PUERTO RICO

Characteristics of the 

Island’s Maritime 

Trade and Potential 

Effects of Modifying 

the Jones Act

Report to Congressional Requesters

March 2013

GAO-13-260

United States Government Accountability Office

GAO
United States Government Accountability Office

Highlights of GAO-13-260, a report to 

congressional requesters

March 2013

PUERTO RICO

Characteristics of the Island’s Maritime Trade and 

Possible Effects of Modifying the Jones Act

Why GAO Did This Study

Puerto Rico is subject to Section 27 of 

the Merchant Marine Act of 1920, 

known as the “Jones Act” (Act), which 

requires that maritime transport of 

cargo between points in the United 

States be carried by vessels that are 

(1) owned by U.S. citizens and 

registered in the United States, (2) built 

in the United States, and (3) operated 

with predominantly U.S.-citizen crews. 

The general purposes of the Jones Act 

include providing the nation with a 

strong merchant marine that can 

provide transportation for the nation’s 

maritime commerce, serve in time of 

war or national emergency, and 

support an adequate shipyard 

industrial base. Companies (shippers) 

that use Jones Act carriers for shipping 

in the Puerto Rico trade have 

expressed concerns that, as a result of 

the Jones Act, freight rates between 

the United States and Puerto Rico are 

higher than they otherwise would be, 

and given the reliance on waterborne 

transportation have an adverse 

economic impact on Puerto Rico.

This report examines (1) maritime 

transportation to and from Puerto Rico 

and how the Jones Act affects that 

trade and (2) possible effects of 

modifying the application of the Jones 

Act in Puerto Rico. GAO collected and 

analyzed information and literature 

relevant to the market and gathered 

the views of numerous public and 

private sector stakeholders through 

interviews and written responses. GAO 

is not making recommendations in this 

report. The Department of 

Transportation (DOT) generally agreed 

with the report, but emphasized that 

many of the issues related to the Jones 

Act are complex and multifaceted. 

DOT and others also provided 

technical clarifications, which GAO 

incorporated, as appropriate.

What GAO Found

Jones Act requirements have resulted in a discrete shipping market between 

Puerto Rico and the United States. Most of the cargo shipped between the 

United States and Puerto Rico is carried by four Jones Act carriers that provide 

dedicated, scheduled weekly service using containerships and container barges. 

Although some vessels are operating beyond their expected useful service life, 

many have been reconstructed or refurbished. Jones Act dry and liquid bulkcargo vessels also operate in the market, although some shippers report that 

qualified bulk-cargo vessels may not always be available to meet their needs. 

Cargo moving between Puerto Rico and foreign destinations is carried by 

numerous foreign-flag vessels, often with greater capacity, and typically as part 

of longer global trade routes. Freight rates are determined by a number of 

factors, including the supply of vessels and consumer demand in the market, as 

well as costs that carriers face to operate, some of which (e.g., crew costs) are 

affected by Jones Act requirements. The average freight rates of the four major 

Jones Act carriers in this market were lower in 2010 than they were in 2006, 

which was the onset of the recent recession in Puerto Rico that has contributed 

to decreases in demand. Foreign-flag carriers serving Puerto Rico from foreign 

ports operate under different rules, regulations, and supply and demand

conditions and generally have lower costs to operate than Jones Act carriers

have. Shippers doing business in Puerto Rico that GAO contacted reported that 

the freight rates are often—although not always—lower for foreign carriers going 

to and from Puerto Rico and foreign locations than the rates shippers pay to ship 

similar cargo to and from the United States, despite longer distances. However, 

data were not available to allow us to validate the examples given or verify the 

extent to which this difference occurred. According to these shippers, lower rates, 

as well as the limited availability of qualified vessels in some cases, can lead 

companies to source products from foreign countries rather than the United 

States.

The effects of modifying the application of the Jones Act for Puerto Rico are 

highly uncertain, and various trade-offs could materialize depending on how the 

Act is modified. Under a full exemption from the Act, the rules and requirements 

that would apply to all carriers would need to be determined. While proponents of 

this change expect increased competition and greater availability of vessels to 

suit shippers’ needs, it is also possible that the reliability and other beneficial 

aspects of the current service could be affected. Furthermore, because of cost 

advantages, unrestricted competition from foreign-flag vessels could result in the 

disappearance of most U.S.-flag vessels in this trade, having a negative impact 

on the U.S. merchant marine and the shipyard industrial base that the Act was 

meant to protect. Instead of a full exemption, some stakeholders advocate an 

exemption from the U.S.-build requirement for vessels. According to proponents 

of this change, the availability of lower-cost, foreign-built vessels could

encourage existing carriers to recapitalize their aging fleets (although one 

existing carrier has recently ordered two new U.S.-built vessels for this trade), 

and could encourage new carriers to enter the market. However, as with a full 

exemption, this partial exemption could also reduce or eliminate existing and

future shipbuilding orders for vessels to be used in the Puerto Rico trade, having 

a negative impact on the shipyard industrial base the Act was meant to support. 

View GAO-13-260. For more information, 

contact Lorelei St. James at (202) 512-2834 or 

stjamesl@gao.gov. 
Page i GAO-13-260 Puerto Rico

Letter 1 

Background 4

Jones Act Results in a Discrete Shipping Market between the 

United States and Puerto Rico 5

Modifying the Jones Act in Puerto Rico Would Have Uncertain 

Effects and May Result in Difficult Trade-offs 22

Concluding Observations 28

Agency and Third-Party Comments 29

Appendix I Scope and Methodology 31

Appendix II Federal Agency Roles in Relation to the Jones Act 36

Appendix III GAO Contacts and Staff Acknowledgments 41

Tables

Table 1: Information on Jones Act Carriers Shipping Containers 

between the United States and Puerto Rico, as of January 

2013 7

Table 2: Information on Select Jones Act Carriers Shipping Bulk 

Cargo between the United States and Puerto Rico, as of 

August 2012 10

Figures

Figure 1: Jones Act Carriers’ Container Shipping Routes between 

the United States, Puerto Rico, and Other Caribbean 

Destinations 9

Figure 2: Examples of Foreign Carriers’ Feeder Services Operating 

in the Caribbean 12

Contents 
Page ii GAO-13-260 Puerto Rico

Abbreviations

BVI British Virgin Islands

CBP Customs and Border Protection

DHS Department of Homeland Security

DOD Department of Defense

DOJ Department of Justice

DOT Department of Transportation

FEU forty-foot equivalent unit

FMC Federal Maritime Commission

LNG liquefied natural gas

MARAD Maritime Administration

NASSCO National Steel and Shipbuilding Company

PREPA Puerto Rico Electric Power Authority

STB Surface Transportation Board

TEU twenty-foot equivalent unit

USVI U.S. Virgin Islands

VISA Voluntary Intermodal Sealift Agreement

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Page 1 GAO-13-260 Puerto Rico

United States Government Accountability Office

Washington, DC 20548

March 14, 2013

The Honorable Gregorio Kilili Camacho Sablan

Ranking Member

Subcommittee on Fisheries, Wildlife, Oceans 

 and Insular Affairs

Committee on Natural Resources

House of Representatives

The Honorable Pedro R. Pierluisi

House of Representatives

Puerto Rico—the largest and most populous insular area1 of the United 

States—depends heavily on maritime transportation to move goods to 

and from the island. The Jones Act,2 in general, requires that maritime 

transport of cargo between points in the United States be carried by 

vessels that are owned by U.S. citizens and registered under the U.S. flag 

with a coastwise3 endorsement, which in turn requires that such vessels 

be built in the United States.4

 

1

The U.S. Department of the Interior, Office of Insular Affairs, defines an insular area as a 

jurisdiction that is neither a part of one of the several states nor a federal district. Insular 

areas of the United States include American Samoa, the Commonwealth of Puerto Rico, 

the Commonwealth of the Northern Mariana Islands, Guam, and the U.S. Virgin Islands, 

as well as the Federated States of Micronesia, the Republic of the Marshall Islands, and 

the Republic of Palau.

Further, because the Jones Act requires 

2

Section 27 of the Merchant Marine Act of 1920, Pub. L. No. 66-261, 41 Stat. 988, 999 

(1920) (codified as amended at 46 U.S.C. § 55102).

3

Coastwise domestic shipping generally refers to the transport of cargo by oceangoing 

vessels between the U.S. mainland and Alaska, Hawaii, and Puerto Rico; and along the 

Atlantic, Gulf, and Pacific Coasts, as well as between these coasts and the St. Lawrence 

Seaway; and between the Atlantic, Gulf, and Pacific Coasts via the Panama Canal. 

4

Ownership must be by a U.S. citizen or by companies controlled by individuals that are 

U.S. citizens with at least 75 percent of ownership. Registry pertains to a vessel certificate 

determining the ownership and nationality of the vessel. The U.S. Coast Guard 

determines the rules and standards, and vessel eligibility for coastwise endorsement 

(which allows vessels to engage in the coastwise trade) and issues certificates of 

documentation defining the type of trade in which vessels are allowed to engage. The 

build requirement includes being rebuilt in the United States, but does not require repairs 

be made in U.S. shipyards. However, section 466 of the Tariff Act of 1930 (Pub. L. No. 71-

361, 46 Stat. 590, 719 (codified at 19 U.S.C. § 1466)), as amended, generally requires 

that any repairs done abroad on certain U.S.-flag vessels, such as those documented for 

coastwise trade, pay a 50 percent duty on the cost of repairs. 

 
 

Page 2 GAO-13-260 Puerto Rico

U.S.-flag registry, U.S. manning laws apply, which require predominantly 

U.S. citizen crews.5 Puerto Rico is subject to all Jones Act requirements. 

However, under statute, U.S. coastwise laws such as the Jones Act 

generally do not apply to cargo transported between the United States 

and certain other insular areas, including the U.S. Virgin Islands.6 In 

addition, under statute, vessels engaging in domestic trade between the 

United States and certain other insular areas, including Guam, require 

only a registry endorsement (i.e., U.S.-flag registry without the U.S.-build 

requirement).7

Among other purposes, the Jones Act, as amended, was intended to 

provide the nation with 1) a strong merchant marine8 that can serve as a 

naval or military auxiliary in time of war or national emergency, 2) 

transportation for the proper growth of the nation’s maritime commerce, 

and 3) support for efficient facilities for building and repairing vessels.9

 

5

All licensed officers must be U.S. citizens and the unlicensed crew must be at least 75 

percent U.S. citizens. See 46 U.S.C. § 8103.

Historically, however, shippers and others engaged in shipping between 

the United States and Puerto Rico have expressed concerns that, as a 

result of the Jones Act, freight rates between the United States and 

Puerto Rico are higher than they otherwise would be, and that the higher 

rates increase prices of goods and have a negative effect on the Puerto 

6

Pursuant to 46 U.S.C. § 55101, the United States coastwise laws, in general, apply to the 

United States, including the island territories and possessions of the United States. 

Section 55101 further provides specified exceptions to the application of the coastwise 

laws, whereby, in general, the coastwise laws do not apply to, for example, the 

Commonwealth of the Northern Mariana Islands and the U.S. Virgin Islands. For the U.S. 

Virgin Islands, under 46 U.S.C. § 55101(b)(3), this exemption is to be in effect until the 

President of the United States declares by proclamation that the coastwise laws apply to 

the Virgin Islands. While the insular areas of the United States, other than Puerto Rico, 

are not within the Customs territory of the United States, under the Harmonized Tariff 

Schedule of the United States, certain types of qualifying insular area exports to the 

United States are exempt from duty.

7

In general, registry endorsements, which do not include a U.S.-build requirement, may be 

issued for vessels to engage in trade with American Samoa, Guam, Kingman Reef, 

Midway, and Wake. See 46 U.S.C. § 12111(b).

8

The term “merchant marine” refers to the commercial ships or fleet of a nation, and to the 

people who operate them. 

