Business Beyond the Reef

The Jones Act often comes up in conversations with businesspeople in Hawaii.  See yesterday’s post for some of the history and economics, but let’s focus on pragmatic business consequences today.

I asked a cattle-rancher on the Big island what his biggest business headache was, expecting him to say something about getting loans or meeting sanitary requirements.  But, no, he said it was the Jones Act.  Hawaii has a surprisingly large and robust cattle industry (some parts of the Big Island look more like Texas than Hawaii) that produces far more than can be consumed in the local market – which isn’t big enough to support an industrial-scale slaughterhouse and meat-packing industry.  So, the ranchers are faced with exporting live cattle to either the U.S. Mainland or to foreign markets.  They tried exporting to Japan many years ago, but that was at a time when Tokyo was saying that Japanese stomachs couldn’t tolerate non-Japanese beef.  Then mad cow disease came along, and shipments of Hawaii cattle and beef were cut off because of one Canadian cow that had been brought south of the border.  The world didn’t notice the long swim required for contact between Hawaiian and Mainland herds.  But I digress.

Hawaii’s cattle industry today requires transport of live cattle to U.S. West Coast slaughterhouses, which brings the Jones Act into play.  It’s not a huge trade, but when ships are available to carry the cattle, the prices, says the rancher, are prohibitive.  It’s cheaper for the cattle ranchers to charter vessels to carry their cattle to Vancouver, Canada and either slaughter them in Canada or have them trucked down into the Lower 48.  This, of course, subjects them to an additional layer of health and safety requirements, which only adds to their costs and cuts their margins.  Getting rid of the Jones Act may or may not make direct transport to the West Coast feasible, but the ranchers would sure like to give it a try.

Better deal in Switzerland than New Jersey

My friend Dana Gray owns Oils of Aloha, a small company on Oahu’s North Shore that produces cooking oils and cosmetics based on macadamia nut oil or kukui oil.  (Try Haleiwa Heat, a mac nut cooking oil infused with garlic and chilies.  Oh yeah.)  Oils of Aloha has developed an international clientele and routinely does bulk shipments to European and Asian customers, as well as the U.S. Mainland.  Dana was fulminating about the Jones Act one day last fall, so I asked him for examples of how the Act impacts his company.  Dana told me that he had recently sent a full container of his products from Hawaii to Switzerland for $4600.  The same day he got a quote to send another container – under Jones Act rules – from Hawaii to New Jersey for an exorbitant $5940.  He figures that the Jones Act costs his company $1340 per container load!

These are anecdotes, but they are indicative of the cost Hawaii pays for the Jones Act.  Getting rid of the Jones Act, however, will not necessarily solve the problem.  If one looks at trans-Pacific shipping, much of it is eastbound only – Asian exports bound for North America.  There is going to be little space available on those vessels even if they were allowed to pick up cargo in Hawaii.  There’s a ton of space available westbound across the Pacific, many ships filled to the brim with empty containers being returned for more Asian exports.  So there may be some scope for increasing Hawaii’s shipments to Asia.  Many such shipments now have to backtrack to California ports before they can head out again westbound, incurring Jones Act costs on the eastbound leg.  And westbound foreign-flag vessels could substantially reduce the cost of products shipped to Hawaii from the U.S. West Coast.

But there is a problem.  Container ships have grown so large that much of the world’s container fleet can’t fit into Hawaii’s small shallow ports.  Honolulu can handle many of the big ones, but not all, and the trend in container ships is to bigger and bigger.  Still, Hawaii’s companies would like to give life without the Jones Act a try.

Not allowed under the Jones Act

The Jones Act becomes a focal point for crisis in Hawaii every few years – and its that time again.  Formally known as the Merchant Marine Act of 1920, the Jones Act is America’s cabotage law – requiring that goods carried between American ports be carried in U.S.-flagged ships.  These ships must be crewed largely by American seamen, owned by U.S. owners, and built in American shipyards.  As such, the Jones Act is about as protectionist as legislation can get.  That said, many maritime countries have similar laws to promote and protect their own shipping and shipbuilding industries, as well as the heritage of their seamen.  (And the same can often be said for the aviation industry, which has similar but not identical protections in the United States and elsewhere.)

