Puerto Rico vs. The Jones Act

The perennial debate over the Jones Act’s impact on domestic trade and the overall general economy is heading for yet another showdown as the General Accounting Office (GAO) prepares an economic impact study of U.S. cabotage laws on the Commonwealth of Puerto Rico, which will be released either late this year or early next year. Hawaii, Alaska and the territory of Guam, which like Puerto Rico is also heavily reliant on federal aid, have protested about the Jones Act’s adverse effects on their economies as well.

In 2010 the U.S. Census Bureau did an analysis of export declarations filed by U.S and Puerto Rican shippers’ based on Schedule B forms submitted to U.S. Customs. The Foreign Trade Division of the Bureau reported that U.S. companies sent 4.5 billion kilos of freight valued at $11.4 billion on Jones Act vessels to Puerto Rico. In turn, Puerto Rico exported 734.6 billion kilos of cargoes valued at $29.9 billion to the U.S., which is a 162% increase in product value flowing back into the U.S.

Since Puerto Rico has no natural resources of commercial value and 90% of its exports are shipped to the U.S., the facts are overwhelmingly conclusive that raw materials are sent to the island and manufactured goods are returned to the mainland. Moreover, U.S. corporations have invested heavily in the Puerto Rican economy since the 1950s and still receive duty-free access as well as robust tax incentives. 

In 1998 the Clinton Administration made permanent Section 30A of the IRS tax code, which allows U.S. companies in Puerto Rico to claim 60% of wages and capital investments in tax credits, estimated to be about $417 million annually. Puerto Rico’s per-capita income is about $16,300, which is the highest in the Caribbean basin and 73rd in the world. While Puerto Rican workers’ pay no federal income tax, they are covered by the U.S. Federal Fair Labor Standards Act, which guarantees the federal minimum wage of $7.25. But they do pay into Medicare and Social Security, which affords its citizens old-age benefits.

In the bonus round of free money for Puerto Rico known as the ‘cover-over’ tax, the U.S. Treasury returns to the island nation about $371 million annually in collected excise tax for rum it imports to the U.S. If that isn’t a sweetheart deal enough, the Caribbean Basin Economic Recovery Act of 1983 also gives the Puerto Rican treasury all excise taxes collected on rum imports from any source, including foreign countries. Imagine getting money on rum it doesn’t even produce?

A One-Way Street 

On April 26, 2012, a study titled “The Economic Impact of the Jones Act on Puerto Rico’s Economy” was submitted to the GAO by University of Puerto Rico-Mayaguez professors Jeffry Valentin-Mari, Ph.D. and Jose I. Alameda-Lozada. Ph.D. The 88-page report, aimed at destroying U.S. cabotage laws, displacing U.S. flag operators and putting thousands of Americans out of work, is filled with superfluous and inadequate information unworthy of an economic study about the Jones Act’s costs to the Puerto Rican economy.

The report is not only disjointed but offers no overwhelming conclusions or compelling reasons to terminate the cabotage law. These professors of economics do not provide any empirical data whatsoever of their own. Instead they fill the report with a mishmash of information readily available on the Internet. They conclude that the impact cost ranges from $656 million to $4 billion and quote the economic costs cited by Paquita Perquera in 1964. Professors Mari and Lozada also say the Jones Act is an “oligopolistic structure controlling productive efficiency of trade commerce in Puerto Rico.” Well, considering that 90% of the island’s exports are sent to the U.S. and U.S. taxpayers have built its infrastructure, this statement is not only disingenuous but bites the hand that feeds it. 

The professors also toss in a few “econometric models,” which offer no mathematical information about the impact of cabotage costs, a WTO statement on foreign trade liberalization, an OECD comment on common shipping principles and a chart offering foreign registrants of flag lines. Obviously, the professors did not know foreigners can own up to 24.99% of a Jones Act company. The report’s motives are clear as the authors state the expansion of the Panama Canal could potentially make Puerto Rico a transshipment hub to the U.S. They recommend to the GAO that there only be a 50% Jones Act trade requirement and that all foreign flags in the trade have 50% Puerto Rican ownership.

The GAO Analysis Quandary

The Jones Act transports about one-quarter of the nation’s cargoes at only two percent of the national freight bill. Furthermore, U.S. cabotage laws not only create $100 billion in economic output but also sustain around 500,000 jobs, which generate about $29 billion in total compensation. U.S. operators have privately invested more than $34 billion building 40,000 vessels in the nation’s shipyards. 

In 2010, Jones Act companies transported about $42.3 billion worth of goods in the Puerto Rican trade at an estimated transportation cost of $767 million, which is 1.66 percent of the value. Additionally, the Census Bureau reported in 2010 the government spent over $21 billion in expenditures on the island, which has kept its $64 billion economy from collapsing during the recession.

The Puerto Rican opposition claims that U.S. cabotage laws have suppressed its ability to trade effectively, but American taxpayers have invested heavily in its infrastructure, which has allowed Puerto Ricans to enjoy the 84th largest GDP in the world. The loss of Jones Act operators in non-contiguous trades will be devastating to the U.S. economy and American jobs, and its impact on national defense and DOD requirements will be incalculable.