It is time to repeal the Passenger Vessel Services Act

Have you ever wondered why the major cruise lines don’t offer cruises that go directly from California to Hawaii, or voyages from New York to Miami that call at the popular tourist cities along the East Coast? The reason is a law enacted in the 1880s called the Passenger Vessel Services Act, which prohibits foreign flag ships from doing itineraries that are composed entirely of U.S. ports.

The reason for this law and for its counterpart, the Jones Act (the Merchant Marine Act of 1920) which applies to cargo, was to protect the United States merchant marine, promote U.S. shipbuilding and to secure jobs for U.S. mariners. Today, of course, the number of U.S. ocean-going passenger ships is insignificant, no cruise ships to speak of are built in the United States and few Americans are interested in being waiters and cabin stewards on cruise ships - - the majority of the jobs on a modern cruise ship.

Meanwhile, the largest of the major cruise lines, Carnival Corporation and Royal Caribbean, are headquartered in the United States and publicly-trade on the New York Stock Exchange.* Thus, the businesses being excluded from doing American itineraries by the Passenger Vessel Services Act are for practical purposes American businesses.

In addition, coastal cities in Europe, the Caribbean, and even in the U.S. have found that having cruise ships stop in their harbors is a great enhancement to the local economy. Evidence of this can be seen by all of the cruise ship piers and cruise ship terminals that have been built in the last decade all around the world. By precluding cruise ships from doing exclusively American itineraries at least a portion of the money that would be spent by cruise ships stopping in American ports is by definition going outside the country.

Why then is the law still in effect? To a large extent it is because talk of repealing the Passenger Vessel Services Act becomes entangled with talk of repealing the Jones Act. There still are American-flagged ships involved in the transport of cargo and there are legitimate strategic reasons for protecting what remains of that industry. Consequently, when packaged with repeal or the Jones Act, there appear to be reasons not to repeal the Passenger Vessel Services Act. While the two laws operate in a similar fashion and were originally designed to serve the same purpose, times have changed and thus repeal of the two laws should be evaluated independently.

From time to time, various schemes emerge to revive the U.S.-flagged passenger fleet and appear to provide a reason for continuing the law. In the most ambitious of these, Norwegian Cruise Line, which was then 100 percent owned by Singapore-based Star Cruises, formed a subsidiary NCL America for the purpose of providing cruises around the Hawaiian Islands. Various exceptions to the Passenger Vessel Services Act were passed by Congress in order to facilitate this scheme and NCL was able to place American flags on three of its vessels. However, by so doing, Congress essentially stood the law on its head - - it was now protecting a foreign-owned business which was operating ships that had not been built in the United States. Moreover, even with these concessions, the venture has not been a success and NCL has withdrawn two of the ships.**

Another reason the law remains on the books is because there is no large constituency demanding its repeal. The cruise lines do not vote. Perhaps as more communities realize that their local economies would be boasted by having more ships stop in their ports, there will be more support for repeal.

* Due to its merger with P&O in 2003, Carnival also has a headquarters in London and also trades on the London Stock Exchange.

** Viewing NCL’s failure as the result of competition from other cruise lines that include a brief stop in Mexico or at Fanning Island in their Hawaii cruise itineraries, the Maritime Administration has proposed a re-interpretation of the Passenger Vessel Services Act which would require foreign-flagged vessels to spend at least 48 hours in a foreign port and to spend at least 50 percent of the cruise outside of the U.S. However, assuming arguendo that this competition is the cause of NCL’s failure, it only demonstrates that there is something inherently inefficient about operating under the PSVA. The other lines have to travel far out of the way, incurring addition fuel costs and making their cruise-itinerary less appealing to passengers, in order to compete in the Hawaii market. If they are nonetheless succeeding in the market, it follows that they are the more efficient competitors. To impose additional barriers to competition would only distort the market further to the detriment of the American consumer.

In addition, the Maritime Administration’s proposal would have effects beyond Hawaii in markets where there are only foreign-flagged ships. For example, on cruises to Canada and New England from New York, the ships would have to spend at least half their time in Canada to the detriment of cities like Boston, Bar Harbor and Portland Maine.