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Journal of Commerce

Building Controversy


11 April 2005
Copyright © 2005 Commonwealth Business Media. All rights reserved.

Is there any other commercial law in the U.S. Code that raises passions among people the way the Jones Act does? In an era of deregulated markets and globalization, the law that Sen. Wesley Jones, R-Wash., sponsored in 1920 is an artifact of a time when national power meant protecting critical domestic industries from foreign competition. Ships in America's domestic maritime trades would be built by Americans, owned by Americans and sailed by American crews.

Eighty-five years later, an aging domestic maritime fleet makes U.S. shippers nervous about the reliability and future of maritime service. Orders for ship replacements are scarce, and the cost of new construction leaves some wondering if U.S. shipyards have priced themselves out of their own market. U.S. yards have turned out a handful of large vessels in the past few years, but a scarcity of orders forces them to rely on government business. In an era of tight federal budgets, there is barely enough defense construction and repair work to keep the yards afloat.

Now comes short-sea shipping, which is making new demands on the Jones Act fleet. The federal government has encouraged the transportation industry to look at coastwise shipping lanes as an environmentally friendly alternative to growing congestion on highways and railroads.

Entrepreneurs spin visions of commercial catamaran ferries speeding trailers and containers past landside bottlenecks at 40 knots or more, an unheard-of speed just a few years ago. Port operators see opportunities for new business. Transportation planners see a safety valve to prevent gridlock that could grind the economy to a halt.

The would-be short-sea industry has again drawn attention to the constraints of the Jones Act, but coming to terms with it is a question of political will. Defenders - the traditional tripod of owners, seafarers and builders - are well-entrenched and politically potent. One Washington attorney said that any challenge to the law brings 100 cruise missiles down on you at point-blank range. Love it or hate it, it's unlikely that the Jones Act will be repealed wholesale, but virtually no one in the field today advocates that. The issue of U.S.-owned ships crewed by U.S. citizens is a national security measure that makes sense in the post-9/11 era.

While the Jones Act will not yield to a frontal attack, some see opportunity to gain ground on the flank. The law appears to be weakest in the U.S.-build requirement. While other nations protect their domestic shipping, the U.S. is virtually alone in requiring those ships to be home-built. Carriers ask, if a U.S. trucker can buy a Volvo, or a U.S. airline can buy an Airbus, why can't they buy a foreign-built ship? There are standard designs for coastwise vessels that cost a fraction of the same ship built in the U.S.

Can the law be modified to accommodate short-sea? Maybe yes, maybe no. The battle has not yet begun. One thing is sure; the outcome will be critical for the short-sea industry.

Bob Kunkel, vice president for operations at Apex Marine Services in New York, said the U.S.-build requirement is not likely to be repealed. Maybe the government would grant temporary waivers to allow short-sea start-ups to buy foreign ships, and tie the waiver to a commitment to build American in the future. "I think that accommodation is to let some secondhand tonnage come in to start up immediately, and tie it in to a new-building contract with a U.S. yard that's ready to make that step," Kunkel said.

"I would fight it until my last second on earth," said Allen Walker, president of the Shipbuilders Council of America, one of two trade associations representing U.S. shipyards. He said short-sea wannabes that complain about U.S. prices often don't have any money to begin with. "There are a lot of people who talk to the shipyards," he said. "The shipyards put in a lot of time and money to develop designs and work with operators, just to find out at the end that these people don't have the means to pay for the vessels at any price. It happens all the time.

"The shipyards get tired of being the whipping boy. In the lifetime of a vessel, the capital cost of the vessel is a small part of the operating cost," Walker said. Operators in the U.S. noncontiguous Jones Act trades - Hawaii, Alaska and Puerto Rico - would side with the builders. A cheaper foreign ship means lower capital costs that would give competitors an edge over carriers with U.S.-built ships.

As chairman of SCOOP, the Short Sea Shipping Cooperative program sponsored by the Maritime Administration, Kunkel arguably has spent more time than anyone trying to resolve the shipbuilding issue. SCOOP met with builders to seek ways to lower costs. The builders were not receptive. "We got stopped dead in our tracks. We said to them, 'Look, you can't just walk away and say the cost is the cost.' We're trying to figure out how to break down the roadblock to get the building started," Kunkel said.

The Coast Guard enforces Jones Act rules that allow only a tiny fraction of a hull and superstructure to be foreign-made. What if the rules allowed builders to bring in foreign hull or superstructure components to be assembled in the U.S? Already manufacturers import foreign-built prefabricated engine room modules that are dropped into a hull, but Cynthia Brown, president of the American Shipbuilding Association, said such "super modules" violate the spirit of the Jones Act.

