Jones Act

The Jones Act (formally known as the Merchant Marine Act of 1920) is a U.S. federal law that governs maritime commerce in American waters. At its heart, it's a piece of protectionism designed to support the U.S. maritime industry. The law mandates that all goods transported by water between two U.S. points must be carried on ships that are built in the United States, owned by U.S. citizens, and crewed by U.S. citizens or permanent residents. Imagine a VIP-only lane on the ocean highway connecting American ports—only American-made, American-owned, and American-staffed vessels are allowed in. Originally passed to ensure a strong domestic shipbuilding industry and a ready supply of merchant mariners for national defense, the Act has become a highly debated topic. For investors, it creates a fascinating and often controversial economic landscape, forging powerful competitive moats for some companies while imposing significant costs on others.

The Jones Act stands on four core pillars. For a ship to be legally allowed to move cargo from, say, Houston to Boston, it must satisfy all of the following conditions:

• U.S.-Flagged: The vessel must be registered in the United States and fly the American flag.
• U.S.-Built: The ship must have been constructed in an American shipyard. This is the most expensive and controversial component, as U.S. shipyards can be four to five times more expensive than their foreign counterparts.
• U.S.-Owned: At least 75% of the vessel's ownership must be held by U.S. citizens.
• U.S.-Crewed: At least 75% of the ship's crew must be U.S. citizens.

This legal framework effectively creates a closed market, a classic barrier to entry that insulates domestic shipping from global competition.

The Jones Act's effects ripple throughout the U.S. economy, creating clear winners and losers.

Supporters argue the Act is vital for national security and job protection. By ensuring a domestic shipbuilding base and a pool of experienced mariners, the U.S. maintains the capability to support its military during times of conflict. The primary beneficiaries are, of course, the companies that operate within this protected ecosystem.

• U.S. Shipbuilders: Companies that build Jones Act-compliant vessels face zero competition from more efficient foreign shipyards for domestic trade routes.
• U.S. Domestic Shippers: Operators of Jones Act fleets, like Matson, Inc. (serving Hawaii and Alaska) or Crowley Maritime, enjoy a near-monopoly or oligopoly on their routes. This allows them to charge significantly higher freight rates than would be possible in a competitive market.

Critics argue the Act is an archaic law that cripples the supply chain and inflates costs for businesses and consumers.

• Higher Shipping Costs: The lack of competition and the high cost of U.S.-built ships mean it can be cheaper to ship goods from a foreign country to the U.S. than between two U.S. ports. This disproportionately harms non-contiguous parts of the U.S., like Hawaii, Alaska, and Puerto Rico, where residents pay more for everyday goods.
• Energy Market Inefficiencies: Transporting U.S.-produced crude oil or liquefied natural gas (LNG) from the Gulf Coast to the Northeast is often prohibitively expensive due to a shortage of Jones Act tankers. This bizarrely results in East Coast refineries sometimes finding it cheaper to import energy from overseas than to source it domestically.

The Jones Act is a textbook example of how regulation can create a durable, albeit artificial, competitive advantage. As an investor, your job is to understand who benefits from this “moat” and who is paying to maintain it.

Companies that are direct beneficiaries of the Jones Act can be attractive investments because their market is legally protected from foreign competition. Their revenue streams are often stable and predictable. When analyzing a U.S. domestic shipping or shipbuilding company, the Jones Act is the source of its moat. You are essentially investing in a government-sanctioned tollbooth on American waters. Look for companies with healthy balance sheets that can afford the high capital expenditure of building new, compliant ships.

Conversely, be wary of businesses whose profit margins are squeezed by the Act.

• Businesses in Remote U.S. Locations: A retailer in Hawaii or a manufacturer in Alaska will have permanently higher input costs than its mainland competitors.
• U.S. Energy Producers and Refiners: Their ability to efficiently move product within their own country is hampered, putting them at a disadvantage to international competitors.
• The Broader Economy: The Act functions as a hidden tax on the economy, contributing to inflation and making U.S. logistics less efficient overall.

The biggest threat to a Jones Act beneficiary is the law itself. While it has survived for over a century, there are constant calls from a wide range of industries for its reform or repeal. An emergency waiver, a major policy shift, or an outright repeal could instantly evaporate the competitive advantage of these companies. This is a significant political risk that must be factored into your valuation. The moat is made of paper and ink, not bricks and mortar.

The Jones Act is a powerful, controversial law that creates an artificial but highly profitable market for a select few U.S. maritime companies. For a value investor, it offers a fascinating lesson in identifying regulatory moats. While the companies benefiting from it can make for compelling investments due to their protected status, it's crucial to recognize that their success is tied to a political decision, not just superior business acumen. Understanding the Jones Act allows you to see the hidden currents of cost and competition flowing through the American economy.