9

Section 1 of the Merchant Marine Act, 1920 (46 U.S.C. App. 861), now codified at 46 

U.S.C. § 50101.
 

Page 3 GAO-13-260 Puerto Rico

Rico economy.10

To address these objectives, we collected and analyzed data, reviewed 

literature and reports relevant to these markets, and gathered the 

perspectives and experiences of numerous public and private sector 

stakeholders, including companies that utilize maritime-shipping services 

(referred to as “shippers” in this report) through interviews and written 

responses. In particular, we gathered information from Jones Act carriers 

operating between the United States and Puerto Rico on various aspects 

of the services they provide, including information on their vessels, 

routes, services, operating and capital costs, and average freight rates. 

We also contacted 10 foreign carriers to obtain similar information; 

however, nine of the ten foreign carriers we contacted declined to be 

interviewed, although representatives from two foreign carriers 

participated in a larger meeting of stakeholders we held in Puerto Rico. 

As a result, we were not able to gather detailed cost or rate information 

from foreign carriers that call in Puerto Rico. See appendix I for more 

information about our scope and methodology and a listing of the 

stakeholders we interviewed.

As a result, some of these stakeholders have called for 

an exemption for Puerto Rico from the Jones Act in its entirety, allowing 

foreign carriers to provide service between the United States and Puerto 

Rico or for an exemption from the U.S.-build requirement of the Jones 

Act, allowing U.S. carriers to use foreign-built vessels. Because of these 

concerns you asked us to examine the effect of the Jones Act’s 

application to Puerto Rico. This report examines (1) the characteristics of 

maritime transportation to and from Puerto Rico and how the Jones Act 

affects that trade, and (2) possible effects of modifying the application of 

the Jones Act in Puerto Rico.

We conducted this performance audit from October 2011 through 

February 2013 in accordance with generally accepted government 

auditing standards. Those standards require that we plan and perform the 

audit to obtain sufficient, appropriate evidence to provide a reasonable 

basis for our findings and conclusions based on our audit objectives. We 

believe that the evidence obtained provides a reasonable basis for our 

findings and conclusions based on our audit objectives.

 

10Similar concerns have also been raised by stakeholders with other noncontiguous areas 

of the United States such as Alaska and Hawaii.
 

Page 4 GAO-13-260 Puerto Rico

Puerto Rico is an island about 1,000 miles southeast of Miami, Florida, 

and relies heavily on oceangoing vessels to move large volumes of goods 

to and from the island. Puerto Rico has maintained a strong trade 

relationship with U.S. suppliers and imports significantly more in trade 

volume, by weight, than it exports back to the United States. Of the total 

volume of trade between the United States and Puerto Rico in 2011, 

about 85 percent was shipped from the United States to Puerto Rico, 

while 15 percent went from Puerto Rico to the United States. Goods 

imported to Puerto Rico from the United States are primarily consumer 

goods, although 8 of the top 10 goods by volume imported into Puerto 

Rico are raw materials related to the manufacturing of pharmaceuticals 

and medical devices. Puerto Rico’s major exports back to the United 

States are typically high-value finished products, particularly 

pharmaceutical products and medical devices. While trade between 

Puerto Rico and the United States is significant, Puerto Rico imports 

more by volume from foreign countries than from the United States, 

primarily due to imports of petroleum products.

The Jones Act is one of the cabotage (also known as “coastwise”) laws of 

the United States and applies to cargo shipped by waterborne 

transportation between two U.S. points.11 Cabotage laws are designed to 

limit the domestic transport of goods and passengers to a country’s 

national flagged vessels. According to the Department of Transportation’s 

(DOT) Maritime Administration (MARAD), under the Jones Act, all 

domestic water transportation providers compete under uniform laws and 

regulations, creating an even playing field.12 The United States is not 

alone in establishing and enforcing cabotage laws. Most trading nations 

of the world, according to MARAD, have or have had cabotage laws of 

some kind. Furthermore, these types of laws are not unique to the 

maritime industry, but U.S. cabotage provisions apply, in some form or 

degree, to other transportation modes, such as aviation, rail, and 

trucking.13

 

11In general, the term “cabotage” has been used to refer to the transport of cargo or 

passengers between two points in the same country, as well as restrictions on such 

transport.

12MARAD, America’s Marine Highway Report to Congress (Washington, D.C., April 2011). 

13While cabotage principles are similar, no U.S.-build requirement exists for other modes 

in the United States.

Background 
 

Page 5 GAO-13-260 Puerto Rico

Several federal agencies have a role in supporting, administering, and 

enforcing the Jones Act. In particular, MARAD’s mission is to promote the 

maintenance of an adequate, well balanced U.S. merchant marine to 

ensure that the United States maintains adequate shipbuilding and repair 

services, efficient ports, and a pool of merchant mariners for both 

domestic commerce and national defense. Although the Department of 

Defense (DOD) does not administer or enforce the Jones Act, the military 

strategy of the United States relies on the use of commercial U.S.-flag 

ships and crews and the availability of a shipyard industrial base to 

support national defense needs. As such, MARAD and DOD jointly 

manage the Voluntary Intermodal Sealift Agreement (VISA) Program, 

established for emergency preparedness, which includes over 300 

commercial U.S.-flag vessels to provide DOD with assured access to 

emergency sealift capacity. See appendix II for more details on federal 

agencies’ roles in relation to the Jones Act.

Jones Act requirements have resulted in a discrete shipping market 

between Puerto Rico and the United States. Most of the cargo shipped 

between the United States and Puerto Rico is carried by four Jones Act 

carriers that provide dedicated, scheduled, weekly service using 

containerships and container barges—some of which have exceeded 

their expected useful life. Dry and liquid bulk cargo vessels also operate 

in the market under the Jones Act, although some shippers report that 

qualified bulk cargo vessels may not always be available to meet their 

needs. Cargo moving between Puerto Rico and foreign destinations is 

carried by numerous foreign-flag vessels, typically as part of longer global 

trade routes. Freight rates in this market are determined by a number of 

factors, including the supply of vessels and consumer demand in the 

market, as well as costs that carriers face to operate, some of which are 

affected by Jones Act requirements. The average freight rates of the four 

major Jones Act carriers in this market were lower in 2010 than they were 

in 2006, as the recent recession has contributed to decreases in demand. 

In contrast, foreign-flag carriers operate under different rules, regulations, 

and supply and demand conditions and generally have lower costs to 

operate than Jones Act carriers. Shippers doing business in Puerto Rico 

reported that freight rates for foreign carriers going to and from foreign 

ports are often—although not always—lower than rates they pay to ship 

similar cargo from the United States, despite longer distances. However, 

data were not available to allow us to validate the examples given or 

verify the extent to which this occurred. According to these shippers, 

lower rates, as well as limited availability of qualified vessels in some 

cases can lead companies to source products from foreign countries 

Jones Act Results in a 

Discrete Shipping 

Market between the 

United States and 

Puerto Rico
 

Page 6 GAO-13-260 Puerto Rico

rather than the United States. The impact of rates to ship between the 

United States and Puerto Rico on prices of goods in Puerto Rico is 

difficult to determine with any precision and likely varies by type of good.

A large majority of the maritime trade between the United States and 

Puerto Rico is shipped in containers by four Jones Act carriers: Crowley 

Puerto Rico Services, Inc.; Horizon Lines, Inc., Sea Star Line, LLC; and 

Trailer Bridge, Inc. These carriers currently use 17 vessels to provide 

their shipping services—5 self-propelled containerships and 12 container 

barges that are pulled by tugboats (see table 1). As shown in the table, 

nearly all of the containerships and several of the barges used by these 

carriers are operating beyond their average expected useful life, which is 

about 30 years for a containership and about 27 years for a barge, 

according to Office of Management and Budget guidance.14

 

14The U.S. Navy, while acknowledging that the Office of Management and Budget’s 

guidance of 30 years, depending on certain factors, estimates an expected service life of 

up to 40 years for cargo vessels and a financial rating agency set the expected useful life 

at 40 years. See OMB Circular No. A-76—Revised Supplemental Handbook, Performance 

of Commercial Activities, (Washington, D.C.: March 1996); Department of the Navy, Naval 

Sea Systems Command, Design Data Sheet: Calculation of Surface Ship Annual Energy 

Usage, Annual Energy Cost, and Fully Burdened Cost of Energy, (Washington, D.C.: 

August 7, 2012).

Containerships in this trade average 39 years old, while barges averaged 

31 years, although one carrier noted that, despite their advanced age, all 

its Jones Act vessels operating in the trade are fully compliant with Coast 

Guard rules and regulations. Furthermore, these averages reflect when 

the vessels were first constructed, but do not account for periodic 

refurbishments of many of the vessels to mitigate some of the effects of 

age and wear on a vessel and extend the expected useful service life.

While the Jones Act vessels operating between the United States and 

Puerto Rico are all enrolled in MARAD and DOD’s VISA program, these 

vessels would have limited contribution to military sealift capabilities, 

according to DOD officials. According to DOD, the containerships—

particularly lift-on/lift-off vessels—in this trade are less useful for military 

Characteristics of 

Maritime Transportation to 

and from Puerto Rico

Four Jones Act Carriers Offer 

Regularly Scheduled Container 

Service 
 

Page 7 GAO-13-260 Puerto Rico

purposes compared to vessels with roll-on/roll-off capability;15

Table 1: Information on Jones Act Carriers Shipping Containers between the United States and Puerto Rico, as of January 

2013

and the 

tugs and barges in this trade are generally considered of lesser military 

value because of their slow speed relative to self-propelled vessels. 

Nonetheless, some of the vessels used for shipping between the United

States and Puerto Rico have participated in past emergency responses, 

such as transporting goods to Haiti after the earthquake in 2010. In 

addition, according to DOD, whether or not the vessel is militarily useful, 

commercial U.S.-flag vessels provide employment to trained officers and 

unlicensed seamen, many of whom could be available to crew 

government-owned sealift vessels in times of war or national emergency.

Carrier

Percent 

market share 

(as of June 

2011)

Type of vessels 

operated

Number 

of vessels 

used

Available

weekly

capacity

(FEUs one 

way)a

Vessel 

age range 

in years

Number of 

service days 

per week U.S. ports servedb

Horizon

Lines

30 Self-propelled 

containership (lift 

on/lift off)

3 2,340 38-44 3 Jacksonville, FL

Elizabeth, NJ

Houston, TX

Sea Star 

Linec 27 Self-propelled 

containership (lift 

on/lift off with roll 

on/roll off 

capability)

2 1,200 36-38 2 Port Everglades, FL

Jacksonville, FL

Crowley 31 Barge (roll on/roll 

off)

8 1,820 33-42 4 Jacksonville, FL

Pennsauken, NJ

Trailer 

Bridge 

12 Barge (roll on/roll 

off)

4 800 14-28 2 Jacksonville, FL

Source: GAO, carriers, and publicly-available literature.

a

A forty-foot equivalent unit (FEU) is a capacity measurement used in container transportation for 

cargo volume that can be carried in a standard 40-foot-long container. A twenty-foot equivalent unit 

(TEU) is a capacity measurement used in container transportation for cargo volume that can be 

carried in a standard 20-foot-long container.

b

All carriers operate to the Port of San Juan in Puerto Rico.

 

15On lift-on/lift-off vessels, cargo is loaded and discharged over the top of the vessel using 

cranes or derricks. By contrast, Roll-on/roll-off vessels are designed to transport wheeled 

cargo, such as trailers, containers on chassis, railroad cars, and vehicles that are loaded 

and unloaded using port ramps. 
 

