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Home This Week Top Story Jones Act requirement comes under new light
Issued : Thursday, November 29, 2012 12:00 AM
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Jones Act requirement comes under new light

By : JAIME SANTIAGO
Edition: November 29, 2012 | Volume: 40 | No: 47

Costs tied to U.S.-built stipulation driving new wedge between supporters and detractors

Local detractors of the Jones Act, that for many years have unsuccessfully tried to have Puerto Rico excluded from the law's provisions, might find support from the least expected source, proponents of the law.

The defenders of the Jones Act—aka the Merchant Marine Act of 1920 requiring any shipment from one U.S. port to another be carried on vessels built in the U.S., owned by U.S. citizens and operated by a U.S. crew— have traditionally been opposed to any changes.

Now, a provision in the law, the requirement for U.S.-built vessels, is drawing serious scrutiny on both sides of the debate, and some Jones Act supporters are discussing the possible benefits of a partial exemption to the law that would do away with the U.S.-built vessel requirement:

—High cost of U.S.-built vessels increase the cost of moving freight and hinders competition.

Vessels are probably the biggest capital cost of a shipping company, and while U.S. shipyards are considered to be among the most expensive in the world and the cost of building domestic vessels continues to rise due to the overcapacity of vessel space in the global market, the price of new ships built outside the U.S. is falling, lowering shipping costs around the world.

Proponents of the partial exemption argue that ships are the primary asset of a shipping company and that expensive U.S.-built vessels translate directly into higher freight rates and less competition because the high cost of Jones Act shipbuilding is a barrier to the entry for new companies in domestic markets and hence competition; also, many argue that the aging vessel fleet currently being used in domestic trades, including Puerto Rico, is inefficient and too costly to operate and maintain.

"The Jones Act requirements have traditionally been based on national security concerns and at present the eight ships serving the domestic U.S.- Puerto Rico trade have an average age of 39 years," said Gualberto "Tito" Rodríguez, chairman of Caribbean Produce Exchange, Puerto Rico's largest produce importer and distributor. "The condition of these vessels doesn't serve either the national security interests of the U.S. or the needs of the Puerto Rico trade."

Rodríguez further explained:

"These ships' old technology makes them inefficient and expensive to operate and that higher cost is passed along to local consumers. We need newer, more-efficient vessels to service the local market, and U.S.-built-vessel costs are many times higher than foreign-built ones; that is why a waiver of the U.S.- built provision of the Jones Act is needed."

Others disagree on the impact the higher cost of U.S.-built vessels has on freight rates.

"Even though it is true that Jones Act vessels have a higher cost, the direct impact on rates isn't that significant," Frank Peak, a former shipping company executive told CARIBBEAN BUSINESS in a previous interview. "These ships are depreciated for an average of 30 years; depending on the weekly loads they might carry, the direct rate differential due to the higher vessel cost might fluctuate from $15 to $60 per container move."

MANY FEEL THAT JONES ACT PROTECTION DOESN'T GUARANTEE A STRONG DOMESTIC SHIPBUILDING INDUSTRY

Statistics show that even with the protection of the Jones Act provisions, it would be hard for the U.S. shipbuilding industry to compete and grow.

A recent Bloomberg report compared the cost of ships built in the U.S. with that of ships built in Korea, which has the three largest shipbuilding companies in the world.

Hyundai, the biggest, is building 10 ships of 13,800 TEUs (20-foot equivalent units) for a foreign-flagged shipping company, for about $120 million each or $8,685 per TEU.

By comparison, Matson Inc., a Jones Act carrier serving the Hawaii- U.S. West Coast trade lane, built its newest containerships in the 2000s in a Philadelphia shipyard at a cost of $60,384 per TEU, seven times the cost of the Hyundai-built vessels.

The Bloomberg report concludes that even with the U.S.-built provision of the Jones Act in place, the U.S. shipbuilding industry wouldn't prosper.

