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Studies peg cost of Jones Act on Puerto Rico at $1.5 billion

By on February 21, 2019

SAN JUAN – The cost of transporting merchandise from the U.S. mainland to Puerto Rico in U.S.-flagged vessels, as required by maritime shipping laws, costs the island $1.5 billion in higher prices for goods, as well as in its effect on competitiveness and lost jobs, according to new studies.

The information is contained in two independent investigations into the impact of the Jones Act that were commissioned by the Chamber of Marketing, Industry and Food Distribution (MIDA by its Spanish acronym) together with the Puerto Rico Chamber of Commerce, the Puerto Rico Restaurants Association (Asore by its Spanish acronym), the United Retailers Association (CUD by its Spanish acronym), the Puerto Rico Products Association and the Puerto Rico Bar Association.

Despite a large number of studies on the Jones Act, last summer there was a debate surrounding the government’s report for the recovery of the island after Hurricane María. A draft report prepared in collaboration with the Federal Emergency Management Agency [FEMA], Homeland Security Operational Analyst Center (HSOAC) and the government-funded RAND Corporation, a nonprofit think tank, recommended the need to exclude Puerto Rico from the 1920 law. However, a study commissioned by the American Maritime Partnership, a trade group whose member companies own more than 40,000 vessels, concluded that the Jones Act had no impact on the local economy.

“Unfortunately, after some opposition based on a study commissioned by the American Maritime Partnership and curiously published a few days after the draft was made public, the final version was edited. And although the recommendation was maintained, the need for more information was indicated. That is why this group decided to collaborate to clear up any doubts that may remain about this matter,” MIDA Executive Vice President, Manuel Reyes Alfonso said.

The organizations hired Advantage Business Consulting (ABC) to design a method to cull the lack of official information on the cost of transportation. ABC economist Vicente Feliciano explained that his firm prepared a questionnaire for a representative sample of food, beverage and other product importers locally to obtain real data on transportation costs. Those surveyed were asked about the transportation costs to import not only from the mainland United States, but also from various international ports with which Puerto Rico frequently trades. The sample response percentage was extremely high, at 70 percent, representing 32 companies that imported about 40,0000 containers in a span of nine months.

“This is the first time this type of information is available, making the value of this analysis unquestionable. The high participation also demonstrates the interest of importers with this issue,” Feliciano said.

For the economist, although a significant difference was expected, the result was surprising. According to the data obtained, transporting containers from the United States, costs on average 2.5 times, or 151 percent more, than transporting from foreign ports—$3,027 from U.S. ports versus $1,206 from non-U.S. ports. This after having made the corresponding adjustments for size of container and distance.

With the data collected, the firm calculated an impact equivalent to a Jones Act tax of 7.2 percent on food and beverages alone, which translates into an increase of $367 million in additional costs to the local economy. “Individually, families pay $300 more or $107 per person for food and beverages,” Feliciano said.

To validate the impact on product prices, Juan Lara, an economist and partner at ABC, explained that the firm used the same model as the study commissioned by the American Maritime Partnership last summer, which concluded there was no difference between the prices charged for the same items sold by a national retailer in its stores in Jacksonville, Fla., and Puerto Rico. He said the exercise simply looked for prices for a small basket of 12 items on the retailer’s website.

“Interestingly, with merely changing the 12 sample products, the difference in prices averaged 22 percent more…in San Juan than in Jacksonville. This, in turn, was compared with the Cost of Living Index Model used by the Institute of Statistics of Puerto Rico, whose most recent report put the difference in the cost of food in both cities at 19.7 percent. It is evident that the sample used by that study was not representative of the typical purchase of Puerto Rican households,” Lara said.

Although the impact of ground transportation was not calculated, Lara explained that his firm was able to obtain enough data to determine the effect of this cost, which the island could potentially save if there were no cabotage laws deterring maritime service from the U.S. west coast. To calculate it, the firm analyzed the cost of bringing a container from California by land and compared it with a port of similar distance but shipped by sea. Chile was chosen for this exercise because ships pass through the Panama Canal from a similar distance if maritime service from California to Puerto Rico existed.

