Keeping Up with the Jones Act

Modern Moves Trigger Cabotage Concerns

By Lori Musser

As the centennial of America’s merchant marine matriarch arrives, modern U.S.-owned, built and crewed vessels of all types still ply coastal waters. Operators running in domestic waterborne trade lanes call that a success.

Standing sentinel for the American merchant marine since 1920, the Jones Act – section 27 of the U.S. Merchant Marine Act – was introduced by Sen. Wesley Jones of Washington State. The provisions of the act supported his state’s shipyard and shipping interests, stipulating that only U.S. ships could carry cargo between U.S. ports. This intentionally made Alaska dependent on Seattle-based shipping.

Of course, there was a broader national security and defense rationale for the Jones Act. It targeted a resurgence of a sustainable American merchant marine fleet to help in times of military conflict; in World War I, the fleet transported vast quantities of war supplies, equipment and troops, but suffered heavy losses.

“The USA is a community of people that makes collective choices, and among those has been a political decision to maintain an active maritime capacity,” said Sam Norton, president and CEO of Overseas Shipholding Group Inc. (OSG), a Florida-based energy transportation provider with a 21-vessel fleet.

The military needs logistical support which can come from the merchant marine. “We don’t just have stealth bombers and super tank facilities; we also need to deliver fuel, equipment, consumables, water and other supplies,” Norton said, adding that capability as part and parcel of the Navy is very expensive. Some assets will sit doing nothing, and the development of manpower becomes challenging.

He called the merchant marine a private-public partnership: “The private sector owns and operates the assets with a preferred position in markets within which they operate which gives the public access to the maritime foundation that it needs.”

Mike Roberts, senior vice president of government relations for 127-year-old Crowley Maritime, which employs 3,000 American mariners, described the Jones Act as “the quintessential build American and hire American law.” It ensures there is a critical mass of mariners and shipbuilding capacity so there is something to scale up to meet a military contingency.

That scalability has been tested, Roberts said: “A few years ago there was a ban on exporting crude oil and at the same time shale oil started to really develop. The demand for Jones Act tankers went through the roof. The market responded really well – an additional 30 American tankers were built and delivered to meet the demand.”

He added: “In the global security environment today, we have more serious threats and concerns than at any time since the cold war.” He said the Jones Act is the only thing that keeps commercial shipping capacity in place and prevents other countries, with perhaps heavily subsidized fleets, from taking U.S. business.

Broad Application

“Many proponents of the Jones Act argue that in the interest of national security – the primary justification for passing the act 100 years ago – the U.S. needs, even today, to have its own ships, its own mariners, its own shipyards, and its own maritime infrastructure,” said Utsav Mathur, a shipping, offshore energy, and global disputes lawyer based in Norton Rose Fulbright’s Houston office.

The act applies to almost all U.S. coastal waters, including those serving Hawaii, Alaska, Puerto Rico and Guam. There are certain exemptions for some territories, such as the U.S. Virgin Islands, and, very occasionally, waivers are granted, typically related to hurricane or disaster impacts. Interestingly, almost every type of vessel is covered by the act, from oceangoing ships, to barges and tugboats, to small service vessels including dredgers. Offshore energy production vessels and service fleets are also included.

While the Jones Act has changed little in a century, shipbuilding, mariner training and qualifications, and vessel operations have transformed immeasurably. So have domestic and global commodities, trade lanes, infrastructure, and economic and political environments. It is a given that Senator Jones didn’t foresee wind farms sprouting up in U.S. Northeast waters, the obliteration of Puerto Rico’s power grid by a hurricane, or autonomous ships sailing the seas.

These types of developments have given rise to numerous back-channel discussions, as well as challenges to alternatively repeal, waive provisions, grant exceptions and otherwise modernize, strengthen or scale back the Jones Act.

Wind Energy Questions

Offshore wind farms are a newcomer to the U.S. and are raising important Jones Act questions. “Anytime you have offshore projects you have project cargo. Many components are built in Europe and will be shipped to staging areas in the U.S. Northeast. When they are moved from the staging area to a fixed offshore construction site, there are Jones Act implications,” Mathur said.

