Bust myths of Jones Act to help Puerto Rico rebuild faster

Bust myths of Jones Act to help Puerto Rico rebuild faster
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The unfolding crisis in Puerto Rico has restarted the discussion of the 1920 Jones Act (cabotage laws) in the U.S. and part of the debate is being polluted by myths. As an economist, here I share the myths that I have identified and some information that may shed light on this debate.

Repeal of the cabotage laws will harm national security. Back in the 1920s, vessels were very important: Wars were fought primarily by vessels that arrived on a beach. Nowadays, the U.S. fights wars using airplanes and drones more than by sending multiple vessels to an enemy territory.

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In fact, the U.S. has fought many wars simultaneously in the last 16 years and there was no need to use merchant marine vessels for anything. Thus, it would be an anachronism to argue that merchant marine vessels are needed to support the Navy.

 

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Repeal of the cabotage laws will increase likelihood of a terrorist attack. I read this inflammatory and unfortunate argument in a recent blog. If a terrorist wants to bomb a vessel in U.S. ports, he or she does not need to wait for the repeal of the Jones Act. He or she could do it now because foreign vessels from foreign countries are allowed to land in U.S. ports!

 

There is no clear evidence that the cabotage laws increased costs to consumers. The Federal Reserve found evidence that the cabotage laws increased prices to consumers and professor Jeffrey Mari from the University of Puerto Rico estimated that cabotage laws increased import prices by close to 20 percent.

Repealing the Jones Act only benefits Puerto Rico and will harm U.S. workers. The Jones Act discourages Puerto Rico from buying more U.S. manufacturing and U.S. agriculture goods because the overall price is increased by transportation costs.

However, with lower transportation costs, U.S. exports will be more competitive, and Puerto Rico will buy more from the U.S. (by the law of demand). Those higher U.S. exports will imply new jobs in the U.S. Those new jobs could exceed the number of workers in the U.S. merchant marines.

Furthermore, removing the cabotage laws can help Florida and Puerto Rico create an even larger hub between the Americas by allowing foreign carriers to stop first in Florida and then land in other U.S. ports. This occurred in Alaska after the Stevens amendment of 2003 to the air cabotage laws.

Enhancing a Florida and Puerto Rico hub would also create thousands of additional jobs. Those newly employed individuals will consume more in the rest of the U.S., creating additional jobs (the “multiplier effect” in economics jargon). Thus, to evaluate job gains and losses we have to observe the whole economy, not just one sector.

Cabotage laws do not represent a barrier in distributing merchandise to Puerto Rico. Most of Puerto Rico's imports come from the U.S., but there are too few (less than 100) vessels to bring enough key items, such as batteries and food.

I know relatives that ordered generators and batteries in early September, but U.S. suppliers told them that there were no vessels available because they were supplying Houston following Hurricane Harvey. Then, in mid-September, they could not find vessels because they were going to Florida following Hurricane Irma.

The vessels finally arrived in mid-October, but both the U.S. suppliers and my relatives lost a lot of revenue because consumers searched for substitutes in the emergency (e.g., foreign batteries, candles and inverters, among other items).

Repealing the Jones Act would allow Puerto Rico retailers to buy more, in a timely fashion, from U.S. suppliers while paying less for transportation. As a matter of fact, there was humanitarian aid stocked in U.S. ports while many Puerto Rican families were starving. There are other problems in the supply chain in Puerto Rico (e.g., inefficiencies attached to FEMA’s control of the ports) but vessels are part of the problem.

Without cabotage laws, there would be no regular service between Puerto Rico and the U.S. If many smaller economies in the Caribbean do not have regular problems in finding merchant marines, why would Puerto Rico encounter such problems?

In fact, many international merchant marines are so efficient that in less than 10 days, 11 international vessels were able to come to Puerto Rico.

Finally, I should point out that some U.S. merchant marines also have international operations through subsidiaries. Thus, with the repeal they will not be out of the market, per se: They will just have to stop raising the price on poor consumers, such as those in Puerto Rico, where, before the hurricane struck, 44 out of every 100 individuals lived in poverty.

If U.S. government wants Puerto Rico to “stand on its feet," then it should support the project of Sen. John McCainJohn Sidney McCainGOP strategist donates to Alabama Democrat Meghan McCain knocks Bannon: 'Who the hell are you' to criticize Romney? Dems demand Tillerson end State hiring freeze, consult with Congress MORE (R-Ariz.) to permanently end these cabotage laws that profit only four companies while harming both consumers and many other businesses.

José G. Caraballo is an assistant professor in the Business Administration College, a researcher at the Interdisciplinary Research Institute and the director of the Census Information Center at the University of Puerto Rico at Cayey.