Article Macroeconomics

Each day the United States both exports and imports millions of barrels of
crude oil and petroleum products. Although a seeming paradox, much of this
activity makes perfect sense. Highly sophisticated refineries on the Gulf
Coast, for example, import heavy, high sulfur grades of crude oil that are
better optimized for processing while lighter, sweeter grades
are exportedfrom the region. Similarly, comparative advantage and the
pursuit of higher profits may lead US refineries to focus their production on
certain fuel types—including for export—while imports are used to meet
other domestic fuel needs.

But that’s not the whole story.

Beyond these market‐driven forces, another contributor to this simultaneous

exporting and importing is the Jones Act, a protectionist law that restricts
domestic shipping to US‐built and flagged vessels. That adds significant
costs.

In 2017, tankers that complied with the law were found to be

approximately 2.8 times more expensive to operate than foreign‐flagged
ships (just over $5 million more per year). Such vessels are estimated to be
four times more expensive to build (over $200 million compared to
approximately $50 million overseas).

That makes for pricey domestic shipping and a competitive edge for imports
able to access more efficient internationally flagged vessels.
East Coast refineries offer an example of this dynamic. Although they enjoy
relatively close geographic proximity to Gulf Coast crude, the high cost of
Jones Act shipping means these refineries instead overwhelmingly turn to
countries such as Nigeria and Libya for their oil needs. In 2022 they
imported over five times more oil from abroad (224.7 million barrels) than
other regions of the United States (42.5 million barrels).
 Economics IA

Global economics

"How Protectionist Shipping Policy Drives Up the Costs"

Introduction

The U.S. has to deal with oil imports and exports daily. The Jones Act complicates this by
razing domestic shipping costs. We will look into the Act's impact, revealing a preference
towards foreign oil, especially for East Coast refineries. The Jones Act, or the Merchant
Marine Act of 1920, mandates that transportation of goods moved between U.S. ports to be
on U.S.-built owned ships. Its goal was to boost the domestic maritime industry and secure
national defense. By limiting sea transport to American vessels, it aimed to protect U.S. jobs
and ensure self-reliance during crises.

Comparative Advantage suggests economies thrive by focusing on goods they can produce
most efficiently. However, the Jones Act, requiring domestic shipping to use U.S.-built,
owned, and flagged vessels, inflates the costs of domestic oil transport. This regulation
changes the U.S.'s comparative advantage in oil refining by making foreign oil imports
more economically attractive, despite its advanced refining capabilities and natural
resources.
Operational and construction costs for Jones Act-compliant vessels are significantly higher
than for foreign-flagged ships, discouraging the use of domestic routes for oil transport.

the Act inadvertently gives competitive edge to imports, leading to a misallocation of

resources away from the U.S.'s intrinsic strengths. Consequently, the U.S. faces increased
costs and a greater reliance on foreign oil, highlighting the economic inefficiencies spawned
by protectionist maritime policies.
Economic surplus:

There are differences in market outcomes and efficiencies.

In the domestic U.S. market, as depicted on the left side of the diagram, the price level,
denoted as P.US, is elevated due to the Jones Act's regulations. These regulations restrict
competition and raise the cost of maritime services, leading to a higher equilibrium price. The
area labeled '1' represents the consumer surplus, which is the benefit consumers receive when
they pay less than what they are willing to for a service. The relatively high price set by the
Jones Act shrinks this consumer surplus.

Under this price level lies the producer surplus, comprised of areas '2' and '3'. This is the
benefit producers gain when the market price exceeds their minimum acceptable price. Under
the Jones Act, this surplus is amplified as producers receive a higher market price, which is a
direct consequence of the reduced competition and increased costs mandated by the Act.
However, this market is not operating at peak efficiency. The diagram shows a deadweight
loss in area '4', indicative of economic inefficiency. This loss represents the forgone consumer
surplus and the additional transactions that would have occurred in a more competitive
market setting. Essentially, it's the cost the economy bears due to the price distortion caused
by the Jones Act, which reduces overall welfare by preventing the market from reaching its
most efficient output.

Contrastingly, the right side of the diagram illustrates the world market in a free trade
environment, where the price level, P.World, is lower. This price is determined by the
intersection of global supply and demand, absent the distortive effects of protectionist policies.
In this scenario, the consumer surplus, while not explicitly marked, is naturally larger than in
the U.S. market under the Jones Act, as consumers benefit from lower prices. The
 producer surplus, also not labeled, would be less than in the U.S. market due to the more
competitive pricing.

The world market graph does not show a deadweight loss, suggesting that the market is more
efficient. The absence of such a loss implies that the quantity of maritime transport services
supplied and demanded in the world market is at an optimal level, maximizing welfare
without losses due to inefficiencies in pricing. This comparison underscores the economic
impact of the Jones Act. While it may protect certain domestic interests, it also introduces
inefficiencies that lead to a welfare loss in the U.S. market.

The Jones Act, a form of Protectionism, aims to protect the U.S. maritime industry.
Safeguarding American jobs and national security. However, this act raises significant
economic efficiency concerns. Higher energy costs and the misallocation of resources, which
contradict the principles of free trade and comparative advantage. Free trade, without barriers,
theoretically enhances global efficiency by allowing countries to specialize. This based on
their relative cost advantages. Yet, protectionist arguments persist. Advocating for domestic
employment protection, shielding infant industries, preventing dumping, and maintaining
product standards. These protectionist measures lead to increased operational costs, making
imported oil more economically viable than domestic alternatives. This scenario shows the
economic inefficiencies introduced by protectionist policies. Also shows the balance between
national security interests and global economic integration.

The Jones Act's protectionist approach raises significant concerns over economic efficiency,
such as higher energy costs and misallocation of resources. It contradicts the economic
principle of free trade, which advocates for the removal of trade barriers to enhance global
efficiency. The Act shows how protectionist policies can introduce economic inefficiencies
and complicate the balance between national security interests and economic prosperity. To
conclude, while the Jones Act aims to protect U.S. maritime interests, it also illustrates the
trade-offs involved in protectionist policies.

Bibliography

-Grabow, C. (2023) How Protectionist Shipping Policy Drives Up the Cost of Energy, Cato.org.
Available at: https://www.cato.org/blog/how-protectionist-shipping-policy-drives-cost-energy
(Accessed: 17 January 2024).

-Loch-Temzelides, T. (2018) Needed: A Cost-Benefit Analysis of the Jones Act, Cato.org.

Available at: https://www.cato.org/cato-online-forum/needed-cost-benefit-analysis-jones-act
(Accessed: 29 December 2023).