Jones Act

Economic Trading Restrictions in Shipping and Cabotage Jones Act:

Maritime nations maintain economic or national security-based restrictions on its maritime trades for a long time. For example, United States has domestic maritime-related Jones Act. Jones Act can be traced to the 3rd act of the first United States Congress in 1789.

Generally, Jones Act is very little different from a federal law enacted in 1817. Jones Act is a cabotage law, in order to restrict United States domestic trade in certain ways. Jones Act has been sometimes criticized on the basis that Jones Act increase transportation costs. On the other hand, United States restricts all of its domestic commerce in some way. Jones Act function well to preserve a vital domestic United States maritime industry.

Cabotage means coastal maritime trade in French. Generally, cabotage laws restrict a maritime nation’s domestic transportation to people of that maritime nation. Almost all countries in the world, maintains cabotage laws with respect to its maritime commerce. For example, United States has Jones Act.

In United States, Jones Act is usually used as short-hand for two different sections of the Merchant Marine Act 1920.

  1. Merchant Marine Act 1920 Section 27 is a cabotage law tracing its origins to laws enacted in 1789 and 1817.
  2. Merchant Marine Act 1920 Section 33 is a marine-related workman’s compensation law described

Cabotage Jones Act restricts the carriage of goods between two points in the United States to:

  1. S.-flag ships
  2. Ships must be built in the United States
  3. Ships must be owned and operated by qualified U.S. citizens

Most maritime nations around the world restrict their maritime cabotage trade to domestic ships. In 1789, United States Congress adopted tariffs that were much higher for foreign ships in United States domestic commerce than U.S.-flag ships. That was the origin of the Jones Act’s restrictions. Afterwards, in 1817, carriage of goods by foreign ships between United States ports was banned. Generally, 1817 law is regarded as a direct descendant of the present clay Jones Act.

Purpose of the Jones Act:

  1. support a strong United States merchant marine that can serve as a naval auxiliary in times of war or national emergency
  2. robust United States shipyard and repair industry

There are other United States cabotage laws like the Jones Act:

  1. The Passenger Ship Services Act of 1886 restricts the carriage of passengers between points in the United States similarly to United States built ships owned and operated by qualified United States citizens.
  2. The Dredging Act of 1906 and the Towing Act of 1940 similarly restrict dredging and ship towing, respectively, in United States waters.

In United States, there is also a Jones Act for fishing. There are some restrictions applicable to fishing in United States waters. In United States waters, fisheries endorsement to a ship’s Certificate of Documentation entitles a ship to engage in restricted fishing. Generally, citizenship requirements for large fishing ships are more restrictive than the requirements for Jones Act carriage of goods.

Penalties for violating the Jones Act can be severe, ranging from civil fines of up to $11,000 per day to potential forfeiture of goods and may include potential criminal penalties if the qualifications of a ship to trade were misrepresented to the United States Government.

Jones Act ship lose its eligibility

  1. If a Jones Act ship that is sold foreign ship owners or operators
  2. If a Jones Act ship is rebuilt outside of the United States

In these conditions, a Jones Act ship may permanently lose its Jones Act eligibility. United States Coast Guard has also considered permanently invalidating a ship’s coastwise eligibility.

Jones Act Regulating Agencies:

  1. United States Coast Guard: regulates the eligibility of ships to be United States documented and have on their Certificate of Documentation a coastwise endorsement which entitles the ship to participate in United States domestic trade
  2. Customs and Border Protection: enforces the Jones Act through cargo movements and issues rulings as to the applicability of the maritime cabotage laws to particular activities
  3. United States Maritime Administration: which makes citizenship decisions bearing on Jones Act qualifications in its maritime promotional programs where United States citizenship is often a prerequisite to participation, citizenship decisions with respect to large fishing ships, and determinations relevant to whether a Jones Act administrative waiver can be issued.

United States Coast Guard and Customs and Border Protection are in the United States Department of Homeland Security. United States Maritime Administration is in the United States Department of Transportation.

In order to qualify for a coastwise endorsement and thereby be eligible to transport goods in United States domestic commerce, a ship must be built in the United States. A ship must be assembled entirely in the United States and all of its major structural components must be fabricated in United States. Furthermore, a ship can be considered United States built if it is made of foreign manufactured steel and has certain foreign parts, including its main engine.

There some exceptions to United States build requirement in the Jones Act. Some foreign built and assembled ships

  1. captured in war
  2. forfeited to the United States Government like in drug seizure
  3. wrecked in United States seas and inland waters

can attain coastwise trading privileges and qualify for Jones Act.

In order to preserve United States built requirement, the Jones Act prohibits otherwise qualifying ships from being rebuilt outside the United States. Jones Act provides that a ship is deemed to have been rebuilt in the United States only if the entire rebuilding, including the construction of any major component of the hull or superstructure, was done in the United States.

If a Jones Act qualified ship is found to have been rebuilt abroad, ship forever loses its Jones Act trading privileges. United States Coast Guard review construction plans in advance and provide preliminary and final determinations whether such work will result in the ship being considered rebuilt abroad.