"It would be very difficult to revive large-scale deep-draft shipbuilding in the U.S.," the report states. "There are currently eight major U.S. shipbuilding yards primarily engaged in naval construction for the U.S. government. Since the termination of the federal Construction Differential Subsidy Program, a program whereby the U.S. government attempted to offset the higher shipbuilding cost in the U.S. by paying up to 50% of the difference between the cost of U.S. and non-U.S. construction in the mid-1980s, fewer than three deep-draft merchant ships have been built in the U.S. per year to meet the limited requirements of the Jones Act market."

Others feel that to boost the production of deep-draft merchant ships in the U.S. significantly, it would be necessary to make the U.S.- shipbuilding industry internationally competitive as it would have to build for export and sell most of their ships in the international market to achieve the required economies of scale. According to experts, the export imperative exists because no single domestic-shipping market in the world, including the U.S. Jones Act market, is sufficiently large enough to support a worldclass shipbuilding industry.

Three countries build more than 90% of the world's deep-draft ships: China, South Korea and Japan. Even Japan, with the smallest production, builds, on average, some 200 deep-draft ships a year, about twice as many as the existing Jones Act fleet of 98.

It would be necessary to develop U.S.-ship exports in the face of global over-capacity and established and highly competitive shipbuilding industries in China, South Korea and Japan.

CONGESTED U.S. MAINLAND LAND-BASED TRANSPORTATION

Another reason given by proponents of the partial Jones Act U.S.- built exemption is the need for alternatives to the existing inland transportation system in the mainland U.S.

For many decades now, railroads and highways have replaced the use of inland waterways as the main transport routes, but the country's economic and trade growth have overwhelmed their infrastructures' capacities, creating the need for alternatives.

The problem of rail and highway congestion has been identified in the continental U.S. as a barrier to increased export activity.

The U.S. Defense Department identified the same problem as a national security issue. After years of research, the Transportation Department presented as a solution the National "Marine Highway" program, designed to focus on the integration of marine routes into the nation's surface transportation system, that calls for the return of coastal shipping as a relief to this congestion.

Proponents of the partial U.S.- built exemption argue that U.S. construction costs shelved the majority of the projects.

According to information provided by Coastal Connect, a maritime technical group and freight forwarding company, looking at implementing a scheduled service of coastal ships that will operate parallel to the U.S. Interstate Highway 95 (I-95) corridor, the Transportation Department estimated that by 2020, highway congestion would be so severe as to virtually stifle commerce. This estimate was based upon the government's projection that freight transportation demand will increase by 60% within that time period. However, the date of gridlock on the nation's highway system has since been advanced to a much sooner date.

Currently, U.S. ports and inter-modal transport systems, or those of more than one carrier or mode of transportation in a single journey, are operating at capacity. The congestion at ports and on main highway corridors has reached a critical stage in terms of inefficiency, waste and environmental damage.

Federal agencies identified more than $67 billion annually in wasted motor fuel and time lost by the public due to highway congestion. The projections for the short- and long-term are worse.

The volume of containerized cargo into the U.S. was projected in 1999 to double by 2020. The Port Authority of New York and New Jersey now projects its container volume to double by 2013. To translate that congestion volume into highway statistics, the I-95 Corridor Coalition advised that trucks now move more than 165 billion ton-miles of freight through the Atlantic region annually. On average, 10,000 trucks use the I-95 corridor daily, and the area is projected to service 58,000 trucks a day by the year 2020.

Current interstate highway development is estimated at $32 million a mile, with the cost of each new interchange estimated at an additional $110 million. Environmentally, the costs of expansion are immense: Available land for widening highways is limited and environmentally sensitive, and the major interstate route of I-95 can't be double-tracked.

Many experts on the subject agree the nation's waterways are the solution, but vessels for the task aren't available.

"The solution to our nation's transportation capacity problem isn't within the Interstate Highway System," said Robert Kunkel, technical manager at Coastal Connect. "We need to develop an effective inland-waterway transportation system, and suitable vessel availability is essential to make this viable; we support the Jones Act and its provisions that protect U.S. seafarers' jobs, but modifying or creating a 'sunset waiver' around the U.S. build requirement of the Jones Act to lower construction costs and provide new tonnage is needed and works to achieve that end."

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