Page 8 GAO-13-260 Puerto Rico

c

In December 2012, Sea Star announced that it has contracted with General Dynamics’ National 

Steel and Shipbuilding Company (NASSCO) shipyard for the construction of two new 3,100-TEU, 

containerships for the Puerto Rico service for about $350 million, with options for three additional 

vessels. When completed, the 764-foot-long containerships will be primarily powered by liquefied 

natural gas (LNG) and will be delivered and enter service between Jacksonville, Florida, and San 

Juan, Puerto Rico in 2015 and 2016. See TOTE, Inc., World’s First and Largest LNG-Powered 

Containerships To Serve Puerto Rico For TOTE, Inc., December 4, 2012.

The four major Jones Act carriers provide regularly scheduled, weekly 

service between ports in the United States and Puerto Rico. These 

carriers offer different types of services based on the types of ships they 

operate. Horizon and Sea Star offer approximately 3-day one-way service 

between various U.S. ports and Puerto Rico on self-propelled 

containerships,16 while Trailer Bridge and Crowley provide somewhat 

slower barge service—approximately 7 days one way.17

 

16Horizon Lines’ service between Houston, Texas, and San Juan, Puerto Rico, requires 7 

days of transit one-way.

Some of these 

vessels also serve ports in the Dominican Republic and the U.S. Virgin 

Islands (see fig. 1).

17These are ocean transit times and do not capture door-to-door time differences. Roll 

on/roll off barge services may save time in cargo loading, unloading, and drayage (i.e., 

moves to or from the port from the origin or destination of the shipment) relative to 

containerships in port.
 

Page 9 GAO-13-260 Puerto Rico

Figure 1: Jones Act Carriers’ Container Shipping Routes between the United States, Puerto Rico, and Other Caribbean 

Destinations

Some carriers have tailored their service specifically for shipping between 

the United States and Puerto Rico. For example, while foreign-flag 

carriers involved in international trade use standardized 20- and 40-foot 

containers, some Jones Act carriers provide shippers with a range of 

larger container units (45-, 48-, and 53-foot). The carriers’ larger container 

units are the same size and type of equipment currently operated within 

the domestic U.S. trucking and rail transportation systems; thus, shippers 

can use the same packing systems they use for other modes of U.S. 

transportation, a benefit that provides cost savings to the carriers and 

shippers. This also enables more efficient loading and unloading of 

containers and trailers, and delivery to their final destination on the island.
 

Page 10 GAO-13-260 Puerto Rico 

According to U.S. and Puerto Rico shippers we interviewed, the four 

carriers generally provide reliable, on-time service between the United 

States and Puerto Rico, allowing shippers to meet “just in time” delivery 

needs. In fact, many island importers’ inventory management relies on 

prompt and regular shipping and receipt of needed goods to stock 

shelves, instead of warehousing goods, a benefit that helps minimize 

inventory storage costs. In particular, we were told by stakeholders that 

warehousing is costly in Puerto Rico because of high energy costs and 

because the Puerto Rico government imposes inventory storage taxes on 

certain goods both imported into and manufactured in Puerto Rico. 

The remaining maritime trade between the United States and Puerto Rico 

is shipped on bulk vessels. Bulk cargo—including dry bulk goods such as 

fertilizer, animal feed, grains, and coal, and liquid bulk goods, such as oil 

and gas—are imported in large volumes and are sometimes seasonal. 

According to MARAD officials, global bulk services are typically based on 

unscheduled operations, as opposed to scheduled container services. 

According to shippers we interviewed, these vessels are often under term 

charters and a limited number of qualified Jones Act vessels may be 

available at any given time to meet shippers’ needs. While not 

encompassing all dry and liquid bulk vessels qualified to provide service 

between the United States and Puerto Rico, shippers that we interviewed 

identified three Jones Act carriers—utilizing a total of six vessels—that 

offer bulk-shipping services between the United States and Puerto Rico 

(see table 2). Some of the vessels are also used to serve ports in the U.S. 

Virgin Islands, the Dominican Republic, and Haiti. 

Table 2: Information on Select Jones Act Carriers Shipping Bulk Cargo between the 

United States and Puerto Rico, as of August 2012 

Carrier 

Type of 

vessels 

operateda

Number of 

vessels 

used

Vessel 

age range in 

years 

U.S. ports 

servedb

Crimson 

Shipping 

Bulk barge 3 12-17 Mobile, AL 

Fernandina 

Beach, FL 

Moran Towing 

Corp 

Bulk barge 

(articulated 

tug barge) 

1c 30 New Orleans, LA 

United Ocean 

Services 

Bulk carrier 2 31-32 New Orleans, LA 

Source: GAO, carriers and their publicly-available websites, and shippers. 

a

Bulk barges are pulled by tugboats; bulk carriers are self-propelled vessels. An articulated tug barge 

is a “hinged” connection system between the tug and barge that allows the tug to push the barge 

Jones Act Vessels Also Provide 

Bulk Cargo and Other 

Transportation Services 
 

Page 11 GAO-13-260 Puerto Rico

instead of pulling it, while providing more maneuvering flexibility similar to that of a containership.

b

These carriers may call in the Port of San Juan or in a number of smaller bulk ports around Puerto 

Rico.

c

One barge is generally used for the regular service dedicated to Puerto Rico; an additional barge can 

be used to compensate when additional capacity or quicker turnaround service is needed.

In addition to services between the United States and Puerto Rico, the 

Jones Act requirements and other U.S. coastwise laws also apply to 

transportation of inter-island cargo, the transportation of passengers, and 

port towing operations, laws that restrict these services to vessels that are 

U.S.-owned and are qualified to engage in U.S. coastwise trade. As a 

result, for example, Puerto Rico has inter-island ferry services that 

transport cargo and passengers between Puerto Rico and its smaller 

islands. These services are operated by the government of Puerto Rico 

and generally cannot use foreign passenger vessels without a waiver.18

According to one representative from the island of Vieques, these ferries 

are also reaching the end of their expected useful life, and the islands of 

Vieques and Culebra rely on daily transport of goods by the Puerto Rico 

ferry system. However, according to the representative, the service 

generates limited revenues, making it difficult to purchase new or used 

U.S-built ferries. In addition, according to representatives of the Puerto 

Rico Shipping Association, five tugboat companies—also subject to 

coastwise requirements19

Numerous foreign carriers and foreign-flag vessels operate in Puerto Rico 

carrying cargo to and from foreign locations. According to data from the 

Puerto Rico Ports Authority, in April 2011 alone, 55 different foreign-flag 

cargo vessels—including tankers, containerships, and roll-on/roll-off 

cargo vessels, among others—loaded and unloaded cargo in the Port of 

San Juan, Puerto Rico. Over the entire year of 2011, 67 percent of the 

—provide towing and other services in the Port 

of San Juan, Puerto Rico.

 

18For example, under MARAD’s small vessel waiver program, small passenger vessels 

authorized to carry no more than 12 passengers for hire are eligible for a waiver of the 

U.S.-build and certain other specific coastwise requirements (see 46 U.S.C. § 12121); in 

addition, there is a statutory exemption regarding Puerto Rico under which vessels not 

qualified to engage in coastwise trade (e.g., foreign vessels) may transport passengers 

between Puerto Rico and other ports in the U.S. until qualified U.S. vessels are available 

(see 46 U.S.C. § 55104).

19See, 46 U.S.C. § 55111 (towing) and § 55112 (vessel escort operations and towing 

assistance).

Numerous Foreign-Flagged 

Vessels Operate in Puerto Rico 
 

Page 12 GAO-13-260 Puerto Rico

vessels that operated in the Port of San Juan were foreign-flag vessels, 

while 33 percent were U.S.-flag vessels. Some of the foreign carriers that 

serve Puerto Rico have extensive international operations—using vessels 

with larger capacity than the major Jones Act carriers—that stop at 

multiple ports along their shipping routes across the globe. Other foreignflag carriers offer “feeder” services throughout the Caribbean from hubs in 

ports such as Kingston, Jamaica (see fig. 2).

Figure 2: Examples of Foreign Carriers’ Feeder Services Operating in the Caribbean

According to MARAD, vessels engaged in foreign trade are typically 

registered under “flag-of-convenience,” or open registries that have less 

stringent regulatory requirements than the U.S. flag registry. In 2011, 
 

Page 13 GAO-13-260 Puerto Rico

most of the foreign-flag vessels calling in the Port of San Juan, Puerto 

Rico were registered under the Panamanian flag, followed by the 

Bahamian flag, the flag of Antigua and Barbuda, and the Liberian flag. 

Foreign carriers can also use vessels that are built anywhere in the world, 

and the average age of foreign-flag vessels (around 11-12 years) is 

significantly less than the average age of Jones Act vessels.

Freight rates are set based on a host of supply and demand factors in the 

market, some of which are affected directly or indirectly by Jones Act 

requirements. However, because so many other factors besides the 

Jones Act affect rates, it is difficult to isolate the exact extent to which 

freight rates between the United States and Puerto Rico are affected by 

the Jones Act. The Puerto Rico trade, much like the maritime cargo trade 

around the world, has been affected by reduced demand overall because 

of the recession. Puerto Rico fell into a recession in 2006—before the 

onset of recession for the U.S. economy—and has had much more 

difficulty recovering from it, according to government sources.20

As demand decreases relative to supply, carriers will adjust their services 

in response.

Moreover, the population of the island has been decreasing in the past 

decade. This lower demand relative to supply (i.e. vessel capacity) is a 

factor that would likely be putting downward pressure on freight rates in 

recent years, as carriers would have more difficulty selling their existing 

capacity. According to the data provided by the four major Jones Act 

carriers, average freight rates from the United States to Puerto Rico 

declined about 10 percent from 2006 through 2010, while rates from 

Puerto Rico to the United States declined about 17 percent.

21

 

20Information from the Commonwealth of Puerto Rico’s Financial Information and 

Operating Data Report, June 8, 2012, and the Government Development Bank for Puerto 

Rico, Economic Activity Index, March 2006.

In this market for example, according to Crowley, the 

company reduced its service to Puerto Rico with one less barge and one 

21Over the longer term, carriers may not be able to sustain services where demand is 

insufficient. For example, Horizon operated five foreign-built vessels under the U.S. flag to 

provide shipping services from the United States to Guam as part of a larger trans-pacific 

service that brought goods from Asia back to the United States on the return leg. 

However, according to a representative of the carrier, because of higher capacity vessels 

being deployed in the trans-pacific trade, slack demand as a result of the recession, and 

resulting decreases in freight rates, Horizon was unable to sustain the service and the 

service was discontinued in 2011. 

Many Factors Determine 

Freight Rates for Maritime 

Transportation in Puerto 

Rico, While Some Factors 

Are Affected by Jones Act 

Requirements
 

Page 14 GAO-13-260 Puerto Rico

less weekly sailing from Jacksonville in 2009, primarily in response to 

decreased demand. Also, more recently in July 2011, Sea Star 

discontinued its service from Philadelphia, Pennsylvania, because of a 

lack of demand. Some shippers and business representatives we spoke 

with were concerned with the possibility that, given the weak demand in 

the market, some carriers may not be able to sustain the level of services 

they currently provide in the Puerto Rico market.

In certain specific markets, however, demand for Jones Act transportation 

between Puerto Rico and the United States may be increasing. For 

example, according to one shipper, there may be increased demand for 

shipping refined petroleum and gas products. For natural gas, this 

appears likely because the expected increased use of this fuel for 

electricity generation, while in the case of refined petroleum products this 

may be occurring because of a closure of the refinery on St. Croix, U.S. 

Virgin Islands that had previously provided petroleum products to Puerto 

Rico. However, several shippers in these markets told us that vessels are 

often not available to provide service. Where the supply of ships is limited 

relative to demand there will be upward pressure on freight rates. 

Typically in such a scenario, carriers and shipowners will respond to 

higher rates in the short term by repositioning existing capacity to serve 

that market, thus bringing supply and demand into balance. However, if 

qualified Jones Act vessels are not available, such adjustments may not 

occur since existing capacity operated by foreign-flag carriers cannot 

enter this market. Over the longer term, the market may adjust through 

new shipbuilding for the Jones Act trade, as long as expectations of 

demand and freight rates are sufficient to support that capital investment. 

