China’s New Year celebration is set for January 25, marking the end of the Year of the Pig and the start of the Year of the Rat. They’ll be celebrating the news that their economy has surpassed Japan’s and is now number two in the world, second only to the USA.
2020 will also be the 100th anniversary of an important U.S. law that is currently facing criticism, but its repeal will benefit China’s growth if this happens during the Year of the Rat. The law, known as the Jones Act, is a key part of the Merchant Marine Act of 1920.
A major part of China’s growth has been through its heavily subsidized industry of building and operating ocean-going ships. They’ve become the dominant players in this industry, which transports 90% of all global trade and involves some 41,000 ships carrying containers, oil, grain, and all manner of goods and equipment across the seven seas.
Separately, there are about 40,000 usually-not-as-large vessels that carry domestic cargo between destinations solely within the United States. Think of ore carriers on the Great Lakes, barges on the Mississippi, tugboats in our major ports, and all the vessels on our inland waterways.
Like much of the world, the United States has what are known as cabotage laws governing internal trade. In our case, the Jones Act essentially requires cargo transported between domestic ports to be carried on vessels that are American-built, American-flagged and owned, and American-crewed.
This is the market that would be opened to China (and others) if our Jones Act is repealed.
As explained by MARAD (the Maritime Administration within the U.S. Department of Transportation):
Domestic waterborne transportation is . . . between ports, coastlines and almost all states and territories — including Alaska, Hawaii, and Puerto Rico. Each year, tens of thousands of vessels transport over a billion tons of cargo, with hundreds of ferry operators transporting millions of passengers, contributing billions to our nation’s economy through freight and passenger revenue, taxes and private investment. . . . To ensure the survival of this key industry, Congress has passed legislation (the Jones Act) reserving this waterborne domestic trade to specific U.S. vessels.
Despite these benefits, a group is calling for the end of the Jones Act under the notion that foreigners could handle our internal cargoes more cheaply. That would be the ultimate example of a foolish effort to be thrifty. Even the father of modern capitalism, Adam Smith, wrote in The Wealth of Nations that countries should protect their maritime trade from foreign competition. This is not just about the economy; it’s about the national interest and security.
What would happen if our domestic shipping began to resemble international shipping?
The Bureau of Transportation Statistics reports that now only 182 of over 41,000 ocean-going cargo ships are American (0.4%). The vast majority are from subsidized China, South Korea or Japan. Currently being built worldwide are another 2,995 ships (as tracked by the shipbrokers BRS Group). Only 8 of those commercial ships are being built in America.
And the smaller the U.S. maritime fleet, the less it can assist our military in times of emergency.
The issue is subsidies, not free enterprise.
China’s government has an official plan to invest mega-billions not only to control global cargo ships but global transportation itself. Years ago it announced its Belt and Road Initiative whereby China invests subsidizes its state companies not only to build cargo ships but also to control port facilities all over the globe. It continues taking these over on both ends of the Panama Canal, in Europe, in South America, in Africa, the Middle East, the Indian Ocean and of course the South China Sea—covering the major global shipping lanes. China’s sole setback came earlier this year when the Trump Administration forced China to divest itself of a major shipping terminal in Long Beach.
According to a Harvard study “Chinese subsidies dramatically altered the geography of production and countries’ market shares,” a decision reportedly made in 2006 when China designated shipbuilding a “strategic industry.” Furthermore, as part of my own research, including informal interviews with MARAD officials, I have discovered that China offers an estimated $7-million per year per ship, per year subsidy to reduce operating costs. Consequently, China has an estimated 13-20% advantage in ship construction costs – not counting the lower regulation and wage rates in the Chinese mainland – which would give them even more of an advantage.
Many other countries have major shipbuilding subsidies (which the U.S. does not), but none as large as China’s.
Many Jones Act opponents promote the notion that Americans will save money by adopting a made-in-China philosophy with shipbuilding. That may be good business on non-vital goods, but with shipbuilding it comes at the expense of pushing the United States out of a crucial industrial area.
We spend great amounts on national security because we know it’s about more than money. Our policy has been to stop nations from subsidizing major industries which they hope to monopolize and it should be no different with shipbuilding and the Jones Act.
Repealing the Jones Act would be surrendering to nations that want to buy a global maritime monopoly, making us dependent on foreign interests in order for the U.S. to engage in world trade. That would be bad any year, and especially during the Year of the Rat.
Former Congressman Istook held key positions in Congress over trade and transportation. He now practices law, teaches political science, and is a Distinguished Fellow with the Frontiers of Freedom Foundation.