How the century-old Jones Act is hurting Hawaii’s economy
It’s stating the obvious to point out that the world has changed drastically since the post-WWI era. Yet, the government is still clinging to an outdated law from 1920 that is doing far more harm than it ever did good.
The Merchant Marine Act of 1920, or the Jones Act as it is more widely known, was adopted during a time when the United States government felt it necessary to prevent dependence on foreign shipping by strengthening its own maritime shipping capabilities. To achieve these ends, the Jones Act required all ships transporting goods between U.S. ports to be U.S.-built, U.S.-owned, and crewed by U.S. citizens. The law’s supporters rallied support under the guise of national security, but its real intent was protectionism.
Now over a century old, the law has proved itself to be nothing short of a colossal failure that has succeeded only in increasing the cost of domestic shipping, impeding market competition, and imposing grave financial burdens on U.S. industries. Nowhere is the Jones Act’s disastrous legacy more apparent than in Hawaii, where local entrepreneurs, like PLF client Bob Gunter, have been especially hurt.
A Hawaii company through and through
Bob Gunter wasn’t born in Hawaii, but it only took one visit for him to fall completely under its spell. As a young man serving in the Army, he had spent his 10-day leave there and promised himself that, someday, he would make the Aloha State his home. Within a few years of concluding his military service, he made good on his word.
Bob spent his first ten years in his new home working in the sugar industry before transitioning into the electric utility industry in Kauai, where he still lives today. He had never set his sights on entrepreneurship, but when a rare opportunity came knocking on his door, he couldn’t resist the call to this new adventure.
A joint venture group was working on opening two micro distilleries in Maui and they wanted Bob to come onboard. He knew almost nothing about the industry, but with his partners’ experience and know-how, the group spent the next six years designing, building, and commissioning a rum distillery and a vodka distillery—both of which are still operating today. Over those years, he gained experience and passion for the industry, and he felt it was time to embark on a new venture of his own.
Bob had always loved Kauai and with its legendary sugarcane industry, and it was the perfect place to open a rum distillery. In 2009, with the help of some investors who pooled their money together, Bob started Kōloa Rum—named in honor of the first commercial sugar mill in the nearby town of the same name.
One of Kōloa’s major selling points is its tasting room. Today, craft distillers across the country feature tasting rooms, but in 2009, Kōloa was ahead of its time. This ingenuity and pioneer spirit may have contributed to the company’s ability to survive the peak of the Great Recession. At a time when so many businesses failed, 16 years later, Kōloa is still alive and well.
The tasting room wasn’t just a novel feature; it was also a great way to spread brand recognition. Each year, two to three million tourists come through Kauai. Visitors would visit the tasting room on vacation and then return home and tell all their friends about Kōloa Rum. As the fanbase grew, so did the demand. The company is now a global success, with distribution in 36 mainland states and international distribution in Canada, Japan, Germany, Austria, France, Italy, the UK, and Ukraine.
No matter how far its distribution spans, Kōloa is a Hawaiian brand through and through, and Bob prides himself on the local industries that work together to bring consumers the variety of unique rum flavors.
Kōloa’s coffee rum attributes its rich taste to the island’s homegrown coffee beans. The cacao chocolate rum features only the best locally grown cacao. And Kōloa’s new spicy cinnamon is made from cinnamon grown on the Big Island. The entire community has had a hand in Kōloa’s success and Bob wouldn’t have it any other way. As CEO, he has made sure that Kōloa is also dedicated to supporting the community by giving back to local charities and nonprofits.
When the COVID-19 pandemic hit and businesses everywhere were forced to shut down, Kōloa adapted. Almost immediately, the distillery began producing hand sanitizer and donating it to local first-responders, care homes, and others in the medical community. Kōloa was deemed an essential business, so production could continue, but all the revenue brought in through tourism was gone. Instead, the company started doing virtual tasting sessions, a welcome reprieve from the stress of the pandemic. Its ability to cater to the times allowed Kōloa to grow by 56% in 2020.
Bob has loved every second of his time with Kōloa, especially the entrepreneurial side of things. He loves being in a position to be creative, innovative, and build relationships with consumers and local businesses alike. The only downside is having to bear the unnecessary economic burdens created by the Jones Act.
The Jones Act: An utter failure
Every Hawaii-based company that ships its goods outside of the state has come up against the Jones Act. Bob and this post-war relic got acquainted in Kōloa’s fifth year, when the company got its first international order from an Australian retailer.
Ten pallets of rum were loaded onto a 20-foot container and sent off to Australia … but the vessel was required to make one stop first. Because of the Jones Act, international routes often don’t include a stop in Hawaii en route to the mainland. Hawaii is simply not a big-enough market to encourage any direct shipping there. Without any direct shipping options, Bob’s rum had to take a trip to Los Angeles before it could proceed to its final destination. This inconvenient, multi-stop trip also came with a hefty price tag. Bob was floored to discover that the cost of the freight’s one-way trip to LA was a whopping $5,000 while its journey from LA to Sydney was only $1,900.
