What’s the real economic cost for Puerto Rico? By John D. McCown, Founder, Blue Alpha Capital
urricane Maria had a devastating effect on Puerto Rico and brought the Jones Act back into the news. This law comes with an economic cost, but the shrillness in recent articles is out of balance with the facts. I’ll compare the claimed costs to a rigorous analysis of the real costs and highlight an unintended consequence that would likely result if the law didn’t apply to Puerto Rico. In May, the NYC Bar Association issued a 15- page report in support of exempting Puerto Rico from the Jones Act. The report claimed that the Jones Act costs Puerto Rico at least $537 million annually. In October 2017, a National Review article pegged the annual cost at $850 million. A September 2017 New York Times article titled “The Law Strangling Puerto Rico,” claimed that a 15% drop in consumer prices would result from repealing the law, equating to a cost of $9 billion annually. These divergent figures lack any real explanation and are referred to as estimates. They share another characteristic: they are all ludicrous and collapse under the weight
of a credible analysis. Almost all goods mov ing by water between the mainland and Puerto Rico go via the Jones Act container carriers. Collectively, their total revenue last year was $800 million. It is nonsensical to claim a cost
Policy makers need to focus on the real math and all the potential consequences before making any changes
above that figure. There is certainly a wage cost difference that impacts the cost of crewing and building U.S. flag vessels. This is a macro difference and the latest figures from the World Bank show U.S. per capita income at 5.66 times worldwide per capita income.
The actual cost difference in crewing and building an American ship compared to a typical foreign flag ship is currently 4 to 1. That does not mean, however, that container shipping costs would go down in that proportion with foreign flag vessels. In these integrated systems, costs related to the ship are just 25% of total costs. Cargo handling, terminal, equipment, trucking, inland transportation, maintenance, sales and G&A costs make up the majority of the costs in container shipping. Those costs are unaffected by flag registry. Likewise, the largest component of vessel costs, fuel, is the same for a Jones Act vessel as it is for a foreign flag vessel. The only costs that are affected by the Jones Act in Puerto Rico amount to some 12% of total costs. Applying the 4 to 1 relationship to those costs, the use of foreign flag vessels would reduce costs by 9%, resulting in savings of approximately $72 million annually. Without minimizing the impact of $72 million per year, I note it is 125 times less than the figure claimed in “The Law Strangling Puerto Rico” article. At 7/100ths of 1% of Puerto Rico’s $102 billion annual GDP, July 2018 // Marine Log 17