Adam Smith v. Wesley Jones

Taking its cue from the NCAA March Madness basketball tournament, the Cato Institute recently sponsored a Protectionist Madness contest that pitted 32 harmful protectionist US trade policies against one another. As reported by Scott Lincicome, after seven rounds and 31 head-to-head “games,” the Jones Act was found to be the worst of the lot.

For those not aware of the Jones Act, which outpolled “Buy American” in the finale by more than two-to-one, the tournament page summarized it: “This 1920 law restricts the transportation of goods between domestic ports to vessels that are US-built, US-flagged, and mostly US-owned and ‑crewed.” 

If that was all people knew about the Jones Act, some would likely support it for the same rationale given in 1920, which was to guarantee a merchant marine “for the national defense and the development of the domestic and foreign commerce of the United States,” and “a naval and military auxiliary in time of war or national emergency.” As Senator Wesley Jones (R-WA) expressed it at the time, “The man…who could discourage the upbuilding of our merchant marine is fighting the battle of alien interests.” 

But while the aspirations listed sound reasonable (as even completely unreasonable government policies are often made to sound), the Jones Act has actually produced a massive failure. It has provided none of those aspired-to benefits. It has done the opposite. But it has imposed very high costs, direct and indirect, that trace to the fact that it makes shipments between American ports several times more expensive than shipping not subject to those restrictions. That is, the results contradict the aspirations to the point of putting it on the side of the interests Jones said he opposed.

Despite the fact that they tend to be, or to represent, special interests who want to maintain the championship caliber rip-off of Americans involved, there are still Jones Act defenders who twist facts and logic to defend it. Their “oppo research” has even led them to cite Adam Smith, one of the most famous defenders of free markets in history, as a supporter.

Given that this year is the tricentennial of Adam Smith’s 1723 birth, such citation illustrates a high degree of awareness of Smith’s commitment to free trade, even three centuries later. But how it is used reveals an abuse of his views rather than putting them profitably to work. 

The connection to Smith is drawn because the Jones Act’s restrictions on waterborne domestic shipping (called cabotage laws) trace back to England’s 1660 navigation law “for the increase of shipping…wherein…the wealth, safety and strength of this kingdom is so much concerned.” It required that all shipping between British ports had to go in British-built ships with British owners, using at least a three-quarters British crew. And in Wealth of Nations, Adam Smith did endorse that policy.

Smith’s rationale, however, for cabotage laws as an exception to the principles of free trade was that “the defense of Great Britain depends very much upon the number of its sailors and shipping.” Consequently, “the act of navigation, therefore, very properly endeavors to give the sailors and shipping of Great Britain the monopoly of the trade of their own country.” He understood that it would restrict trade and the wealth it would create, but “as defense…is of much more importance than opulence, the act of navigation is, perhaps, the wisest of all the commercial regulations of England.” But we must note that his conclusion only followed if the restriction improved a country’s defensive capabilities.

Smith argued that in the case of 18^th century England, the threat faced from the Dutch (who he described as “the great carriers of Europe”), because they were Britain’s main naval rival, justified expanding English naval military strength. But he also noted that the navigation acts aimed to undermine the sea-power of the Dutch at least as much as to stimulate British sea-power. As he wrote, “though England and Holland were not actually at war, the most violent animosity subsisted between the two nations.” In consequence, what justified the policy was warlike “diminution of the naval power of Holland, the only naval power which could endanger the security of England.” So Smith viewed the sacrifices in both economic burdens and reduced liberty involved worth it, because he thought it provided the means to better defend all of England’s liberties from the greater threat of foreign aggression. But only if that was the case.

In other words, Smith did not endorse the restrictions of the navigation acts as inherently justified, but only justified by a serious, specific war threat that domestic shipping restrictions would help defend against at a cost worth paying. But that argument does not apply to America now. While there is a great deal of evidence to consider on that score, one can start to understand by asking a single question — “Whose naval power has been diminished by the Jones Act?” — because the only such country is America. 

If a country faced an all-or-nothing choice between defense and opulence, as Smith phrased it, when a country is seriously threatened with aggression, defense is more important than opulence. But it is a marginal choice, not an all-or-nothing choice. Given a country’s current circumstances, including threats and defense readiness, shipping restrictions could potentially improve military readiness, but that doesn’t mean it will necessarily do so. It just means we must weigh how valuable the shipping restrictions involved have been in added military readiness against its costs. 