“I did a double-take,” he remembers. “Wait a minute, that can’t be right. It’s three times as far from LA to Sydney as it is from Hawaii to LA; how can that be? And then I began to question and look into that.”
The more Bob learned about the Jones Act, the more he realized how it disproportionately hurt Hawaii. There are only two Jones Act-compliant shippers in Hawaii, on which the entire state must depend. This has made shipping to and from Hawaii extremely expensive. In fact, goods shipped to Hawaii often cost twice as much as in other states.
For Kōloa, this financial burden is not only felt when shipping out its final product, but also when they import materials like bottles and packaging that are essential to their business but not locally available.
As Bob explains, “We essentially have a duopoly for Jones Act-compliant companies who ship 90% of what we consume because 90% of what we consume in Hawaii is shipped in by ocean transport. It’s clear to me, just based on my anecdotal experience and research, that we do pay a premium in terms of rates for all that we consume here.”
A naturally inquisitive person, Bob eventually came across writings and research from the Grassroot Institute and the Cato Institute, both of which shed light on the utter failings of the Jones Act.
The maritime industry is not as robust as it was in the post-WWI era. The number of cargo ships has drastically decreased, as has the quality. In the U.S. today, there are fewer than 100 ships left that meet the standards of the Jones Act. There are plenty of high-quality, foreign vessels available, but their use is strictly prohibited under the Jones Act. This backs ports in Hawaii, Alaska, and Puerto Rico into a corner and forces them into the arms of the “approved” vessels that hold the monopoly on all shipping to and from the contiguous U.S.
The Jones Act has failed to meet any of its alleged objectives. As Bob says, “In all the things that it was intended to do in terms of nurturing, protecting, preserving the shipbuilding industry and shipbuilding capacity in the U.S., preserving jobs, longshore and so forth, the opposite has happened.”
The negative impacts go beyond just shipping costs alone.
When the cost of waterborne vessels is astronomically high, demand for shipping services decreases, which ultimately leads to fewer vessels and fewer jobs for the maritime industry. To avoid these costs, businesses turn to other shipping methods like trucks, trains, and pipelines. As the transportation costs get higher, so does the cost of goods. When all is said and done, U.S. consumers and businesses are left paying for it, and the entire U.S. economy suffers.
We can’t even quantify the damage the law does because no one really knows. And the government’s own estimations don’t paint any sort of clear picture. As Cato’s research explains: “There are not many published estimates of the cost to the U.S. economy of the Jones Act. In the 1990s, the U.S. International Trade Commission (USITC) published several papers on the topic using different assumptions, yielding estimates of economy-wide costs ranging from $656 million to $9.8 billion.”
According to Cato, there haven’t been any other attempts to tally the costs in over two decades: “Since 2002 the USITC has declined to provide an estimate of the law’s costs. The estimates it has provided, however, seem to overlook the full range of costs generated by the Jones Act … The Jones Act restricts shipping, which is an intermediate good (or service) that factors into the cost of nearly everything purchased by businesses and households.”
Yet, while Hawaii-based companies without deep pockets are left to shoulder this burden, the government has done nothing to lighten the load. Instead, it continues to defend the Jones Act’s existence without evidence. As Bob says, “All of the arguments that I’ve heard to preserve and maintain the Jones Act are straw arguments.”
The only entities that benefit from the Jones Act are the shipping companies that enjoy the monopolies this protectionist law affords them. This is precisely why it’s been such a hard law to fight. As Cato’s research states, “The small number of beneficiaries, which primarily include domestic shipyards and some labor unions, are more powerfully motivated to preserve the status quo than are the far more numerous adversely affected interests in seeking its repeal.”
While the law remains in effect, the World Economic Forum has declared it the most restrictive law of its kind, as Cato points out.
With Pacific Legal Foundation’s help, Bob is asking the courts to put an end to the Jones Act once and for all. The Constitution’s Port Preference Clause demands that each state’s and U.S. territory’s ports be treated equally. The Jones Act ignores this protection and leaves Hawaii, Alaska, Puerto Rico, and Guam to suffer disproportionately.
In abolishing the Jones Act, Bob believes all industries would flourish. “I’m a staunch believer in the free enterprise system, fair market, free enterprise system. I think having the Jones Act repealed or determined to be unconstitutional would open up the floodgates of opportunity. Not only for more competitive pricing and better service, but it would just be a paradigm shift from what we’ve been living with for all these years.”
As Pacific Legal Foundation attorney Josh Polk says, “It is clear that the Jones Act has been an unmitigated disaster for the United States. Instead of protecting U.S. industries and promoting jobs, it has inflated costs, limited competition, and weakened the very sectors it was intended to support. The time has come to acknowledge that the Jones Act is no longer serving the best interests of the United States.”
