freight vessels that deposit cargo in Long Beach Harbor cannot then pick up other cargo and deliver it to ports in cities like Seattle, Oakland, Anchorage or Honolulu. Cargo shipments from one domestic port to another must be done by a Jones Act vessel.
In some ways, the Jones Act has clearly failed. In the 1940s, the U.S. built the vast majority of the world’s big vessels. Today, it is an also-ran.
One clear indicator of the rise of the world’s current shipbuilding leaders — and of the failure to keep the U.S. competitive in the field — is embedded in the names of America’s competition. The world’s largest shipbuilder is Hyundai Heavy Industries Co, while its competition includes Daewoo Shipbuilding and Marine Engineering and Samsung Heavy Industries Co. Yes, Hyundai, Daewoo and Samsung; three iconic industrial or tech companies.
Collectively, South Korea, Japan and China produce more than 90 percent of large-scale non-military vessels every year, according to data assembled by Martin Stopford, a British economist who has spent decades studying the maritime economy.
Most of the remaining major shipyards in the United States are building for the military, leaving a handful to construct the largest Jones Act vessels. For many years, those shipyards produced a couple of large merchant vessels annually, leading to supply bottlenecks. There are many signs their workflow is speeding up after hitting its nadir, thanks to America’s shale oil boom. (A 40-year-old law that bans most U.S. oil exports guarantees that Jones Act vessels will move it between American ports.)
But that doesn’t mean the U.S. is returning to competitiveness in the global market. International maritime consultants Drewry Maritime Research recently highlighted that two 850-foot container ships scheduled for delivery to Matson Navigation Inc. from Aker Philadelphia Shipyard in 2018 will cost $209 million each; a comparable ship built in Japan, South Korea or China can cost $50 million or less. The lower prices, shipping industry experts and economists told Civil Beat, are due to the massive scale of production or substantially lower salaries and environmental standards.
“I don’t know of anyone who would really argue that by building ships in the U.S., we are saving money,” said Sumner La Croix, a University of Hawaii economist who has worked as a consultant to Young Brothers, the company that dominates Hawaii’s interisland trade.
La Croix said that if freight companies could purchase international vessels at a fraction of the price, they would likely pass on the cost benefits in a heavily regulated industry like ocean transport. This could eventually result in lower prices for shippers and, ultimately, customers who purchase goods in Hawaii.
U.S. Sen. John McCain, who in January attempted — and failed — to get the Senate to eliminate the Jones Act’s requirement that ships be built in U.S. shipyards, has argued that protectionism is preventing American shipbuilders from innovating to compete in the international market.
While Jones Act defenders assert that American shipbuilding is coming back, there are few signs of thriving competition in the non-contiguous American states and territories.
Horizon Lines was a Jones Act transporter for 56 years until December, when it sold its Hawaii services to Pasha Group and its Alaska services and the rest of its remaining operations to Matson. Horizon Lines is awaiting regulatory approval on those sales. Early this year, Horizon Lines ended all service to Puerto Rico and then sold its terminal assets there.
If regulators allow the deals to go through, Matson and Pasha will control the lion’s share of the Hawaii freight market. And if another transporter wants to join them in the islands, it will have to purchase vessels at top-dollar U.S. prices to enter this market.
The act’s defenders often argue that the cost of the law — which they usually describe as very low — is worth it because the Jones Act protects huge numbers of solid middle-class employees.
“For Hawaii, it represents some 23,000 jobs,” Sen. Hirono told Civil Beat in an interview on Jan 9, 2014. “That’s important. That’s really critical for Hawaii … We’re trying to create more jobs in Hawaii, not the other way around.”
That is a persuasive-sounding employment number in tiny Hawaii. The question, given that the state gathers no such data, is what was the senator basing it on?
The source of the 23,000 number was a PricewaterhouseCoopers study from 2012, based on 2006 data. The report was privately commissioned by the Transportation Institute, a trade organization that is closely linked to the American Maritime Partnership, an influential lobbying group made up of shipping industry and maritime union interests. The AMP provided the Transportation Institute’s study to Sen. Hirono’s office.
Since the study is “private,” AMP representative Darrell Conner explained in an interview, it could not be shared with the public or the media.
After Civil Beat noted to both the senator’s office and the AMP that without seeing the report, there is no way for the public to verify the reliability of the numbers, Hirono’s office and the AMP each sent over a select few pages of two different PwC reports.
On page 23 of the more recent report — which is titled, “Contribution of the Jones Act Shipping Industry to the U.S. Economy in 2011” — the “Jones Act industry” is credited for 2,370 maritime jobs in Hawaii four years ago. The report also says that a total of 8,780 positions were directly or peripherally linked to the Act.
