Civil Aviation and Maritime Industries: The Affect of “Cabotage” Laws
Topics such as market competition, the adjustment of prices, mercantilism, and federal law in the civil aviation and maritime industries were examined more closely through research. Perfect competition and how it is limited by cartels was among the first of the issues discussed. In a perfect world, prices would be regulated through supply and demand, with no assistance from the federal government. However, this is not a perfect world. Second, mercantilism is explored more deeply in relation to “cabotage” in the Airline Deregulation Act as well as the Jones Act. Then, the Foreign Dredge Act of 1906 and the Shipping Act of 1916 are discussed and the problems we face in regard to those laws. Finally, we finish with the topic of deepening and widening the Panama Canal to accommodate the Post-Panamex ships.
In both the civil aviation and maritime industries, federal law creates cartels by forbidding competition. A cartel is defined by the Capstone Encyclopedia of Business as “a group of organizations that make an agreement, formally or informally, not to compete with each other”. The purpose of these cartels is to keep prices at the desired level and eliminate all competitors. In doing so, all consumers must pay the same price. With perfect competition comes assumptions in relation to competition that we must understand.
First, it is stated that the market must consist of many buyers and sellers, and no individual buyer or seller can differentiate themselves in the market. Ultimately, the market is large and ever growing, meaning anyone can enter. However, no individual person can personally influence the market, that depends on the market as a whole. Second, it is assumed that all products and their features in a certain competitive market must be indistinguishable, meaning that all products are the same and no products are offered or sold at a different price. Third, it is assumed that there is a mobility of resources. This means that all all countries and continents have access to their desired resources and products, regardless of their geographic location. Another assumption is that there is a common knowledge in perfect competition, meaning that all parties are aware of the products available and their worth. The idea of ongoing trading is the fifth and last assumption of perfect competition. Ideally, there is communication between the buyers and sellers, without interruption from the government.
In the civil aviation and maritime industries, mercantilist laws exist where competition is prohibited. Mercantilism, also referred to as commercialism, is an economic theory that is believed to generate wealth through trade and profitable decisions. Adam Smith, the father of economics, came up with the term “mercantile system”, to describe “the system of political economy that sought to enrich the country by restraining imports and encouraging exports”. Basically, by increasing exports and minimizing imports, countries can become economically efficient. A popular belief in mercantilism is that for a country to be successful they must have a strong military, which is often expensive. By becoming economically efficient in trading and enforcing tariffs and government subsidies in other countries, a mercantilist country can create a trade surplus, which would assist in funding a strong military.
In 1978, the Airline Deregulation Act was passed. This is one example of a mercantilist law that is negatively affecting the civil aviation industry. The act was passed in order to amend the Federal Aviation Act of 1958 which combined “all government bureaus, boards, and committees into the Federal Aviation Agency”. It also created an air transportation system which depends on forces in the competitive market to decipher the quality, variety, and price of air transportation services. This law assisted in authorizing international carriers to provide domestic services, while also encouraging the start up of domestic airlines, as more sizable airlines cut back on shorter, less financially rewarding flights. Thus, by removing the Civil Aeronautics Board (CAB) which previously regulated the prices, routes, and schedules of airlines, competition was promoted in the airline industry. The Airline Depreciation Act also resulted in price drops for airlines, a choice for certain routes to fly, and an increase in revenue from the changes.
Despite the positive outcomes of the approved acts, negative effects have begun to overpower the positives, partially because airlines dropped their smaller flying routes. This resulted in many airlines shutting down because of the act. From when the act was passed in 1978 until 2002, nine major airlines as well as over one hundred smaller airlines filed for bankruptcy or were liquidated. Among the major airlines that went bankrupt include America West Airlines, Braniff, Continental, Eastern, Midway, Northwest Airlines, Pan Am, and TWA. Not only did previously existing airlines go bankrupt because of the Airline Deregulation Act, but so did many of the newer airlines founded in the aftermath of the amended act. Another negative result of the act was the ban of foreign airlines flying customers domestically. A new part of the act required airlines flying domestically to be American owned. This became known as “cabotage”, which was a result from both the Airline Deregulation Act as well as the Jones Act of 1920. For example, Jetstar, an Australian carrier, can fly domestic routes within New Zealand and Australia, or they can also fly to Los Angeles or San Francisco. However, they are prohibited from flying from Los Angeles to San Francisco because they are not an American airline. Similarly, Air Canada is permitted to offer flights from Canada to Philadelphia or New York, but not Philadelphia to New York. This is due to cabotage, which does not allow foreign airlines to fly domestic flights in the United States. Therefore, cabotage limits competition in the aviation market and creates more success for larger airlines.
