Jones Act Closed ‘Loophole’ That Could Help Hawaii, New Article Shows

by Mark Coleman

There is an argument floating around that if the protectionist federal maritime law known as the Jones Act really were a problem for Hawaii, American companies would just ship their goods to the islands by way of Canada or Mexico. 

Sad to say, it isn’t so.

Nevertheless, that’s what a prominent state senator told us recently at the institute, during a conversation in which he said he agrees with many of the institute’s positions, but not our support for Jones Act reform.

Not long afterward, Grassroot Institute of Hawaii research associate Jonathan Helton looked into the senator’s claim. The result is his new article, “Jones Act closed loophole that could help Hawaii.” It begins by explaining why anyone would want to avoid using Jones Act ships to transport goods between U.S. ports in the first place.

Basically, it’s because the Jones Act requires that all goods carried between U.S. ports be on U.S.-built and flagged ships that also are mostly owned and crewed by Americans.

“This makes it significantly more expensive to transport goods to Hawaii,” Helton says, “not only because of how the act limits foreign competition, but also because ships built in the U.S. are at least four to five times more expensive than ships on the world market.”

As the institute has noted repeatedly, these protectionist Jones Act measures add to the cost of shipping for virtually all Americans, while for Hawaii residents in particular, its strict regulations cost about $1.2 billion a year, or about $1,800 per average family, according to a 2020 institute study.

With all due respect to the state senator, Helton found that, in fact, there was once such a loophole in America’s “coastwise” maritime laws, only it was the 1920 Jones Act that closed it.

Before the days of the Jones Act, Helton writes, American waterborne transport companies still were protected from foreign competition, but savvy American companies doing business with Alaska figured out they could save money if they bypassed U.S. ports such as Seattle and instead sent their merchandise by rail to Canada, from where they could use foreign ships to carry their merchandise the rest of the way.

This didn’t sit well with U.S. Sen. Wesley Jones, a Republican representing Washington state, who considered it an egregious loophole to America’s existing coastwise laws. Companies in his home state were losing money to foreign ships operating out of Canada’s ports, and he wanted to stop that.

Thus, in the text of the Merchant Marine Act of 1920, of which the Jones Act is Section 27, Jones included wording that would eliminate the workarounds. Today, the law’s wording is the same as it was in 1920: “A vessel may not provide any part of the transportation of merchandise by water, or by land and water, between points in the United States to which the coastwise laws apply, either directly or via a foreign port.”

According to Helton, “By land and water” is the critical part of the law. 

“Trucks or railroads were now off-limits for U.S. businesses seeking a workaround. Anyone wanting to ship goods between U.S. ports on foreign ships by just moving them across the border would have to bear the brunt of the Jones Act’s requirements”

Meanwhile, Helton found there actually is still a so-called Jones Act loophole, one apparently not anticipated by Sen. Jones. 

“It materialized shortly after the Jones Act’s passage,” Helton writes “and has been recognized policy [by U.S. Customs and Border Protection] since at least 1938.”

Basically, he says, a company can use foreign ships to transport goods from one U.S. port to another, but only if at some point during the journey the goods are offloaded at a foreign port and substantially modified, after which they can continue their journey to the second U.S. port via a foreign vessel.

Helton explains how this “manufacturing loophole” has helped Hawaii in the past, though these days it isn’t one upon which U.S. industries can rely.

In the end, Helton says, “Sen. Jones wanted to reserve domestic water transportation for U.S. ships. And he made sure that loopholes were hard to come by. Today, the best loophole we could wish for is significant Jones Act reform.”

MARK COLEMAN is managing editor and communications director for the Grassroot Institute of Hawaii, an independent nonprofit research organization that seeks to lower the cost of living, expand opportunities and foster prosperity for all in Hawaii.

Any opinions, advice, or statements contained in our Open Forum section are those of the author and/or the organization represented, and do not necessarily reflect the opinions of the Hawaii Filipino Chronicle board’s editorial staff.