Unions, Protectionism and the Deepwater Horizon Disaster

One of the loudest criticisms of the Obama administration's lackluster efforts in the Gulf of Mexico was that the White House has, for some bizarre reason, refused many countries' offers to help with the BP oil spill's clean-up and containment efforts.  Those refusals are well-documented, and according to the State Department, the United States government has received assistance offers from 18 foreign countries, but thus far has accepted only four of them: (i) Mexico’s offer of two skimmers and 13,780 feet of boom (accepted in early May); (ii) Norway’s offer of eight skimming systems (accepted in early May); (iii) the Netherlands' offer of three sets of Koseq Rigid Sweeping Arms (accepted on May 23); and (iv) Canada’s offer of 9,843 feet of containment boom (accepted on June 4).

As you can see, that's not a whole lot of foreign help, especially for a disaster this size, and it's mostly equipment - only two Mexican skimmer ships have apparently been employed by the US government so far.  So what's up?  Well, many critics of the administration's efforts have cited an obscure protectionist law (the "Jones Act" ), which prevents foreign ships with foreign (i.e., non-union) workers from engaging in "cabotage" in US waters, as the reason why there aren't more foreign ships helping with the cleanup efforts.  Here's Steve Horowitz with the gist of the critics' argument (h/t Mark Perry):

With all of the damage and finger-pointing taking place around BP's Deepwater Horizon disaster, one of the most frequently asked questions is whether the federal and local governments are doing all they can to address the problems. One way in which they are clearly not doing so is the President's continued refusal to request an emergency waiver of one piece of legislation that is slowing down the response: the Merchant Marine Act of 1920, better known as the Jones Act.

The Jones Act is actually section 27 of the MMA and requires "that all goods transported by water between U.S. ports be carried in U.S.-flag ships, constructed in the United States, owned by U.S. citizens, and crewed by U.S. citizens and U.S. permanent residents." This, of course, includes the Gulf of Mexico. Thus any attempt to move equipment from one U.S. port to another for the purpose of either stopping or cleaning up the Deepwater Horizon leak must involve U.S. ships, fully constructed in the U.S., etc..

Of course in a world of globalized trade few such ships exist. In fact, a number of foreign-constructed or crewed ships are in U.S ports at the moment and could easily transport oil sucking equipment or more booms to the Gulf, but the Jones Act prevents them from doing so. Like the school buses that sat in a parking lot while folks were stranded during Hurricane Katrina, those non-U.S. ships and their equipment are sitting idle while an environmental disaster unfolds.

Interestingly, two days after Katrina struck the Gulf Coast, Homeland Security Secretary Michael Chertoff got approval for a blanket waiver of the Jones Act so that oil and natural gas could be brought into the area on non-approved ships. Meanwhile, President Obama and others continue to insist that such a blanket waiver is "not needed at this time."

From the pictures we're seeing of the Gulf, that seems a hard position to defend. However, as an economist, it's always worth asking: cui bono? Who is benefiting from this law's enforcement. One major beneficiary is organized labor. Ships that meet the requirements of the Jones Act are crewed by unionized labor and granting waivers to it (or outright repealing it as it needlessly raises the costs of all kinds of U.S. made goods) would bring lower-wage labor into competition with those nice union jobs, potentially threatening them. One theory is that President Obama does not want to risk alienating the labor vote by waiving the Jones Act even for a short period of time. President Bush had no such concerns as labor wasn't going to vote for him anyway.

Ok.  So basically, Horowitz and others argue that the Gulf clean-up effort isn't firing on all cylinders because President Obama, with a watchful eye on the November midterm elections, caved to the pressure of US labor unions and their hired guns and refused to issue a blanket waiver of the Jones Act.  Blech.

However, as Horowitz notes, the administration's response has been that such a waiver isn't needed right now, and they and other outlets have noted that foreign vessels are working in the Gulf as we, errr, speak.  Indeed, those two aforementioned Mexican ships are operating there already (no, there's no NAFTA exception because the US expressly exempted cabotage from NAFTA's rules), and according to a June 15 article by Offshore, there are actually fifteen foreign vessels doing clean-up work in the Gulf.  Admiral Thad Allen, the guy in charge of the big clean-up effort, also stated last week that no one has even requested a Jones Act waiver.  Hmmm.

So who's wrong and who's right here?  Horowitz and his fellow angry critics or the White House?

Well, it appears that, technically, they're both right, but while the White House probably can't be accused of outright lying, they're definitely not telling us the whole story, and the whole thing reeks of of labor union patronage.  (Shocking, I know!)  The aforementioned Offshore article helps to explain (emphasis mine):

National Incident Commander Admiral Thad Allen instructed the Coast Guard federal on-scene coordinator, U.S. Customs and Border Protection, and the U.S. Maritime Administration to ensure any Jones Act waiver requests regarding the BP oil spill response receive accelerated processing.