A ship only qualifies to participate in the Jones Act if ship is owned and operated by a qualified United States citizen. Ship owning company must be beneficially owned at least 75% by United States citizens.

There are two significant exceptions to the United States citizen ownership requirements in Jones Act:

  • Foreign lessors: enacted in 1996 and significantly amended in 2004. Foreign lease exception permits certain banks, financial institutions and lessors to own qualified Jones Act ships through a United States entity qualified to document a ship in the United States so long as it is, among other things, bareboat-chartered for at least three years to a qualified United States citizen ship operator.
  • Bowaters exception: enacted in 1956 expressly to assist the Bowater Southern Paper Corp. retain ownership of its United States tugs and barges after being acquired by a foreign company. Bowaters exception permits certain United States industrial, mining and similar companies who are largely based in the United States to own and operate Jones Act ships.

Jones Act does not prohibit foreign investment in United States maritime companies. U.S.-flag ships engaged solely in the United States foreign trade can be owned by foreign persons so long as the ship-owning entity qualifies for United States ship documentation. Furthermore, U.S.-flag ships engaged in domestic or Jones Act trade, foreign companies can invest subject to citizenship, equity and control restrictions.

Public company can qualify as a Jones Act United States citizen. Public companies qualify to own and operate Jones Act ships. On 26 November 2012, United States Coast Guard issued guidance, that addresses some of the practical difficulties that public companies face in complying with the 75% beneficial ownership requirement. United States Coast Guard guidance arose from an administrative penalty action proposed by United States Coast Guard against Trico Marine Services Inc., public Jones Act company, in 2011.

Jones Act can be waived pursuant to a law enacted in 1950. Jones Act Waivers can be granted in either of two ways:

  • by the Secretary of Defense: Secretary of Defense finds it necessary in the interest of national defense.
  • by the Secretary of the Department of Homeland Security (because Customs and Border Protection is responsible for administering navigation laws): Secretary of the Department of Homeland Security finds it is necessary in the interest of national defense and following a determination by United States Maritime Administration that qualified S.-flag ships are unavailable. Only a few voyage related waivers of the Jones Act have been granted over time, and Customs and Border Protection has indicated that waivers cannot be issued solely for economic reasons.

For example, Jones Act was waived for short periods of time following each of Hurricanes Katrina, Rita and Sandy and for a number of voyages relating to the release of crude oil from the Strategic Petroleum Reserve in 2011.

Jones Act can be waived for small passenger ships which carry no more than 12 passengers. United States Maritime Administration has authority to permit foreign built small passenger ships for hire to operate in the United States Jones Act restricted trade provided employment of the passenger ship that does not adversely affect United States shipyards or the business of a ship constructed in the United States.

Jones Act does extend offshore to certain places. United States Jones Act applies within United States territorial waters, 3 nm (nautical miles) from the shoreline, such that the movement of any goods between such waters and a United States port or other point in the United States is considered a Jones Act movement. For example, the recovery of spilled oil on the surface of the water within the territorial waters which is then brought to a United States port for disposal is a Jones Act movement.

Jones Act applies to anything temporarily or permanently affixed to the United States outer continental shelf within the meaning of the Outer Continental Shelf Lands Act of 1953 (OCSLA). Hence, United States Jones Act applies to the transportation of pipe, drilling mud, parts and other items from United States ports to drill rigs in the United States Gulf of Mexico.

United States Department of Homeland Security’s sub division Customs and Border Protection, maintains an active database government web page, relating to many customs and trade matters, including Jones Act matters. Customs and Border Protection rulings have limited precedential effect, but nevertheless provide guidance on the application of the Jones Act.

It is not clear whether the Jones Act applies to offshore alternative energy projects such as wind farms because Outer Continental Shelf Lands Act of 1953 (OCSLA) appears to be limited to oil and gas activity and Outer Continental Shelf Lands Act of 1953 (OCSLA) is the only statutory basis for considering places outside United States territorial waters to be points in the United States for purposes of the Jones Act.

Cruise to Nowhere is a term indicating a passenger cruise that begins and ends at the same point in the United States. Customs and Border Protection has determined that such a cruise is not covered by the Passenger Ship Services Act so long as the ship leaves United States territorial waters because the passengers embark and disembark at the same place in the United States.

Marine Highway is a term employed in statute and by the United States Maritime Administration to denote a domestic maritime route that parallels a landside highway. Movement of cargo by sea along the east coast of the United States is the marine highway equivalent of I95 (Interstate 95) which connects Maine to Florida. It has been promoted the adoption of measures to encourage marine highways as a way to alleviate landside congestion and for other policy reasons. Marine highways are an offshoot of a similar concept termed short sea shipping.

Fair Inference Rule is adopted by the United States Maritime Administration, but not adopted by the United States Coast Guard, to the effect that a ship owner can show compliance with the United States citizenship 75% beneficial ownership requirement by virtue of showing that at least 95% of the addresses of its shareholders are in the United States. Fair Inference Rule is derived from a 1936 Federal District Court Case (Collier Advertising Services v. Hudson River Day Line).