Antiquated Law Holding Back U.S. Supply Chain

Due to the Jones Act, a law passed in 1920, any vessel transporting freight from one U.S. port to another is subject to a strict set of legal criteria. Any ship engaging in such activity is required to 1.) be made in the United States, 2.) be owned by an American citizen, and 3.) be crewed by American citizens or legal residents. The motivation of this was to promote a domestic merchant-marine force and ship-building industry for national security and strategic reasons. However, these requirements substantially increase the cost of domestic trade by water.¹ In part for this reason, the majority of U.S. domestic freight is carried by rail and truck, despite the U.S. having an extensive coastline and navigable waterways. According to data from the Census Bureau, 68.5% of U.S. domestic freight is carried by truck (41.6%) and rail (26.9%). Including freight carried by both train and rail (18.4%), this figure comes out to 86.9%. Only 5.6% of freight is carried by water, mainly via inland water in the Mississippi River.

So, how do these requirements increase shipping costs for the U.S. economy? How could supply chains improve in the absence of these restrictions, and how would this affect the industrial real estate sector?

This law imposes higher costs for domestic trade via water in two primary ways: reducing supply and competition and increasing capital and operating costs.

Supply Reduction

The simplest way this law reduces the supply of vessels to transport goods within the U.S. is by banning foreign-flagged vessels from moving goods. Effectively, the entire stock of ships (except for U.S. flagged ones) across the globe is banned from operating between U.S. ports. For example, if an international container ship going from Houston to Shenzhen were to stop at Tampa, it would be unable to unload any goods there. International carriers are competitive with the cost of trucking. One analysis found a potential cost savings of 36% for transporting from Long Beach, CA to Memphis, TN via ship (assuming international costs) relative to train.²

A company looking to transport goods within the U.S. via water has a limited number of options. Each month, the Maritime Administration publishes an inventory of ships eligible to transport within the U.S. As of April 2023, there are only 93 ships eligible to move oil or freight from one U.S. port to another. Figure 1 reports these ships by type. The majority of these are tanker ships with 60% of the fleet. Because of replacement costs, the fleet has been shrinking and is older on average than international ships, leading to higher operating costs as well.³

Figure 1: Number of Jones Act Eligible Ships by Type

Cost Increases

The law leads to higher capital costs and operating costs. American-made ships are much more expensive than ones made abroad. Additionally, Americans command higher wages, inflating operating expenses for ships that are required to be fully crewed by them.

An analysis by the Congressional Research Service found that domestic coastal-sized ships are up to eight times more expensive than foreign ships due to lack of competition and economies of scale. While foreign-built coastal-sized ships cost around $25-30 million, domestic-built equivalents are $190-250 million. Figure 2 reflects the total cost estimates for the equipment to haul 23,000 tons. The train equipment needed (four locomotives and 220 rail cars) would cost $30 million. Additionally, coastal oil tankers made in the U.S. can be upwards of five times more expensive than foreign-produced ones. ⁴

Figure 2: Comparative Cost of a U.S.-Built Ship ($ Millions)

A study by the Maritime Administration found foreign-flagged vessels have much lower crew costs as a percentage of their operating costs due to their ability to find workers across the globe. Crew costs make up 68% of U.S. ships’ operating expenses, but only 35% for foreign-flagged ships.⁵ Clearly, the citizen manning requirement inflates the cost of domestic shipping via water. Together, requiring the use of more expensive ships and more expensive labor contributes to water-based shipping not being price competitive.

While we have demonstrated U.S. internal shipping costs are inflated due to this law, we have yet to explain why this is harmful. Shipping costs are one of many transaction costs involved with domestic trade. In general, transaction costs act as frictions that can prevent otherwise mutually beneficial transactions. This, in turn, limits the ability for specialization and trade lowering our productive capacity. Indeed, academic literature has found a 50% increase in shipping costs, all else equal, is associated with a 30-basis-point reduction in annual GDP growth for developing countries.⁶

Road Transport

Road transportation, while highly flexible, faces limitations in scaling costs effectively. Each additional container movement incurs a similar marginal cost. This mode is most competitive for short distances and smaller loads. Beyond these constraints, road transport becomes less viable economically.

Rail Transport

Rail transport, in contrast, demonstrates significant cost efficiencies, particularly for bulk cargo. A 10-car freight train, equating to the capacity of 600 trucks, underscores its advantage in handling heavy loads over long distances. Rail offers declining marginal costs as train sizes increase, presenting a greener and more energy-efficient option compared to road transport.

Maritime Transport and Containerization

Container shipping has profoundly transformed the economics of maritime transport, creating a ripple effect in global trade efficiency. In a bygone era, shipping could consume up to 10% of a product's retail price, but modern logistics has shrunk that figure to less than 2%. The leap in efficiency is most pronounced when considering the operational costs of mega-container vessels; a 5,000 TEU ship operates at half the cost per container compared to its 2,500 TEU predecessor. This level of scalability is not just incremental but pivotal, spurring cost-effective global transport of bulk goods.