Recent announcements from two Jones Act carriers concerning plans to 

build new containerships and tankers indicate that the U.S. flag industry is 

responding to the emergence of new market demand.

Operating costs for carriers are another supply factor that contributes to 

the determination of freight rates. Most of the carriers’ operating costs 

(about 69 percent based on carrier data for 2011) are non-vessel 

operating costs, including such things as terminal and port costs, among 

others—and are not directly affected by Jones Act requirements, and 

would be similarly borne by any carrier operating between the United 

States and Puerto Rico. Vessel operating costs (which include crew 

costs, insurance, maintenance and repair, and fuel costs, among others) 

comprise about 31 percent of the carriers’ operating costs on average. 

Some vessel operating costs are affected by rules and regulations related 

to the Jones Act and operating under the U.S. flag. Most significantly, 

Jones Act carriers must hire predominantly U.S.-citizen crews, and 
 

Page 15 GAO-13-260 Puerto Rico

according to data provided by the major Jones Act carriers, crew costs in 

this trade represented an average of about 20 percent of vessel operating 

costs in 2011. According to MARAD, the standard of living in the United 

States, labor agreements negotiated with mariner unions, benefits 

included in overall compensation, and government manning 

requirements, all affect crew costs. By contrast, foreign-flag carriers 

operating under an open registry have flexibility to hire crews from around 

the world, and can therefore avoid the higher costs associated with U.S.-

crews. While not specific to the carriers or the vessels operating between 

the United States and Puerto Rico, according to a MARAD report, the 

combination of these various requirements and work rules can result in 

overall crewing costs for U.S. flag operators that are roughly 5 times 

greater than crewing costs for foreign-flag carriers, on average.22

According to Jones Act carriers and other stakeholders, some operating 

costs have been increasing. For example, fuel is one of the largest vessel 

operating cost for the Jones Act carriers in this market—representing an 

average of about 64 percent of the four major Jones Act carriers’ vessel 

operating costs in 2011—and fuel costs have increased substantially over 

the last ten years. While fuel costs are not directly affected by Jones Act 

requirements, older vessels burn fuel faster and less efficiently compared 

to newer vessels, and the age of some of the Jones Act carriers’ vessels 

has contributed to increasing fuel costs. However, MARAD noted that the 

majority of the Jones Act vessels are barges being towed by rebuilt 

tugboats at lower speeds than self-propelled containerships, which makes 

barges relatively fuel efficient compared to self-propelled vessels. 

Furthermore, older vessels require more maintenance and repair

expenses than newer vessels. For the major carriers in the Puerto Rico 

market, this expense represented an average of about 4 percent of vessel 

In 

addition, U.S.-flag vessels are subject to government safety inspections 

and vessels have to comply with a variety of construction, safety, and 

environmental regulatory requirements, which affect their costs. 

According to the MARAD report, the lack of government safety 

inspections of foreign-flag vessels operating under open registries helps 

provide such vessels with increased operating flexibility and lower 

operating costs.

 

22The report further noted that in some other countries mariners do not have to pay 

income tax, which adds to cost differentials for U.S.-flag operators. See MARAD, 

Comparison of U.S. and Foreign‐Flag Operating Costs (Washington, D.C.: September 

2011). 
 

Page 16 GAO-13-260 Puerto Rico

operating costs in 2011. While the age of these vessels is not a direct 

result of the Jones Act, to some extent the U.S.-build requirement and the 

high costs of U.S. built vessels may delay recapitalization decisions, or 

render such decisions infeasible. Because foreign carriers can typically 

use vessels that are built anywhere in the world, rather than having to use 

generally more expensive U.S.-built vessels, they have more flexibility to 

recapitalize their fleets. As mentioned, on average, foreign-flag vessels 

are newer, and as such will generally benefit from lower overall fuel and 

ongoing maintenance costs.

According to shippers and carriers, several other factors not directly 

related to Jones Act requirements in the Puerto Rico market contribute to 

how freight rates are set, including the following:

• For approximately 85 percent of the cargo moving between the United 

States and Puerto Rico, freight rates are set on a negotiated basis 

under contract.23

• The short travel distance between the United States and Puerto Rico 

makes it possible for barge operators to compete with self-propelled 

containership operators. As we noted, barge service takes longer to 

transport goods than self-propelled containerships.

Although volume discounts are not unique to this 

market or the global maritime shipping industry, large volume shippers 

have more leverage to negotiate contracts with lower rates while small 

volume shippers or those that require infrequent service will likely pay 

higher rates. Based on our interviews with shippers, the negotiated 

rates vary substantially for shippers based on their companies’ size 

and regularity of use of shipping services.

24

 

23For the remaining cargo, freight rates are based on the carriers’ publicly filed tariffs.

However, barge 

vessels are less expensive to operate and maintain. As such, 

according to data provided by the four major Jones Act container 

carriers, freight rates for barge service from the United States to 

Puerto Rico are generally lower than rates for self-propelled 

containerships. For shippers with goods that are less time sensitive, 

barges offer a less expensive option for service between the United 

States and Puerto Rico. However, according to some shippers we 

interviewed, when they periodically require faster service or service

24However, roll on/roll off barge services may offer some time savings in cargo loading 

and unloading relative to the lift on/lift off operations of containerships once in port.
 

Page 17 GAO-13-260 Puerto Rico

from ports outside Florida there are fewer competitive alternatives, 

since only two carriers offer such service.

• Some of the cargo imported from the United States is temperature 

controlled perishable goods, such as dairy, meat, and agricultural 

products. According to representatives of the Puerto Rico Farm 

Bureau, the cost and reliability of shipping perishable food items is 

important because the island has less than a week’s supply of 

perishables at any given time. Some shippers reported paying 

substantially more for service using refrigerated containers, 

sometimes a few thousand dollars more per container, compared to a 

non-refrigerated container. Although higher prices for refrigerated 

cargoes are not unique to this market or the global maritime shipping 

industry, these and other representatives of an association for food 

importers perceived less competition for this particular market 

segment.

• According to the four major Jones Act carriers, typically, vessels are 

about 80 percent full for their total container capacity moving 

southbound from the United States to Puerto Rico, and only 20 

percent full for total container capacity moving northbound from 

Puerto Rico to the United States. The lower demand on return legs of 

the routes (known as “backhaul”) results in relatively lower freight 

rates for this traffic. According to data provided by the four carriers, 

average freight rates for the return leg were about 55 percent less 

than the average rates from the United States to Puerto Rico in 2010. 

Some of the shippers we spoke with said low rates for the backhaul 

shipping services are beneficial to their business.

Another factor that could have affected freight rates in the past was 

conduct by certain carriers that led to a Department of Justice antitrust 

investigation. The investigation found that some Jones Act carriers 

conspired to fix rates at least as early as May 2002 until at least April 

2008. In addition, with respect to a class action lawsuit against various 

Jones Act carriers, in August 2011, the United States District Court for the 

District of Puerto Rico granted final approval of settlement agreements. 

The settlement terms give class action members the option of freezing 

the base rates—not including other charges or fees, such as fuel 
 

Page 18 GAO-13-260 Puerto Rico

surcharges—of any shipping contract that exists with three of the Jones 

Act carrier defendants for a period of 2 years.25

Foreign carriers operate in a different market with different characteristics 

and, as mentioned, generally have lower vessel operating costs 

compared to Jones Act carriers.26

According to representatives of several shippers we spoke with, freight 

rates offered by foreign carriers are often lower than Jones Act carriers 

for shipping the same or similar goods from more distant foreign 

locations. Shippers provided a number of examples of specific rate 

differentials, but we were unable to validate these rate differentials or 

estimate an average differential because we could not obtain necessary 

data since most cargo move under negotiated contract rates that are 

confidential and foreign carriers were not responsive to our requests for 

information. Furthermore, we were unable to determine specifics of the 

services being provided for the rate examples we were given (e.g., 

delivery times, reliability of the service, etc.), and therefore, in some 

instances, the rate examples may not be comparable.

As with the Jones Act market, rates for 

shipments between Puerto Rico and foreign countries are determined by 

various supply and demand factors. For example, some foreign carriers’ 

longer trade routes allow them to spread their costs out over more 

containers or cargo and achieve economies of scale that are not available 

to Jones Act carriers providing dedicated service between the United 

States and Puerto Rico. In addition, while the recession has resulted in 

reduced demand in global shipping and put downward pressure on freight 

rates, because foreign carriers and shipowners operate in a global 

market, they may have more flexibility than Jones Act carriers to 

reposition vessel capacity in response to market- or product-specific 

fluctuations in demand.

Nonetheless, some companies operating in Puerto Rico told us that they 

may not purchase goods from U.S. sources because of higher 

transportation costs on Jones Act vessels compared to foreign-flag 

 

25The ongoing investigation of shipping practices of various Jones Act carriers that serve 

Puerto Rico has led to, among other things, the imposition of about $46 million in criminal 

fines and guilty pleas in 2011 and 2012 by three of the four major Jones Act carriers.

26MARAD, Comparison of U.S. and Foreign‐Flag Operating Costs. 

Foreign Carriers Serving 

Puerto Rico Face Different 

Market Conditions and 

Costs than Jones Act 

Carriers Which Can Lead 

to Different Freight Rates 

for Similar Shipments and 

Affect Sourcing Decisions
 

Page 19 GAO-13-260 Puerto Rico

vessels. In some instances, they may instead purchase the same or a 

closely substitutable good from a foreign country. This was particularly 

evident in the bulk shipping market. For instance, according to 

representatives of the Puerto Rico Farm Bureau, the rate difference 

between Jones Act carriers and foreign carriers has led farmers and 

ranchers on the island to more often source animal feed and crop 

fertilizers from foreign sources than from U.S. domestic sources, even 

though commodity prices were stated to be similar. They provided an 

example that shipping feed from New Jersey by Jones Act carriers costs 

more per ton than shipping from Saint John, Canada, by a foreign 

carrier—even though Saint John is 500 miles further away. According to 

the representatives, this cost differential is significant enough that it has 

led to a shift in sourcing these goods from Canada. Other companies 

involved in food importing gave additional examples of corn and potatoes 

being sourced from foreign countries rather than the United States, which 

they attributed to the lower cost of foreign shipping. However, data was 

not available to verify the extent to which changes in sourcing occurs 

because of higher transportation costs on Jones Act vessels.

Sourcing decisions in the market for petroleum products may also be 

affected by differences in freight rates between Jones Act vessels and 

foreign-flag vessels and the availability of qualified Jones Act vessels. An 

oil and gas importer in Puerto Rico told us that the company makes 

purchasing decisions based on the total price of oil or gas—including any 

applicable duties or other charges—plus transportation costs. The 

company looks at total prices from numerous suppliers around the 

world—including U.S. suppliers—but generally does not purchase from 

U.S. suppliers because the total cost is higher as a result of the 

differential in transportation costs. Representatives noted that the 

company does not purchase from U.S. suppliers in some case because of 

a lack of available Jones Act vessels to ship the product from U.S. ports. 

In another example, representatives of airlines purchasing jet fuel for use 

in Puerto Rico told us that they typically import fuel to the island from 

foreign countries, such as Venezuela, rather than from Gulf Coast 

refineries. They do so because of difficulty in finding available Jones Act 

vessels to transport jet fuel and, when vessels are available, the high cost 

of such shipments compared to shipping the product from foreign 

countries. These representatives noted that jet fuel availability in certain 

areas of the East Coast of the United States as well as in Puerto Rico 

was recently adversely affected by the closures of several refineries, 

including the one in St. Croix, U.S. Virgin Islands.
 

