Cabotage Law in Puerto Rico

We’ve been asked about cabotage law in Puerto Rico. It’s a confusing topic with many different points of view, so we’ll look at the controversies.

Cabotage is transport from one place in a country to another place in the same country by a ship (or plane, etc.) from another country. So a Canadian ship that picks up goods in New York and takes them to Florida is involved in cabotage. 80% of the countries with coastlines have laws restricting cabotage.

The U.S. has cabotage laws affecting air travel, and Puerto Rico has protested those laws and asked for special exceptions. But when we hear about cabotage law in Puerto Rico, we’re usually talking about the Merchant Marine Act of 1920, commonly known as The Jones Act.

Click through the link to learn the history and the details of the Jones Act. In brief, the Jones Act says that ships carrying goods from one U.S. port to another need to be American ships. More than half of the freight ships coming into Puerto Rico are foreign ships, usually bringing foreign goods from foreign lands. But a ship carrying goods from Florida to Puerto Rico has to be an American ship. It has to be American made, with an American crew, flying the American flag.

The Jones Act made headlines after Hurricane Maria. Many news outlets introduced the law, which most Americans had never heard of, as an obstacle to disaster recovery in Puerto Rico. While experts debunked that idea, leaders in Puerto Rico and in the states clamored for a waiver of the Jones Act.

Does the Jones Act mean higher prices?

American ships are more expensive to build and operate than ships from many other nations, just as American goods are often more expensive than foreign goods. For Puerto Rico, it would often be simpler for a foreign ship to stop and drop off goods on the way to a state. For example, a ship traveling from South America might stop in Puerto Rico with freight, pick up goods from Puerto Rico, and then make its way to Florida. That’s cabotage.

With the Jones Act in force, that’s against the law.

But it’s also against the law for a foreign ship to stop off at multiple ports along the Eastern seaboard. Goods have to be delivered to one U.S. port and then transported around the U.S. by American carriers. From one city in a U.S. state to another, trucks and trains can carry the freight cheaply. From a port in a U.S. state to Puerto Rico or vice versa, it’s got to be a ship or an airplane.

Some analyses have claimed that this makes the cost of living much higher in Puerto Rico. The extra shipping costs, the argument goes, make prices in Puerto Rico much higher than in the states.

Prices in Puerto Rico often are higher than in the states. But is this the result of the Jones Act? In a word, no. A can of soup selling in Puerto Rico for $1.81 costs $0.04 to ship in accordance with the Jones Act. That fraction of a cent doesn’t explain any price differences. Prices are set by retailers, manufacturers, and brands. Shipping costs account for very little of the price of goods.

What would happen without the Jones Act?

Those who argue against the Jones Act imagine that manufacturers in the states could choose to ship their goods to Puerto Rico on foreign ships. They suggest that goods might be cheaper that way, or that the cost of American shipping could be reduced by competition. The New York Fed’s report on the economy of Puerto Rico suggests a 5-year waiver of the Jones Act to see whether it makes a difference or not.

“While the Jones Act is often cited as a factor that raises business costs,” the report said, “there is no comprehensive, objective study assessing its potential effects on Puerto Rico’s shipping costs or the Island’s economy as a whole.”

The Government Accountability Office undertook a study of the question, but they concluded that “precise, verifiable estimates of the effects of the act, or its modification, are not available.” They found that shipping costs with foreign vessels were sometimes but not always cheaper, that companies in Puerto Rico sometimes chose foreign goods over U.S.-made goods because of shipping costs, and that shipping costs under the Jones Act were negotiated and varied widely. They also found that major retailers like Walmart didn’t consider shipping costs important in their pricing decisions. Those decisions are made at a corporate level, not in Puerto Rico. Other retailers said that their pricing was based on competitors’ prices and was not influenced by shipping costs. Overall, they found that pricing was too complex to connect directly with the Jones Act.

While we can imagine foreign ships carrying U.S. goods from Florida to Puerto Rico, it might not be cost effective for the shippers. Shipping companies say that the Jones Act keeps regular freight transport from the states to Puerto Rico on track. American ships carry goods to Puerto Rico from the states and from Puerto Rico to the states on regular routes. Foreign ships might not do that.

The Jones Act also allows for backhauls. Shipping companies told the GAO that their ships were about 80% full when traveling from the states to Puerto Rico, but only about half full when returning to the mainland. Because of this, Puerto Rican companies can get bargain rates when shipping their goods to the states. Would foreign flag ships offer backhaul services to the states? Probably not.

Statehood and the Jones Act

While it seems logical that the Jones Act might increase shipping costs to Puerto Rico and affect the cost of living, there is very little evidence that it actually does. A long waiver of the act could provide clear evidence one way or the other.

Alaska and Hawaii  are both subject to the Jones Act, while the U.S. Virgin Islands are not. It isn’t a matter of political status, and it would not be changed by a change in Puerto Rico’s political status. However, Puerto Rico would be in a stronger position to ask for an experimental waiver or a change in the law if she were a state. As a territory, Puerto Rico has no senators and no voting representative in Congress. As a state, Puerto Rico would have up to seven legislators in the federal government.

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