The numbers are a far cry from the statistics in the earlier PwC report, that Conner said is based on 2006 data. Nine years ago, by PwC’s accounting, there were 4,714 jobs directly attributable to the Jones Act in Hawaii and a total of 23,225 direct and induced jobs. This is the number, slightly rounded, that Sen. Hirono cited to Civil Beat last year.
“Most of the jobs in the maritime sector would exist with or without the Jones Act, even if you had foreign-flagged ships going from here to the West Coast.” — Hawaii Shippers’ Council President Mike Hansen
Asked for clarification on the number, Hirono aide Regan Page said the office only recently received the new report. The cover page of that report is dated January 2014.
In 2012, Hirono also cited a very different number of 10,000 jobs that were directly attributable to the Jones Act, Page confirmed.
“We didn’t request these studies. We have seen them,” she said. “We used at the time what we believed to be most accurate.”
Even without access to the full reports, the Transportation Institute’s data raises other questions and issues.
For one, by PwC’s count, Hawaii lost 2,344 jobs directly linked to the Jones Act and a total of 14,445 direct and peripherally related jobs in a five-year period. What happened to them?
While Civil Beat was unable to review the methodology of the studies, the 2006 to 2011 window of time is when Norwegian Cruise Lines’ reduced its Hawaii fleet from three vessels to just one. The Pride of Hawaii now services the Mediterranean as the Norwegian Jade and the Pride of Aloha is cruising between Miami and the Bahamas as the Norwegian Sky. They carry a total of 2,012 crewmembers these days, suggesting a similar loss of Jones Act-related workers in Hawaii.
Conner of the AMP said that other factors — less freight shipping due to the recession and the shutdown of the Hawaii Superferry — in that same period of time also resulted in the end of Jones Act-related jobs in Hawaii.
That may well account for the reduction in “direct” jobs, but could those forces really explain the total loss of 14,445 peripheral and direct jobs? Conner cited an estimate that each of the massive cruise ships resulted in thousands of additional jobs on land in Hawaii. “So it is not surprising that there is a big drop,” the AMP representative said. “I think those are the factors if you look at the changes in the numbers.”
Conner may think so, but until his partners share their full report and methodology, it is not possible to verify. Even he said he isn’t sure exactly what jobs are and are not included in those statistics.
The decline in the directly attributable job numbers also highlights several flaws in some Jones Act advocates’ jobs argument. For one, the law is supposed to protect Jones Act jobs, but if the study is correct, Hawaii lost about half of the “direct employment” over a period of just five years.
Also, a more careful look at the 2,000 or so jobs lost on two cruise lines shows that it is problematic for a politician to credit the Jones Act for those jobs. Norwegian Cruise Lines’ three vessels in Hawaii all benefited from an exemption from the Jones Act’s U.S build requirement — thanks partly to the intervention of the late U.S. Sen. Daniel K. Inouye.
So, while the three ships all flew under American flags, two were entirely built in foreign shipyards, while the third was started in Mississippi and completed in Germany. Technically, those ships, thanks to the exemption, became part of the Jones Act fleet, but the employment on them could more correctly be attributed to the exemption than the U.S. build requirement.
Lastly, advocates of the Jones Act often suggest that swaths of maritime jobs wouldn’t exist if there were no build requirement or other Jones Act requirements. “Most of the jobs in the maritime sector would exist with or without the Jones Act,” said Hawaii Shippers’ Council President Mike Hansen, “even if you had foreign-flagged ships going from here to the West Coast.”
The Jones Act has been around so long that it has become part of the baseline analysis of Hawaii’s economy, according to several local economists interviewed by Civil Beat. This means it is very challenging to calculate how our lives might be different — and perhaps less expensive — without it.
It is especially hard to calculate the cost of the Jones Act, and contrast it with the benefits, when no credible, neutral organization has measured the law’s overall impact on prices in the state.
Economists and researchers at UH’s research organization and the state’s resource center for economic and statistical data, DBEDT, did not know of any convincing contemporary study on this. “Nobody has done it,” said Eugene Tian, the state’s top researcher at DBEDT. “It is really necessary.”
Tian noted that the state would face logistical difficulties in conducting such a study because the main cargo companies would need to voluntarily make their total shipping revenues in Hawaii public. Representatives of Matson Navigation Co. and Horizon Lines declined to share such information when contacted by Civil Beat. While the state can’t require such companies to divulge their numbers, Tian said, federal authorities can.
Gov. David Ige said in an April 2 editorial board meeting with Civil Beat that Hawaii would benefit from up-to-date and credible data on the cost of the Jones Act, but that this would likely only happen via the nation’s capital. “I would love for Congress to take up the Jones Act so we can get some of that analysis directly,” the governor said.
The fundamental question remains: is the Jones Act worth it for Hawaii? Nobody really knows — but the man who runs Hawaii would like to.
Additional reporting by Adrienne LaFrance in Washington, D.C.
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