Page 20 GAO-13-260 Puerto Rico

The cost and availability of vessels can also affect future sourcing 

decisions. For example, the Puerto Rico Electric Power Authority 

(PREPA) is planning to transition its primary power generation fuel from 

oil to natural gas and expects its natural gas consumption to increase 

substantially in the future. PREPA currently purchases most of its natural 

gas from Trinidad and Tobago and transports it on foreign-flag vessels, 

but is developing plans to purchase more natural gas from U.S. suppliers 

beginning in 2014, because of the expected lower price of natural gas 

from the United States. To do so, Jones Act-qualified LNG tankers would 

need to be available.27 However, PREPA officials voiced concerns about 

the availability of eligible vessels, since none currently operates between 

the United States and Puerto Rico. They said the cost to build and 

operate a new LNG tanker under Jones Act requirements could result in 

high shipping costs that offset the savings from purchasing natural gas 

from the United States. Some foreign-flag LNG vessels are eligible to 

apply for an exemption under statute,28

We examined trade data for various commodities mentioned by shippers 

to see the extent to which these goods are sourced from other countries. 

Some commodities showed high percentages of foreign sourcing, while 

others were either split more evenly or mostly sourced domestically. It is 

difficult to discern the effect of any one factor, such as freight rates, on 

the sourcing of imports, because many factors can affect a business’s 

sourcing decision at any given time, including the availability of ships and 

but PREPA officials were 

concerned that these vessels may not be available because they are 

currently under long-term contracts. Furthermore, because many of these 

vessels may be 16 years old or older, officials were concerned that they 

may not be as efficient or have the same level of safety that newer 

vessels may have.

 

27LNG is natural gas that has been liquefied for purposes of transport. To form, natural 

gas is cooled to below -260 degrees Fahrenheit to form a liquid. LNG is transported in 

double-hulled vessels specifically designed to handle the low temperature of LNG.

28In November 2011, a statute was enacted into law to authorize the Coast Guard to issue 

coastwise endorsements to three specific LNG vessels. These ships are currently 

operating in the Northeast. In addition, in 1996, a statute was enacted into law that 

created an exemption for non-Jones Act eligible vessels to transport LNG to Puerto Rico if 

the vessel (1) is a foreign built vessel built before October 19, 1996 or (2) was 

documented under the U.S. flag before October 19, 1996, even if the vessel then sailed 

under a foreign flag before being reflagged under the U.S. flag. According to MARAD and 

the White House’s Domestic Policy Council, 37 such vessels exist—13 were built by U.S. 

shipyards and 24 were built in foreign shipyards.
 

Page 21 GAO-13-260 Puerto Rico

the price of the goods. In any case, to the extent that the lack of available 

vessels may be causing shippers to seek foreign sources for some 

products, this lack of availability may signal the need for new Jones Act 

vessels to enter this trade. However, if carriers do not believe that the 

rates they will be able to charge in the future would be sufficient to 

support such investments, new vessels might not enter the trade and the 

products may continue to be sourced from non-U.S. sources. Recent 

announcements from two Jones Act carriers concerning plans to build 

new vessels indicate the willingness of the U.S. flag industry to respond 

to market demand.

The prices of goods sold in Puerto Rico are determined by a host of 

supply and demand factors, similar to freight rates, and therefore, the 

impact of any costs to ship between the United States and Puerto Rico on 

the average prices of goods in Puerto Rico is difficult, if not impossible, to 

determine with precision.29

 

29Because of the complexities in how product prices are set, and because sufficient data 

on freight rate differentials and product prices are not available, we did not attempt to 

estimate the impact of any freight rate differentials on product prices in Puerto Rico. 

On the demand side, key factors include the 

state of the economy and associated level of income of consumers, the 

tastes of potential consumers for various goods, and the extent to which 

consumers have ready substitutes (of other goods or the same good from 

elsewhere) available to meet their needs. For example, if consumers 

have ready substitutes available to them, it may be more difficult for 

retailers to pass on transportation costs in prices. On the supply side, a 

host of cost factors is also important, transportation costs among them.

Some shippers we interviewed told us that transportation costs to Puerto 

Rico from the United States represent a minimal portion of the costs of 

goods they sell in Puerto Rico, while other shippers stated that these 

costs were more significant. These differences in the impact of 

transportation costs appear to vary depending on the nature of the 

shipper, and the shipping requirements of the goods. In particular, we 

were told that prices for some goods that require fast delivery or 

refrigerated containers—particularly food products subject to spoilage—

may be more affected by transportation costs, because transportation 

costs represent a higher proportion of the total cost of the goods. We 

were also told that other cost factors that may influence pricing are 

somewhat unique to Puerto Rico. Some shippers noted that doing 

business on the island is expensive relative to costs for similar 

Many Factors Influence 

Prices of Goods in Puerto 

Rico and the Impact of 

Transportation Costs 

Likely Varies by Type of 

Good 
 

Page 22 GAO-13-260 Puerto Rico

businesses in the United States. In particular, some shippers stated that 

storage and distribution in Puerto Rico can be more costly than in the 

United States and are factors in the prices at which goods sell.

Some shippers told us that their decisions on pricing are influenced by the 

extent of competition in Puerto Rico for the goods they provide. For 

example, according to a major U.S. company doing business in Puerto 

Rico, its pricing strategy is dependent on the pricing of the local 

competitors on the island. Company representatives explained that their 

prices may or may not be similar in Puerto Rico compared to U.S. 

mainland stores, but that those prices are not driven by shipping costs. 

Further, for some larger chain stores, pricing decisions are made at a 

corporate level so that prices for goods often do not differ considerably 

from location to location, despite variances in transportation costs. For 

example, according to a major U.S. chain store operating in Puerto Rico, 

its merchants often want to be able to offer a consistent every day price in 

its stores. Thus, the company decides, in some cases, to price some 

goods in Puerto Rico the same as in U.S. stores at potentially reduced 

profitability for those goods sold in Puerto Rico.

Many of the shippers and other stakeholders we interviewed expressed 

the view that allowing foreign carriers to enter this trade would create a 

more competitive marketplace with lower freight rates, which could in 

turn, affect shippers’ business decisions and product prices. For example, 

shippers told us that lower freight rates between the United States and 

Puerto Rico could result in shippers choosing to source more goods from 

the United States as opposed to foreign countries, and that lower rates 

could lead to lower prices for products sold to consumers in Puerto Rico. 

We were also told that a broader array of providers available in the 

international market would help to ensure that specific services and 

vessels are always available to meet shippers’ needs.

Modifying the Jones 

Act in Puerto Rico 

Would Have 

Uncertain Effects and 

May Result in Difficult 

Trade-offs

Potential Effects and 

Trade-offs of a Full 

Exemption 
 

Page 23 GAO-13-260 Puerto Rico

However, the effect on competition and freight rates from allowing foreign 

carriers to enter this trade is uncertain and depends on a variety of 

factors. Foreign carriers operating in the U.S. coastwise trade could be 

required to comply with other U.S. laws and regulations, even if Puerto 

Rico were exempted from the Jones Act, which could increase foreign 

carriers’ costs and may affect the rates they could charge. We reported in 

199830 and continue to find that arriving at an accurate estimate of the 

costs to foreign carriers of complying with U.S. laws would be very 

difficult, in part, because the estimate would depend heavily on which 

laws are considered applicable and on how they are applied.31 Federal 

agency stakeholders we talked with generally indicated that they were 

reluctant to speculate on the extent to which U.S. laws might be 

applicable to such foreign carriers in the absence of Jones Act 

requirements. However, we reported in 1998 that, in particular, additional 

taxes and labor costs might be incurred. Some stakeholders contend, 

albeit speculatively, that if these costs were estimated and included, any 

rate advantage foreign carriers may have over Jones Act carriers would 

be lessened. For example, income generated by foreign corporations 

operating foreign-flagged vessels in the domestic trade could be subject 

to U.S. taxation,32

 

30GAO, Maritime Issues: Assessment of the International Trade Commission’s 1995 

Analysis of the Economic Impact of the Jones Act, 

depending on the circumstances. In addition, if foreignflagged vessels were to spend most of their time in U.S. waters—as they 

might if they were to provide dedicated service between the United States 

and Puerto Rico—it would be necessary to obtain for any foreign 

crewmembers an immigration status that permits them to engage in 

GAO/RCED-98-96R (Washington, 

D.C., Mar. 6 1998).

31As we reported in 1998, if the Jones Act was repealed and the Congress were not to 

amend other statutes to take repeal into account, the administrative agencies and the 

courts would be left to interpret the existing laws. The applicability of the laws may depend 

on the extent to which foreign vessels operated in U.S. domestic commerce. Intermittent 

or infrequent contacts might make the laws inapplicable. See GAO/RCED-98-96R. 

32The Internal Revenue Code has special rules for “transportation income.” If the 

transportation income is attributable to transportation that begins and ends in the United 

States, it is treated as income derived from sources in the United States. If it begins or

ends in the United States, 50 percent of the transportation income is treated as income 

derived from sources in the United States. The Internal Revenue Code also excludes from 

the gross income of foreign corporations income derived from the international operation 

of vessels if their home countries grant an equivalent exemption from paying taxes to U.S. 

corporations.
 

Page 24 GAO-13-260 Puerto Rico

employment in the United States, requirements that could increase 

costs.33

Regardless of the legal questions above, entry by foreign carriers could 

have a number of other consequences. Although complying with U.S. 

laws could lessen any cost advantage to foreign carriers, current Jones 

Act carriers could still be operating at a cost disadvantage. Economic 

theory would suggest that entry into a market by lower-cost providers 

would likely alter the market dynamics in a way that higher-cost producers 

may have difficulty continuing to compete in the market. To the extent that 

foreign carriers can use cost advantages to charge lower rates and take 

market share from the existing carriers, such entry could lead to lost 

service by Jones Act carriers, their exit from the market, or consolidation 

among carriers serving the market. Current Jones Act carriers might also 

opt to provide service under a foreign flag to avoid costs associated with 

the U.S. flag. According to MARAD officials, unrestricted competition with 

foreign-flag operators in the Puerto Rico trade would almost certainly lead 

to the disappearance of most U.S.-flag vessels in this trade. MARAD 

officials noted that U.S. carriers currently do not typically compete with 

foreign-flag carriers in other Caribbean markets under the U.S. flag. 

Where U.S. carriers do compete with foreign-flag carriers, they typically 

operate non-U.S.-flag vessels, suggesting that U.S.-flag vessels may not 

be able to successfully compete against foreign-flag vessels if Jones Act 

restrictions were lifted for Puerto Rico.

To the extent that the number of carriers operating under the U.S. flag 

decreases under this scenario, expectations for future orders for new 

vessels built in U.S. shipyards could be reduced or eliminated—which is 

discussed in more detail later in this report—and the number of U.S. 

mariners could likewise decrease. According to MARAD, up to 1,400 

mariners were crewed full-time on Jones Act vessels in Puerto Rico in 

2011, including on offshore service vessels, harbor tugs, ferries, and 

 

33Aliens admitted as D nonimmigrant crewmembers may not be employed in connection 

with the domestic movement of vessels or aircraft in the United States. 8 C.F.R. § 

214.2(d)(1). Thus, they may not be employed in connection with the transportation of 

goods between one U.S. port and another. An alien crewmember who is allowed to leave 

the vessel on the basis of a D nonimmigrant visa must leave the United States on the 

same vessel or, with permission, on another vessel, and may not remain ashore more 

than 29 days. 8 C.F.R. § 252.1(d). If a crewmember is not permitted to go ashore, the 

master or agent of the vessel or aircraft must keep the crewmember aboard at all times 

while the vessel or aircraft is in the United States. 8 C.F.R. § 252.1(a).
 

Page 25 GAO-13-260 Puerto Rico

barge services in addition to the vessels we identified earlier (see tables 1 

and 2). A decline in the number of U.S.-flag vessels would result in the 

loss of jobs that employ skilled mariners needed to crew the U.S. military 

reserve and other deep-sea vessels in times of emergency. Furthermore, 

according to MARAD, the loss of U.S.-flag service would reduce their 

ability to ensure that marine transportation serves the Puerto Rico 

economy.