According to the example, bringing a container by land from California to Jacksonville costs around $7,000 which is then added to the maritime cost of $2,404 for a total of about $9,404. This contrasts greatly with shipping a container from Chile by sea at a cost of $2,483, for a difference of 279 percent. “With these results, there can be no doubt that the land cost should be part of the list of damages caused by the Jones Act and should be expanded in future studies,” Lara concluded.

Small business at a disadvantage

The second study was conducted by the New York firm, John Dunham & Associates (JDA), whose chief economist, John Dunham, has extensive experience in the maritime transport sector, having worked for the Port Authority of New York and New Jersey, the Port Authority of Philadelphia and the Ports and Commerce Department of the City of New York.

Dunham’s firm used data from various sources such as PIERS, or Port Import/Export Reporting Service; published rates; and previous studies to feed the input-output model IMPLAN (Impact Analysis for Planning). Using the model and the data from various sources, the firm performed six exercises to calculate the impact of cabotage on the island’s economy. One of the exercises used the report by Reeve & Associates and Estudios Técnicos in July 2018.

“All the calculations concluded that there was a significant impact. From this analysis, the firm chose and adapted the sources to make their own recommendation, concluding water transportation costs to Puerto Rico are $568.9 million higher, and prices are $1.1 billion higher than they would be without the Jones Act limitations,” the report reads.

If this is the case, Dunham said, Puerto Rico has 13,250 fewer jobs than it would have were there a free market for ocean freight. The jobs would pay residents $337.3 million more in wages, and would result from nearly $1.5 billion in increased economic activity, he said, adding that the resulting higher prices for goods on the island cost residents nearly $375 a year, or $1,050 for a typical family of 2.8 members.

He also said that overall tax revenue would be $106.4 million more were the island to be exempt from the Jones Act’s provisions.

Dunham also concluded that the Jones Act harms the United States and has not met its intended objectives. The study documents the “dramatic” reduction in employment on U.S. vessels and shipyards since the 1950s and how U.S. producers have lost the Puerto Rico market in terms of bulk merchandise but for which they have strong export markets due to the lack U.S.-flagged ships. Specifically, commodities such as: oil (91 percent from outside the U.S.), grains (97 percent), cement (99 percent), beet sugar (95 percent) and oilseed farming (98.6 percent foreign).

“With the results of these two economic studies, we have enough data to demand that we be heard here as well as in the United States Congress. The numbers are clear, the impact is devastating for the economy of our island and even more so being as vulnerable to natural disasters such a as Hurricane Maria,” said the president of the Puerto Rico Chamber of Commerce, Kenneth Rivera.

The president of the Puerto Rico Bar Association, Edgardo Román, expressed the commitment of the entity to “freeing” the island from the “burden” of the Jones Act. He recalled that the Bar Association has been working on the issue for years, particularly since the presidency of Mark Anthony Bimbela, who created what is known as the “Junte de Voluntades”—an organization that gathered labor unions, churches, political parties and business associations—through which support has been obtained with the recent passing of resolutions by the New York City Bar Association and the American Bar Association.

The president of the Puerto Rico Restaurants Association, José Salvatella said the island’s food security is directly tied to its “extreme dependence” on imports. After Hurricane María, he said “we had great difficulties in meeting our client’s needs, to the point that one of our partners had to import food by plane at a cost 10 times higher than what it would have cost by sea due to the lack of service.”

For her part, Liliana Cubano, of the Puerto Rico Products Association, stressed that the importance of maritime transportation is linked to the island’s competitiveness. “We must remember that in many cases local production depends on imports of raw materials. In the same way, our future development will depend on the ability to export once we have finished the product and, for that, we not only need to be competitive producing, but we also need connections to the markets [from] where those products have to arrive. The few port alternatives in the U.S. [mainland] increase land transportation costs, which affect our export possibilities.”

Meanwhile, Jorge Arguelles, president of the United Retailers Association, said the results of the studies reveal that small-business owners are the most affected by “these exorbitant transportation costs.” He added that the findings could even be underestimating the impact on small businesses because many of the respondents were large importers, which obtain lower transportation prices than small ones as a result of their scale.

 

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