Robert Hopkins

Michael Brook

As we sail past President Trump's first 100 days in office, it appears that the basic structure of the Jones Act will remain in place. However, a few developing issues could significantly affect enforcement and interpretation of the act. One of these issues could have a dramatic impact on the US offshore oil and gas industry.

The Jones Act requires, among other things, that the transportation of merchandise between points in the United States be carried out by US-owned, -built, -crewed, and -flagged vessels. Violating the act can result in severe penalties that can range from governmental seizure of transported merchandise to fines equal to the value of the merchandise or the cost of transportation. 46 USC. § 55102(c).

With roots traced back to cabotage laws passed by the first Congress in 1789, the Jones Act was enacted in 1920 in the aftermath of World War I on the rational that a fleet of US-based vessels served the “national defense” as well as the development of “domestic and foreign commerce.” 46 USC § 50101.

Critics of the act argue that the protectionist statute significantly increases costs to the shipping industry; precludes foreign ships from assisting in cases of national emergency; and creates unnecessary obstacles for industry stakeholders, particularly in situations where US-flagged vessels simply do not have the capabilities of their foreign counterparts.

Recent presidents from both parties have generally supported the Jones Act. President George W. Bush noted, “[p]rograms that have contributed to the growth of our domestic fleet, such as the Jones Act ... should be maintained.” Similarly, President Barack Obama indicated that the Jones Act is “vital for commerce and our national security.”

The impact of the Jones Act presents an interesting paradox for the policies proposed by President Donald J. Trump. On one hand, President Trump has consistently advocated for maintaining/creating jobs for US workers — one of the act’s key goals. Additionally, President Trump’s positions on increasing US-based manufacturing and strengthening the national defense appear to be directly aligned with the same goals.

On the other hand, some studies argue that the Jones Act results in economic inefficiency by raising prices for American consumers and inhibiting competition and, as such, could be at odds with President Trump’s promises of deregulation. One study estimated that the Jones Act has cost the US economy as much as $1.3 billion a year.

Although President Trump has yet to issue a formal statement on the Jones Act, a number of factors point to the likelihood that it will not be going away anytime soon.

First, President Trump’s appointment of Elaine Chao as secretary of transportation has been praised by several pro-Jones Act organizations, including the Seafarers International Union. Chao generally has been viewed as supportive of the act and during her confirmation hearing Chao stated, “[t]he Jones Act is the law of the land, and it will be obeyed unless the Congress changes its mind on that.” Second, past efforts in Congress to repeal the statute failed to get much traction, as American maritime interest groups have mounted strong opposition.

While it appears that the Jones Act will not be going away, there are several emerging issues to consider going forward.

One such issue is heightened enforcement, which Congress urged in its appropriations bills for 2016 and 2017. In response, Customs and Border Protection (CBP) established the Jones Act Division of Enforcement (JADE) in July 2016. Moreover, on April 4, the Department of Justice (DOJ) levied the largest fine in the history of the Jones Act — a $10 million fine assessed against an Alaskan oil exploration company for transporting a jack-up drill rig from the Gulf of Mexico to Alaska aboard a foreign-flagged vessel. The DOJ announced, “[r]esolution of this case demonstrates that the Jones Act will be actively enforced and that an intentional violation will not be rewarded.” These developments, coupled with President Trump’s emphasis on maintaining/creating jobs for US workers, indicate that there may well be yet a greater focus on enforcement.

As discussed above, the Jones Act prohibits the transportation of merchandise by a foreign vessel. However, “vessel equipment” generally does not constitute merchandise. During the last 40 years, CBP has issued various interpretive rulings finding that certain specialized oil and gas industry equipment is “vessel equipment” and therefore exempt from the Jones Act. Such rulings have been relied on by the US offshore oil and gas industry and, as a result, foreign-flagged vessels have been heavily involved in oil and gas operations in the Gulf of Mexico.

Just two days prior to President Trump taking office, CBP proposed a rule that would revoke some of its above prior rulings, including exempting certain specialized oil and gas equipment from the Jones Act. CBP’s proposal has received significant attention and conflicting feedback, and CBP has twice extended the period for public comment. The US oil and gas industry has initiated a fierce campaign opposing the proposed rule, which would have significant implications for the US offshore oil and gas industry.

While the presidential power to modify the Jones Act is limited, the president has the ability to grant Jones Act waivers for “national defense” reasons. Historically, waivers are rarely granted, and have generally been limited to war, natural disaster, or significant oil and gas shortages. With President Trump’s business-first focus and unconventional approach toward advancing US economic interests, there exists the possibility of the issuance of limited waivers geared to benefiting discreet US economic interests that would also be founded on national defense concerns.

All this means the Jones Act is likely here to stay, for now.

Protecting US jobs — one of the overarching goals of the Jones Act — is at the forefront of the Trump administration’s policies. That said, a few developing issues relating to enforcement and interpretation of the Jones Act should be monitored as they may significantly impact certain industries, including oil and gas.

Robert B. Hopkins is the managing partner of the Baltimore office of Duane Morris LLP and Michael C. Brook is an associate in the firm’s Baltimore office.