Does the Jones Act double import prices in Puerto Rico?

Question

The Jones Act is a protectionist law passed in the 1920's requiring ships carrying goods between American ports to be made in America and crewed by Americans.

The Jones Act has become an issue recently because members of Congress have been requesting the Trump Administration to waive this requirement to facilitate supplies being sent to Puerto Rico in the wake of Hurricane Maria. In that context, Senator John McCain said this yesterday:

It is unacceptable to force the people of Puerto Rico to pay at least twice as much for food, clean drinking water, supplies and infrastructure due to Jones Act requirements as they work to recover from this disaster.

Is Senator McCain right that the Jones Act doubles the prices of imports to Puerto Rico? Have there been any economic analyses on this subject, either specific to Puerto Rico or more general analyses?

Answer 1

The Jones Act is a protectionist law passed in the 1920's requiring ships carrying goods between American ports to be made in America and crewed by Americans.

While this is accurate, it doesn't really explain why the Jones Act is problematic. The issue isn't necessarily carrying goods between United States (US) ports. It's that the Jones Act prevents a ship traveling to a mainland US port from offloading cargo at Puerto Rico as it passes.

A ship with cargo intended for Puerto Rico and with cargo intended for Miami goes past Puerto Rico without stopping and offloads all of its cargo in Miami. Then a US ship transports the cargo from Miami to Puerto Rico. Meanwhile, if the ship carries cargo for Jamaica, it can offload that and pick up Jamaica to Miami cargo to replace it.

My question is, is Senator McCain right that the Jones Act doubles the prices of imports to Puerto Rico? Have there been any economic analyses on this subject, either specific to Puerto Rico or more general analyses?

The Competitive Enterprise Institute says:

According to a 2011 study from the U.S. Department of Transportation’s Maritime Administration, U.S.-flagged vessels have daily operating costs more than twice those of foreign-flagged vessels.

This may be the source of McCain's claim.

Another possibility: the Cato Institute quotes the Federal Reserve Bank of New York as saying in 2012 (PDF):

It costs an estimated $3,063 to ship a twenty-foot container of household and commercial goods from the East Coast of the United States to Puerto Rico; the same shipment costs $1,504 to nearby Santo Domingo (Dominican Republic) and $1,687 to Kingston (Jamaica)-destinations that are not subject to Jones Act restrictions…

Note that $3063 is more than double $1504.

More generally, Jalopnik quotes the New York Times as saying:

A 2012 report by two University of Puerto Rico economists found that the Jones Act caused a $17 billion loss to the island’s economy from 1990 through 2010. Other studies have estimated the Jones Act’s damage to Puerto Rico, Hawaii and Alaska to be $2.8 billion to $9.8 billion per year.

According to Wikipedia, Puerto Rico imports $44 billion a year. Half that would be $22 billion, not $2.8 billion or $9.8 billion. This suggests but does not establish that McCain might have been referring to the cost of transportation (importing), not the cost of imports.

Answer 2

TL;DR: McCain did not invent that number (it does come from an economic analysis). But, it's complicated.

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In 2015, the Government Development Bank of Puerto Rico commissioned a report (archived version) to assess Puerto Rico's economy. The report titled "Puerto Rico - A Way Forward" (by former IMF economists Anne Krueger, Ranjit Teja, and Andrew Wolfe) became known as the "Krueger Report" and it includes the following item:

Transport costs. All islands, remote from the centers of economic activity, suffer from high transportation costs. But Puerto Rico does so disproportionately, with import costs at least twice as high as in neighboring islands on account of the Jones Act, which forces all shipping to and from US ports to be conducted with US vessels and crews. Even those that consider the negative effects of the Jones Act to be exaggerated – e.g., outbound cargo rates are lower than inbound ones, as ships would rather not return empty – concede it is a clear net negative. Puerto Rico also has local laws that add to transportation costs – specifically, prices and licensing requirements set by the Public Service Commission for ground transportation.

(emphasis mine).

