Text of my Op-Ed on Puerto Rico & Jones Act in July 2018 Marine Log

Hurricane Maria had a devastating effect on Puerto Rico and has brought the Jones Act back into the news. This law comes with an economic cost, but the shrillness in recent articles is out of balance with the facts. I’ll compare the claimed costs to a rigorous analysis of the real costs and highlight an unintended consequence that would likely result if the law didn’t apply to Puerto Rico.

In May, the NYC Bar Association issued a 15-page report in support of exempting Puerto Rico from the Jones Act. The report claimed that the Jones Act costs Puerto Rico at least $537 million annually. In October, 2017, a National Review article pegged the annual cost at $850 million. In a September, 2017 New York Times article entitled “The Law Strangling Puerto Rico”, the claimed 15% drop in consumer prices that would result from repealing the law, equating to a cost of $9 billion annually. 

These divergent figures lack any real explanation and are referred to as estimates. They share another characteristic: they are all ludicrous and collapse under the weight of a credible analysis.

Almost all goods moving by water between the mainland and Puerto Rico go via the Jones Act container carriers. Collectively, their total revenue last year was $800 million. It is nonsensical to claim a cost above that figure.  There is certainly a wage cost difference that impacts the cost of crewing and building U.S. flag vessels. This is a macro difference and the latest figures from the World Bank show U.S. per capita income at 5.66 times worldwide per capita income. The actual cost difference in crewing and building an American ship compared to a typical foreign flag ship is currently 4 to 1. That does not mean, however, that container shipping costs would go down in that proportion with foreign flag vessels. 

In these integrated systems, costs related to the ship are just 25% of total costs. Cargo handling, terminal, equipment, trucking, inland transportation, maintenance, sales and G&A costs make up the majority of the costs in container shipping. Those costs are unaffected by flag registry.  

Likewise, the largest component of vessel costs, fuel, is the same for a Jones Act or foreign flag vessel. The only costs that are affected by the Jones Act in Puerto Rico amount to some 12% of total costs. Applying the 4 to 1 relationship to those costs, the use of foreign flag vessels would reduce costs by 9%, resulting in savings of approximately $72 million annually.     

Without minimizing the impact of $72 million per year, I note it is 125 times less than the figure claimed in “The Law Strangling Puerto Rico” article. At 7/100ths of 1% of Puerto Rico’s $102 billion annual GDP, the Jones Act isn’t the culprit it has been made out to be. Based on a factual analysis, if Puerto Rico didn’t have the Jones Act, it would immediately benefit from $72 million in cost savings. 

Another immediate effect would be the withdrawal of U.S. flag vessels as the 9% reduction is well above typical profit margins and they couldn’t compete.  However, a much more foreboding consequence for Puerto Rico would occur shortly thereafter and it is not being given any attention.

Maps show Puerto Rico is almost no deviation for ships going between the mainland and South America. The South America market is heavily skewed northbound, while the Puerto Rico market is more heavily skewed southbound. Without the Jones Act, these facts will come together to have Puerto Rico served by foreign flag carriers en-route to South America. While southbound shippers may be indifferent to this, a change from direct service to en-route service will have pronounced effects on northbound shippers. With four times as many loaded containers going southbound to Puerto Rico versus northbound, today the sharp imbalance results in extremely low rates in the northbound direction. 

The imbalance goes away with en-route service as the foreign carriers will load up northbound with containers from South America. Northbound shippers from Puerto Rico would at least need to meet that rate to displace a South America load. Transit times would go up as loads would get to the mainland only after riding ships that first went to South America. 

As northbound rates from South America are more than $3,000 per load compared $300 per load from Puerto Rico, there will be more than a ten-fold increase for Puerto Rico manufacturers who ship products to the mainland. This would be devastating to large Puerto Rican employers like Bacardi and Goya. If such a geometric rate increase resulted in Bacardi and other rum manufacturers shifting production away from Puerto Rico, the result would be cataclysmic. 

The government of Puerto Rico is rebated some $400 million annually in the form of federal excise taxes on rum produced in Puerto Rico and sold on the mainland. Changes in the supply chain risk this major source of revenue. 

Policy makers need to focus on the real math and all the potential consequences before making any changes here.