He added that while the application of the Jones Act to wind energy installations and equipment movements is still being sorted out, the sector will have to make decisions related to vessel choice for logistics and construction, including component lay-down and transfer points, based on the interpretation of the act.

“For some projects, there is potential for components to be loaded on foreign-flag vessels in Europe and moved directly to the installation site,” Mathur said. There are pending requests on how the Jones Act applies to offshore wind projects.

Avangrid, the winning bidder for Massachusetts’ first offshore wind project, has called the Jones Act a peculiarity of the U.S. market that will trigger innovative delivery alternatives that might set global precedent – using smaller coasting trade feeder barges to shuttle to the typically more expensive on-site jack-up vessels, rather than having costly jack-up vessels go back and forth to port.

With the rise of new natural gas extraction techniques, and with new high-volume liquefied natural gas, or LNG, liquefaction facilities coming on line, a shortage of foreign and domestic LNG tanker capacity is also a certainty.

“The thing I get asked about most is LNG. There has been a lot of discussion about finding the right capacity to move LNG on coastal routes, and there are questions about getting limited exemptions or waivers,” Mathur said.
Roberts said that Crowley is assessing Puerto Rico’s emerging market for natural gas: “There may be potential for a Jones Act tank vessel to meet demand, and Crowley is excited about that opportunity.”

In 2018, despite the nation having become a net exporter of LNG, the U.S. Northeast imported Russian LNG for the first time, due in part to a lack of any Jones Act-compliant tanker tonnage to deliver U.S. LNG. In April 2019, Bloomberg reported that U.S. President Donald Trump considered a request for a 10-year Jones Act waiver for certain energy shipments from mainland ports to cash-strapped and hurricane-battered Puerto Rico. No action was reported.

Trump’s widely promoted energy agenda would seem to run counter to the Jones Act, in contrast to his America First agenda, which supports a home-grown merchant marine and U.S. shipyards, and their role in national defense strategy.

Evolving Interpretation

Changes to the Jones Act have been few and far between, but its interpretation is not static. On Oct. 23, 2019, U.S. Customs and Border Protection, or CBP, published Proposed Modification and Revocation of Ruling Letters relating to CBP’s Application of the Jones Act to the Transportation of Certain Merchandise and Equipment between Coastwise Points.

Comments were due Nov. 22. The proposed changes address which incidental movements constitute “transportation” with respect to offshore lifting operations and whether a non-coastwise-qualified lifting vessel would violate the Jones Act when it moves a short distance to avoid collision with a surface or subsea structure when installing an offshore platform’s topside. There also is a question of which offshore articles transported between coastwise points are “vessel equipment” and therefore not obliged to be carried on Jones Act vessels.

“The Jones Act only applies to the movement of merchandise, not equipment,” Mathur said, adding, “there are rulings that certain portable items moved to an offshore site are integral to the mission of the vessel and therefore excluded.” The Jones Act fleet and offshore energy industry are watching this issue closely.

A second hot topic, the incidental movements of vessels, begs the question of what qualifies as coastwise transportation.

“For now, if a Jones Act barge arrives at an offshore platform with topside components and a dynamically positioned foreign-flag construction vessel lifts the topside and then has to make a lateral move of a few feet prior to placing the topside at a coastwise point on the OCS, the move is interpreted as a Jones Act violation,” Mathur said. There is a need to clarify what qualifies as a small incidental move, so that the Jones Act doesn’t get bogged down in minutiae or labeled as illogical.

Enforcement and Outreach

The National Jones Act Division of Enforcement was created in 2016 and located in New Orleans, a center for the offshore sector, reminding industry that the CBP takes its Jones Act outreach and enforcement obligations seriously.

Current coasting trade operators have come of age during the Jones Act era and are typically strong Jones Act supporters. The premier industry coalition, the American Maritime Partnership, shares that “ … a strong domestic maritime industry is critical for America’s economic, national and homeland security, and is best supported by maintaining the Jones Act as the foundation of America’s domestic maritime policy.”

