Puerto Rico Can Move Forward -- Without the Jones Act
The Jones Act has come in for some blistering criticism over the past several weeks, and for good reason. The 97-year-old protectionist maritime law was waived for a 10-day-period by President Trump to help speed efforts to aid Hurricane Maria-damaged Puerto Rico and its 3.5 million people.
Pressure was placed on the Trump administration to extend the waiver, which ended Oct. 8. But the powerful U.S. Maritime Partnership, the main U.S. shipbuilders lobby, remains dead set against it. The law currently requires that shipments between any two U.S. ports be made using American-built, American-owned and mostly American-manned vessels.
Trump’s emergency waiver for Puerto Rico followed two other recent waivers in the wake of Hurricanes Harvey and Irma in Texas and Florida. This raises the larger question that, if the Jones Act is such an impediment to economic relief after a natural disaster, how much of an economic impediment is it during normal economic times?
The short answer is that it’s a big impediment. So big, in fact, that leaving the act in place likely will undermine attempts to rebuild Puerto Rico’s economy.
In simple economic terms, the Jones Act is a classic protectionist ploy, constraining demand for goods in Puerto Rico by limiting price discovery and creating artificial scarcity. For years, food in Puerto Rico has cost up to twice as much as in Florida, and cars cost 40 percent more than on the mainland, in large part because of the law. San Juan Mayor Carmen Yulín Cruz, no friend of Trump’s, praised his initial decision to issue the waiver as “an act of justice” and said it would instantly bring down the cost of supplies and construction materials by 33 percent.
There is now talk of spending up to a $100 billion on electricity upgrades and other infrastructure on the island. But any rebuilding will be throwing good money after bad unless changes to the Jones Act are made.
The Jones Act similarly undermines the Hawaiian and Alaskan economies, as well as the larger continental U.S. economy more indirectly. The domestic maritime industry argues the law is necessary to have a vibrant maritime industry.
But the numbers concerning the U.S. ocean-going fleet’s health over the past half-century don’t lie. According to a study published earlier this year, there were 2,926 large, ocean-going ships in the U.S. commercial fleet in 1960, making up 16.9 percent of the world fleet. By 2016, the number had fallen to 169 ships, only 0.4 percent of the world fleet. U.S.-flagged ships carried 25 percent of U.S. international trade in 1955; by 2015, the share had dropped to 1 percent of total exports.
Past studies have estimated the law keeps consumer prices 15-20 percent higher and reduces economic growth by $500 million each year. Another study showed the Jones Act cost Puerto Rico $17 billion in economic growth between 1990 and 2010. It’s no wonder the territory has been in a recession for 11 straight years.
To be sure, Puerto Rico had major economic problems even before Hurricane Maria. There is the $74 billion public debt crisis, a demographic trend that has seen 10 percent of the island’s citizens move to the mainland United States in the past decade and endemic local corruption. Additionally, the island’s bankrupt electric utility, PREPA, gets most of its electricity from old, oil-fired power plants and loses as much as 12 percent of its revenues to power theft and faulty billing, three times the U.S. average.
If handled well, the Trump administration could get credit for building a better Puerto Rico in a way George W. Bush never did for New Orleans’ improved public education system, because the initial mistakes his administration made following Hurricane Katrina forever colored how it was remembered.
But the foundation of the entire political economy in Puerto Rico is the Jones Act, which has created a special class of shippers from the mainland who funnel U.S.-based goods from a few ports on the East Coast at much higher costs. Until Congress and the president can find a way to advance sustainable long-term policies in the face of very loud and deep-pocketed shipping interests, Puerto Rico’s future will not be sustainable. Both the island and the larger U.S. economy will continue to suffer.