Good and bad trade news: Jones Act suspension, but more tariffs on the way

Two conflicting bits of trade news came out yesterday. The good news is that the Trump administration is considering temporarily suspending the Jones Act, which is a protectionist shipping law enacted in 1920 that raises oil prices. The bad news is that the administration also announced new Section 301 tariff investigations targeting the European Union, Switzerland, and other allies. This is the same statute behind Trump’s China tariffs, which at one point were as high as 145 percent. China is also a target of the new Section 301 investigations.

The Jones Act

It is the height of irony that the Jones Act, originally a wartime measure in the aftermath of World War I, will now likely be suspended because of a war. Trump’s Iran war is raising oil prices, and one way to provide relief is to move oil markets in the direction of free trade by removing shipping restrictions.

CEI has a long history of opposing the Jones Act. Our former colleague Mario Loyola produced a short version of these arguments as part of our #NeverNeeded series during the COVID pandemic in 2020, as well as a longer paper.

The Jones Act requires commercial ships moving between US ports to be US-built, US-owned, and US-crewed. In 1920, it had a national security rationale. This was just after World War I, and policymakers wanted to ensure that the US had a viable domestic shipping industry so that the Navy could press private ships into war service in the event of another war.

This rationale became obsolete by World War II. The military instead used aircraft carriers and giant destroyers. Commercial ships would have been all but useless in World War II’s naval battles.

Instead, the US shipping industry became a government welfare case. US-built ships cost three to five times more than foreign-built ships, which means nobody buys them. There are only about 90 Jones Act ships currently in service, compared with thousands of commercial ships worldwide. There are no Jones Act-compliant oil tankers.

The Jones Act is why New England relies on pipelines and imports for energy, despite abundant US supplies. The Jones Act makes it more expensive to ship oil up the coast from Houston than to import it all the way from Russia or the Middle East.

The Jones Act also affects disaster relief efforts in Alaska and Hawaii, as well as Puerto Rico and other US territories, while also raising the cost of living. In fact, until recently, Jones Act waivers were standard procedure after every major hurricane in the Caribbean.

Section 301

If a Jones Act waiver is a bit of alloyed good news, the administration’s latest Section 301 investigations are unalloyed bad news.

After the Supreme Court struck down Trump’s IEEPA-based tariffs, the administration quickly re-enacted most of the affected tariffs under a different statute, Section 122 of the 1974 Trade Act. Not only are Section 122 tariffs time-limited to 150 days, they are also likely illegal and are already under legal challenge.

The IEEPA tariffs rested on a trade deficit emergency, about which courts were as skeptical as economists. Whether a country exports more than it imports or vice versa does not matter because either way, if individuals agree to a trade, it is because they get something in return. People trade value for value, whether they are importing or exporting.

Section 122 depends on a balance of payments crisis. This is a different thing from the balance of trade, and some people in the administration seem not to know this. The balance of trade refers to whether a country is a net exporter or a net importer.

The balance of payments instead has to do with foreign currency reserves. This was a concern under the old Bretton Woods system of fixed exchange rates for foreign currency. It is not possible to have a balance of payments crisis under the floating exchange rates the US has had since the early 1970s. Right now, the balance of payments is exactly where it should be: zero. That is because under floating rates set by markets, supply and demand equal out in a constantly self-correcting process.

Without a balance of payments crisis, there is no legal justification for Section 122 tariffs. In order for the tariffs to be legal, the administration would first have to put the dollar back onto fixed exchange rates with other currencies. Then it would have to mismanage those fixed rates for years before such a crisis would emerge.

That means the administration needs yet another place to turn when the Section 122 tariffs expire or are struck down. One of those places is Section 301 of the same 1974 Trade Act as Section 122.

These tariffs require investigations before they can be implemented, though they are little more than rubber stamps at this point. They must find that a country is engaging in unfair trade practices.

In this case, the Trump administration is returning to exactly the kind of mercantilism Adam Smith warned against 250 years ago in The Wealth of Nations. In an actual quote from the US Trade Representative, “many U.S. trading partners are producing more goods than they can consume domestically. This overproduction displaces existing U.S. domestic production or prevents investment and expansion in U.S. manufacturing production.” (Hat tip to NTU’s Bryan Riley.)

This surplus-and-exchange model that Jamieson Greer criticizes appears in Book I, Chapter 1 of Adam Smith’s Wealth of Nations. He calls it the division of labor. It is the foundation of all prosperity. Without it, humans would still be hunter-gatherers. Actually, even hunting and gathering implies at least some division of labor, so Greer is even more off-base than that.

With intellectual foundations as confused as Greer’s, these tariffs cannot be about the merits. Trump believes trade is bad, and that’s it. He has a gut dislike of trade, and a gut fondness for tariffs. Everything else is post-facto rationalizing of the president’s gut feeling.

While potential Jones Act relief would help somewhat with oil prices, the economic and diplomatic damage from upcoming Section 301 tariffs would more than outweigh any temporary benefit.

For more on the Jones Act, Section 301 tariffs, and the larger case for free trade, see Kent Lassman, Iain Murray, and my paper Trade under Blockade.