Jones Act Results in a Discrete Shipping Market between the United States and Puerto Rico

Jones Act requirements have resulted in a discrete shipping market  between Puerto Rico and the United States. Most of the cargo shipped  between the United States and Puerto Rico is carried by four Jones Act  carriers that provide dedicated, scheduled, weekly service using  containerships and container barges—some of which have exceeded  their expected useful life. Dry and liquid bulk cargo vessels also operate  in the market under the Jones Act, although some shippers report that  qualified bulk cargo vessels may not always be available to meet their  needs. Cargo moving between Puerto Rico and foreign destinations is  carried by numerous foreign-flag vessels, typically as part of longer global  trade routes. Freight rates in this market are determined by a number of  factors, including the supply of vessels and consumer demand in the  market, as well as costs that carriers face to operate, some of which are  affected by Jones Act requirements. The average freight rates of the four  major Jones Act carriers in this market were lower in 2010 than they were  in 2006, as the recent recession has contributed to decreases in demand. In contrast, foreign-flag carriers operate under different rules, regulations,  and supply and demand conditions and generally have lower costs to  operate than Jones Act carriers. Shippers doing business in Puerto Rico  reported that freight rates for foreign carriers going to and from foreign  ports are often—although not always—lower than rates they pay to ship  similar cargo from the United States, despite longer distances. However,  data were not available to allow us to validate the examples given or  verify the extent to which this occurred. According to these shippers,  lower rates, as well as limited availability of qualified vessels in some  cases can lead companies to source products from foreign countries  rather than the United States. 1). 2). According to shippers and carriers, several other factors not directly  related to Jones Act requirements in the Puerto Rico market contribute to  how freight rates are set, including the following:
For approximately 85 percent of the cargo moving between the United  States and Puerto Rico, freight rates are set on a negotiated basis   Although volume discounts are not unique to this  under contract.market or the global maritime shipping industry, large volume shippers  have more leverage to negotiate contracts with lower rates while small  volume shippers or those that require infrequent service will likely pay  higher rates. Many Factors Influence Prices of Goods in Puerto Rico and the Impact of Transportation Costs Likely Varies by Type of Good

The prices of goods sold in Puerto Rico are determined by a host of  supply and demand factors, similar to freight rates, and therefore, the  impact of any costs to ship between the United States and Puerto Rico on  the average prices of goods in Puerto Rico is difficult, if not impossible, to   On the demand side, key factors include the  determine with precision.state of the economy and associated level of income of consumers, the  tastes of potential consumers for various goods, and the extent to which  consumers have ready substitutes (of other goods or the same good from  elsewhere) available to meet their needs. According to MARAD officials, unrestricted competition with  foreign-flag operators in the Puerto Rico trade would almost certainly lead  to the disappearance of most U.S.-flag vessels in this trade. The nature of the service provided between Puerto Rico and the United  States could also be affected by a full exemption from the Jones Act. Potential Effects and Trade-offs of an Exemption to the U.S.- Build Requirement

Rather than allowing foreign carriers to provide service between the  United States and Puerto Rico, a different modification advocated by  some stakeholders would be to allow vessels engaged in trade between  the United States and Puerto Rico to be eligible for an exemption from the  U.S.-build requirement of the Jones Act. According to proponents of this change, the availability of lower cost  vessels could encourage existing carriers to recapitalize their aging fleets. Because of these price differentials, eliminating the U.S.-build  requirement and allowing Jones Act carriers to deploy foreign-built  vessels to serve Puerto Rico could reduce or eliminate U.S. shipyards’  expectations for future orders from this market and could have serious  implications for the recent order for two U.S.-built ships for this market  from one of the Jones Act carriers. Concluding Observations

The Jones Act was enacted nearly a century ago to help promote a viable  maritime and shipbuilding industry that would, among other things,  provide transportation for the nation’s maritime commerce and be  available to serve the nation in times of war and national emergency. However, it is not possible to measure the extent to which  rates in this trade are higher than they otherwise would be because the  extent to which rules and regulations that would apply to international  carriers’ vessels that may serve this trade are not known, and so many  factors influence freight rates and product prices that the independent  effect and associated economic costs of the Jones Act cannot be  determined. Homeland Security and DOT provided technical clarifications, which we  incorporated, as appropriate. DOT also generally agreed with the  information presented in the report, but noted that many of the issues  related to the Jones Act are both complex and multifaceted. We collected and analyzed data relevant to these markets and gathered  the perspectives and experiences of numerous public and private sector  stakeholders through interviews and written responses.
Why GAO Did This Study