Previous reports on the impact of the Jones Act have noted that it is not easy to tease out its effects from all the other factors affecting freight costs.

For example, a 2012 "Report on the competitiveness of Puerto Rico's economy", the New York Federal Reserve cited some representative numbers:

Available data show that shipping is more costly to Puerto Rico than to regional peers and that Puerto Rican ports have lagged other regional ports in activity in recent years. While causality from the Jones Act has not been established, it stands to reason that the act is an important contributor insofar as it reduces competition (shipments between the Island and the U.S. mainland are handled by just four carriers). It costs an estimated $3,063 to ship a twenty-foot container of household and commercial goods from the East Coast of the United States to Puerto Rico; the same shipment costs $1,504 to nearby Santo Domingo (Dominican Republic) and $1,687 to Kingston (Jamaica)- destinations that are not subject to Jones Act restrictions.

However, this report also acknowledges that

While the Jones Act is often cited as a factor that raises business costs, there is no comprehensive, objective study assessing its potential effects on Puerto Rico’s shipping costs or the Island’s economy as a whole. Experts on the Island have varying views on the magnitude of the act’s effect, but most agree that the net effect is negative—largely because the act boosts the cost of imported goods to Island residents but also because it makes exports less competitive and diminishes the viability of the Island as a major regional trans-shipment port. However, some in the shipping industry argue that the net effect is minimal - that the restrictions effectively help establish incentives for more reliable service and create jobs for American workers, many of whom are Puerto Ricans themselves, largely offsetting the adverse effects of higher costs.

Similarly, "Puerto Rico: Characteristics of the Island's Maritime Trade and Potential Effects of Modifying the Jones Act", a GAO report from 2013, concludes:

so many factors influence freight rates and product prices that the independent effect and associated economic costs of the Jones Act cannot be determined.

Also see: "Economic Impact of Jones Act on Puerto Rico's Economy", a report by two University of Puerto Rico economists presented to the GAO.

Answer 3

The claim in your question seems to be different from the claim in the quote from McCain. While the quote is vague in regard to what they are paying "twice as much" in relation to, comparing per-container prices for Puerto Rico, the United States and the Dominican Republic would suggest that the Act isn't doubling import costs.

According to the World Bank data for 2014, imports cost:

• 1,289 USD/container in the US;

• 1,145 USD/container in the Dominican Republic; and

• 1,350 USD/container in Puerto Rico.

I couldn't find any sources for individual prices on 'food' that would be liable to pass skeptics' criteria for sources, but there are numerous sites related to consumer prices, which are crowd sourced. I had a very hard time finding anything on them that even approached McCain's suggestion that Puerto Ricans were paying "twice as much" on anything that could be considered average staple food items.

It's important to understand that McCain has been trying to kill this act since at least 2015, and that the act itself only pertains to shipping between US ports. Nothing stops a Chinese freighter from taking a direct route to Puerto Rico, its main impact is to prevent foreign entities from becoming deeply involved in ship building, US port-to-port transportation, and crewing those vessels with non-citizens.

It's older data, but Pages 20-21 of this report seems to cover the potential impact of "liberalizing" import restrictions. Looks like they believed that repealing the Jones act would increase the economy by 656 million USD, but cause 10,000+ in employment losses. With the caveat that "more conservative models" might lead to lesser increases.

Would appear that the natural disaster in Puerto Rico was a convenient opportunity to attack the Jones Act, but X% (~18% higher than the Dominican Republic, if per container import is a good metric, and the World Bank data I linked is accurate) higher prices isn't as emotionally powerful as "They have to pay at least twice as much because of this Act".

Answer 4

The prices in Puerto Rico grocery stores versus the prices in other US grocery stores, such as the nearest mainland city, Miami, can be readily compared online.

For a 1.5 liter bottle of water:

Puerto Rico: $1.58
Miami: $1.73

Most grocery prices are about the same, although milk is more expensive in Puerto Rico.

Another source, suggested by Adam, shows that the food component of the cost of living index is 4% lower for San Juan compare to Miami.