Smith on Jones

One defining characteristic of early economists was their antipathy toward protectionism, because they realized that high tariffs and import restrictions harm a nation’s citizens by eliminating mutual benefits that voluntary exchange would have created. Adam Smith, history’s most famous economist, was among their number. However, there was the one case of protectionism he endorsed, a misrepresentation of which is still reflected in U.S. policy.

Smith’s “exception” involved England’s 1660 navigation law. All shipping between British ports was restricted to British-built and -owned ships, and at least three-quarters of the crew had to be British. While England’s mercantilist burdens stoked America’s revolution, the U.S. Congress’s inaugural session enacted similar restrictions on coastal shipping, later codified by the Jones Act of 1920, which still governs maritime commerce in U.S. waters.

In Wealth of Nations, Adam Smith argued 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.” Smith saw that it would restrict trade and destroy wealth, 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.”

Unfortunately, the circumstances justifying Smith’s endorsement do not apply to the Jones Act. Despite massive costs, it does not expand American shipping, sailors, or capabilities.

In an all-or-nothing choice between defense and opulence, defense, when threatened by aggression, is more important. But it is not all-or-nothing. At issue is how much value is added to readiness and at what cost.

Smith’s endorsement is sensible only when defense would be otherwise inadequate. If sufficient defensive capability existed, any added value would be small. Smith argued that it was the threat from the Dutch, Britain’s main naval rival, which justified the restrictions. In fact, the Navigation Acts aimed at “diminution of the naval power of Holland, the only naval power which could endanger the security of England,” as much as to stimulate British sea power.

Smith, therefore, endorsed shipping restrictions only when justified by a specific, very serious threat of war. He did not endorse them as a general principle. However, circumstances like those that led to Smith’s support have not applied to America for many years, yet Jones Act restrictions have been retained.

One might consider Chinese military sea power as a current analog. But restricting America’s coastal trade to American ships does not appreciably restrict Chinese sea power, military or commercial, as is clearly demonstrated by the tidal wave of goods China’s ships carry to America and around the world.

Beyond the question of the severity of the naval threats America faces, to be sensible the Jones Act would have to increase the number of American ships, sailors, and construction capabilities. But it does not.

U.S.-flagged ships fell from 43 percent of global shipping in 1950 to only about 1.5 percent of America’s foreign trade by 2009. Half of that tonnage capacity disappeared between 1975 and 2007.

Ships subject to the Jones Act fell from 193 in 2000 to 90 in 2014. 110 tankers shrank to 43. Almost five times as many American ships now fly other flags to escape Jones Act burdens, despite the fact that it disqualifies them from carrying cargo between U.S. ports.

The Jones Act would also have to provide services that would be hard to acquire during hostilities and emergencies. But it does not.

The Department of Defense concluded that “very few commercial ships with high military utility have been constructed in U.S. shipyards in the past 20 years. Consequently…nearly all [charter] offers are for foreign-built ships.” Further, after both Hurricanes Katrina and Sandy, Jones Act restrictions had to be suspended because they hindered emergency responses.

The Jones Act’s costs are also substantial.

Jones Act–eligible ships can cost triple or quadruple what Korean- or Japanese-built ships cost. Crew expenses are similarly inflated, as are maintenance and repair costs. Consequently, foreign tankers can transport oil for one-third the cost of American tankers.

The Jones Act doesn’t add naval or defense capabilities, voiding Adam Smith’s endorsement. American-flagged ships and trade carried have plummeted. The Act hinders emergency operations. The military services it supposedly enables are already provided more efficiently by foreign ships. And the costs are large. It deserves burial at sea.

Gary M. Galles is a Research Fellow at the Independent Institute, Professor of Economics at Pepperdine University, and Adjunct Scholar at the Ludwig von Mises Institute.
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