SAN FRANCISCO (Reuters) - Tensions over a 95-year-old shipping law have reignited after Puerto Rico’s governor said it has contributed to the island’s dire fiscal situation, a charge met with fierce resistance from the U.S. shipping industry but support from some oil companies and economists.
In a speech on June 29 outlining Puerto Rico’s $72 billion debt burden, Governor Garcia Padilla called for the island to be exempted from the Jones Act, which requires ships carrying goods from one U.S. port to another to be built in the United States, have U.S. owners and be mostly staffed by U.S. crews.
Because it is an island, Puerto Rico relies heavily on ships to bring goods from the U.S. mainland to its ports.
A 2012 report by two University of Puerto Rico economists concluded that the policy translated into a $537 million hit to the island’s economy in 2010, and recommended the statute be phased out.
Discussion of the Jones Act comes after Padilla shocked bond-holders last week by saying he wants to restructure the huge debt and postpone bond payments, after a nearly decade-long recession characterized by high unemployment.
What part the Jones Act has played in leading to Puerto Rico’s current fiscal crisis is hotly debated. Shipping companies say the island has benefited from years of reliable service. Critics say it has unfairly raised prices to the detriment of Puerto Rican businesses and people.
“It is unfortunate that the Jones Act is being used as one excuse for the financial crisis, which was brought about by too much public-sector borrowing and spending,” said Mark Miller, an official with Crowley Maritime Corp, a major shipping company servicing Puerto Rico.
(Graphic on Puerto Rico's Jones Act effect link.reuters.com/kef25w)
Crowley, along with Trailer Bridge Inc, Sea Star Line LLC and National Shipping of America, is responsible for most of the shipments from U.S. states to Puerto Rico. Trailer Bridge, Sea Star Line, and National Shipping of America did not respond to a request for comment.
The American Maritime Partnership (AMP), the powerful lobby group for the U.S. shipping industry, attacked a separate report released on June 29 by former IMF economists, which was requested by Padilla’s administration and which found that the Jones Act was hurting Puerto Rico’s economy.
The report found that the price of imports from U.S. states was at least double that in neighboring islands like the U.S. Virgin Island, which is not covered by the act.
Pro-growth reforms like a cut in transportation costs through a Jones Act waiver are needed to restore competitiveness and help Puerto Rico out of its financial pit, the report said.
U.S. shipping interests disagree.
“The statements about the Jones Act in the (former IMF economists’) report are overly simplistic, completely one-sided, and just plain wrong,” said Mark Ruge, counsel to AMP.
He pointed to a 2013 report by the Government Accountability Office (GAO) which said there are too many factors at play to estimate the economic impact of the Jones Act on prices in Puerto Rico.
While shippers doing business in Puerto Rico reported that freight rates are often, but not always, lower for foreign carriers, the GAO said it was unclear what impact modifying the Jones Act would have on the economy.
Puerto Rico is unlikely to win an exemption, which are usually only granted by the Department of Homeland Security during national emergencies, like Hurricanes Sandy and Katrina, when fuel and other supplies are desperately needed.
An exemption could have a substantial impact on the U.S. territory, which in 2013 imported $45 billion and exported $62 billion in goods, according to the Government Development Bank of Puerto Rico.
Opponents of the act have some powerful allies, including oil companies, which argue that there aren’t enough U.S.-built ships available, leading to expensive bottlenecks.
“It’s inefficient and it distorts the market,” said David Hackett, president of Stillwater Associates, a transportation energy consulting company.
“It makes life more expensive for people living on islands like Puerto Rico, Guam, Hawaii and those in Alaska.”
Hackett notes that the U.S. East Coast imports 500,000 barrels of gasoline a day from overseas while the Gulf Coast exports nearly that same amount to foreign buyers.
A primary reason the Gulf Coast does not simply send its gasoline to the East Coast is because of the Jones Act, which makes it prohibitively expensive to move the freight.
Another prominent Jones Act opponent is Sen. John McCain, who has offered legislation on the topic in the past that failed to gain traction. He has called AMP “as powerful as anybody or any organization I have run up against in my political career.”
The Jones Act was first adopted in 1920 to ensure that U.S. merchant marine ships remained capable of serving military needs in the event of war or national emergency and to ensure a strong domestic maritime industry.
AMP still touts the act as critical to national security and says that without it, the United States would be dependent on foreign-owned and flagged vessels, leaving it shorthanded in the event of a crisis. U.S. presidents from Ronald Reagan to Barack Obama have endorsed it as important to national security.
Jones Act supporters say it promotes jobs in domestic shipbuilding. It has wide support in Congress because workers in all 50 U.S. states make components for the vessels.
Congress reaffirmed its support for the Jones Act last year when it passed overwhelmingly as part of the Defense Authorization Act.
Pedro Pierluisi, Puerto Rico’s resident commissioner in the U.S. Congress, introduced a bill in July 2013 for the U.S. territory to receive an exemption from the Jones Act, but he is skeptical of its chances.
“To say this legislation faces political headwinds in Washington is a serious understatement,” he said.
Editing by Stuart Grudgings