The Jones Act was passed to give sailors additional rights, including but not limited to the ability to seek damages from the ship’s crew, captain, or ship owner in the event of an emergency. The act also stated that products and passengers transported over water between United States ports be accomplished by American made ships as well as an American crew and ship owner. The Jones Act simply spikes prices for American consumers, as the prices of American imports increase due to foreign airlines and ships being denied the right to deliver goods to United States ports. The Jones Act also raises maintenance and operating expenses for the United States because it is more costly to hold and maintain ships in domestic ports as opposed to foreign ones. The cost to maintain an American tanker is approximately 70% more than the cost to maintain a foreign vessel who can disperse their costs among their dense amounts of cargo shipments along their routes. The higher prices for American shipping costs create a distaste for foreign trade in the United States, as they must pay more for the expenses as a result of the Jones Act.
As if raising prices is not bad enough, the Jones Act also weakens competition in the United States shipping industry. The shipping industry is artificially increased with support from the United States government, reducing the enticement for American companies to work independently from the government to create their own success. Resulting from the Jones Act, the government’s involvement diverts the money and resources from independent companies. This creates more government spending and especially inflation, which devalues the American dollar by increasing prices.
A prime example of the Jones Act’s negative effect on the market is the rock salt industry. Rock salt is heavily produced and imported to the United States to use in the winter for snow and ice storms. States such as Delaware and Maryland import most of their rock salt from Chile through the Panama Canal, rather than United States ports. In 2014, the Jones Act prohibited officials in New Jersey from utilizing a foreign ship to import their 40,000 tons of salt from Maine in time for an abrupt winter snow storm. The New Jersey Department of Transportation has a ship on standby with an entire load of salt, but was denied access to dock because of the Jones Act. The next closest American ship with salt was almost a month away from New Jersey. As a result of the Jones Act, simple tasks are made more difficult and problems arise. Because New Jersey could not get their salt in time, “at least four state of emergency alerts” were issues by governor Chris Christie.
Coinciding with the Jones Act is the Foreign Dredge Act of 1906, which says, “A foreign-built dredge shall not, under penalty of forfeiture, engage in dredging in the United States unless documented as a vessel of the United States.”. This act was passed in 1906 after a big storm caused an immense amount of damage to Galveston, Texas, and problems arose on which company should dredge the designated areas. With United States dredging companies knowing their prices were higher than foreign dredging companies, they argued for the decision to only allow American dredgers to operate on United States soil. This created a drop in competition as well as increased prices.
Along with the Foreign Dredge Act of 1906 is the Shipping Act of 1916. As stated by Duke Law, “The Shipping Act of 1916 was designed to secure an American merchant marine which would be adequate for the needs of our national defense and our commerce, and to regulate competitive practices in ocean shipping for the protection of shippers, importers, exporters, carriers, and the public.”. It was created in 1914 after war in Europe created problems with international shipping, as many ships were being utilized for war effort. In response, under the act, Congress created the United States Shipping Board. The Shipping Act of 1916 caused problems for international ports and trade, as shipping was limited from foreign ships.
The recent deepening and widening of the Panama Canal to allow Post-Panamex ships to be used has created issues. Due to the Jones Act, the Foreign Dredge Act, and the Shipping Act, American ports are limited for assistance in the building of the new Post-Panamex ports. Because of the laws prohibiting U.S. shipping vessels from being made overseas, American ports and vessels are not as sophisticated as certain foreign made vessels, not to mention it is more expensive to maintain the American ones. The most effective dredging companies in the world are mainly from Belgium and the Netherlands, where marine engineering projects have been almost mastered from research over the centuries. In order for the construction of the Panama Canal to be assisted by American domestic ports, it will take more time and money, slowing the production and requiring more unnecessary resources. This is yet another issue that could have been easily avoided if not for some of the terribly restricting acts.
As decades pass, laws are ratified in order to benefit one party or another. Sometimes these laws may be effective, other times they may not. As we have seen in multiple acts such as the Airline Deregulation Act and the Jones Act, only to name a couple, the effects have not been overwhelmingly positive. The government has become too involved, creating zero competition in the market while increasing prices at the same time. While some may not agree with the idea of allowing foreign companies to operate in the United States, they can certainly help. The increase in competition could lower prices and increase sales for companies at the same time. If these laws could somehow be appealed and reversed, we would see more competition and greater success for both the consumers and the companies.
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