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Prices Of Goods Could More Than Double If Puerto Rico Is Exempted From Jones Act

Carriers present latest economic study on U.S. mainland-Puerto Rico maritime trade


October 25, 2001
Copyright © 2001 CARIBBEAN BUSINESS. All Rights Reserved.

Ocean freight rates between Puerto Rico and the U.S. mainland could increase as much as 90% for southbound traffic and five-fold (500%) for northbound traffic if the island was exempted from the Jones Act.

A study prepared by management and economic consultants Reeve & Associates and released on Wednesday by the Puerto Rico Maritime Alliance (PRMA) concludes, "There is no credible evidence that the Jones Act costs the residents of Puerto Rico any more than they would pay if they were not subject to it, and, in the event the Jones Act was no longer in force, it is highly possible that Puerto Rican residents would pay more for ocean freight with the U.S. mainland, particularly for shipments from Puerto Rico."

Since July, Puerto Rico’s Senate Foreign & Federal Affairs Committee has been studying the effects of a possible exemption of Puerto Rico from the applicability of the Jones Act. The Jones Act of 1920 requires, among other things, that goods moving in the U.S. domestic trade (for example between Puerto Rico and the U.S. mainland) be carried in vessels manned by U.S. citizens, owned by U.S. citizens, and built in U.S. shipyards.

The results of a confidential carrier survey of Puerto Rico’s five principal Jones Act ocean carriers indicated that, thanks to a high level of competition, high frequency of service, and excess capacity, freight rates in the U.S. mainland/Puerto Rico trade between 1991 and 2001 have decreased 35%, or an average 4.3% annually. In the past five years, southbound rates have fallen 4.1% and northbound rates 5% annually.

"This study points out that there are no sure benefits of getting rid of the Jones Act in Puerto Rico, and surely a downside," said Mike Roberts, a PRMA consultant. "There would be an adverse effect on Puerto Rico’s jobs and security issues which could be a concern. The Jones Act does not harm the island’s economy, and probably helps it."

While the report focuses on the economics and quality of service of the ocean liner shipping services in the Puerto Rico-U.S. mainland market, it warns that the Jones Act extends beyond other issues such as U.S. national security, specifically in Puerto Rico, since vessels’ officers and crews must be U.S. citizens and they control the deployment and operations of the vessels.

Other considerations are labor and environmental laws governing U.S. carriers’ operations, which would not apply to foreign vessels; and the economic growth brought about by employment of American citizens and the U.S. federal and Puerto Rican tax revenues (many foreign carriers in international shipping pay zero corporate tax.).

"Over the years, there has been a knee-jerk reaction from business organizations favoring Puerto Rico’s exemption from Jones Act regulations. But this had been done without empirical data that suggests that the volume imbalance found in southbound and northbound traffic will affect the costs, in this case, in favor of Puerto Rican shippers," said Mario Escudero, senior vice president and general counsel for Holt Group’s Navieras.

The study also examines Jones Act carriers’ cost structure, indicating that only 11% of the carriers’ total costs are related at all to the Jones Act. These costs are made up of crew expenses (8%) and vessels’ capital costs (3%). The remaining 89% of carriers’ costs include terminal charges (30%), sales & administration (18%) and inland transportation (17%), as well as equipment (10%), fuel (7%), and other miscellaneous expenses (6%) that have nothing to do with whether the Jones Act applies to Puerto Rico or not.

A Jones Act exemption in Puerto Rico could reduce to 8% the average total costs of Jones Act carriers (from the 11% mentioned previously). But the figure does not include key business expenses such as establishing intermodal transportation (ground and rail transportation between marine terminals and shippers) and marine terminal operations.

Another significant expense would entail the transfer of foreign cargo, usually shipped in twenty- and forty-foot equivalent units (TEU and FEU, respectively) to U.S. intermodal equipment. U.S. cargo transportation systems commonly use 45-, 48- and 53-foot containers with their accompanying trailer truck platforms. Conversely, U.S. shippers’ cargo equipment could not be efficiently accommodated on foreign ships originally built to accommodate TEUs and FEUs.

Finally, an analysis of the impact of Jones Act transport on consumer goods revealed that freight costs account for less than 1% of the good’s total retail price. Based on a survey conducted on Sept. 13 and comparing the cost of goods in Puerto Rico versus Jacksonville, Fla., the survey shows a cost percentage ranging from 0.1% to 0.9% (except in the case of paper towels where the added cost was 2%).

The PRMA is made up of ocean carriers, labor organizations, and others involved in the ocean shipping industry between Puerto Rico and the U.S. mainland. Members include the island’s five largest ocean carriers (CSX Lines, Crowley Lines Service, Navieras, Sea Star Lines, and Trailer Bridge), labor unions (International Longshoreman Association (ILA) Local 902 and Local 1575, International Union Local 506 and 402, Seafarers International Union, Union de Empleados de Muelles (ILA) Local 1901 and 1740, and Union de Tronquistas Local 901), and other related companies.

This Caribbean Business article appears courtesy of Casiano Communications.
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