For the Jones Act to improve American military readiness, it would have to substantially increase the number of reliable American ships, sailors and naval construction (especially military ships, whose construction is far different from commercial ships today) in an efficient way. It would also have to diminish the naval threats posed by other countries. But it has not done either. It has sharply reduced American shipping and defense capabilities, and done so at an exorbitant cost, a result completely at odds with Adam Smith’s rationale. So rather than endorsing the Jones Act, he would condemn it as ineffective. And given that the evidence for that conclusion has been known for many years, “I didn’t know” provides an excuse only to those who adamantly maintain a willful ignorance.

Consider just a few examples of that well-worn evidence.

From 43 percent of global shipping in 1950, the Department of Transportation found in 2009 that

“US-flag ships carry only about 1.5 percent of the foreign trade of the United States.” From 1975 to 2007, US-flagged ships in international trade shriveled by more than three-quarters, and their capacity by more than half.

Large, ocean-going vessels meeting Jones Act requirements fell more than half from 2000 to 2014, and now there are only 90 such Jones Act eligible ships. Eligible tanker capacity has been similarly more than halved. In 2013 it was reported that only 13 ships could legally move oil between American ports. 

Several times as many American ships now fly other flags rather than that of the US to escape Jones Act burdens, even though it makes them ineligible for domestic shipping. When the vast majority of those supposedly subsidized by a law opt out of that “assistance,” it is a burden rather than a boon.  

Even if the Jones Act had a positive effect on American shipping, which it clearly does not, it does little for military vessel production potential, as only one shipyard that builds the Navy’s primary vessels also builds commercial shipping vessels.

If Jones Act constraints provided added valuable shipping services otherwise unavailable during hostilities and emergencies, it could claim some support there. But it does not.

In the Persian Gulf war, five-sixths of dry-cargo ships chartered by Military Sealift Command (MSC) were foreign-flagged. Under one-third of the Maritime Administration’s Ready Reserve Fleet were American-made. The Department of Defense reported that “unfortunately, very few commercial ships with high military utility have been constructed in US shipyards in the past 20 years. Consequently when MSC has a requirement to charter a vessel, nearly all of the offers are for foreign-built ships.”

The Jones Act also undermines emergency preparedness. In the aftermath of Hurricanes Katrina and Sandy, among other examples, Jones Act restrictions had to be suspended because they hindered emergency responses.

The Jones Act also severely punishes places like Hawaii, Alaska, and Puerto Rico, since shipping between them and the nearby US mainland is made many times more costly. That balloons their residents’ cost of living, which often results in their turning to far more distant trading partners as a result. And that, in turn, harms those American producers whose products are squeezed out as a result, and other American consumers of the products they produce.

For its negative “contribution” to the Jones Act’s stated goals, its costs have been very large. And those costs go beyond what has been discussed here. As Colin Grabow and his co-authors put it, the law also “generates enormous collateral damage through excessive wear and tear on the country’s infrastructure, time wasted in traffic congestion, and the accumulated health and environmental toll caused by unnecessary carbon emissions and hazardous material spills from trucks and trains.”  

Because the Jones Act subtracts from, rather than adds to, America’s naval defense capabilities, careful thought renders claims of Adam Smith’s endorsement for it void. But that same ineffectiveness has spawned other substantial misrepresentations on the part of its few beneficiaries. Perhaps most notable has been the claim that there are 40,000 Jones Act eligible ships. As Rob Quartel notes, however, “there are probably 39,650 barges,” which are a far cry from ocean-going deep water ships, and without that misrepresentation, a 40,000 ship “Jones Act fleet” becomes less than 100 ships.

The Jones Act, the most restrictive cabotage law in the world, has decimated the number of American-flagged ships and the trade they carry, not built it up. The ships that remain are often highly inefficient and obsolete, far older than those of other countries and what most consider the useful life of such ships. American shipbuilding capacity has shrunk to little more than a rounding error in world capacity. With fewer and older American ships, the merchant marine has also shrunk and aged. The military support services it is supposed to provide are insignificant, already provided more efficiently by foreign ships. It has hindered rather than helped in mounting emergency operations. 

It is long past time Americans saw through the multiple misrepresentations that have defended the Jones Act’s nothing-for-something restrictions for over a century, including twisting Adam Smith’s logic into a false endorsement of its enormously costly restrictions. It is an unjust, inefficient, and harmful policy that puts our country at more risk, and only benefits a very small number of special interests. That makes it easy to see why those few can claim that “We’re number one!” among the many abusive policies featured in Protectionist Madness.

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