Puerto Rico is subject to Section 27 of the Merchant Marine Act of 1920, known as the "Jones Act" (Act), which requires that maritime transport of cargo between points in the United States be carried by vessels that are (1) owned by U.S. citizens and registered in the United States, (2) built in the United States, and (3) operated with predominantly U.S.-citizen crews. The general purposes of the Jones Act include providing the nation with a strong merchant marine that can provide transportation for the nation's maritime commerce, serve in time of war or national emergency, and support an adequate shipyard industrial base. Companies (shippers) that use Jones Act carriers for shipping in the Puerto Rico trade have expressed concerns that, as a result of the Jones Act, freight rates between the United States and Puerto Rico are higher than they otherwise would be, and given the reliance on waterborne transportation have an adverse economic impact on Puerto Rico.
This report examines (1) maritime transportation to and from Puerto Rico and how the Jones Act affects that trade and (2) possible effects of modifying the application of the Jones Act in Puerto Rico. GAO collected and analyzed information and literature relevant to the market and gathered the views of numerous public and private sector stakeholders through interviews and written responses. GAO is not making recommendations in this report. The Department of Transportation (DOT) generally agreed with the report, but emphasized that many of the issues related to the Jones Act are complex and multifaceted. DOT and others also provided technical clarifications, which GAO incorporated, as appropriate.

What GAO Found

Jones Act requirements have resulted in a discrete shipping market between Puerto Rico and the United States. Most of the cargo shipped between the United States and Puerto Rico is carried by four Jones Act carriers that provide dedicated, scheduled weekly service using containerships and container barges. Although some vessels are operating beyond their expected useful service life, many have been reconstructed or refurbished. Jones Act dry and liquid bulkcargo vessels also operate in the market, although some shippers report that qualified bulk-cargo vessels may not always be available to meet their needs. Cargo moving between Puerto Rico and foreign destinations is carried by numerous foreign-flag vessels, often with greater capacity, and typically as part of longer global trade routes. Freight rates are determined by a number of factors, including the supply of vessels and consumer demand in the market, as well as costs that carriers face to operate, some of which (e.g., crew costs) are affected by Jones Act requirements. The average freight rates of the four major Jones Act carriers in this market were lower in 2010 than they were in 2006, which was the onset of the recent recession in Puerto Rico that has contributed to decreases in demand. Foreign-flag carriers serving Puerto Rico from foreign ports operate under different rules, regulations, and supply and demand conditions and generally have lower costs to operate than Jones Act carriers have. Shippers doing business in Puerto Rico that GAO contacted reported that the freight rates are often--although not always--lower for foreign carriers going to and from Puerto Rico and foreign locations than the rates shippers pay to ship similar cargo to and from the United States, despite longer distances. However, data were not available to allow us to validate the examples given or verify the extent to which this difference occurred. According to these shippers, lower rates, as well as the limited availability of qualified vessels in some cases, can lead companies to source products from foreign countries rather than the United States.
The effects of modifying the application of the Jones Act for Puerto Rico are highly uncertain, and various trade-offs could materialize depending on how the Act is modified. Under a full exemption from the Act, the rules and requirements that would apply to all carriers would need to be determined. While proponents of this change expect increased competition and greater availability of vessels to suit shippers' needs, it is also possible that the reliability and other beneficial aspects of the current service could be affected. Furthermore, because of cost advantages, unrestricted competition from foreign-flag vessels could result in the disappearance of most U.S.-flag vessels in this trade, having a negative impact on the U.S. merchant marine and the shipyard industrial base that the Act was meant to protect. Instead of a full exemption, some stakeholders advocate an exemption from the U.S.-build requirement for vessels. According to proponents of this change, the availability of lower-cost, foreign-built vessels could encourage existing carriers to recapitalize their aging fleets (although one existing carrier has recently ordered two new U.S.-built vessels for this trade), and could encourage new carriers to enter the market. However, as with a full exemption, this partial exemption could also reduce or eliminate existing and future shipbuilding orders for vessels to be used in the Puerto Rico trade, having a negative impact on the shipyard industrial base the Act was meant to support.