Yet studies proving or disproving the efficacy of the act abound. The Organization for Economic Cooperation and Development, or OECD, published a policy paper in April 2019, Local Content Requirements and their Economic Effect on Shipbuilding – A Quantitative Assessment, which included a look at the Jones Act.

This study used the OECD’s Trade in Value-Added database and its inter-country input-output framework to simulate the impacts of the Jones Act on the maritime sector and on the general economy. The paper concluded that significant economic gains would be had through the abolition of the act. It cited higher transportation costs between American ports primarily related to higher vessel operating and labor costs, an aging U.S. fleet, and a lack of oceangoing vessels in the U.S. merchant marine, as indicators that action is needed.

The paper estimated large benefits for the broader U.S. economy, and for the U.S. shipbuilding industry, if the act went away. The paper stated: “The results refer to the economic gains [after] the shipbuilding industry will have reached international productivity levels, water transportation services will have approached the price levels of non-Jones Act conform vessels, and intra-U.S. maritime trade will have been stimulated by lower freight rates.”

The report suggested government can “help stimulate employment generation through a stable macroeconomic framework as well as certain structural policies which encourage innovation, skills and business development.”
“In its most basic and literal sense, any law that limits the number of ships available to engage in a particular trade is a law that can hinder that trade – any protectionist law does that,” Mathur commented. “But despite the hindrances, proponents argue the Jones Act has value because it helps maintain the American merchant marine, jobs, and the capability to support national defense and security initiatives.”

Results and Impacts

The Jones Act has been in place long enough for entire industries to develop around it. Some of those are sufficiently significant to the region that their demise would wreak havoc.

For example, the Jones Act is entrenched throughout the entire U.S. Gulf offshore service industry. “If it was repealed, proponents argue that in all likelihood most of those jobs would go away, as well as the U.S. shipyards that build the offshore service fleet,” Mathur said.

The Puerto Rican trade has also grown up around the Jones Act. It is unique, having both a closed-loop routing and a short-sea voyage through sensitive coastal ecosystems, giving rise to the development of a world-leading LNG/dual-powered fleet.

Crowley’s shipping division operates about 25 crewed vessels having invested between US$2.5 billion and US$3 billion in U.S.-built ships since the turn of the century. “We are all-in on domestic shipping,” Roberts said. The fleet renewal program in Puerto Rico now includes two brand new LNG-powered vessels.

While Crowley has a high-volume container trade with Puerto Rico, it moves most other cargoes, such as the project cargo slated to restore the electrical grid following Hurricane Maria – some 700 transformers and 60,000-70,000 utility poles.

Because higher freight rates on the coastal trades are perhaps the most belabored negative of the Jones Act, ideas are often put forward to help keep rates down. “Ideas that preserve and maintain some U.S. jobs while reducing costs are out there, and for every idea, there is support, but there is also opposition,” Mathur said. In addition to tax incentive modification suggestions, he said that some have argued for limited repeal of portions of the act for certain trade routes to lower transportation costs.

However, Crowley argues that competition is the best way to keep rates in check. Roberts said Crowley’s coastwise trade faces a fundamentally different structure than that applying to foreign trades, but that competition still works to keep the markets growing and vibrant and innovative.

OSG’s Norton accepts that Jones Act costs are higher, but caveats that by adding that there has to be a business case and a defined market that allows operators to make money. The U.S. merchant marine is supported by the private sector at a fraction of the cost of the government and military directly providing similar capacity, he said.

“The Navy is building up to 20 tanker support vessels for its battle fleets,” said Norton. The first two are under construction in San Diego at a cost about US$600 million. “By comparison, the Maritime Security Program is a subsidy for about 60 U.S.-flag ships that trade internationally. It costs US$300 million per year with a stipend of US$5 million per year per vessel. That allows the defense department to draw on the services of 60 vessels for less than half the cost of one new tanker,” Norton said.

While opponents point to cost effects and interpretation issues, proponents say that the Jones Act, while perhaps poised for updates and modifications, is buttressed by policy which is largely achieving what it set out to do almost a hundred years ago.  

Based in the U.S., Lori Musser is a veteran shipping industry writer.

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