Trade in the United States is disjointed by a rule that is meant to promote the American shipbuilding industry but instead hurts all the others. The Jones Act demands that trade traveling from one port to another in the U.S. must travel on ships built, owned, and operated by U.S. citizens or permanent residents. Since the American shipbuilding industry isn’t competitive compared to those in other places in the world, the Act severely limits trade between ports. For instance, no liquified natural gas ships are built in the United States, so despite the massive amounts of LNG exported from Texas to places like Europe and Asia, the people of Boston are stuck buying LNG from places like Russia. India has had similar laws on its books but has now decided to do away with them to promote its coastal trade. Colin Grabow explains at the Cato Institute:
In an ambitious move to promote coastal shipping, Indiaโs governmentย reportedlyย plans to abolish cabotage restrictions that prevent foreign vessels from transporting goods between the countryโs ports. The rationale is easy to understand. With Indiaโs merchant fleetย comprisingย less than one percent of the worldโs deadweight tonnage (essentially, carrying capacity), the existing cabotage law places the vast majority of the worldโs shipping offโโlimits for transportation within India. That means fewer options, higher prices, and added pressure on other transport modes such as trucking and rail.
If India proceeds with the planned opening of its domestic maritime market, it will continue something of aย recent international trend. In 2021 Chinaย relaxedย its protectionist maritime measures on aย trial basis to allow theย transshipmentย of international cargo via Chinese ports on foreignโโflagged ships. And last year Brazilย easedย its cabotage laws to bolster competition and the use of domestic shipping. Canada, meanwhile, extended limitedย cabotage privileges to European Union vessels as part of aย trade agreement with the EU that took effect in 2017.
Past decades have seen other notable examples of cabotage restrictions being pared back. In 1993โ2004 the European Unionย liberalizedย maritime cabotage among EU members, and in 1993 New Zealand allowed foreign vessels visiting the country in the course of conducting international trade to engage in limited domestic transport. In the latter case, even this relatively modest step appeared to produce significant benefits, correlating with aย 20โ25 percentย decline in freight rates from 1994โ2000 and improved service.
In stark contrast, the United States clings to the 103โโyearโโoldย Jones Act, described by the World Economic Forum as the worldโs โmost restrictive exampleโ of aย cabotage law. The title is well deserved. Aย 1991 U.S. Maritime Administrationย summaryย of the worldโs cabotage laws, for example, found the United States was one of just six countriesโBrazil, Egypt, Indonesia, Peru, and Spain being the othersโthat required vessels used in domestic trade to be constructed in that same country. Since then, Spain has discarded its prohibition on foreignโโbuilt vessels, Brazil has liberalized its cabotage law, and the other countries have requirements significantlyย less severeย than those of the Jones Act.
Numerous other countries, including neighboringย Canadaย andย Mexico, also already have commonsense waiver provisions allowing the use of foreign vessels if no domestic vessel is available. The United States, meanwhile, only allows Jones Act waiversโrarely issuedโfor reasons ofย national defense, and in recent years has made it evenย moreย difficultย to obtain them.
Unwillingness to reform or repeal the Jones Act is particularly unfortunate given theย significant gainsย the United States stands to reap from liberalization. That approximatelyย 40 percentย of the U.S. populationโincluding over 5.5 million Americans in Alaska, Guam, Hawaii, and Puerto Rico who heavily rely on marine transportโlives in coastal areas speaks to the opportunity costs stemming from inefficient (orย nonโโexistent) domestic shipping. Evenย modest reforms would still pay considerable dividends.
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