The transformative power of containerization on maritime transport cannot be overstated; it has redefined efficiency and profitability, significantly diminishing both travel time and transport costs. Today's container vessels, boasting a capacity up to six times that of their predecessors, attribute their enhanced performance to swift transshipment facilitated by advanced cranes and the drastic reduction of port turnaround times from weeks to mere hours. Even as ship sizes scale up, operational times remain largely unaffected, thanks to increased crane support, although this necessitates more on-ground equipment. Container ships now spend most of their operational lifespan at sea, at speeds that eclipse traditional freighters, effectively reducing travel time for cargo by up to 80%. The efficiencies gained through modern shipping innovations casts a shadow on the outdated Jones Act, which has created inflated costs and a restrictive market environment.

Intermodal Freight Transport's Renaissance

Intermodal transport, the integration of different modes of transportation, could see a marked renaissance in the U.S. For instance, the ports of Los Angeles and Long Beach, already handling an impressive share of U.S. containerized freight, might witness shifts. Currently, many ships offload entirely at these ports, relying on road and rail to move goods inland.

Removing Jones Act restrictions could see ships distributing goods further along the coast, decreasing the current over-reliance on overland routes. The map below displays intermodal freight facilities, highlighting those with direct port connections with triangles. Regular shipping lines running north and south along the East and West coasts can help connect supply chains with these intermodal facilities closer to their destinations. Using water-based shipping reduces reliance on trucks and alleviates congestion on major interstates such as I-95, I-5, and I-10.

New Orleans, with its strategic positioning at the mouth of the Mississippi River, provides a clear example of the untapped potential. This port could become a pivotal redistribution point, integrating maritime and inland waterway transport, something that the Jones Act's vessel criteria might currently be hindering.

Shifting freight processing from expensive industrial markets like Los Angeles to cheaper ones like Seattle will help reduce costs for logistics providers and consumers. In this example, it would represent a roughly 40% industrial rent discount.

Global Maritime Network's Adaptation

The world's shipping lanes are not static; they ebb and flow in response to global trade dynamics. For instance, the Panama Canal, a vital conduit linking the East and West coasts of the U.S., stands to gain more prominence. Vessels like the New Panamax, designed to maximize the canal's size constraints, might become more common. Why? As already mentioned, the Jones Act imposes restrictions on the types of vessels used in domestic trade, often excluding larger, more efficient ships. Its removal could usher in these larger vessels, making routes like the Panama Canal more attractive.

Furthermore, ports like Savannah and Charleston, which play critical roles in global maritime networks, might find their positions bolstered. As ships potentially have more freedom in their domestic stops, these ports could handle increased traffic, serving both international and burgeoning domestic maritime routes.

Elevating Secondary and Tertiary Ports:

• Houston: Houston plays a significant role in the U.S. maritime logistics matrix. Its location near the Gulf of Mexico is a distinct advantage, acting as a gateway for both Atlantic and Pacific routes, especially when considering the Panama Canal's significance. Without the Jones Act, ships that typically bypass Houston for international routes might find it feasible to stop there, given its strategic location.
• Tampa: Tampa's port infrastructure is more suited for smaller vessels, which are more agile and can navigate its waters with ease. Without the Jones Act, international vessels that are typically bound by restrictions could now consider Tampa as a viable docking point, especially for routes that target the southeastern U.S. Moreover, Tampa offers excellent road and rail connectivity to Florida and the broader Southeast. Removal of Jones Act impediments could see ships offloading goods directly at Tampa, rather than at larger ports and then transporting goods overland.

Supply Chain Integration's New Paradigm

The potential shifts in maritime logistics would compel U.S. shipping companies to rethink their supply chain strategies. They might need to establish collaborations, particularly with international counterparts, to navigate the changing landscape. Ports like Houston could become focal points of these changes, necessitating significant infrastructural investments to handle the anticipated trade flows. If the Jones Act was abolished, it would require large scale audit/reexamination of every firm’s supply chain.

There are two additional benefits from overturning the Jones Act. First, it would lower costs of living for the residents of Puerto Rico and Hawaii, who have no choice but to import by boat. One estimate puts the cost on the Hawaii economy to the tune of $1.2 billion annually.⁷ Second, U.S. energy independence would improve. Much of the oil and gas produced in the Gulf Coast is not refined in the U.S. due to lack of capacity and pricing. One analysis found it costs around five times more to transport crude oil from the Gulf Coast to Northeastern U.S. refineries than from Eastern Canada.⁸ Without the Jones Act, U.S. oil imports would likely decline as we consume more of our domestic production.

In conclusion, the current law as it stands acts effectively as a partial blockade on trade. The U.S. is sub-optimally connected with global supply chains. Due to the higher costs imposed by this law, water-based shipping is largely non-price competitive within the U.S. In the absence of this century-old law, the U.S. would have a cheaper and more efficient supply-chain. Reductions in shipping costs would likely help reduce prices and push-back against above-target inflation.

Demand for industrial space would likely shift away from major ports such as Los Angeles and into smaller markets such as Seattle, Savannah and New Orleans. Lower rents in these markets would help logistics companies offer cheaper services. In summary, abolishing the Jones Act would shift industrial demand around geographically, lead to far more freight being carried by water, and increase economic growth through lower shipping costs.