The nature of the service provided between Puerto Rico and the United 

States could also be affected by a full exemption from the Jones Act. In 

particular, foreign carriers that currently serve Puerto Rico as part of a 

multiple-stop trade route would likely continue this model to 

accommodate other shipping routes to and from other Caribbean 

destinations or world markets rather than provide dedicated service 

between the United States and Puerto Rico, as the current Jones Act 

carriers provide. If this were to occur, some stakeholders expressed 

concerns about the effect that such an altered shipping service would 

have on the reliability of service to and from the United States. For 

example, longer multi-port trade routes make it difficult to ensure that 

scheduled service will be consistently reliable, because carriers are more 

likely to experience weather delays or delays at ports, and could even 

intentionally bypass ports on occasion to make up lost travel time. 

According to some shippers, reduced reliability of service could result in 

shippers needing to keep larger inventories of products, and could thus 

increase warehousing and inventory-related costs for companies in 

Puerto Rico. As we described previously, importers’ inventory 

management relies on prompt and regular shipping and receipt of needed 

goods to stock shelves, which is less costly than warehousing goods on 

the island. Additionally, some stakeholders expressed concern about the 

possible loss of convenient and inexpensive backhaul service. If, under 

new market conditions, carriers choose not to provide dedicated service, 

then backhaul services from Puerto Rico to the United States would also 

be part of longer multi-port trade routes and may not be direct from 

Puerto Rico to the United States. Because of limited volumes in this 

market, the result could be sporadic service or higher rates.

Rather than allowing foreign carriers to provide service between the 

United States and Puerto Rico, a different modification advocated by 

some stakeholders would be to allow vessels engaged in trade between 

the United States and Puerto Rico to be eligible for an exemption from the 

U.S.-build requirement of the Jones Act. This would allow U.S.-flag 

carriers to purchase or use foreign-built vessels for shipping between the 

Potential Effects and 

Trade-offs of an 

Exemption to the U.S.-

Build Requirement
 

Page 26 GAO-13-260 Puerto Rico

United States and Puerto Rico.34 According to industry stakeholders we 

interviewed, foreign-built barges can be priced about 20 percent less than 

U.S.-built barges,35 and foreign-built containerships can be priced 50 

percent less than similar U.S.-built containerships.36

According to proponents of this change, the availability of lower cost 

vessels could encourage existing carriers to recapitalize their aging fleets. 

As previously mentioned, many of the Jones Act vessels in this trade are 

operating beyond the end of their expected useful life, and according to 

some stakeholders, the high cost of building new U.S. vessels, as well as 

decreased demand in the market, may result in carriers deferring 

recapitalization decisions. Proponents also point out that newer, more 

efficient vessels generally have lower operating costs than vessels 

currently operating in the trade and thus may reduce operating costs for 

carriers. In addition, according to proponents, the availability of lower cost 

vessels would encourage additional competition, particularly in those 

sectors where demand may be increasing and available vessels are 

lacking, such as in bulk cargo shipping.

Regardless of whether vessels are U.S.-built or foreign-built, the costs of 

any new vessels will need to be recouped over the life of the vessel 

through freight rates. Should carriers decide to move forward with 

recapitalizing their fleets, they will need to decide if expected freight rates 

over many years are sufficient to support the purchase of new vessels.37

 

34In this scenario, according to DHS, foreign-built vessels operated by U.S.-flag carriers 

would be required to be documented with a registry endorsement pursuant to 46 U.S.C. § 

12111.

The vessels currently involved in the trade, because they have largely 

been paid for and depreciated, have negligible ongoing capital costs. 

Purchasing new vessels will result in higher ongoing capital costs for 

35According to one shipbuilder, this cost differential may be largely eliminated when 

factoring in delivery costs of moving a barge from shipyards in Asia to the United States.

36To some extent, current prices for foreign vessels could be unusually low because of a 

global slowdown in the shipbuilding markets, which has led to considerably reduced 

prices, according to industry publications and reports.

37Among the key factors, beyond the purchase price, that affect whether a carrier will be 

able to recover its capital investment in a newly built vessel, given expected freight rates, 

are 1) the expected useful life of the vessel, and 2) the rate of interest applicable on the 

funds used to finance the purchase of the vessel. A longer expected life for a vessel, and 

a lower interest rate would tend to lower the annual capital cost of a new vessel. 
 

Page 27 GAO-13-260 Puerto Rico

carriers, although these higher capital costs will be offset to some extent 

by reduced fuel, and vessel maintenance and repair costs. Given the 

current economic conditions in Puerto Rico and decreases in overall 

demand, it could be challenging for some carriers to invest in new 

vessels. The higher cost of U.S.-built vessels relative to foreign-built 

vessels—particularly containerships—exacerbates that challenge. 

However, one carrier recently placed an order for two new U.S.-built 

vessels for the Puerto Rico trade and another Jones Act carrier recently 

purchased two new tankers for use in the Gulf of Mexico, indicating that—

despite the poor economic conditions currently—the higher cost of U.S.-

built vessels is not a barrier in their case. Nonetheless, allowing carriers 

to purchase or charter new or existing foreign-built vessels would

presumably reduce the expense of recapitalizing the fleet, and make it 

more likely that carriers would choose to invest in newer vessels because 

they will be able to recoup that investment.

Foreign shipyards can build vessels for less than U.S. shipyards for 

several reasons. For example, foreign shipyards—particularly large yards 

in China, Japan, and South Korea—enjoy considerable economies of 

scale because of long production runs of relatively standard vessel 

designs. Long production runs reduce labor costs per unit, as workers 

become more efficient because they repeat their job frequently due to the 

high volume of vessels being built, and support a strong industrial base of 

parts and material suppliers. U.S. shipyards typically build customized 

vessels, according to customer design specifications, which might only be 

used to build one or a few vessels.38

 

38If the Jones Act carriers in this trade were permitted to use foreign-built vessels, any 

order from a Jones Act carrier is likely to be for a small number of vessels given the 

current fleet size and market; if these vessels are not part of a larger production run of 

vessels, the foreign shipyard may not be able to reach the higher production volumes that 

contribute to lower prices.

Specifically, for self-propelled 

vessels such as containerships, which are manufactured in small volumes 

in the United States, U.S. shipyards often cannot take advantage of the 

efficiencies of scale afforded by large-series production and common 

design orders. According to one shipyard we interviewed, when they do 

have longer production runs, U.S. shipyards—like foreign shipyards—are 

able to develop efficiencies of scale and reduce costs. Some foreign 

shipyards also tend to be more operationally and cost efficient with the 

production steps of building a vessel and the amount of labor associated 

with those steps, according to representatives from one U.S. shipyard 
 

Page 28 GAO-13-260 Puerto Rico

where we interviewed. However, because some U.S. shipyards are 

subsidiaries of, or partners with foreign shipyards, many of these types of 

efficient production processes—such as streamlined workflow and 

sequencing, and consistent workforce collaboration—are being adopted 

in these U.S. shipyards. Other factors such as lower wages in foreign 

shipyards and a variety of construction, safety, and environmental 

regulatory standards that exist in U.S. shipyards—such as required 

shipyard safety measures when using certain paints such as those 

containing lead—can also reduce costs for foreign shipyards compared to 

U.S. shipyards.

Because of these price differentials, eliminating the U.S.-build 

requirement and allowing Jones Act carriers to deploy foreign-built 

vessels to serve Puerto Rico could reduce or eliminate U.S. shipyards’ 

expectations for future orders from this market and could have serious 

implications for the recent order for two U.S.-built ships for this market 

from one of the Jones Act carriers. According to MARAD and DOD 

officials, and representatives of U.S. shipyards, orders for commercial 

vessels have become significantly more important to retaining the 

industrial shipbuilding base because military and other non-commercial 

vessel orders have declined. Although the number of vessels that could 

likely be replaced is small, it would equate to a substantial order for U.S. 

shipbuilders that could help sustain their operations, as well as help them 

to retain a skilled workforce and supplier base. Absent new orders, that 

workforce could be put at risk.

Shipyards and other supporters of the Jones Act also raise concerns that 

allowing an exemption to Puerto Rico would open the possibilities of 

allowing an exemption for all noncontiguous markets subject to the Jones 

Act, such as Hawaii and Alaska, as well as coastal markets, a situation 

that could result in more significant effects on shipyards and the shipyard 

industrial base needed by DOD. According to DOD officials, to the extent 

that Jones Act markets are unable to sustain a viable reserve fleet, DOD 

would have to incur substantial additional costs to maintain and 

recapitalize a reserve fleet of its own.

The Jones Act was enacted nearly a century ago to help promote a viable 

maritime and shipbuilding industry that would, among other things, 

provide transportation for the nation’s maritime commerce and be 

available to serve the nation in times of war and national emergency. The 

possible effects of the Act on Puerto Rico as well as U.S. businesses are 

manyfold. The Act may result in higher freight rates—particularly for 

Concluding 

Observations 
 

Page 29 GAO-13-260 Puerto Rico

certain goods—than would be the case if service by foreign carriers were 

allowed. Nevertheless, at the same time, the law has helped to ensure 

reliable, regular service between the United States and Puerto Rico—

service that is important to the Puerto Rican economy. Because of freight 

rate differentials or the lack of availability of Jones Act vessels for certain 

products, the Act may cause businesses in Puerto Rico to import goods 

from foreign locations when the same goods are readily available from 

U.S. providers. However, it is not possible to measure the extent to which 

rates in this trade are higher than they otherwise would be because the 

extent to which rules and regulations that would apply to international 

carriers’ vessels that may serve this trade are not known, and so many 

factors influence freight rates and product prices that the independent 

effect and associated economic costs of the Jones Act cannot be 

determined. Finally, the original goal of the Act remains important to 

military preparedness and to the shipbuilding and maritime industries, but 

understanding the full extent and distribution of the costs that underlie 

these benefits is elusive. This circumstance results in a question as to 

whether the status quo presents the most cost effective way to achieve 

the goals expressed in the Jones Act. Ultimately, addressing these issues 

would require policymakers to balance complex policy trade-offs with the 

recognition that precise, verifiable estimates of the effects of the Act, or its 

modification, are not available.

We provided a draft of this report to the departments of Commerce, 

Defense, Homeland Security, Justice, and Transportation for review and 

comment. Commerce, Defense, and Justice had no comments. 

Homeland Security and DOT provided technical clarifications, which we 

incorporated, as appropriate. DOT also generally agreed with the 

information presented in the report, but noted that many of the issues 

related to the Jones Act are both complex and multifaceted. In particular, 

DOT noted that while the report highlights issues that could affect the 

number of new vessels added to the Jones Act trade, carriers have 

recently purchased or announced plans to purchase new U.S.-built ships 

for the petroleum and container trades. DOT further noted that 

consideration of a ship’s age, cost, efficiency, and their effect on the 

Jones Act trade is influenced by numerous factors such as the types of 

ships involved, their condition, and the way in which they are maintained 

and operated. In addition, to verify information, we sent relevant sections 

of the draft report to various shippers and stakeholders, the Shipbuilders 

Council of America, and the four major Jones Act carriers, which also 

provided technical comments that we incorporated, as appropriate.

Agency and ThirdParty Comments 
 

Page 30 GAO-13-260 Puerto Rico

As agreed with your offices, unless you publicly announce the contents of 

this report earlier, we plan no further distribution until 30 days from the 

report date. At that time, we will send copies of this report to other 

interested congressional committees and members; the Secretary of 

Commerce; the Secretary of Defense; the Secretary of Homeland 

Security; the U.S. Attorney General; the Secretary of Transportation; the 

Chairman of the Surface Transportation Board; the Chairman of the 

Federal Maritime Commission; the Director, Office of Management and 

Budget; and others. The report is also available at no charge on the GAO 

Web site at http://www.gao.gov. 