The purpose of the Jones Act depends on who you talk to, so let’s go to the source.  The preamble of the Act itself says “It is necessary for the national defense and for the proper growth of its foreign and domestic commerce that the United States shall have a merchant marine …”.  The basic idea in 1920 was that a proper merchant marine was necessary for national defense (how could you rely on other countries’ ships during a war?) and for international trade (how can you rely on foreign-owned, foreign-flagged vessels to carry your goods?).  The second notion has largely disappeared; non-U.S.-flag vessels are ubiquitous in U.S. ports and our imports and exports have not suffered.  It is harder to dispose of the national security argument.

My first job out of college was as an economist with the U.S. Maritime Administration.  There was concern at the time about the “loyalty” of American-owned ships plying the seas under “flags of convenience”, mainly Panamanian or Liberian.  I was tasked to explore whether or not these ships would bolt for safety in wartime, rather than move desperately needed cargoes for their owner’s country.  The question can’t be answered in absolute terms, but my overall conclusion was that, if times are desperate enough, any country will seize whatever ships happen to be in their ports at the time they are needed.  Beyond that, we could assume that some unknown but large proportion of shipowners would be patriotic enough to make their foreign-flagged ships available.  And there would always be the “spot” market for hiring ships of any flag.  In other words, we didn’t really need to have a quantity of American-flagged vessels ready for military transport needs.  That wasn’t the answer my political masters were looking for.

The current Jones Act dispute in Hawaii arises from both politics and economics.  On the political surface, Hawaii has a new Republican Congressman, Charles Djou, who is challenging local Democratic orthodoxy by calling for a repeal of the Jones Act as it applies to Hawaii.  This guarantees headlines for Djou because the godfathers of Hawaii’s Democratic establishment, especially Senator Daniel Inouye, are staunch supporters of the Jones Act.  As an island state, Hawaii gets the vast majority of its goods by sea from the U.S. West Coast.  Since those cargoes move between U.S. ports, the Jones Act applies and U.S. carriers must be used, creating an oligopoly for Matson and Horizon, the two main carriers on the Hawaii-West Coast routes.

The older Hawaii Democrats vividly remember the longshoremen’s strikes of the 1950s and are quite content that the Jones Act provides for some stability in the Hawaii-West Coast trade.  Their usually younger opponents (Djou, former Democratic Congressman Ed Case and many Hawaii consumers) object to the economic burden of the high shipping rates that the oligopoly can charge.  Some estimate that the Jones Act costs Hawaii more than $3000/household every year.  They see foreign flag vessels moving between the West Coast and Asia and wonder why we can’t use them.  (In a similar vein, a U.S. International Trade Commission study in 2002 concluded that the Jones Act costs somewhere between $119 million and $9.8 billion annually (now there’s a range!) because it prevents use of low-cost non-U.S. ships.

I once tried to arrange a live debate about the Jones Act when Business Beyond the Reef was still a radio talk show.  Opponents were eager to come on the air, but Inouye’s office, Matson and Horizon refused to participate.  Their tactic is simply to discuss the Jones Act as little as possible.  The public discussion has begun, and we’ll continue with some insights tomorrow.

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I didn’t report on my outrigger paddling adventures last week as there was nothing good to say.  We stank.  This Sunday’s races were substantially better.  Windward Kai raced at Oahu’s Ke’ehi Lagoon and we actually had a victory.  I race with our old guys (the men’s 60s crew, sometimes the mixed 60′s or other crews).  In the men’s 60 race Sunday, we had a rocket start and a good turn, coming out of the turn in 3rd place with a quarter mile to go.  Halfway back, we had built a three-length lead over the 4th place boat, when it suddenly felt like someone had turned the ignition off.  We had no power left and were overtaken on the line, finishing about ten seconds out of 3rd and less than a second from 4th place.  Disappointing.

Two races later, our mixed 60s (mixed means three men and three women) went to work.  They had been finishing 3rd or 4th all season, but they nailed it this time.  Good start and they came out of the 1/4 mile turn all even with two other boats.  Then they put the hammer down to gradually eke out a lead, taking 1st place by about a boat length.  Magnificent!

