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August 20 2018

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August 20 2018 | The Journal of Commerce 37 Beneath the Surface Gary Ferrulli A US CONGRESSIONAL committee recently held a hearing on the Jones Act, specifically looking at its impact on the Puerto Rican economy. Tes- tifying were those who bought and paid for a report made public during the week of July 16. Essentially, the report says the Jones Act has little or no financial impact on Puerto Rico. It cites a study of select items purchased at a Walmart in Jacksonville and the same items purchased at a Walmart in Puerto Rico. Rates to St. Thomas and St. Croix were the same or higher than those to Puerto Rico, the study found, while those to the Dominican Republic were slightly less. This, of course, is the flip side of an earlier report saying the Jones Act had cost the Puerto Rican economy billions of dollars over an extended period. That report was done for a coalition wanting to eliminate the Jones Act. Both studies reflect what those who paid for them wanted to convey to the world. While trying to be fac- tual, neither is realistic; they make select arguments based on select facts that suit the story line they're trying to sell. Looking at the two reports objectively, one says the econo- my was impacted by a figure that exceeds the total revenue of all the carriers in the trade — so simply put, it can't be factual. On the other side, the Walmart comparison fails to acknowledge that Walmart equalizes freight costs by region, with Jacksonville and Puerto Rico in the same region. Comparing the shipping rates to St. Thomas and St. Croix with those to Puerto Rico also is misleading — two tiny markets served from the US mainland using transshipment — over Puerto Rico. The fact is that the freight cost to Puerto Rico is higher than it would be if foreign-flag carriers could pick up freight at US ports and deliver cargo to Puerto Rico because their costs are considerably lower for two primary reasons: the cost of Jones Act vessels and the cost of US crews. Consider that in the recent past, Pasha, Crowley, Matson, and Tote have built Jones Act-compliant ves- sels in US yards, each in the general size of 3,000 TEU each. These ships cost more than $200 million each, while a 4,250-TEU ship with techno- logically advanced propulsion can be built in Korea or China for less than $50 million each. The crew cost for a Jones Act service is at least $3 million to $4 million a year higher per vessel, and also must be paid for. The debate isn't if the rates are higher, because they are. It should start with by what that amount is realistically. The comparisons that most would make are the shipping rates from the US to Puerto Rico versus the rates to ship the same commodities to Rotterdam, Ham- burg, Shanghai, Busan, Mumbai, and other destinations thousands of miles away. Puerto Rico is three days from Jacksonville, the largest single origin to Puerto Rico for container move- ments, many days or weeks from the other named locations. Obviously, the costs should be much lower for such a significant difference in distance, a cost-per-mile comparison — and a bad one. The rates to Europe and Asia are backhaul rates and are weighted heavily by scrap materials, agricul- tural goods, and primary commod- ities. The commodities moving to Puerto Rico are consumables, so it's hard to make a real comparison. If you look only at distance, rates to Puerto Rico are triple or more than those to the distant locations. It comes down to the cost of doing business as a Jones Act carrier versus doing business as a foreign-flag carrier. Ships have a service life of 25 years. Do the math and compare the cost of capital and depreciation, then do the same for the operating expense, with a focus on the crew. Those are the basic and major cost differences between Jones Act container vessels and a nominal foreign-flag service. Realistically, services between the US and South America, or Europe, and possibly Asia could call at Puerto Rico for US-Puerto Rico cargoes. What would the rates be? Lower than today, yes. How much lower, given the size of the market, the additional steaming time, extra port call, and the empty reposition- ing costs, is difficult to assess. That appears to be the price for maintaining a US-flag presence in the offshore domestic trades. The main- tenance of shipbuilding capabilities comes into play. The number of Jones Act-qualified container ships during the last 10 years can be counted easily, because there are few. The training of US seamen and women, again, isn't a significant number. but it's apparently enough to warrant the Jones Act still being around, with little chance of changing. The political aspect overshadows all other arguments. Who is really go- ing to take on the lobbying power and money behind several unions, the Department of Defense that wants to support the US shipyards, the shipyards and the states they reside in and employ thousands of people, and the carriers and port interests involved in the Jones Act trades to do away with the Jones Act? The fact is that cargo interests pay higher rates for movements to the Jones Act trades than on US exports to distant countries on for- eign-flag carriers. Period. It's the cost of doing business. JOC Gary Ferrulli is chief executive of Global Logistics & Transport Consulting. Contact him at gferrulli@globallogistics The flip side of the Jones Act The debate isn't if the rates are higher, because they are.

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