If you or your staff have any questions about this report, please contact 

me at (202) 512-2834 or by e-mail at stjamesl@gao.gov. Contact points 

for our Offices of Congressional Relations and Public Affairs may be 

found on the last page of this report. GAO staff who made major 

contributions to this report are listed in appendix III.

Lorelei St. James

Director, Physical Infrastructure Issues
Appendix I: Scope and Methodology

Page 31 GAO-13-260 Puerto Rico

To address the two objectives, we reviewed relevant literature related to 

maritime shipping between the United States and Puerto Rico, and 

Puerto Rico and other foreign locations based on search results from 

databases, such as ProQuest®, as well as trade publications, industry 

stakeholder groups, and the Internet. We also reviewed and synthesized 

published reports from government sources that discussed and analyzed 

effects of the Jones Act,1

We collected and analyzed data relevant to these markets and gathered 

the perspectives and experiences of numerous public and private sector 

stakeholders through interviews and written responses. We gathered 

information from the four major Jones Act carriers—Crowley Maritime 

Corporation; Horizon Lines, Inc.; Sea Star Line; and Trailer Bridge, Inc.—

and Moran Towing Corporation about their business operations in 

providing shipping services between the United States and Puerto Rico, 

including information about the vessels used, the ports served, the routes 

operated, the frequency of service, and rates charged for shipping. We 

analyzed information on capital and operating costs for the four major 

carriers to understand how aspects of the Jones Act impact their costs of 

doing business. We interviewed representatives of these companies with 

respect to the economics of the market, differences between their 

services and services provided by foreign carriers, and implications 

associated with certain potential changes to the Jones Act. Nine of the 

including reports from GAO, U.S. International 

Trade Commission, Maritime Administration (MARAD), Customs and 

Border Protection (CBP), Congressional Research Service, 

Congressional Budget Office, U.S. Department of Energy, and Federal 

Reserve Bank. We also reviewed literature that described the nature and 

economics associated with global shipping markets. Furthermore, we 

synthesized information on the legal framework that governs U.S. 

domestic cargo shipping between U.S. and Puerto Rico and other 

domestic noncontiguous markets. This synthesis included information on 

the Jones Act, its requirements and pertinent legislative history, and other 

related laws and regulations. We also reviewed federal agency 

documentation of CBP and the Coast Guard responsible for enforcing 

and administering Jones Act provisions, U.S. vessel documentation laws 

and requirements, and the process for granting administrative waivers for 

Jones Act requirements.

 

1

Section 27 of the Merchant Marine Act of 1920, Pub. L. No. 66-261, 41 Stat. 988, 999 

(1920) (codified as amended at 46 U.S.C. § 55102).

Appendix I: Scope and Methodology
Appendix I: Scope and Methodology

Page 32 GAO-13-260 Puerto Rico

ten foreign carriers we contacted declined to be interviewed, although 

representatives from two foreign carriers participated in a larger meeting 

of stakeholders held in Puerto Rico. As a result, we were not able to 

gather detailed cost or rate information from foreign carriers that make 

port calls in Puerto Rico.

We interviewed numerous U.S. industry associations, and a selection of 

companies in the United States and Puerto Rico that purchase shipping 

services from Jones Act and foreign carriers, to obtain a range of different 

perspectives on these shipping markets, the impacts of those markets on 

their operations, and to understand different perspectives on the 

implications associated with changes to the Jones Act. We interviewed 

representatives of the American Maritime Partnership, American Maritime 

Congress, and Chamber of Shipping of America. We interviewed 

representatives of 10 U.S. and 6 Puerto Rico companies that ship 

products between the United States and Puerto Rico that included a 

range of major business areas, such as pharmaceutical, biotechnology, 

personal and household consumer products, food and beverage 

products, and large retail industries. We obtained information and 

discussed their perspectives on the nature of the maritime trade markets 

in Puerto Rico and the Caribbean Basin, the reliability of shipping service, 

volume and products being shipped, how they determine product prices 

and how shipping costs may or may not affect those prices, and how the 

Jones Act may affect these markets.

We selected the U.S. companies within the major business areas by 

assembling a list from Internet searches and from a customer list 

provided by one Jones Act carrier that purchases shipping services in the 

Puerto Rico trade. We divided the list into five industry categories and 

randomly selected six in each category for a total of 30 companies to 

contact. We conducted semistructured telephone interviews with the 10 

companies that agreed to talk to us. We selected the Puerto Rico 

companies by requesting representatives of six of the Puerto Rico trade 

associations we met with while visiting Puerto Rico to provide a diverse 

list of about 20 businesses based on their unique knowledge of their 

members and those they considered generally representative of the 

different business sectors within their association’s membership base. We 

requested that the list included a size range of large, medium, and small 

companies in terms of the number of monthly shipments imported or 

exported. We received a list of 20 companies from three of the six 

associations. In consultation with a GAO design methodologist, we 

randomly selected 15 companies, five within each list, to contact. We 

conducted semistructured telephone interviews with the 6 Puerto Rico 
Appendix I: Scope and Methodology

Page 33 GAO-13-260 Puerto Rico

companies that agreed to talk to us. Because we selected a 

nonprobability sample of the companies to interview, the information we 

obtained from these interviews cannot be generalized to all U.S. and 

Puerto Rico companies (shippers) that purchase shipping services from 

Jones Act carriers between the United States and Puerto Rico.

We also interviewed representatives from five shipyards in the United 

States to understand their capabilities to build vessels for the Puerto Rico 

trade, how the Jones Act affects their operations, and differences in costs 

associated with shipbuilding in the United States and shipyards abroad. 

We selected the shipyards based on size of operations, type of vessels 

built, and recommendations from the representatives of the Shipbuilders 

Council of America. They included Bay Shipbuilding Co., Gladding-Hearn 

Shipbuilding, Kvichak Marine Industries, National Steel and Shipbuilding 

Company (NASSCO), and VT Halter Marine shipyards. We also visited 

the NASSCO shipyard in San Diego, California, to meet with 

representatives. Furthermore, we interviewed representatives from 

General Dynamics’ American Overseas Marine to discuss the market and 

availability of LNG tankers for transporting LNG cargo from the United 

States to Puerto Rico currently and in the future. Because we selected 

these shipyards as part of a nonprobability sample, our findings cannot be 

generalized to all U.S. shipyards.

We also visited Puerto Rico to meet with a range of stakeholders to 

obtain information and perspectives on the range of views regarding how 

the Jones Act affects Puerto Rico, the shipping market, and the broader 

economy. We met with government officials from CBP responsible for 

San Juan and Ponce entry ports, Government Development Bank, Puerto 

Rico Electric Power Authority, Department of Economic Development and 

Commerce, Puerto Rico Port Authority, the City of Ponce (along with 

officials associated with the former Port of the Americas Authority), as 

well as economists in Puerto Rico who have analyzed the Jones Act in 

relation to Puerto Rico’s economy, to understand their perspectives on 

these issues. We also met with representatives of nine trade 

associations: the Puerto Rico Shipping Association, the Puerto Rico 

Manufacturers Association, the Puerto Rico Chamber of Commerce, the 

Puerto Rico Pharmaceutical Industry Association, the Puerto Rico 

Products Association, the Puerto Rico Chamber of Food Marketing, 

Industry & Distribution, the Puerto Rico Farm Bureau, the Puerto Rico 

United Retailers Association, and the Gasoline Retailers Association. 

Because we selected various stakeholders as part of a nonprobability 

sample, our findings cannot be generalized to all Puerto Rico 

stakeholders.
Appendix I: Scope and Methodology

Page 34 GAO-13-260 Puerto Rico

We collected data and information and discussed the Puerto Rico market 

and implications of changes to the Jones Act with officials from MARAD 

and several other federal government agencies. For example, we 

discussed the process for documenting Jones Act vessels with the U.S. 

Coast Guard; how tax laws may apply given changes to the act with the 

Internal Revenue Service; and information about federal antitrust actions 

taken in connection with an ongoing investigation, by the Department of 

Justice, of price fixing in the shipping market between the United States 

and Puerto Rico.2

Undertaking an analysis to measure the economic impact of the Jones 

Act on Puerto Rico requires a credible estimate of the differences in 

freight rates between Jones Act carriers and prospective international 

carriers that could serve this market. We did not attempt to develop a 

model to provide such estimates because the necessary data on routes, 

carriers, vessels, shippers, cargo, and rates, were not available to us.

We collected data on waterborne commerce between 

the United States and Puerto Rico, and between Puerto Rico and the rest 

of the world, from the U.S. Census Bureau. We reviewed related 

documentation and interviewed knowledgeable agency officials about the 

data and determined the data to be sufficiently reliable for our reporting 

purposes. We discussed the process for granting waivers to the Jones 

Act with Department of Homeland Security (DHS) and CBP officials, and 

discussed administration and enforcement of the Jones Act and 

implications of changes to the act with CBP officials in Puerto Rico. We 

interviewed officials from the Department of Defense (DOD) to 

understand how the Jones Act supports its strategic and mission 

objectives, and to understand the agency’s perspectives on the 

implications of making changes to the Jones Act specifically with respect 

to Puerto Rico and more broadly.

3

 

2

An ongoing investigation by the Department of Justice’s Antitrust Division has led to, 

among other things, guilty pleas in 2011 and 2012 by three of the four Jones Act carriers 

that serve Puerto Rico. In general, the three carriers each separately pled guilty to 

conspiracy to suppress and eliminate competition by agreeing to fix rates and surcharges 

for certain water freight transportation services between the continental United States and 

Puerto Rico. In addition, to date, the three shipping companies have been sentenced to 

pay about $46 million in criminal fines and six executives have been sentenced to serve 

prison time totaling more than 11 years.

If 

we had been able to obtain all the necessary data, we could have 

3

Necessary data, particularly for foreign carriers, are not publicly available, and would be 

considered proprietary. Foreign carriers are under no obligation to provide data to us and 

were not responsive to our requests for information.
Appendix I: Scope and Methodology

Page 35 GAO-13-260 Puerto Rico

conducted an analysis that would attempt to reveal whether and to what 

extent freight rates are higher on Jones Act routes to Puerto Rico

compared to similar service in the international shipping market. We 

would have also been able to hold constant other key factors that would 

influence rates such as distance travelled, size and age of vessel, and 

characteristics of shippers and cargo. However, a further step in this 

analysis would require a series of assumptions about the extent to which 

U.S. laws would be applicable to foreign carriers providing service 

between the United States and Puerto Rico. These assumptions would 

allow us to better gauge whether foreign carriers entering this trade would 

have higher costs than they currently do in providing their international 

services. Federal stakeholders we talked with indicated that they were, in 

general, reluctant to speculate on the extent to which U.S. laws might be 

applicable to such foreign carriers in the absence of Jones Act 

requirements. Ultimately, even if the necessary data for these analyses 

were available and even if we could develop alternative scenarios about 

how international carriers’ costs might be affected by the application of 

U.S. law, it would still remain uncertain how those costs would be 

manifested in freight rates. Finally, there are also many uncertainties 

about how any change in freight rates would affect the Puerto Rico 

economy—and in particular how they would affect product prices—under 

varied circumstances.