News that Singapore has sentenced a Swiss national for spray-painting graffiti brings back memories – and they are not good.  The two cases are not parallel, but there are similarities to the infamous Michael Fay affair of 1994.  It was worse on Fay, of course, but it colored my entire experience of living and working in Singapore, where I managed the American Embassy’s commercial section.

Fay's painting wasn't this good.

Fay was arrested and charged with spray-painting cars and also stealing road signs.  He wasn’t the only kid involved, but most of the others had managed to be spirited out of the country by concerned parents before Singapore would have seized their passports.  Fay was a student at the Singapore American School, where our son knew him slightly.  Our son avoided Fay, who seemed to him to be a “bad apple”.  Probably a good judgment, as Fay certainly was not a choir boy.

That said, Singapore’s behavior as the case progressed was a bit peculiar.  Fay and his buddies had, probably unknowingly, included the car of one of Singapore’s supreme court justices among their targets, raising the case to a higher level than it likely deserved.  This was an era when Singapore’s Lee Kwan Yew was competing with Malaysia’s Mahathir bin Mohamad to see who could better diss the imperialist Americans.  We were in the middle of the great Asian values debate, which collapsed so quickly during the Asian financial crisis three years later.

Singapore had two laws under which Fay could have been prosecuted.  One was the Malicious Mischief Act, which carried penalties of a fine and a jail sentence – and which had been used in local cases of graffiti-style spray-painting to that point.  The other was the Vandalism Act, originally used to combat spray-painting of Communist political slogans on public buildings, and which carried fines, a jail sentence and caning.  Fay’s crime did not involve either political slogans or public buildings, but the Vandalism Act was the law he was charged under.  Some say that Lee Kwan Yew himself made the decision.  When convicted, Fay was sentenced to six strokes of the cane, a small fine and four months in prison.

It’s interesting to note that the Vandalism Act was used in today’s case as well, though the crime was spray-painting non-Communist slogans on train cars (see it here), not a public building.  And the current case involves breaking and entering, an aggravating element that did not arise in the Fay case.  With the added charge, Swiss Oliver Fricker was sentenced to only three strokes of the cane, but he did get five months in prison.

Vandalism was a hot topic in America at the time of the Michael Fay case, many cities being faced with the dual challenges of gang activity and the new “sport” of tagging.  Probably most Americans viewed caning as something like being spanked with a switch, failing to realize that the cane is a bamboo pole, soaked in water to make it heavier, and wielded by a martial arts expert.  Certainly the Clinton White House did not realize this in the beginning, despite substantial communication from the American Embassy in Singapore.  They glommed on to it later when President Clinton made his appeal for clemency that succeeded only in getting the caning sentence reduced from six strokes to four.

There were some other oddities.  Normally, in any kind of diplomatic fracas, informal communication continues between the two sides.  This is absolutely essential if the countries involved are to be able to have “what if” discussions.  “What if” my side takes this action, or your does that – so surprises are kept to a minimum and mutually acceptable solutions have a chance of being developed.  Singapore shut this off.  The Embassy could find no one to talk to in the Foreign Ministry, the judicial system, or any other part of the Singapore Government.  Word had obviously gone out from on high not to talk to the Americans.  This likely led to Singapore’s seemingly honest surprise that the White House was angered when Fay’s caning sentence was reduced by only two strokes.  Singapore’s foreign policy objective had been achieved when President Clinton asked for clemency, but keeping the four strokes just rubbed it in and kept Singapore under a cloud during the remainder of the Clinton Administration.

I’ll never the forget the morning I walked out of the U.S. Embassy while Fay was awaiting trial.  I had just been in a meeting about the Fay affair, when I was accosted by a Singapore woman sympathetic to Fay.  She had an armload of books she wanted to send to him in jail so he could have something to read, and asked me how she could do it.  I told her to go right into the Embassy and speak to one of the consular officers who was visiting Fay.  She said she couldn’t do that.  When I asked why, she pointed to several spots around the Embassy where she said Singapore had mounted cameras to keep track of who entered or left.  I had been briefed by Embassy security and saw that this woman had nailed every one of the surveillance cameras!  I nodded and took the books from her, delivering them to the consular section myself.

Don’t get me wrong.  There are many things I love about Singapore and I admire the Lion City’s many accomplishments.  The Fay affair, unfortunately, is not among the things I admire.