The admiral’s guidance would route waivers through the on-scene coordinator and the national incident commander for expedited clearance.

No Jones Act waivers have been required for the 15 foreign-flagged vessels currently in operation in the Gulf of Mexico. A foreign flag vessel can conduct certain operations as part of the flotilla if it is an oil spill response vessel and meets the requirements of 46 USC § 55113.

Federal law prohibits a foreign-flagged vessel from transporting merchandise between points in the United States encompassed by the Coastwise laws. The CBP determines the application of the Jones Act.

Being a diligent lawyer, I took a look at 46 USC § 55113 and here's what it says:

Notwithstanding any other provision of law, an oil spill response vessel documented under the laws of a foreign country may operate in waters of the United States on an emergency and temporary basis, for the purpose of recovering, transporting, and unloading in a United States port oil discharged as a result of an oil spill in or near those waters, if (1) an adequate number and type of oil spill response vessels documented under the laws of the United States cannot be engaged to recover oil from an oil spill in or near those waters in a timely manner, as determined by the Federal On-Scene Coordinator for a discharge or threat of a discharge of oil; and (2) the foreign country has by its laws accorded to vessels of the United States the same privileges accorded to vessels of the foreign country under this section.

So basically, Jones Act waivers aren't needed if a foreign-documented "oil spill response vessel" meets the two criteria listed above.  This explains how (a) the Jones Act remains unwaived; (b) some foreign vessels are working in the Gulf right now; and (c) other foreign vessels - like the transport-type that Horwitz describes above - can't operate in the Gulf because of the Jones Act.  It also explains how the White House technically isn't lying when it says that foreign ships can operate, and are operating, in the Gulf without a Jones Act waiver, so a blanket waiver isn't "needed."

Yet something still stinks here.  And bad.

First, if there's no political benefit to not issuing a blanket waiver like Bush did after Katrina, then why not stop the PR bleeding (such as these comments by Hawaii Congressman Charles Djou (R) or this Fox News story) and just issue the damn waiver?  Seems like a no brainer, right?  Well, unless, of course, the AFL-CIO's spokesman on the Jones Act issue has met with the White House and expressed his clients', ahem, views on the subject, and the White House has already exhibited a strong willingness to cave to union pressure on obscure trade issues (see, e.g., mexican trucks).

Second, now that the Jones Act has become a political issue, will the Obama adminstration openly deny a new limited Jones Act waiver request?  Earlier administration statements from White House Spokesman Robert Gibbs "that there are no pending requests" came before today when Dallas businessman Fred McCallister formally requested one pursuant to the expedited process described above:

Fred McCallister, an investment banker with Allegiance Capital Corporation, sent a letter to Incident Commander Admiral Thad Allen today asking for a limited waiver of the Jones Act, to enable 12 to 25 foreign flagged skimmer ships to assist in clean-up efforts in the Gulf.

"Many in the Gulf have been calling for this equipment, which can collect 3,500 gallons of oil per hour per vessel from Gulf waters. With estimates now at 2.5 million gallons of oil spilling into the Gulf every day, the urgency can't be overstated," said McCallister, a Vice President at Allegiance Capital.

The Jones Act has been waived as part of disaster response in the past, including a waiver to assist in response to Hurricane Katrina. More recently it has been waived to support renewable energy development efforts off of the coast of Delaware. Several Gulf state leaders have asked for a general waiver of the Jones Act this week.

Mr. McCallister has 12 skimming vessels specifically designed to remove surface oil from the Gulf that are immediately available and at least 13 more that can be made available over the next few weeks. The firm also has specialized vessels for deploying oil booms and providing housing for personnel working in the Gulf of Mexico on the BP oil spill cleanup.

McCallister's vessels probably don't meet one of the waiver requirements set forth in 46 USC § 55113, so they're going to provide a test for the White House.  It appears that, contrary to Admiral Allen's earlier statement, at least one Jones Act waiver request was submitted and denied, but that was long before the new media and political firestorm.  Things are much different now, and a denial of this new waiver request would certainly make news, especially considering that the quotes above come from a press release by McCallister's investment firm, and he was on Fox earlier this week.  (Something tells me that he's probably not going to keep quiet if his request is denied.) 

So will the White House really deny a(nother?) formal Jones Act waiver request when the Deepwater Horizon effort is, from a PR perspective at least, an abject failure?

It appears that the answer to that question depends on just how much all that union support is worth, and we're all about to find out about that very, very soon.