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New Study Sees Major Gains from Jones Act Reform

Summary:
Last year, the Cato Institute released a policy analysis highlighting the often-overlooked costs of the Jones Act to the American economy. Far from just raising transportation costs, the policy analysis argued that there are a whole host of indirect costs that are ultimately born by U.S. consumers and businesses.  A new study from the Organization for Economic Cooperation and Development (OECD) provides further evidence for such claims. It estimates that repeal or even partial liberalization of the law could produce economic gains of up to billion. As the report states: The total U.S. economy may benefit from an increase in final demand in the range of USD 22 billion (scenario 1 [in which the Jones Act’s domestic build requirement is eliminated]) and USD 74 billion (scenario 2

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Last year, the Cato Institute released a policy analysis highlighting the often-overlooked costs of the Jones Act to the American economy. Far from just raising transportation costs, the policy analysis argued that there are a whole host of indirect costs that are ultimately born by U.S. consumers and businesses.  A new study from the Organization for Economic Cooperation and Development (OECD) provides further evidence for such claims. It estimates that repeal or even partial liberalization of the law could produce economic gains of up to $64 billion. As the report states:

The total U.S. economy may benefit from an increase in final demand in the range of USD 22 billion (scenario 1 [in which the Jones Act’s domestic build requirement is eliminated]) and USD 74 billion (scenario 2 [assuming full repeal]) which represent a rise between 0.12% and 0.39 percent in the long-term. U.S. total output is likely to increase between USD 40 billion (0.1%) and USD 135 billion (0.4%). In terms of domestic value added the results amount to around USD 19 billion and USD 64 billion, making up an increase of around 0.1% to 0.36% for the total U.S. economy.

These figures are significant. To place them in perspective, the U.S. International Trade Commission estimated the 15-year increase in U.S. GDP from joining the Trans-Pacific Partnership agreement to be $42.7 billion. In other words, simply by removing the Jones Act, the United States could realize potential gains in excess of ratifying a major trade deal with eleven other countries including the world’s third-largest economy. And it wouldn’t require negotiations with other countries to do so.

Furthermore, the economic benefits estimated by the OECD do not include secondary effects such as reduced highway congestion, less pollution, or the removal of an irritant from U.S. trade relations. The OECD’s numbers, in other words, are perhaps best viewed as a conservative estimate of the gains that could be unlocked by Jones Act reform.  

So how are such numbers realized? In large part because of the benefits to industries that would see their transportation costs reduced, thus boosting their demand for transport services and increasing the amount of value added. This means more domestic economic activity. As the OECD report points out:

From an economic perspective, the Act evidently creates large cost inefficiencies by protecting the U.S. shipbuilding industry—a tiny economic sector in the U.S.—at the expenses of other U.S. industries with enormous economic potential…With the abolishment of the Act the associated gains will in the long-term more than compensate the initial losses incurred by the U.S. shipbuilding industry.

Finally, while Jones Act reform would lead to adjustment costs for U.S. shipbuilders facing competition, one of the OECD report’s key findings is that this sector would ultimately be among the chief beneficiaries of changes to this law:

In both simulation scenarios, the U.S. commercial shipbuilding industry has the potential to increase its final demand by around 70% from approximately USD 841 million to USD 1.43 billion and its total output by about 71% from USD 859 million to USD 1.47 billion. Despite the repeal of the local content requirement the domestic U.S. shipbuilding industry can largely benefit as reflected in the increase in value added of around USD 44 million. This is the result of the increased number of new ship orders following the reduction in sales prices.

This should come as no surprise. Rather than bolstering the U.S. shipbuilding sector, the findings provide additional evidence that the Jones Act is protecting it to death. Denied the benefits of foreign competition, this sector has failed to innovate and reduce costs, in turn depressing demand for its offerings. It is therefore unsurprising that the Jones Act fleet continues to decline. And if the Jones Act is harming U.S. shipbuilding—as it no doubt is—then why should the law be regarded as an asset to national security? The entire rationale for this law continues to fall apart. 

If Congress is concerned about the state of the U.S. shipbuilding industry, repealing the Jones Act needs to be on the table.

The Jones Act is no minor irritant or niche issue. As this latest OECD study and other reports have noted, it is in fact a profound burden, and one that the United States can no longer bear. It’s time for policymakers to take notice.

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