We conducted this performance audit from October 2011 through 

February 2013 in accordance with generally accepted government 

auditing standards. Those standards require that we plan and perform the 

audit to obtain sufficient, appropriate evidence to provide a reasonable 

basis for our findings and conclusions based on our audit objectives. We 

believe that the evidence obtained provides a reasonable basis for our 

findings and conclusions based on our audit objectives.
Appendix II: Federal Agency Roles in Relation 

to the Jones Act

Page 36 GAO-13-260 Puerto Rico

The Maritime Administration’s (MARAD) mission is to promote the 

maintenance of an adequate, well-balanced U.S. merchant marine to 

ensure that the United States maintains adequate shipbuilding and repair 

services, efficient ports, and a pool of merchant marines for both 

domestic commerce and national defense. In support of that mission, 

MARAD administers (1) the Federal Ship Financing Program that 

guarantees private loans to commercial shipowners and shipyards for 

ship and shipyard building and modernization, (2) the Small Shipyards 

Grant Program that funds capital and related improvements for qualified 

small shipyard facilities, (3) the Capital Construction Fund Program that 

assists owners and operators of U.S.-flag vessels to help modernize and 

expand the U.S. merchant marine through construction, reconstruction, or 

acquisition of vessels, and (4) the Construction Reserve Fund that 

provides financial assistance as tax deferral benefits to eligible U.S.-flag 

operators whereby gains attributable to the sale or loss of a vessel may 

be deferred as long as the proceeds are used to expand or modernize the 

U.S. merchant fleet.

Within the DHS, the U.S. Coast Guard is responsible for administering 

and enforcing documentation requirements for U.S.-flag registry (e.g., 

determining whether vessels meet U.S.-ownership and build 

requirements), and CBP is responsible for enforcing and administering 

laws and regulations pertaining to the coastwise trade, including the 

Jones Act. The Surface Transportation Board (STB) has regulatory 

oversight of certain domestic shipping-freight rates, including 

noncontiguous ocean shipping freight rate matters, and Jones Act carriers 

are required to file tariff rates with STB as well as terms and conditions of 

contracts they execute with shippers.1

 

1

Carriers providing transportation or service in noncontiguous domestic trade, such as 

Jones Act carriers, are required by statute and associated regulations to file tariffs 

showing their rates and service terms and joint rates that they establish with other carriers 

including motor carriers, water carriers, and freight forwarders. STB has the authority to 

determine the “reasonableness” of a rate for a movement by or with a water carrier in 

noncontiguous domestic trade, among other things. A complaint can be filed with STB that 

a rate, classification, rule, or practice in noncontiguous domestic trade violates the 

requirements related to transportation or service provided by a carrier subject to this 

jurisdiction. See 49 U.S.C. Chapter 137.

Foreign maritime carriers operating 

in the United States come under the jurisdiction of the Federal Maritime 

Commission (FMC), which exercises regulatory oversight of foreign trade, 

and requires common carriers involved in foreign-U.S. trade to file tariffs 

and service agreements. Section 7 of the Shipping Act of 1984, as 

Appendix II: Federal Agency Roles in 

Relation to the Jones Act
Appendix II: Federal Agency Roles in Relation 

to the Jones Act

Page 37 GAO-13-260 Puerto Rico

amended, exempts agreements between foreign common carriers from 

U.S. antitrust law so long as the carriers file with FMC, and allows foreign 

carriers to discuss and set rates and service terms and conditions.2

In general, with respect to navigation and vessel inspection laws, such as 

the Jones Act, statutorily authorized administrative waivers may occur in 

the interest of national defense. More specifically, such waivers are to 

occur upon request of the Secretary of Defense whereby the head of the 

agency responsible for the administration of the particular navigation or 

inspection laws at issue is required by statute to waive compliance with 

those laws to the extent the Secretary of Defense considers necessary in 

the interest of national defense.3 National defense waivers may also 

occur where the head of the agency responsible for the administration of 

such navigation or vessel inspection laws, (i.e., DHS), considers it 

necessary in the interest of national defense to waive such compliance, 

following a determination by the Maritime Administrator on the nonavailability of qualified U.S.-flag capacity to meet national defense 

requirements.4

In addition to administrative waivers, special legislation has been enacted 

which permits the Coast Guard to issue limited coastwise endorsements 

to specific vessels, or for specific purposes, and some for limited periods 

of time, that allows specific vessels to engage in coastwise transportation.

For example, the America’s Cup Act of 2011 authorized the issuance of 

coastwise endorsements for three specified vessels as well as for three 

In November 2012, for example, following the effects of 

Hurricane Sandy, the Secretary of Homeland Security issued a temporary 

waiver of the Jones Act to allow non-Jones Act oil tankers to transport oil 

from U.S. ports in the Gulf of Mexico to Northeastern ports to provide 

additional fuel resources to the region. This waiver provided, in part, that 

the lost production, refining, and transportation capacity had resulted in 

the imminent unavailability of petroleum products, including gasoline, and 

threatened the nation’s economic and national security.

 

2

See Pub. L. No. 98-237, 98 Stat. 73 (codified at 46 U.S.C. § 40307). Under this 

exemption, antitrust immunity is not, however, extended to such agreements relating to 

transportation within the United States.

3

See, 46 U.S.C. § 501(a). 

4

See, 46 U.S.C. § 501(b). December 2012 amendments to this authority additionally 

require MARAD to identify any actions that could be taken to enable qualified U.S.-flag 

capacity to meet national defense requirements, among other new notification duties.
Appendix II: Federal Agency Roles in Relation 

to the Jones Act

Page 38 GAO-13-260 Puerto Rico

liquefied gas tankers, under certain specified conditions. Also, such 

legislation has been enacted specifically in relation to the Puerto Rico 

trade. The most recent legislation specific to Puerto Rico was enacted in 

2006 to authorize DHS, through the Coast Guard, to issue a coastwise 

endorsement to allow, for example, foreign-built liquefied gas tankers built 

before 1996 to transport LNG or liquefied petroleum gas to Puerto Rico 

from other ports in the United States.5

Although DOD does not administer or enforce the Jones Act, the military 

strategy of the United States relies on the use of commercial U.S.-flag 

ships and crews and the availability of a shipyard industrial base to 

support national defense needs. MARAD and DOD jointly manage the 

VISA program, which was established for emergency preparedness and 

which includes over 300 commercial U.S.-flag vessels to provide DOD 

assured access to emergency sealift capacity that complements its sealift 

capabilities in transition to wartime operations.6

Similar to the continued decline in the pool of vessels and U.S. mariners, 

the U.S. shipyard industrial base has also been declining, according to 

DOD officials. DOD relies on commercial shipyards and an adequate 

DOD needs vessels with 

specific requirements, such as speed capability, cargo capacity, and 

capability of carrying specialized equipment and supplies without 

significant modification. Whether or not the vessel is militarily useful, 

commercial U.S.-flag vessels provide employment to trained officers and 

unlicensed seamen, many of whom could be available to crew 

government-owned sealift vessels in times of war or national emergency. 

Having such vessels and crews available in times of emergency is 

beneficial to DOD and limits its need for procuring and maintaining 

comparable vessels in the government-owned fleet of cargo vessels, 

which could constitute a significant additional cost to the agency.

 

5

Pub. L. No. 109–304, 120 Stat. 1485, 1504 (2006) (codified at 46 U.S.C. § 12120).

6

In addition to the VISA program, other programs exist to ensure sealift capability using a 

mix of government and commercial vessels. MARAD operates the Ready Reserve Force, 

consisting of a fleet of 46 government-owned cargo vessels, which is activated only upon 

the request of the DOD and supports the transport of unit and combat support equipment 

during the initial military mobilization period before commercial vessels can be marshaled. 

MARAD also administers the Maritime Security Program which enrolls 60 modern, 

militarily-useful, U.S.-flag commercial ships—operating in the international trades—where 

owners receive a fixed retainer payment in exchange for providing DOD with access to 

their vessels during times of war, national emergency, or when deemed necessary by the 

Secretary of Defense.
Appendix II: Federal Agency Roles in Relation 

to the Jones Act

Page 39 GAO-13-260 Puerto Rico

shipyard industrial base to service and repair military vessels, and build 

new vessels to replace or expand the military fleet. Seven major 

shipyards currently construct the vast majority of military vessels, and 

some of these also construct a small number of commercial vessels, and 

according to industry representatives, are generally capable of building 

larger oceangoing vessels such as those used in the Puerto Rico trade 

and other noncontiguous and coastwise trades. About 280 medium and 

small commercial U.S. shipyards are engaged in repairing government 

ships and producing the large majority of smaller commercial vessels 

such as tugboats, barges, and service boats engaged in Jones Act trade. 

Some of the larger yards are also capable of building large oceangoing 

vessels, according to the Shipbuilders Council of America and a shipyard 

we interviewed. According to DOD, these shipyards play an important role 

in sustaining industries that support shipbuilding. Overall, the number of 

oceangoing commercial vessels produced in the United States is low in 

comparison to the production from foreign shipyards, which typically 

specialize in building certain types of large containerships, tankers, LNG 

carriers, or bulk carriers. Most large, commercial cargo vessels that 

supply the world shipping industry are being built in China, Japan, and the 

Republic of Korea, as discussed earlier.

In an effort to address these declines, the U.S. Navy partnered with 

MARAD in November 2011, through memorandum of agreement, for 

supporting the objectives relating to the American Marine Highway 

Program, particularly in the development, design, construction, and 

operation of U.S- built and U.S.-crewed dual-use vessels that can serve 

in peacetime in the Jones Act trade and also provide sealift capability for 

DOD in time of national emergency.7

 

7

Under the American Marine Highway Program, the goal is to focus on designing vessel 

types best suited for transporting trailers and cargoes, normally driven over U.S. 

highways, on the marine highways to contribute to the national goals of reducing 

congestion, pollution, and wear and tear from large tractor-trailers on the nation’s highway 

system. The military dual-use goal of the program will require the design of applicable ship 

types to meet minimum speed, size, and range requirements to meet DOD’s needs. See 

MARAD, American Marine Highway Design Project Final Report, (Annapolis, MD: Oct. 28, 

2011).

The purpose of the American 

Marine Highway Program is to expand the use of the inland and coastal 

waterways for transporting cargo to reduce congestion in other 

transportation modes, thus expanding the domestic waterbornetransportation markets that would be served by Jones Act vessels. The 

program is expected to help generate commercial work for U.S. shipyards 
Appendix II: Federal Agency Roles in Relation 

to the Jones Act

Page 40 GAO-13-260 Puerto Rico

and jobs for U.S. mariners. In support of the American Marine Highway 

program, the National Defense Authorization Act for Fiscal Year 2010 

required the establishment and implementation of the Marine Highway 

Grants program,8 and $7 million in funds was congressionally directed to 

the new grants program in committee reports9 accompanying the 

Consolidated Appropriations Act, 2010.10 Grants under the Marine 

Highway Grants program could extend to the purchase or lease of 

equipment used at port terminals and facilities, and construction or 

modification of vessels to increase energy efficiency and meet 

environmental standards. According to the Navy, the American Marine 

Highway Program and dual-use vessel concept is likely to be the most 

cost-effective means of addressing future recapitalization of the 

government-owned and commercial vessels on which they rely. Many of 

the vessels in the Ready Reserve Force are nearing the end of their 

practical service life and must be replaced by newer ships. The estimated 

cost for the recapitalization for the entire Ready Reserve Force is in the 

billions of dollars.11

 

8

Pub. L. No. 111-84, 123 Stat. 2190, 2724-25 (2009).

9

See, H. R. Conf. Rep. No. 111-366, at 425 (2009), and S. Rep. No. 111-69, at 97-98 

(2009).

10Pub. L. No. 111-117, 123 Stat. 3034 (2009).

11See MARAD, America’s Marine Highway Report to Congress, April 2011.
Appendix III: GAO Contacts and Staff 

Acknowledgments

Page 41 GAO-13-260 Puerto Rico

Lorelei St. James, (202) 512-2834 or stjamesl@gao.gov

In addition to the contact named above, the following individuals made 

important contributions to this report, Andrew Von Ah, Assistant Director; 

Amy Abramowitz; Ken Bombara; Stephen L. Caldwell; Vashun Cole; 

Laura Erion; Emil Friberg; Geoffrey Hamilton; Sarah Jones; Hannah 

Laufe; Thanh Lu; Joshua Ormond; Amy Rosewarne; and Shana Wallace.

Appendix III: GAO Contacts and Staff 

Acknowledgments 

GAO Contact

Staff 

Acknowledgments 

(544171)
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