Why aren't we doing more domestic coastal shipping
In June of this year, a tanker truck carrying 8,500 gallons of gasoline on Interstate-95 in Philadelphia lost control at an exit ramp resulting in a crash that destroyed a section of the overpass; the driver lost his life in the accident.
The repair was originally estimated to take months. However, through a combination of luck, determination, and a kind of institutional coordination that is normally the stuff of dreams, the city was able to complete it in a matter of weeks.
Perhaps the stakes were too high to allow for a more relaxed approach. Every day that section of I-95 remained closed, a critical node in the nation’s supply chain would remain disrupted. Nearly 150,000 cars, including 14,000 commercial trucks, passed through this section of I-95 every day. Those trucks carried cargo worth $100 billion annually. An extended disruption to this flow of goods would have caused severe congestion, delays, and price inflation throughout the region.
While the rapid repair of the bridge demonstrates what our institutions are capable of if they could just get aligned, the urgency and panic around this road collapse sheds light on how dependent we are on trucking. Along with the heavy traffic that it carries, I-95 has another curious characteristic. It runs parallel to the entire Atlantic coastline, from northern Maine to Miami, passing through major metropolitan centers like Boston, New York, Philadelphia, and Washington D.C. along the way.
However, according to data from the U.S. Department of Transportation, while the proportion of all ton-miles of domestic freight shipped by truck increased by nearly 13% between 1980 and 2019, the proportion of ton-miles transported via domestic coastwise shipping declined by 12% in the same time (one ton-mile represents one ton carried one mile). And this is during a time when the overall GDP grew substantially. In other words, as the amount of goods shipped domestically expanded, we chose to ship more and more by road, even when viable coastal routes were available.
This becomes even more perplexing when we learn that shipping by water is several multiples more fuel efficient than shipping by road. If the U.S. increased utilization of domestic coastwise shipping to replace some land based transport happening along parallel routes, it could serve to reduce our dependency on road based transportation. This could clear up congestion and reduce the burden on our road infrastructure, while also lowering the cost and emissions per ton of cargo shipped.
So what’s the hold up?
In an analysis submitted to Congress in 2017, industry specialist John Frittelli lays out several ways in which cumbersome regulation and government action is holding back greater coastal utilization.
High cost of construction
The first impediment is the high cost of building container ships in the U.S. — six to eight times more expensive than foreign-built ships. The Jones Act, a 1920s law that aimed to bolster the domestic ship-building industry, requires domestic freight shipments in the U.S. be done via ships that are built in the U.S. and manned by an American crew. Protected from foreign competition, the U.S. ship building industry appears to be getting away with substantial production inefficiency.
High cargo handling costs
The next impediment that Frittelli identifies are high cargo handling costs.
U.S. container ports are widely considered to be much less efficient than ports in Europe and Asia, some of which are fully automated. A 2013 study examining the feasibility of coastal container services on the East Coast found that port handling costs were the largest cost element, greater than ship fuel and vessel capital cost, the second- and third-largest cost elements. (From Frittelli paper; emphasis added)
Frittelli doesn’t go into too much detail about why cargo handling costs are so inflated. Lack of automation is one factor. Generally higher personnel costs in the U.S. may be another. If U.S. ports are generally underutilized, lack of scale could also be a source of relative inefficiency.
High crew costs
The third constraining factor Frittelli identifies are relatively high crew costs. As a result, the crew costs on such ships make up 70% of the daily operating costs, compared to 28% for similar foreign ships.
The federal government supports U.S.-flagged international vessels through financial subsidies and cargo protection measures to enhance their competitiveness against more cost-effective foreign counterparts.
The Maritime Security Act enables subsidies for U.S.-crewed and U.S.-flagged commercial ships sailing internationally in exchange for military use rights during conflicts. The program has been expanded multiple times with subsidies totaling millions annually. These subsidies alleviate the burden of higher crew expenses, enabling competitiveness in global freight markets.
Through a mechanism called “cargo preference,” the government mandates that only U.S.-flagged ships transport government-owned or supported cargo.
Ironically, these protections and subsidies have the adverse effect of reducing domestic water-based shipping. Domestic ships and international ships draw from the same labor pool of merchant mariners to fill their crews. Hence, domestic shippers struggle to compete for talent against international shippers who benefit from government subsidies.
The market for domestic shipping has responded in a variety of interesting and significant ways to the above constraints.
Diversion of freight to land-based transportation
The dominance of trucking and rail is probably the most significant market response to inflated ship rates. As mentioned earlier, the proportion of ton-miles transported via trucks between 1980 and 2019 grew to completely replace domestic coastwise water traffic. Frittelli estimates that total raw tonnage carried via intercity truck grew by over 200% between 1960 and 2014 while domestic coastal shipping in the contiguous 48 states declined by 44% in the same period.