"We're seeing companies trying to stretch the envelope. That is a concern," Brown said. "Where the law never really addressed that initially, the intent was there. The definition of the law needs to be modernized to address that."

Construction costs are mitigated by series construction: building many copies of the same ship design. Former Maritime Administrator William G. Schubert said U.S. yards can and do build vessels that are competitively priced on the world market, when yards can benefit from economies of scale. "I think there are some creative ways to maintain the integrity of the Jones Act, keeping jobs in U.S. shipyards. I've always believed that," he said.

"How do you prime the pump to improve efficiency, which would stimulate even more series construction? I wracked my brain for years trying to figure out how that can be done," Schubert said. "I truly believe that it would be useful to look to the automobile industry. How do we maintain an automobile-manufacturing base in the United States? It's a strategic industrial base like the shipbuilding industry. We need to look for successful examples of how that was done." He said U.S. automakers reinvented themselves by adapting to the global market.

Brown said the Jones Act trade "has always been a protected market. The whole purpose was to have competition domestically, but not competition from abroad, which is highly subsidized. We have competition in the Jones Act. It is competition among U.S. companies that are playing by the same rules, where foreign governments don't play by those rules. Our government does not believe in subsidizing commercial shipbuilding. Every other government does."

If short-sea operators are concerned about the price of ships, Brown said they should raise their rates to cover their actual costs. "I think what happens is that your freight rates will go up to reflect the cost of transportation. If that's what the cost is, that's what the cost is. The cost needs to reflect the true cost, not artificial. Do you want a foreign government to subsidize our transportation rates?"

Kunkel's response: "It's fine for that statement to be made, but we're looking at a sector of the market where the rate hasn't been determined yet." Talk about higher rates, and there's a greater risk of failure before the industry gets under way. "The Jones Act is favored in Congress; it is favored in the U.S. industry. It has very strong backing. The attempt to make changes will only delay short-sea shipping more. We know that getting rid of the Jones Act is a dead-end argument. Instead of an argument, we should have a discussion of what is needed to make it more competitive."

A critical question that's missing from the short-sea debate is what do shippers want? Schubert said there has been much concentration on the supply side of the short-sea equation. "The demand side would be the customers that would use it. I was coming to the conclusion that we need to put much more focus on the demand side."

Five years ago, after a bitter and highly publicized battle between Jones Act defenders and a coalition that sought to repeal the U.S.-build requirement, the National Industrial Transportation League hosted discussions aimed at finding common ground between Jones Act shippers and carriers. "We tried to sit down and talk about the problems, to see if we could arrive at some business solutions," said Peter Gatti, the NIT League's executive vice president. "If a business solution wasn't readily available, we would try to work a result that would eventually lead to changes in the act to address that specific problem."

The biggest unresolved problem was replacing old Jones Act ships, some of which were built more than 40 years ago. "That issue has never been addressed, because it's so cost-prohibitive to the carriers to go out and build new tonnage," Gatti said. "That is one of the major obstacles behind the whole short-sea shipping effort. If the vessels are not there, how is it going to be a viable alternative to the other modes that clearly have an operating advantage?"

Gatti said Jones Act supporters fear a slippery slope. Opening the law to address one problem could unleash an avalanche of change that will obliterate the Jones Act. "That's a major threshold question," Gatti said. "Right now, you can talk to a lot of these guys privately, and they'll tell you that's exactly the way they view it." But the same supporters are reticent about speaking publicly.

"Protectionism has never benefited anyone in the industry," Gatti said. Once the U.S.-flag international trades had support from operating and construction subsidies. "Those things did not prevent companies from going out of business. It never has," he said. "Protectionism will never foster the vitality to keep this industry afloat, no pun intended."

Kunkel said he has attended every short-sea shipping conference in the past three years. "We're all walking away from these conferences and saying, 'What do we do now?' We say we need new technology. The shippers are saying they want to see speed to at least match what the truckers are delivering."

Replacing existing Jones Act tonnage is only one piece of the puzzle. If operators want high-speed ferries or other roll-on, roll-off ships, there is no alternative to new construction, Kunkel said. The impetus may come from the military. The Defense Department is considering high-speed ferries to shuttle troops and supplies to land from larger ships offshore. The military specifications may not be too much more than a commercial carrier's requirements, so a U.S. yard could build the ships in volume, and everyone saves money.

"Everyone will laugh at me, but 18 years ago, when people came to me and said they were going to build a 40-knot ship, I laughed, too," Kunkel said. "They're here, and the Army, Marines and Navy are all looking at them. That may be the conduit to get a series construction going."

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