Trucking does provide many advantages including greater flexibility of destinations and faster speeds. But the sheer dominance of trucking in the American freight system is not a pure reflection of trucking’s natural competitive strengths. Coastal shipping would be hauling more cargo if it wasn’t constrained by the various government-induced inflationary pressures mentioned above.
The incrementally higher use of trucking and rail, relative to what would be occurring in a more naturally competitive environment, means that there is greater wear and tear on our road infrastructure, greater road traffic congestion, and greater air pollution (trucks are significantly less fuel efficient than water-based modes of transport) than there otherwise would be.
Use of sea-barges instead of ships for coastal shipping
Since the cost of using ships is prohibitive, shippers have resorted to using sea barges for carrying dry bulk raw materials (like coal or grains) and chemicals for shipments that do move by sea. Tonnage carried by sea barges has remained steady since 1980 while the use of ships for coastal transport has collapsed in that period. As a result, barges which accounted for only 10% of all coastwise tonnage in 1980 accounted for over 60% in 2014.
Barges have certain advantages over ships — they are cheaper to build and require a smaller crew to operate. And since there is a steady demand for their services, U.S. manufacturers have been able to innovate their design over time, making them more suited to the dynamics of the seas.
However, barges are generally smaller, slower, and less reliable over long distances than ships.
Inflationary pressure to overall economy
Water-based transportation is significantly cheaper and more fuel efficient than transporting freight by land. This means that water-based freight has the potential to set the minimum price for shipping goods domestically, at least in parts of the country that have ample access to a navigable waterway. However, the factors keeping coastal shipping rates inflated appear to be interfering with ships’ abilities to play that price-seeking role in the economy.
The lack of aggressive competition from coastal shipping may also be allowing trucks and rail to slow down their own pace of innovation, allowing them to keep rates higher than they otherwise would have been. It is impossible to know exactly how greater competition from coastal shipping would have impacted prices across the domestic logistics system, but it is fair to say that they likely would have been lower than they are today.
Weaker fleet preparedness and ship building capacity
The atrophied state of U.S. ship building points to the risks of relying on protectionist policies to bolster a domestic industry. Policies like the Jones Act were justified by the logic that protecting the domestic ship building industry from foreign competition would keep U.S. ship building capacity strong, which is imperative for maritime and national security. However, nearly a century after the bill was passed, it seems that protecting the industry led to inflated prices causing domestic shippers to move their freight to trucks and rail, starving the domestic ship building industry of the demand it needed to remain robust and tap into scale efficiencies. In fact, anemic domestic ship building capacity may have reached a point where it undermines America’s ability to maintain naval dominance into the future.
This vicious cycle has further knock on effects. For example, the high cost of a U.S.-built vessel incentivizes shipping companies to hold onto their existing vessels for longer than their prescribed lifetime. According to Frittelli, three-fourths of the domestic container ship fleet is older than the prescribed maximum economic life of 20 years, with nearly two-thirds older than 30 years.
From Frittelli,
The federal government has attempted to promote the U.S. merchant marine by imposing legal restrictions that direct cargo toward U.S.-built ships and offering financial assistance to encourage use of U.S.-built ships. However, federal policies have not addressed the issue that is arguably most important to cargo shippers, the cost of shipping. The capital cost of a new ship limits their availability, with some commonly used ship types missing from the domestic fleet. This encourages domestic shippers to find other means of transport, further reducing the ability of domestic shipyards to achieve economies in production. This reinforcing loop serves neither the domestic ship owner nor shipbuilder.
The national security question
It appears that certain policies of the U.S. government are holding back domestic coastal shipping from taking its natural place in the economic system. Of course, this is not the result of blind negligence on the part of the government. Policy analysts have written much about constraining regulation and the government has explored various projects to meaningfully revitalize water-based transport. The paper by John Frittelli analyzed above is just one of many such studies commissioned by Congress.
There are important concerns counterbalancing the positive economic potential of unleashing our domestic coastal shipping sector. National security is the primary among those. Exposing our domestic ship building industry to foreign competition too abruptly could make us dependent on foreign manufacturing for our naval capacity. Allowing non-American crews to travel between domestic ports could pose espionage risks and disincentivize investment into training new American sailors. Sacrificing national security at the altar of economic growth puts the cart before the horse.
The domestic water-based shipping industry has been operating under roughly the same policy paradigm for decades — protectionist and government-subsidized. Frittelli argues that while these policies do provide some support to the industry, they do not address the core concern of customers (cargo shippers) — the high cost of shipping. Instead, this policy paradigm inadvertently keeps the costs of water-based shipping inflated leading to a host of market responses that undermine the national security interests that inspired the policies in the first place. Not to mention placing undue burden on road infrastructure, energy supplies, and the environment at large.
